As the state electricity company PLN reported in its Electricity Business Plan, this figure is expected to continue to rise along with the increasing use of fossil fuels (fossil oil, gas and coal). Indonesia's Nationally Determined Contribution (NDC) 2022 document stated that climate change could lead to the potential loss of 0.66-3.45 percent of gross domestic product in Indonesia's economy by 2030.

In response, the government has pledged to achieve net-zero emissions by 2060. As part of it, Indonesia will reduce emissions gradually, which will be around 31.89 percent of the business-as-usual scenario (unconditionally) in 2030, as stated in the Enhanced Nationally Determined Contribution submitted on Sept. 23, 2022. To fulfill the net-zero target ambition, the government has enacted the Tax Harmonization Law No.7/2021, in which one of its articles stipulates that a carbon tax be levied on carbon emissions that harm the environment.

Officials have said a fully-fledged carbon market would likely begin operation in 2025, but the carbon tax kicked under a pilot program in April 2022 for above-cap pollution level at a rate of Rp 30,000 (US$2.09) per ton of CO2e for coal-fired power plants.

The question is whether the tariff is the right rate of carbon tax businesses have to pay to emit every tCO2e to reach the government's ambition. According to the Carbon Tax Guide by the World Bank, the Social Cost of Carbon (SCC) approach is one of the most economically efficient approaches; it matches the carbon tax rate to estimates of the social costs of GHG emissions.

In layperson's terms, the SCC refers to the damages caused by emitting one additional ton of CO2e. Hence, with this approach, the effective carbon tax rate should not fall below the estimates of the SCC. Referring to the Report of the High-Level Commission on Carbon Prices, the High-Level Commission on Carbon Prices requires carbon price of at least $40-80/tCO2 by 2020 and $50-100/tCO2 by 2030 to achieve the Paris temperature target of well below 2 degrees Celsius.

Singapore is the first ASEAN country to introduce a carbon tax under the Carbon Pricing Act No.23/2018 (National Climate Change Secretary of Singapore, 2023). Its initial carbon tax rate is S$5 (US$3.76) per tCO2e from 2019 to 2023. This rate will rise in three phases from 2019 to 2030, in which the rate will be around S$80 per tCO2e of emissions in 2030 to achieve the country's net-zero emissions by 2050 (National Climate Change Secretary of Singapore, 2023).

The National Climate Secretary said this was to signal and provide businesses time to adapt without any immediate unfavorable impacts on competitiveness.

Compared with Singapore, the carbon tax rate in Indonesia is still relatively low. Furthermore, if we compare it with countries that have been enacting the carbon price for years, such as Sweden (around US$129.89 per tCO2e), Switzerland (around US$129.86 per tCO2e), France (around US$49.29 per tCO2e), Finland (around US$71.84 per tCO2e), the carbon tax rate in Indonesia is far lower (World Bank, 2022). Moreover, the introduction of a carbon tax in Indonesia is relatively late compared with these countries.

The right carbon tax rate should incentivize taxpayers to reduce their GHG emissions to lower their tax obligations. In the case of industry, a carbon tax may induce investment in cleaner energy sources. Indonesia is highly advantaged by having abundant natural renewable energy sources. It has rivers or hot springs to draw hydro or geothermal power and adequate land for wind or solar energy.

Therefore, these gifts of nature need to be taken advantage of by the government through a periodic review of the carbon tax rate that can prompt businesses to invest in the natural renewable energy sources.

In addition, a high enough carbon tax rate will increase the demand for renewable energy since, in energy markets, the additional costs due to the carbon tax will be passed on to consumers, encouraging them to switch to renewable energy, which is cheaper.

As for the course of the transition to the low carbon energy sources, the government can offset a high carbon tax rate by lowering the income tax rate or abolishing several other types of taxes so that consumers do not bear too much of the tax burden; thus, the government can reduce carbon emissions without causing any damage to the economy.

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The writer is an analyst at the Financial Services Authority (OJK). The views are his own.

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