- What is a Carbon Tax?
- How Carbon Taxes Work?
- Global Experience and Effectiveness
- Carbon Taxation in Indonesia
As the world continues to grapple with the escalating impacts of climate change, carbon taxation has emerged as one of the key tools in reducing greenhouse gas emissions. But what is it, how does it work, and what are the implications?
What is a Carbon Tax?
A carbon tax is a fee imposed on the carbon content of fossil fuels. Essentially, it is a Pigouvian tax, a tax on market activities that generate negative externalities, like pollution. By charging emitters of carbon dioxide (CO₂), the goal is to internalize the social and environmental costs of emissions, nudging businesses and individuals toward cleaner energy sources and sustainable practices.
This tax is typically applied upstream (at the point of fuel extraction or import) or downstream (on end-users like power plants). The more carbon a fuel emits when burned like coal compared to natural gas the higher the tax.
How Carbon Taxes Work?
The basic mechanism is straightforward: the government sets a tax rate (e.g., $30 per ton of CO₂), which gets added to the price of carbon-intensive fuels. This makes fossil fuels relatively more expensive than renewable alternatives, encouraging users to conserve energy or switch to cleaner sources.
Read more:
Fossil Fuels: The Dirty Facts
Importantly, carbon tax revenues can be recycled. This means they can be used to reduce other taxes (like income or corporate taxes), fund green innovation, or compensate lower-income households who are disproportionately affected by rising energy prices. Design matters. The distributional impacts, who bears the cost, depend on factors like tax exemptions, subsidies, and how revenue is used. Poorer households often spend a greater share of their income on energy, making equity a central concern
Global Experience and Effectiveness
Countries like Sweden, Finland, and Norway have implemented carbon taxes since the 1990s with measurable success in reducing emissions without hindering economic growth. For instance, Sweden has one of the highest carbon tax rates (over $100/ton), yet has managed to cut emissions while growing its GDP. Empirical studies in Europe show that countries implementing carbon taxes tend to experience a significant reduction in CO₂ emissions compared to those without such policies.
In some cases, reductions in emissions per unit of GDP have been observed even when overall emissions rose due to increased output. However, carbon taxes also raise concerns about competitiveness and economic equity, especially in energy-intensive industries. To address this, many countries use preferential measures like reduced rates for certain sectors or direct rebates.
Carbon Taxation in Indonesia
Indonesia took a significant step in combating climate change with the implementation of Law No. 7 of 2021, which introduced the country’s first carbon tax. Effective from April 1, 2022, the tax targets emissions from coal-fired power plants (PLTU), starting at Rp30 per kilogram of CO₂ equivalent. This move aims to internalize environmental costs into the fiscal framework, marking a major shift toward addressing climate change.
The carbon tax presents several opportunities for Indonesia. The revenue generated could fund green investments like renewable energy development and energy efficiency programs, while also supporting social welfare initiatives to protect low-income households from rising energy costs.
By aligning with the Paris Agreement, the carbon tax could stimulate innovation, attract international climate finance, and help establish Indonesia as a leader in sustainable finance and clean technology. If successfully implemented, it has the potential to drive economic resilience and environmental stewardship in the country.
Read more:
The Paris Agreement: This Is Why Earth Is in Grave Danger
The implementation of a carbon tax is a strategic step towards a low-emission economy. However, to maximize its impact and avoid risks, businesses need a deep understanding and the right strategy. Technical and consultative support is crucial in designing emission reduction projects that are in line with regulations, while also being eligible for monetization through carbon offset schemes.
The right advisory service can help you identify opportunities, develop project strategies, and ensure your projects are running according to international standards. Take advantage of the opportunities from evolving climate policies with targeted steps. It’s time to start designing your carbon projects strategically and impactfully.
Author: Ainur Subhan
Editor: Sabilla Reza
References:
Ghazouani, A., Xia, W., Jebli, M., & Shahzad, U. (2020). Exploring the Role of Carbon Taxation Policies on CO2 Emissions: Contextual Evidence from Tax Implementation and Non-Implementation European Countries. Sustainability. https://doi.org/10.3390/su12208680.
Wang, Q., Hubacek, K., Feng, K., Wei, Y. M., & Liang, Q. M. (2016). Distributional effects of carbon taxation. Applied energy, 184, 1123-1131.
Rasji, Kevin Noble Effendi, Auzan Wafi. (2023). Implikasi Pemberlakuan Pajak Karbon Terhadap Investasi dan Pertumbuhan Ekonomi di Indonesia. QISTINA: Jurnal Multidisiplin Indonesia Vol. 2 No. P-ISSN: 2964-6278 E-ISSN: 2964-1268