This document discusses carbon pricing mechanisms such as carbon taxes and emissions trading schemes that could be implemented in Indonesia to help achieve its emissions reduction targets. It provides an overview of Indonesia's NDC commitments and potential funding sources for emissions reductions. The key carbon pricing options for Indonesia are analyzed, including examples of how carbon taxes have been implemented in various countries. Overall, the document analyzes the potential for Indonesia to adopt carbon pricing policies to accelerate climate change mitigation efforts.

1. Unveiling the Potential
of Carbon Tax
Implementation in
Indonesia
Dicky Edwin Hindarto

2. Global NDC aggregate
Source: climate action tracker

3. Indonesia NDC’s
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
1995 2000 2005 2010 2015 2020 2025 2030 2035
BAU Baseline Emisi Baseline Emisi Skenario Kebijakan Ambitious
Baseline Emisi Skenario Kebijakan Fair Baseline Emisi Skenario Kebijakan Unilateral
Emission reduction at
362 M.ton CO2e or
20% compared to BAU
in 2020
Ambitious Scenario:
Emission reduction plan
at 1,2 G.ton CO2e
or 41 % compared to BAU
In 2030
Unilateral scenario:
Emission reduction plan of
848 M.ton CO2e or
29 % compared to BAU in 2030
BAU Baseline
Fair scenario of baseline emission
Ambitious scenario of baseline
Unilateral scenario of baseline
Source, Bappenas, 2015

4. How Indonesia finance its GHG
emission reduction activities
Non-Market
Based
Mechanism
Government
Budget
Private Sector
Foreign Direct
Investment
Private Investment
Private Sector
Public
Local Gov’t Budget
Investment
Central Gov’t
Budget
Foreign Investment
Private &Gov’t
Investment
Market Based
Mechanism
Carbon Market
Other Types of
Market
Market based
mechanism is one of the
tools to finance GHG
emission reduction
activities

5. We will need to put a price on a carbon
to speed up climate change mitigation
• Carbon pricing that consist of market-based
mechanism (MBM) and carbon tax is a
policy mechanisms that use market, price, and other
economic variables to provide incentives for
polluters to reduce or eliminate negative
environmental externalities.
• Carbon pricing, if designed well, are widely seen as
an effective tool for reducing greenhouse gases
(GHGs) and fostering energy efficiency and
renewable energy as well as developing sustainable
forestry.
• Some of the well known carbon pricing types are
emission trading scheme (ETS), carbon taxes,
crediting mechanism, and certificates of renewable
and energy efficiencies.
Source: climate action tracker

6. A price on a carbon is necessary
• Putting a price on a carbon will make the calculation and planning
easier
• Every country must reduce the emission based on their own target
National Target
• Putting the price on a carbon will generate revenue and
business opportunity that can be used to implement low
carbon technologies
Source of
Revenue
• As the emission will become cost, companies will be triggered
to be more efficient in the production process
Product and
Process Efficiency
• The private sector will be interested to invest in the low-
carbon development as there is incentive for reducing
emission
Scaling Up Private
Sector Fund
• By putting price on a carbon it is likely the price of energy will
get higher, thus changing behavior of the people to be more
efficient (demand side management)
Trigger Behavior
Change
6

7. A ton is a ton!
Measurable, reporting, and verification (MRV) will be needed to make
sure:
a ton is a ton!
It means that any emission reduction activities in any part of the world
gave the same effect to atmosphere if we do it in the same amount!
Baseline emission
Projected emission
reduction
Emission
units
in ton
CO2
To change activity unit (kWh, kg, liter, etc) to ton CO2 we use emission factor
Emission = activity unit x emission factor
Emission factor is average emission rate of a given GHG for a given source,
relative to units of activity (UNFCCC)
MRV
Is needed

8. Carbon pricing types
• Clean development
Mechanism (CDM)
• Joint Implementation
• Emission Trading
Scheme (ETS)
• Crediting scheme (VCS,
JCM, plan vivo, CCB)
• Carbon tax

