Indonesia takes 'low and slow' path to carbon tax

JAKARTA • Indonesia, the world's top exporter of thermal coal, will take a gradual approach in pricing and capping greenhouse gas emissions when it rolls out its first carbon tax and trade policy next year.

South-east Asia's largest economy, which relies on coal for 70 per cent of its electricity, will set an official limit from April 1, with those emitting above the cap to buy offsets or pay a tax of 30,000 rupiah (S$2.90) per tonne of carbon dioxide equivalent, according to fiscal policy chief Febrio Kacaribu in an interview last Wednesday.

"We want to start it low and slow," Dr Kacaribu said, adding that it was a necessary compromise to get buy-in from lawmakers amid "challenging" talks about the energy transition and its potential toll on jobs.

Indonesia will be the second in South-east Asia to price carbon, after Singapore, which imposes a levy of $5 per tonne of CO2.

In a pilot run this year, 32 coal-fired power plants faced emission limits ranging from 0.918 to 1.094 tons of CO2 per megawatt hour depending on how much electricity they generate, according to the energy ministry's data.

"The cap is a bit too high now," Dr Kacaribu said, and the carbon price is "very low" - less than half the proposed amount and one of the cheapest in the world.

The government plans to lower the cap to create more demand for carbon credits, then ensure the increase in the credits' price does not disrupt the economy before raising the emissions tax.

While the archipelagic nation has experienced firsthand the dangers of rising water levels and extreme natural disasters, it is also well aware of the importance of fossil fuels both to its power supply and exports.

International and private-sector financing is key to helping Indonesia meet its climate targets.

The government could open its market to global carbon trading once nations agree on the ground rules, Dr Kacaribu said.

The Indonesia Stock Exchange and its London counterpart have said they will work together on a carbon bourse.

Emissions trading could also be expanded beyond coal plants after 2025 to the forestry sector, for Indonesia to tap interest from developed nations for offsets using its swathes of mangroves and rainforests that act as carbon sink.

Indonesia needs US$270 billion to meet its commitment to cut emissions by 29 per cent against the business-as-usual scenario in 2030. Of that, US$250 billion would go to the energy and transport sectors, with hefty costs to decommission coal plants and develop renewable energy sources.

"We have started to move with our first steps, now we're asking the world to move with their first or second steps," Dr Kacaribu said. "We offer projects. Are they going to come with similar intentions and start collaborating with us?"

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A version of this article appeared in the print edition of The Straits Times on November 16, 2021, with the headline 'Indonesia takes 'low and slow' path to carbon tax'. Subscribe