Putting a Price on Emissions: Indonesian Government Plans to Impose Carbon Tax

Indonesia, together with other countries, has submitted to the United Nations Framework Convention on Climate Change (UNFCCC) its post-2020 climate pledges to reduce global emissions, known as intended nationally determined contributions. Indonesia has signed the Paris Agreement and ratified it through Law No. 16 of 2016. Following this action, Indonesia submitted its nationally determined contributions (NDC) in 2016, sealing its voluntary pledge to reduce emissions by 29% to 41% by 2030.

To help achieve this emissions reduction target, the Government of Indonesia (GOI) is in the process of drafting a more progressive emissions reduction scheme under a draft Presidential Regulation on Instruments of Carbon Economic Value for NDC (Carbon Economic Value Bill). The proposed scheme would 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 finalized and is expected to be enacted this year.

The GOI also is pursuing an amendment of Law No. 6 of 1983 on the General Provisions and Taxation Procedures (Tax Law) that would include a new carbon tax scheme. This proposed amendment would be the fifth amendment to the Tax Law (Tax Bill). The Tax Bill is currently registered with the House of Representatives as one of the 33 bills included in the priority national legislation program. Once enacted, the Tax Bill would become the legal basis for the government to impose the levy on greenhouse gas emissions outlined in the Carbon Economic Value Bill.

Proposed Carbon Tax

The concept of a carbon tax is not new. Approximately 29 countries worldwide have adopted a carbon tax scheme, ranging from less than US$1 per ton of carbon dioxide equivalent (tCO2e) in Poland and Ukraine to US$137 per tCO2e in Sweden. Under Indonesia\'s Tax Bill (Article 44G), carbon emissions having a negative impact on the environment will be subject to a minimum carbon tax of IDR 75 per kilogram of CO2e or other equivalent measurement unit (equivalent to around US$5.2 per tCO2e).

The proposed carbon tax would be imposed on individuals or entities purchasing goods containing carbon and/or conducting 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.

Goods containing carbon include, but are not limited to, fossil fuels that cause carbon emissions. Regulated activities would include those 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 sectors in terms of greenhouse gas emission contributions.

Further Regulation

The scope of the carbon tax is yet to be determined by the GOI. Details on the type of goods and activities that will be taxed, the applicable tax rate, and the calculation, payment, and reporting of the tax are expected to be further regulated in a Government Regulation and Ministry of Finance Regulation.

Impact on Business

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.

Responding to the proposed carbon tax, business players, in particular those in the coal and cement industries, have voiced their concerns through business associations. They have expressed concern that the carbon tax would place too high a burden on businesses. Business players have also questioned the carbon tax rate calculation.

Incentive to Lower Emissions

While many brown energy companies are concerned about the imposition of Indonesia\'s carbon tax scheme, there will be incentives provided for taxpayers to lower their greenhouse gas emissions by switching to more sustainable practices and utilizing cleaner fuels.

The carbon tax may also help generate more investment in the renewable energy sector, which would support the GOI\'s plan to have renewable energy account for at least 23% of the country\'s total energy mix by 2025. At the moment that goal seems far off. With minimum facilities and support given to the renewable energy sector, as of mid-2020 the share of renewable energy was 10.9% and coal-fired plants continue to dominate the supply of power in Indonesia.

The GOI\'s putting a price on greenhouse gas emissions could give business players the momentum to generate more revenue from their sustainable operations. MedcoEnergi, one of the largest oil and gas companies in Indonesia, has a liquefied petroleum gas sister company that captures and processes associated gas that would otherwise have been released and created more greenhouse gases. This gas recovery and utilization project has enabled MedcoEnergi to generate 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, which will regulate the carbon trade and provide payments based on performance, industries can explore these types of schemes to generate additional revenue streams.

Revenue Generation

At this juncture, based on the current Tax Bill, the revenue generated from the carbon tax in Indonesia would be allocated solely for the country\'s climate change mitigation and adaptation activities. This differs from other countries with a carbon tax that allocate generated revenue to the general spending budget and programs such as education and health and lowering income and property taxes. The additional income generated by Indonesia\'s carbon tax scheme will be managed by the Environmental Fund Management Agency (Badan Pengelola Dana Lingkungan Hidup or BPDLH), an independent management fund formed by the government and tasked with accumulating, managing, and distributing funds for mitigation and adaptation actions.

As the Tax Bill winds its way toward enactment, business actors have the opportunity to provide input to the government on the scope and rate of the proposed carbon tax. Likewise, brown energy players can offer feedback on proposed incentives for implementing cleaner energy operations, to ensure all sustainable actions are rewarded.

For more information, please contact:

Fransiscus Rodyanto, Partner
fransiscusrodyanto@ssek.com

Aldilla S. Suwana, Associate
aldillasuwana@ssek.com

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