9. Carbon pricing instrument map

10. Current market based mechanisms and carbon taxin Indonesia
CDM
• Overly high
expectation
• Difficult and
complex to be
implemented
• Ceased due to the
lack of demands
• Currently no CDM
project developed
• Unbalance/unfair
credits allocation
as all the credits
goes to the buyer
VCS
• Smaller scale than
CDM.
• Indonesia has the
biggest REDD+
project and it is
until now the only
land based project
of VCS in
Indonesia.
• Several projects
was conversion
from CDM, due to
the lack of CER
demand.
Domestic
Scheme
• Currently is in the
very preliminary
stage.
• It requires strong
support from the
government.
• It is expected to
be alternative
option for the
market based
mitigation
actions.
The JCM Scheme
• The Joint Crediting Mechanism currently is the most progressive market based
mechanism and climate change mitigation activities in Indonesia and in the world.
• It is not only about the bilateral carbon trading, but rather how to develop and
implement the green investment as well as low emission development and
technology transfer between the 2 countries.
• Japan and Indonesia have their own national target on emission reduction and it can
be done through JCM through sharing of the emission credit.
• Both countries are required to increase their economic development as well as
develop more opportunities for their private sectors.
Indonesia
NDC
Market and non
market approaches
JCM is the newest market
based mechanism to be
developed, but the fastest
growing in the world
Carbon Tax
• The plan of
establishing the
energy security
fund/levy.
• It is an
opportunity
carbon tax
implementation.
• Currently it is
being explored,
particularly the
carbon tax for
transportation

11. Carbon pricing instrument map

12. To calculate the emission we use MRV
M is measurement
R is reporting
V is verification
National Sub-national / Scheme Project / Activity level
M R V
Scale
Some basic elements of MRV
1.Scope of MRV (and governance)
2.Methodology and baseline
3.Measurement system (qualitative and
quantitative)
4.Reporting
5.Verification (and third party entities)
6.Registry and issuance system.

13. How crediting works?
• Emission reduction is the difference between emission scenario without project with
the actual emission after the project is being implemented.
• In crediting, each 1 ton of CO2 emission reduction is equivalent to 1 carbon credit
Emission before project
Emission after project
Carbon credit
before project after project
CO2
CO2
• To quantify emission reduction, methodology is needed.

14. How cap and trade/ETS mechanism works?
Emissions trading or cap and trade is a government-
mandated, market-based approach to
controlling emission by providing economic incentives for
achieving reductions in the emissions of pollutants
By applying
cap and trade
policy,
quantifiable
emission
reductions
can be
delivered by
setting a cap.

15. What is carbon tax?
• Carbon tax is a form of explicit carbon pricing; it refers to a tax directly linked
to the level of CO2 emissions, often expressed as a value per tCO2 equivalent1
• With carbon tax, a ton of emitted GHG has a price according to the taxation
policy. Thus, creating incentives for emitters to shift to less GHG intensive
ways of production and resulting in reduced emission.
1 based on “Climate carbon – Aligning prices and policies,’ OECS Environment Policy Paper, October 2013 no01

16. More about carbon tax (1)
• Carbon tax which can be said as a derivative of the pigouvian tax.
(pigouvian is a tax on any market activity that generates negative
externalities).
• Carbon tax is a tax that imposed on emissions and fuel from fossils.
This tax was originally designed to change behavior to reduce GHG
emissions / pollution caused by companies in the production
process, and also to reduce the amount of fossil fuels used by
individuals and companies.
• In financing carbon taxes, the government must have a record of the
company's carbon footprint or database of emitting companies,
because this document will be the basis for calculating carbon taxes.
• Therefore every company must be encouraged to have or report on
its emissions. Carbon disclosure is very important to know how
much emissions are used by each company.

17. More about carbon tax (2)
• Government intervention through tax policy is needed to
encourage behavior change in economic activity actors
(producers and consumers).
• Tax collection is not only intended to optimize state revenues,
but can also be used as an instrument to influence the pattern
of economic and social behavior of the community.
• "The tax system can be used to encourage certain activities."
(Bird and Zolt, 2003: 34). As an instrument of fiscal policy, tax
policy can be in the form of an incentive instrument and can
also be a disincentive instrument.
• Tax as a disincentive instrument can be used to correct market
failures such as the emergence of negative externalities
including minimizing the negative impact of high carbon
industries.

