COP Debate on Carbon Trading: Where Does Indonesia Stand?
Oleh: Alifia Sekar
Within the last decade, the issue of carbon pricing has sparked a heated debate regarding its part in global efforts to combat the climate crisis. Carbon pricing is a mechanism intended to address negative externalities–the carbon emissions–that have emerged from the production process, but the cost is not counted. There are two mechanisms in implementing carbon pricing, namely through carbon trading (the entity’s emissions allowance is traded when it exceeds the limit) and carbon tax (entity is subject to a direct charge) (Kaufman, 2016). Carbon trading is generally preferred by many countries and companies, as we can spot through the EU Emission Trading System and the Regional Greenhouse Gas Initiative in the US.
However, no global framework has specifically regulated the carbon trading regulations, even carbon pricing, as those concepts contained in Article 6 of the Paris Agreement are still often debated regarding the technical rules — primarily related to the issue of double-counting in the calculation of emissions. It was only at COP 26 yesterday that the preliminary rules on the carbon-trading agreement were ultimately finalized and then ratified by each country (McFarlane & Dalton, 2021). Despite all the pros and cons of how this annual event made progress, I believe this decision has become one of the successes that Glasgow has achieved.
The following intriguing question is, where is Indonesia’s position in this scheme? Surprisingly or not, as one of the top ten emitters, Indonesia is enthusiastically welcoming the presence of carbon trading. This is due to the enormous potential revenue that the government can get from the global carbon market. A 2018 government report shows that Indonesia can produce 500 million tonnes of carbon offset per year for trade to other entities (Rosadi, 2021). This optimism was manifested by ratifying the carbon tax rules incorporated in the General Taxation Law by the Indonesian parliamentary, right before the COP 26 event started (7/10). In the initial stage, the carbon tax will target the coal-fired power plant sector as of April 1, 2022, at a rate of 30,000 rupiahs or $2.11/tonne carbon when exceeding the cap. The entity can then purchase a carbon certificate to reduce its tax liability or pay the charge directly to the government (Ministry of Finance, 2021). Nevertheless, this mechanism targets not only upstream taxes but also downstream consumers while targeting the products and activities as well (Mafira, 2021). Eventually, all income collected will be re-directed to support climate programs, such as investment in environmentally friendly technology or social programs for the poor (Ministry of Finance, 2021). In the meantime, a fully-fledged carbon market will likely operate in 2025 (Suroyo & Munthe, 2021).
Under its primary objective, namely encouraging behavioral change, the government hopes that the carbon tax can encourage the companies and investors to develop new low-carbon technologies or in the energy sector, move to produce renewable ones. Some people might argue that this scheme will only create a greenwashing phenomenon because producers can buy carbon certificates and continue their business as usual. However, the cost-effectiveness of this policy would all depend on the price level the government has set. If the price does not stimulate the company to install new technology, the government can gradually increase the price level and vice versa. On the other side, this flexibility in regulating emission caps and price levels also delegitimizes the argument from the business sector that carbon tax will increase their production costs, thus taking down the competitiveness on the market and harming the consumer as taxpayers. The price that Indonesia sets are relatively cheap when compared to other countries such as Japan ($3), Switzerland ($1o1), and Sweden ($137) (Hindarto, 2021). Restate the statement from Ungku & Chistina (2021), “the lower 30 rupiahs initial rate should soften the blow and encourage industries to make the transition before a market-driven tax rate comes in with the establishment of the carbon trade mechanism.”
