Three years have passed since the NDC was submitted to the United Nations, but Indonesia still contributes to an increase in the concentration of carbon dioxide (CO2) at a rate of 1.94 parts per million (ppm) per year, pushing it up from 371.7 ppm in June 2004 to 398.8 ppm in June 2018 according to the Meteorology, Climatology and Geophysics Agency (BMKG).

The government has implemented several policies to fulfill this plan.

First was Presidential Instruction No. 8/2018 on the Delays and Evaluation of Licensing of Oil Palm Plantations and Increased Productivity of Oil Palm Plantations. The policy orders the provincial and regencies/municipalities to conduct licensing evaluations and stop issuing oil palm plantation licenses for the next three years.

Second, the government has also increased the continuous climate change mitigation budget from Rp 72.3 trillion (US$5 billion) in 2016 to Rp 81.7 trillion in 2017. In both years, money was allocated only for mitigation needs.

Different treatments were implemented in 2018, namely a mitigation allocation of Rp 72.2 trillion plus an adaptation allocation of Rp 49.2 trillion. The total budget for addressing climate change in 2018 was Rp 121.4 trillion in total.

The public service agency or BLU, which is planned to be under the Environment and Forestry Ministry, would be in charge of three matters: raising funds, placing funds in investment instruments and transferring funds. Funds can be allotted from the state budget (APBN), regional budgets (APBD) and other sources of income in accordance with the law.

However, the annual concentration of carbon dioxide that rises continuously shows that what has been done by the government is not enough. There are other things that must be done by the government to implement Indonesia’s commitments in 2030. 

So far, the policies taken by the government still revolve around the expenditure side of the APBN, while there are other policies on the revenue side that can be implemented. One thing that is likely to be done by the government regarding climate change is to impose a carbon tax.

Carbon tax is one type of Pigouvian tax, which is a tax imposed on activities that cause negative externalities. In particular, it is imposed on burning carbon-based fuels such as coal, oil and gas.

The tax imposition mechanism can be carried out in the upstream sector, i.e. when fuel is extracted from the ground, or in the downstream sector, when the fuel is sold or carbon emissions are produced by the business sector.

The technical implementation of this tax is that it can be charged with a certain value per fuel unit. In addition, more detailed techniques could involve applying different rates for each type of fuel based on the level of their emissions. If the level of carbon emissions of certain fuel is higher, then the value charged would also be higher.

On the other hand, the government could also tax the use of carbon that is chemically bound into manufacturing products such as plastic. Companies that are able to isolate the production of carbon dioxide and not release it into the atmosphere could also get similar incentives, or receive an offsetting tax credit deducted from the previous carbon tax obligation.

Implementing a carbon tax would also have various impacts. First, this disincentive would increase the cost of using carbon-based fuels, so the company would focus on clean energy. This is more likely to improve exploration of renewable energies such as water, solar, wind and geothermal energy from the private sector.

Second, the imposition of a carbon tax would increase the price of gasoline and electricity. This would create a massive impact not only on producers, but also consumers at the household level. It would urge them to be more economical. In the long term, this is also more likely to gradually reduce the use of private vehicles.

However, this tax has a negative side: its regressive character. Low income consumers would bear additional burdens. However, the government can also minimize its impact by allocating funds from a carbon tax to climate crisis management. One of the examples is the provision of subsidies to mass transportation that make its cost more affordable for poor people. The BLU that would be formed by the government could also be entrusted with the responsibility of regulating the use of this carbon tax funds in the future.

All in all, the imposition of carbon taxes is clearly a policy that would significantly reduce carbon emissions. The moratorium on plantation expansion and climate crisis budgeting are already good, but structured carbon taxation would be an additional monetary disincentive that not only motivates both the government and private sector to develop clean energy, but also cuts consumption that produces carbon emissions.

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The writer works for the Directorate General of Tax. The views expressed are his own.

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