Indonesia will begin to tax coal-fired power stations in April 2022 using a tax mechanism based on emission limits, or cap and tax, to start the implementation that will eventually reach all sectors of the economy to reduce national greenhouse gas emissions. Indonesia’s carbon tax is a strong signal that will encourage the development of carbon markets/carbon emissions trading, technological innovation, and more efficient and eco-friendly investments in the country.

The carbon tax was part of the country’s tax reforms, the latest in a series of legislation overhauls that aim to make the country more attractive for investment. The carbon tax is imposed on the carbon content of fossil fuel. It is based on the notion that charging polluters based on how much they pollute will result in behavioral change toward greener practices.

Under the law, every kilogram of carbon equivalent emissions that exceed a certain cap will be subjected to a Rp-30 (0.21 cent dollar) tax. That is roughly equal to about $2.1 per metric ton of carbon equivalent. The government hopes the tax will restrict greenhouse gas emissions, which contributes to an increase in global temperature, and will ultimately reduce the risk of climate disasters in Indonesia.

According to Indonesia’s Nationally Determined Contribution (NDC) plan, the country aims to reduce carbon emission without outside help by 29 percent compared to the business-as-usual level by 2030. With international support, Indonesia aims to reduce its emissions by 41 percent of the business-as-usual level.

The government has been working on a carbon tax roadmap since the beginning of this year. The inclusion of carbon tax in the country’s tax code was its first milestone. Next, the government plans to finalize a presidential decree on the economic value of carbon and develop a carbon tax and carbon exchange mechanism. Finally, the Ministry of Energy and Mineral Resources will launch a pilot project for carbon trading in the energy sector by the end of this year.

The Finance Ministry claims that putting a price on carbon is a policy that Indonesia should adopt for a number of reasons. First, it is an effective climate change mitigation strategy. Second, it provides significant revenue that can solve budget deficit problems. Lastly, it can be implemented simultaneously with the removal of fossil fuel subsidies to achieve a sustainable low-carbon economy. All of these points are valid and justified as long as the carbon tax policy is carefully designed.

The government is aiming to have the carbon tax fully implemented by 2025 through the carbon exchange, where companies can trade their emissions permits. That will be done through the gradual expansion of the carbon taxation sector, depending on how ready it is and the creation of carbon tax management regulations.

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