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Ideatax, Jakarta -- In the near future, the Indonesian government will impose a carbon tax as part of the implementation of the Harmonization of Tax Regulations Law (HPP Law). However, not many Indonesian taxpayers are aware of this type of tax. This is because carbon tax, which is a derivative of Pigouvian tax, has not been previously recognized in the Indonesian taxation system. With this statement, the author tries to provide an explanation as well as suggestions regarding the carbon tax mechanism.
Article 13 of the Taxation Harmonization Law stipulates that carbon tax is imposed on carbon emissions that damage the environment. The imposition of carbon tax is done by taking the carbon tax roadmap and the carbon market roadmap into account. In addition, this law also stipulates that the carbon road map contains carbon emission reduction strategies, priority sector targets, alignment with renewable energy development, and other policies.
Furthermore, Article 13 of the Taxation Harmonization Law also stipulates that the subject of Carbon Tax is an individual or entity that purchases goods containing carbon or conducts activities that produce carbon emissions. Meanwhile, the object of carbon tax is the purchase of carbon-containing goods or activities that produce carbon emissions in a certain amount. The carbon tax rate is higher or equal to the carbon price rate in the carbon dioxide (CO2) equivalent market or equivalent units.
The implementation of carbon tax cannot be separated from the high level of pollution in Indonesia. According to Dunne (2021), Indonesia was named the fourth largest emitter in the world in 2015. And in 2016, the pollution index in Indonesia was 21.6 µg/m3 or far above the WHO standard of 10.0 µg/m3 (Greenstone & Fan, 2019). Furthermore, Dunne (2020) also stated that per capita emissions in Indonesia in 2015 were 9.2 tons of CO2 or higher than the world average per capita emissions of 7.0 tons of CO2.
The high level of pollution causes various negative implications such as climate change, acid rain, an increase in the number of pneumonia and bronchitis patients, an increase in the health budget, and a decrease in investment. In addition, Greenstone & Fan (2019) reported that the average life expectancy in Indonesia was reduced by 1.2 years due to pollution.
The government has undertaken numerous attempts to reduce pollution in Indonesia. For instance by regulating the vehicle emission test requirements, Euro 3 standard requirements, moratorium on natural forest and peatland use permits, regulation of working hours, motor vehicle free days, and so on.
However, these attempts do not show significant results. Therefore, through the Taxation Harmonization Law, the Government hopes to reduce emission levels in Indonesia in accordance with the Paris Pledge agreement. According to Himes & Kam (1999), carbon tax has various competitive advantages in reducing emission levels compared to other policy instruments which are as follows:
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Reducing emissions at a lower cost than other policy instruments.
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Funding the state treasury and implementing environmental improvement programs.
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Reducing tax distortions.
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Encouraging technological innovation in a sustainable manner.
While a carbon tax has various benefits, it also creates externalities. First, the imposition of a carbon tax will increase fuel prices and raise production costs. From a macroeconomic perspective, this increase in energy prices has a negative impact on all macroeconomic indicators. Furthermore, the BKF estimates that the implementation of carbon tax will reduce economic growth by 0.06% from what it should be (Ministry of Finance, 2021).
Second, the imposition of a carbon tax will also cause ethical problems where economic actors will think that they can freely pollute the environment as long as they pay the carbon tax. Third, a carbon tax may cause distortions and overlapping taxation with Article 22 income tax on oil and gas, coal; and local taxes on motor vehicles.
In order to be effective in reducing pollution levels in Indonesia, there are several things that the Government can do for the carbon tax. First, before implementing a carbon tax, the government should remove taxes that potentially cause tax distortions. For example, the government can restructure Article 22 of the Income Tax Law on coal, oil, gas and motor vehicle taxes. This is important to eliminate double taxation on energy consumption that can lead to high economic costs.
Second, the government should clearly define the object of carbon tax. Based on a report by the Ministry of Environment and Forestry (2019), the largest source of pollutants in Indonesia in 2018 was the forestry and peat sector, which amounted to 44%, followed by the energy sector at 36% and waste at 8%. Therefore, in addition to imposing a carbon tax on energy consumption, the Government also needs to impose a carbon tax on activities that cause forest and peatland fires.
Third, the Government needs to clarify the payment mechanism, reporting, and monitoring of carbon tax. This policy is essential to avoid tax evasion in carbon tax and improve tax compliance.
Fourth, to support the implementation of carbon tax, the Government can consistently provide tax incentives to industrial sectors that use renewable energy innovations. In the long run, this policy will attract renewable energy investment and change the behavior patterns of economic actors towards a green economy.
In conclusion, we hope that the implementation of a carbon tax can effectively reduce emissions in Indonesia and at the same time, accelerate green economy innovation and increase state revenue.
Related Regulations
Law Number 7 Of 2021 Concerning Harmonization of Tax Regulations.
References
Dunne, D. (2022, January 06). The Carbon Brief Profile: Indonesia. Retrieved from Carbon Brief: clear on climate: https://www.carbonbrief.org/the-carbon-brief-profile-indonesia
Greenstone, M., & Fan, Q. (2019). Indonesia's Worsening Air Quality and Its Impact on Life Expectancy. Chicago: AQLI: Air Quality Life Index.
Himes, S., & Kam, F.d. (1999). Environmentally-Related Taxes: A Tax Policy Perspective. In Environmental Taxes: Recent Developments in China and OECD Countries (pp. 51-59). Paris: OECD Publishing. doi:https://doi.org/10.1787/9789264173439-en.
Ministry of Finance. (2021). Academic Draft of the Bill on the Fifth Amendment to Law Number 6 of 1983 concerning General Provisions and Tax Procedures. Jakarta: Ministry of Finance.
Ministry of Environment and Forestry. (2019). Greenhouse Gas Inventory Report and Monitoring, Reporting and Verification. Jakarta: KLH. Retrieved from http://ditjenppi.menlhk.go.id/reddplus/images/adminppi/dok/igrk/lapigrkmrv2019.pdf
