Indonesian Plans for a Carbon Tax

Indonesian plans to impose a carbon tax.  This was always expected.  Indonesia submitted its post-2020 climate pledges to reduce global emissions, their intended nationally determined contributions (NDC), to the to the United Nations Framework Convention on Climate Change (UNFCCC). 

Indonesia signed the Paris Agreement, and ratified it through Law No. 16 of 2016.  Indonesia submitted its NDC in 2016, and sealed its voluntary pledge to reduce emissions by 29% to 41% by 2030.  These are ambitious targets.  To achieve this emissions reduction target, Indonesia is in the process of drafting a more progressive emissions reduction scheme under the draft Presidential Regulation on Instruments of Carbon Economic Value for NDC (Carbon Economic Value Bill).  This will likely take a while, and there are contentions as to whether the government would reserve the sole right to regulate the trade, allow private transactions, or have a mix of both. 

The proposed scheme would be to regulate the carbon trade, provide payments based on performance in reducing greenhouse gas emissions, and impose a levy on carbon emissions.  The Carbon Economic Value Bill is in the process of being finalised, and is expected to enacted by the end of the year, or more likely, the first quarter of 2022. 

The current Indonesian administration is pursuing an amendment of Law No. 6 of 1983, the General Provisions and Taxation Procedures (Tax Law) to include a new carbon tax scheme.  The proposed amendment would be the fifth amendment to the bill.  This bill is registered with the Majelis Permusyawaratan as one of thirty-three bills included in the priority national legislation programme.  This bill is intended to become the legal basis to impose a levy on greenhouse gas emissions outlined in the Carbon Economic Value Bill. 

Under Indonesia’s Tax Bill (Article 44G), carbon emissions with a negative impact on the environment will be subject to a minimum carbon tax of Rp 75 per kilogramme of CO₂e or other equivalent measurement unit.  This would be around US$5.20 per tonne CO₂e.  The proposed carbon tax would be imposed on individuals or entities purchasing goods containing carbon or engaged in activities that generate carbon emissions.  The Tax Bill contains general carbon tax provisions, which include catch-all provisions to tax any goods or activities that cause environmental externalities, such as depletion of natural resources, environmental pollution, or environmental damage. 

According to the bill, goods containing carbon include, but are not limited to, fossil fuels that cause carbon emissions.  Regulated activities are defined as activities that produce carbon emissions in the energy and transportation, agriculture, forestry and peat lands, industry, and waste treatment sectors.  Indonesia’s NDC identified these sectors as the five main sources greenhouse gas emission contributions.  Aside from this, the full scope of the carbon tax is still undefined, and details are still scarce. 

If all five targeted sectors are taxed without any exemption, many businesses will be affected and will have to recalculate their strategies in response to a carbon tax that directly puts a price on greenhouse gas emissions.  Businesses in carbon-intensive sectors such as coal-fired power plants, oil and mining, pulp and paper, cement, plastic, petrochemicals, and palm oil plantations, among others, will be the most heavily affected.  Industry player have already voiced their concern, and there have been nascent attempts to lobby against it through business associations.  Their primary contentions that the carbon tax places too high a burden on businesses, and not the government.  Businesses have also questioned the calculation of the carbon tax rate. 

Brown energy companies are rightly concerned about the imposition of Indonesia’s carbon tax scheme.  It is expected that there will be incentives provided for taxpayers to lower their greenhouse gas emission.  It is expected that the carbon tax may help generate investment in the renewable energy sector.  This could support the government’s intention for renewable energy to account for at least 23% of the country’s total energy mix by 2025.  That is an ambitious goal.  Currently, the share of renewable energy is 10.9%.  Coal-fired plants dominate the supply of power in Indonesia and are a major source of revenue. 

It is expect that with the expected exponential increase in carbon credits, and the pressure on brown energy businesses, there will be an increasing shift to more sustainable energy generation.  It is about the money.  There is a blue ocean market for generating profit through the issuance of Verified Carbon Units (VCUs), and the sale of carbon credits on the international voluntary carbon market.  As the government moves toward the enactment of the Carbon Economic Value Bill, to regulate carbon trade and provide payments based on performance, more players will explore opportunities to generate additional revenue streams. 

There are a number of projects and initiatives that intend to take advantage of these new developments in carbon trading.  We will closely watch the market in the next few months to see if Indonesia can keep to the ambitious timetable it set.