TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Want to put a price on CO2? Start with a coal tax
While the government negotiates its carbon pricing plan, it could make strides in its climate commitment while generating revenue by imposing a simple carbon tax.
Change Size
Fishermen watch on Sept. 5, 2021 as smoke rises from a chimney of a coal-fired power plant in Meulaboh, Aceh. (AFP/Chaideer Mahyuddin)
I
ndonesia is currently considering its next big step in the fight against climate change: carbon pricing (Macroeconomic Framework and Fiscal Policy Principles for 2022, Finance Ministry). Negotiating and implementing a carbon pricing mechanism will likely take years, but it doesn’t mean we need to wait for an effective carbon tax. There are other policy solutions that could be implemented immediately to achieve the same goal.
Putting a price on carbon dioxide (CO2), the No. 1 contributor to climate change, is widely agreed to be one of the most effective and economically efficient ways to reduce emissions, according to “Taxing Energy Use 2019” by the Organisation for Economic Co-operation and Development (OECD). This is because it encourages consumers and investors to switch to less polluting alternatives. The options on Indonesia’s table include a national emissions trading scheme and a carbon tax.
But the government is finding out that, while carbon pricing is an economically elegant solution, it is also politically controversial. The Indonesian Chamber of Commerce has come out in support of a carbon tax (Kontan.co.id, Aug. 25, 2021), but wants more analysis of its potential impacts and a road map for implementation, including incentives.
Carbon-intensive sectors have voiced concerns that the carbon tax would impact their competitiveness (“Putting A Price On Emissions”, F. Rodyanto & A.S. Suwana, Mondaq). In response, the government is considering applying the carbon tax only to coal-fired power plants starting in 2022, and then gradually imposing it on other sectors from 2025 onwards.
The final outcome of these consultations and negotiations are uncertain and could take considerable time. And once an approach is agreed, phased implementation of the tax will likely take years. South Africa’s carbon tax was nearly a decade in the making. Even after the Carbon Tax Act 15 of 2019 was enacted, most large emitting industries remain exempt, including coal and coal energy.
While the government is developing a carbon pricing mechanism, a process we wholeheartedly support, an interim solution would be to simply bump up regular taxes on coal (“Taxing Coal to Hit the Goals”, T.B. Sumarno, IISD). Imposing excise and value added tax (VAT) on fossil fuels can act as a de facto carbon price. Applying conventional tax on coal would be remarkably effective, given that coal accounts for 40 percent of Indonesia’s energy-related emissions. It would also be relatively easy to administer, applying one tax rate to one type of fuel.
Indonesia’s existing taxes on coal are way too low to reflect the fuel’s costs to society. In contrast, coal production and consumption benefit from multiple tax exemptions. The social costs of coal include air pollution, land and water contamination, and climate change. Indonesia’s coal-fired power plants are estimated to cause around 7,480 premature deaths per year from air pollution-related diseases, according to a study published in Environmental Science & Technology. A tax would go some way to incorporating these social costs in the price of coal.
