Carbon Tax: Pros and Cons

Carbon Tax: Pros and Cons

Carbon Series - 23 Oct, 2023 09:10 WIB

Jakarta, Ideatax -- Bam! The provision on Carbon Tax has been finalized since 2021. The Harmonization of Tax Regulations Act regulates that the government can impose a carbon tax on carbon emissions that have a negative impact on the environment.

 

However, up to 2 years since its enactment, there are no technical provisions that further regulate the carbon tax. In fact, the Minister of Finance admitted that the implementation of carbon tax in Indonesia is not an easy matter. This is due to the fact that not everyone realizes the importance of carbon tax for environmental sustainability (CNBC Indonesia, 2023). (CNBC Indonesia, 2023).

 

Looking at its history, it is known that the first country to impose a carbon tax was Finland. Finland has introduced carbon tax since 1990 with a tariff of 1.12 Euro per ton CO2e or IDR 18,340. At that time, Finland's emissions were only 0.3 percent of the world's emissions. Ever since then, countries around the world have begun to implement carbon taxes as an effort to mitigate carbon emissions (Khastar, Aslani, & Nejati; 2020). The countries that have implemented carbon taxes can be seen in the following table:

 

 

The implementation of carbon tax in Indonesia is not a smooth and easy journey. To achieve the law, it takes a lot of consideration and in-depth studies. Based on several studies, it is known that carbon tax is a derivative of Pigouvian tax designed to change society's habit. The habit in question is the one to reduce greenhouse gas emission. The goal is clear: reducing greenhouse gas emissions, increasing state revenue, encouraging innovation and change, and improving the efficacy and efficiency of tax collection.

 


Also Read: Carbon Series: Aspects of Carbon Tax According to the HPP Law


 

A very similar statement was made by Cuervo and Gandhi (1998) in an IMF Working Paper. In their research, Cuervo and Gandhi (1998) mentioned that there are two main advantages of carbon tax. First, carbon tax can achieve the goal of environmental sustainability at minimal cost. This efficiency has a static dimension and a dynamic dimension.

 

The static dimension results from the fact that the market mechanism encourages companies to choose efficient carbon reduction methods that result in the least cost. Whereas the dynamic dimension results from the carbon tax mechanism triggering companies to conduct research and develop innovations to reduce the amount of emissions produced.

 

The second benefit resulting from the implementation of a carbon tax is the potential increase in state revenue. It is undeniable that the implementation of a carbon tax will increase state revenue both in terms of the amount of tax collected and from transactions on the carbon exchange. In fact, the HPP law states that carbon tax revenues can be used to finance pollution mitigation activities.

 

Although the carbon tax generates a number of benefits, experts also argue that the implementation of carbon tax carries negative consequences, especially in the macroeconomic sector. Based on the academic text of the HPP Law, it is known that the implementation of carbon tax will put negative pressure on economic growth. The negative pressure on economic growth is caused by the imposition of carbon tax that may cause an increase in energy prices, which in turn will lead to an increase in the price of goods and services. The increase in the price of goods and services leads to a decrease in household expenditure.

 

Based on a paper by the Fiscal Policy Agency (2021), it is known that the implementation of a carbon tax in 2022 will cause Indonesia's economic growth to grow 0.06% lower than if Indonesia did not adopt a carbon tax. In fact, the Fiscal Policy Agency predicts that economic growth in Indonesia will grow by 0.58% lower in 2030 if the implementation of carbon tax is not accompanied by follow-up actions.

 

Based on this fact, the implementation of carbon tax must be balanced with follow-up actions including increasing the aggregate demand side in order for the carbon tax to run optimally without having a negative impact on macroeconomic conditions. The increase in aggregate demand side can be achieved by providing incentives to industries that can reduce the amount of emission produced. Stimulating the demand side can also be achieved through the provision of VAT and STLG incentives for the purchase of environmentally friendly motorcycles or cars. From the microeconomic side, providing incentives at the selling price level will give buyers the choice to buy goods according to their economic capabilities. In fact, Blundell, Level and Miller (2021) argue that providing VAT incentives will help stimulate the economy.

 

However, it should be remembered that the stimulus for incentives must be timely, temporary and targeted. This means that the provision of incentives must be done at the right time, conducted for a certain period of time and targeted at certain targets. Providing incentives that are not timely, temporary and targeted will instead lead to price dilution which will ultimately cause the purpose of providing incentives not to be realized.

 

References

BKF. (2021). Naskah Akademik RUU tentang Perubahan Kelima atas Undang - undang Nomor 6 Tahun 1983 tentang KUP. Jakarta: Kementerian Keuangan.

Blundell, R., Levell, P., & Miller, H. (2021). A temporary VAT cut could help stimulate the economy, but only if timed correctly. The Institute for Fiscal Studies.

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

Cuervo, J., & Gandhi, V. P. (1998). Carbon Taxes: Their Macroeconomic Effects and Prospect for Global Adoption-A Survey of the Literature. New York: IMF.

Khastar, M., Aslani, A., & Nejati, M. (2020). How does carbon tax affect social welfare and emission reduction in Finland? Elsevier, 736-744

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