Indonesia delays carbon tax till July to help economic recovery

Last year, Indonesia initiated a levy for emissions by coal power plant operators beyond a set limit. PHOTO: REUTERS

JAKARTA - Indonesia is delaying the roll-out of its carbon tax to July from April, a move that analysts say will help its economic recovery amid surging energy prices and support businesses.

Last October, South-east Asia's top economy initiated a new levy of as much as 30,000 rupiah (S$2.80) per tonne of carbon dioxide equivalent (CO2e) for emissions generated by coal power plant operators beyond a set limit.

"The road map has not been finished and we are still preparing for a few regulations so that (the tax) can be implemented mid-year," said Finance Minister Sri Mulyani early this week, noting that the government is seeking a balance between carrying out reforms and recovering the economy.

An official with the Finance Ministry's Fiscal Policy Office said last week that the delay takes into account global developments, such as inflation and the war in Ukraine.

Business players have voiced concerns over potentially higher power costs that can hurt industrial competitiveness.

Indonesia, the world's eighth biggest greenhouse emitter, has introduced the carbon tax as part of its attempt to gradually wean itself off the fossil fuel and meet its target of net-zero emissions by 2060 or sooner. The tax will also serve as a reference for a carbon market to begin in 2025.

The planned tax has been trialled on 32 operations. 

Indonesia will become the fourth country in Asia to implement a carbon tax.

It also has a wider plan to impose a tax on carbon-emitting industries, including pulp and paper, cement and petrochemicals, but the tax structure has not been finalised.

Last November, Indonesia also passed another regulation that sets a price on carbon emissions and creates a mechanism to trade carbon. Technical rules to implement the carbon trading are under deliberation.

Economist Satria Sambijantoro at securities firm Bahana Sekuritas said Indonesia's delay in the carbon tax implementation is in line with the current global trend, and would be beneficial for its economic recovery.

"Globally, there's a shortage of fossil fuel energy because a shift into renewable energy comes too quickly," he told The Straits Times. "It's a trend worldwide to delay a while the transition into renewable energy and temporarily rely on fossil fuel energy to facilitate the surging energy demand due to the economic reopening."

Mr Satria noted that the launch of the carbon tax this year will be timely, particularly due to Indonesia's role as the Group of 20 president.

"It would be imperative for the Indonesian government to proceed with this carbon tax... this year and (this) would set an example for the decarbonisation part of the global economy going forward," he said.

Bahana estimates that potential carbon tax revenue in the first year of its implementation will reach between 29 trillion rupiah and 57 trillion rupiah, assuming a tax rate of between US$5 (S$6.80) and US$10 per tonne CO2e, which it considers sensible for developing countries like Indonesia.

Executive director Fabby Tumiwa at think-tank Institute for Essential Services Reform said that a few regulations, including a decree from the Energy and Mineral Resources Ministry, have to be issued and harmonised to implement the carbon tax, while institutions to monitor its application must be prepared.

"It is not easy to synchronise all the regulations to ensure they are effective. In my view, it's more appropriate to delay, instead of rushing off to apply it, until they can be implemented fully and will not trigger confusion as stakeholders must make business decisions pertaining to the carbon tax," he told The Straits Times.

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