Carbon Pricing and its Implications

Carbon Pricing and its Implications

PPN

19 Oct, 2023 10:10 WIB

Jakarta, Ideatax -- In the HPP Law, the Government has stipulated that the carbon tax rate is equal to the market price of carbon in the domestic carbon market. However, the Government also stipulates that if the carbon price in the domestic carbon market is lower than IDR 30,000 per ton CO2e, then the carbon tax rate is set at IDR 30,000 per ton CO2e.

 

For the record, carbon pricing is an instrument to capture the cost of externalities arising from greenhouse gas emissions through a price mechanism, generally in the form of a price for carbon dioxide emissions (The World Bank, 2023). Furthermore, the World Bank (2023) also explains that the price imposed on carbon emissions helps shift the burden of greenhouse gas emissions to responsible parties and to those who can shift it.

 

Returning to the HPP law, the imposition of carbon tax in Indonesia refers to the carbon roadmap with the following timeline: First, in 2021 a carbon trading mechanism will be developed. Second, from 2022 to 2024, a tax mechanism based on emission limits (cap and tax) will be implemented for the power generation sector limited to coal-fired power plants. Third, in 2025 onwards, full implementation of carbon trading and expansion of carbon taxation sectors with phasing according to the readiness of related sectors by taking into account, among others, economic conditions, readiness of actors, impact and scale.

 

So far, the development of carbon tax mechanism in Indonesia is still on track despite a slight delay. The Minister of Finance, Sri Mulyani, explained that carbon tax is not an easy scheme where this type of tax requires cooperation and coordination from various parties (CNBC Indonesia, 2023). Fortunately, the President and the Ministry of Finance have a strong commitment to the implementation of the carbon tax. Evidently, at the end of September, President Joko Widodo officially opened the first carbon market in Indonesia organized by IDXCarbon (BEI, 2023).

 


Also Read: Understanding Indonesia's Carbon Tax Roadmap


 

Compared to other countries, Indonesia's carbon tax rate is still relatively low at IDR 30,000 per ton of CO2e. Japan, for example, charges a carbon tax of USD 3 per ton of CO2e or IDR 46,480. On the other hand, Chile imposes a carbon tax of USD 5 per ton of CO2e or IDR 77,466 per ton of CO2e (Bavbek, 2016). In fact, in an academic paper, the government proposed a carbon tax rate in Indonesia of IDR 75,000 per ton of CO2e (CNBC Indonesia, 2023).

 

Logically, a relatively lower carbon tax rate compared to carbon tax rates in other countries and the price of carbon in the carbon market would make the carbon market very attractive and competitive for emitters. Thus, by paying less, emitters get the same benefits as if they were buying carbon in other countries' carbon markets. Lower carbon tax rates also trigger capital flows from abroad. The Coordinating Minister for Maritime Affairs and Investment stated that Indonesia's carbon market has the potential to absorb investments of up to USD 9.5 billion or Rp147.11 trillion (Republika, 2023). In fact, Amazon Web Service is said to be committed to investing USD 5 billion to buy carbon in Indonesia's Voluntary Carbon Market (VCM) (Republika, 2023).

 

However, it should be noted that a carbon tax rate that is too low also has negative implications. A carbon tax rate that is too low may not be effective enough to change people's behavior in reducing greenhouse gas emissions, which is the main objective of the policy (The Japan Times, 2022). For example, carbon market prices in China and South Korea are generally set lower than in the European Union. As a result, China and South Korea's carbon pricing and carbon tax policies have not had a significant impact on environmental change (The Japan Times, 2022).

 

In addition, carbon taxes and carbon prices that are too low can lead to greenwashing practices (Liputan 6, 2021). Greenwashing is a marketing and communication strategy of a company to provide an environmentally friendly image, both in terms of products, values, and company goals without actually carrying out activities that have an impact on environmental sustainability (UI, 2023).

 

Based on this, although carbon trading in Indonesia uses a market mechanism, the Financial Services Authority (OJK) as a carbon exchange regulator can intervene if it is deemed that the carbon price in the domestic carbon market is too low. This is to ensure that the carbon market mechanism and carbon tax run effectively and efficiently as intended by the HPP Law.

 

References

Bavbek, G. (2016). Carbon Taxation Policy Case Studies. Istanbul: EDAM.

BEI. (2023, September 26). Peluncuran Bursa Karbon Indonesia (IDXCarbon). Retrieved from Indonesia Stock Exchange: https://www.idx.co.id/id/berita/berita/b882a251-3e5c-ee11-b808-005056aec3a4?id=10282

CNBC Indonesia. (2023, Februari 02). Pajak Karbon di RI 'Ngaret', Sri Mulyani: Ini Rumit! Retrieved from CNBC Indonesia: https://www.cnbcindonesia.com/news/20230201192011-4-410188/pajak-karbon-di-ri-ngaret-sri-mulyani-ini-rumit

Liputan 6. (2021, November 18). Sri Mulyani Sebut Harga Karbon Terlalu Murah Timbulkan Praktik Greenwashing, Apa Itu? Retrieved from Liputan 6: https://www.liputan6.com/bisnis/read/4714291/sri-mulyani-sebut-harga-karbon-terlalu-murah-timbulkan-praktik-greenwashing-apa-itu

Republika. (2023, September 29). Bursa Karbon Berpotensi Serap Investasi Rp 147 Triliun. Retrieved from Republika: https://ekonomi.republika.co.id/berita/s1l50k502/bursa-karbon-berpotensi-serap-investasi-rp-147-triliun

The Japan Times. (2022, August 22). Carbon prices in Asia are too cheap to help curb emissions. Retrieved from The Japan Times: https://www.japantimes.co.jp/news/2022/08/08/business/carbon-prices-asia-too-cheap/

The World Bank. (2023, September 29). Carbon Pricing Dashboard. Retrieved from The World Bank: https://carbonpricingdashboard.worldbank.org/what-carbon-pricing#:~:text=Carbon%20pricing%20is%20an%20instrument,to%20their%20sources%20through%20a

UI. (2023, September 29). Greenwashing Ketika Realita tak Sehijau Kata - kata. Retrieved from Universitas Indonesia Wordpress: https://green.ui.ac.id/greenwashing-ketika-realita-tak-sehijau-kata-kata/