Albeit the carbon tax’s potential effects, there are two disagreements the government should alert. First, regarding the heavily subsidized coal production. The competitiveness of Indonesian coal prices in the global market is due to the government’s high subsidies (Arinaldo & Adiatma, 2019). Even though there have been subsidies reform in 2015, fossil fuels subsidies remain at 9% of the total state budget on average, much higher than spending for the climate program, which only covers 6% on average (Mafira, 2021) — though as claimed by Atwood et al., (2017) that if this subsidy is being revoked, the cost of coal-generated electricity could increase by more than double and higher than renewable energy. These two contradictory goals eventually make the increase in coal price unfelt by PLN, the state electricity company, if the subsidies remain. Even the government would have to pay more to cover the gap between the rising fossil fuel price and PLN’s cost (Mafira, 2021). Hence, while implementing the carbon tax, the government still has to gradually reduce the subsidies or shift them to build renewable industries.
The second and foremost criticism is about the new exploration of coalfield the government still does. According to the Climate Action Tracker (2020), amid the pandemic, the government still targets to install 27 GW of coal electricity in 2028, making Indonesia one of five countries that planned to construct new coal plantations in 2020. This development agenda is certainly contra to the purpose of carbon tax itself and makes the renewables market become less competitive. Therefore, if the government is serious about its climate commitment and does not apply the carbon tax only to collect revenue due to the potentials it has, the construction of a new coal power plant must be terminated. In conclusion, a carbon tax should not only be about how much Indonesia could gain but also how this scheme could discipline local producers to support the government’s commitment to the climate agenda.
References
Arinaldo, D. & Adiatma, J.C. (2019). Indonesia’s coal dynamics: toward a just energy transition. Jakarta: Institute for Essential Services Reform (IESR).
Attwood, C., Bridle, R., Gass, P., Halimanjaya, A. S., Laan, T., Lontoh, L., Christensen, L. T. (2017). Financial Supports for Coal and Renewable in Indonesia. Retrieved from https://www.iisd. org/sites/default/files/publications/financial-supports-coal-renewables-indonesia.pdf
Climate Action Tracker. (2020). Indonesia: Country Summary. Retrieved from https://climateactiontracker.org/countries/indonesia/
Hindarto, D. (2021). Implementasi Pajak Karbon di Tahun 2022, Antara Rencana dan Tantangan. Mongabay. Retrieved from https://www.mongabay.co.id/2021/10/11/implementasi-pajak-karbon-di-tahun-2022-antara-rencana-dan-tantangan/
Kaufman, N. (2016). Carbon Tax vs. Cap-and-Trade: What’s a Better Policy to Cut Emissions?. World Resources Institute. Retrieved from https://www.wri.org/insights/carbon-tax-vs-cap-and-trade-whats-better-policy-cut-emissions
Mafira, T. (2021). Blog: Indonesia wants a carbon tax, but with subsidies? Climate Policy Initiative. Retrieved from https://www.climatepolicyinitiative.org/id/blog-indonesia-wants-a-carbon-tax-but-with-subsidies/
McFarlane, S., & Dalton, M. (2021). COP26 Opens Path to International Carbon Trading. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/cop26-opens-path-to-international-carbon-trading-11636922314
Ministry of Finance. (2021). Pajak karbon sebagai instrumen pengendali perubahan iklim. Retrieved from https://www.kemenkeu.go.id/publikasi/berita/pajak-karbon-sebagai-instrumen-pengendali-perubahan-iklim/
Rosadi, D. (2021). Indonesia akan memimpin pasar perdagangan karbon dunia. Katadata. Retrieved from https://katadata.co.id/doddyrosadi/berita/612c6ed5ee0b1/indonesia-akan-memimpin-pasar-perdagangan-karbon-dunia
Suroyo, G., & Munthe, B. (2021). Indonesia introduces carbon trading policy to reduce emission.Reuters. Retrieved from https://www.reuters.com/business/cop/indonesia-introduces-carbon-trading-policy-reduce-emission-2021-11-15/
Ungku, F., & Christina, B. (2021). Indonesia’s new carbon tax signals higher power costs amid calls for clarity. Reuters. Retrieved from https://www.reuters.com/world/asia-pacific/indonesias-new-carbon-tax-signals-higher-power-costs-amid-calls-clarity-2021-10-08/
