Export tax on coal for energy security, safety
Based on the current global trend, the demand for coal will keep increasing in accordance with the surge in world demand for energy. The International Energy Agency (IEA) predicts global coal demand for power plants by 2035 will be more than double the 1990 mark. China and India will be the main drivers of the world demand as their need alone now exceeds the total global consumption of 1990.
The significant increase in global demand has led to excessive coal exploitation in Indonesia. Energy and Mineral Resources Ministry data shows that our 2011 coal production was more than twice the output of 2004. The excessive production is associated with illegal mining activities (without permits) and legal permits gained through violation of laws.
The Supreme Audit Agency (BPK) found only 40 percent of 10,235 registered mining companies secure clean and clear business permits. This chaotic situation happens because of the weak capacity in mining-industry governance. The regional governments are only able to issue permits but lack the capacity to govern and oversee the business activities.
The significant increase in national coal production does not lead to the improvement of access to electricity at home. More than three-quarters of coal produced in Indonesia goes overseas, while more than a quarter of households across the country have no access to electricity.
The situation in the eastern part of the country is even worse since its electrification rate is much lower than that in Java and Bali. In Papua, for example, households with electricity connections account for less than one-third of all households.
The excessive coal exports have made it difficult for the government and the state-owned electricity company PT PLN to increase the electrification rate. A significant increase in the electrification rate is only possible by having additional power plants using cheap energy sources.
The 2010 IEA report still put coal as the cheapest energy source, particularly for a producer country like Indonesia, which claims to have done a lot to lower carbon emissions from the energy sector.
In addition, the reckless coal exports have put Indonesia’s energy security on the line. While Indonesia ranks second in coal exports, production is ranked fifth, although its coal deposits are not even in the top-ten list. This means Indonesia is in the process of eliminating the cheapest energy source, for development in other countries.
The excessive coal production, without good governance, has driven forest degradation and threatens the safety of citizens. Forest Watch Indonesia reported that about 11 million hectares of mining concessions were located in preservation and conservation forests. This is a serious threat to environmental protection because post-mining reclamation has been very poorly implemented due to the vague definition of “reclamation” in the mineral mining law and the lack of mining inspectors overseeing mining activities.
Under the current legal definition of reclamation, mining companies may just leave the mining pits with minimum treatment such as by simply planting trees and putting fish in the pit. They do not need to fill the pit with soil and ensure that top soil can allow plants to grow. Although the treatment can be very lenient, it is not always implemented due to the lack of monitoring and law enforcement.
The latest BPK report shows that 43 mining companies operating in Kalimantan failed to make deposits into the reclamation-guarantee fund, which means there is no guarantee for post-mining reclamation. This can be a disaster for local people living near the mining area. In the East Kalimantan capital of Samarinda, for example, five kids died after drowning in the “pit pool” in just a few months, from July to October last year.
The contribution of the excessive coal production to state revenue is not much either. In 2009, coal-mining royalties and levies only accounted for 6 percent of state revenue. The BPK also found serious tax evasion committed by coal mining companies. In the 2010 fiscal year alone, 329 coal mining companies in Kalimantan evaded royalty and permanent fee payments amounting to US$53.7 million.
The Australian Bureau of Agriculture and Resource Economics and Science (ABARES) research on Indonesian mining taxes found that the Indonesian government is collecting a relatively low share of economic rents from the mineral industry. The low tax rate, combined with the lack of governance, drives excessive coal exploitation.
The Trade Ministry plan to impose export taxes on coal needs to be implemented soon. The export-tax policy will not only increase government revenue, but also reduce the coal exploitation to meet its optimal level. In addition, it will also improve the supply of coal for the domestic market to help about 90 million people without electricity.
The policy will create fairness with its counterpart industries (i.e. oil palm plantations) that have been paying export taxes since 1994. Palm oil and coal are needed for domestic use despite their operation causing negative externalities, though at a different level.
The domestic-market obligation policy (through an export tax) will create multiple positive impacts for domestic consumers, the state budget and environment conservation, and will improve the safety of citizens.
The writer is a public policy analyst and recipient of the 2009 Australian Leadership Award.