18. Carbon pricing instrument statistic
Jurisdiction
• 39 National
• 23 Sub-national
Instrument
• 38 carbon pricing instruments
(already implemented or
scheduled for implementation)
• 90% increased compare to 1st
January 2012
Coverage
• Around 12% of the global
emission or 7 GtCO2e
• ETS consists of 8% & carbon
tax consists of 4%
Price
• Ranging from US$ 1 – 130
/tCO2e

19. Carbon tax map 2017
Source: The World Bank

20. Cap & Trade or Carbon Tax?
Instrument Strengths Weaknesses
Cap &
Trade
• Assure the delivery of emission
reduction target through emission
cap
• The administrative costs are
generally low in relation to the
value of carbon pricing
instrument
• Uncertainty of the allowance price
• Implementation of ETS is
complicated as a result of
requirement to create a new
commodity, the allocation of these
commodity and the establishment of
a market for trading
Carbon
Tax
• Assure the price certainty, as it is
determined by the government
• Generally easier to implement, as
it can build on existing taxation
infrastructure
• Generally set by modeling the cost
of reducing emission to a certain
target. Inaccuracies in the model will
result actual emission reduction
which is different than the target
• The utilization of iterative approach
to set the tax rates resulted higher
administration cost and uncertainty
for low-carbon investment.
Currently several countries opted to combine these instruments to
mitigate its downside. The combine instrument is generally called
“Hybrid Instrument”

21. List of countries implementing carbon
pricing instruments
Carbon Tax
National:
Japan, Mexico, Chile, South
Africa, Costa Rica
Sub-National:
British Columbia, Alberta
ETS
National:
Liechtenstein, Austria, Belgium,
Bulgaria, Croatia, Cyprus,
Czech Republic, Germany,
Greece, Hungary, Lithuania,
Italy, Luxembourg, Malta, The
Netherlands, Romania,
Slovakia, Spain, Kazakhstan,
Korea, Taiwan
Sub-national:
RGGI, Tokyo, Saitama, Kyoto,
California, Quebec, Shenzhen,
Guangdong, Shanghai, Beijing,
Tianjin, Hubei, Chongqing
ETS and Carbon Tax
Iceland, Norway, Denmark,
Estonia, Finland, France, Ireland,
Latvia, Poland, Portugal,
Slovenia, Sweden, United
Kingdom
The classification is excluded other policy instruments such as: removal of fossil-
fuel subsidies, infrastructure investment in transport and energy, renewable
energy portfolio standard, and energy efficiency standard

22. Case Study: How do countries choose carbon
pricing instrument?
• EU Legislative remit does not cover fiscal
policies such as carbon taxation
EU-ETS
• Concentrated nature of its energy
sector-marked by small number of
market participants and small trading
volumes
• Carbon tax could be built on the existing
infrastructure used for other taxes
South Africa
Carbon Tax
The choice of carbon pricing instrument is based on national
circumstances and political realities

23. Carbon Tax Implementation (1)
Jurisdiction Features
Alberta, Canada • Based on the Specified Gas Emitters Regulation (SGER)
• Scope includes facilities emit 100,000 tCO2e or more
annually
• Requirement to reduce its energy intensity by 12% with
baseline 2003-2005
• In 2016, SGER is amended, thus the facilities is require to
reduce its energy intensity to 15% on 1st January 2016 and
20% on 1st of January 2017
• Facilities can choose to not reduce their energy intensity
and make contribution to Climate Change and Emission
Management Fund instead. This option will result higher
cost as the current carbon price is reach CAN$ 15/tCO2e or
US$ 11/tCO2e.
United States • Based on US Environmental Protection Agency’s Clean
Power Plan
• Has set emission reduction target of 32% of 2005 level by
2030 for the power sector
• States have the flexibility to choose their own compliance
mechanisms, including emissions trading, efficiency
measures, and increased deployment of renewable
energy

24. Carbon Tax Implementation (2)
Jurisdiction Features
Chile • Based on the National Carbon Tax, implemented in 2017
• Applies to all stationary sources with thermal input capacity
greater than 50MW
• The value of the tax is denominated in US$. The level of the tax is
local currency equivalent of US$ 5/tCO2e.
• It also has considered to integrate the MRV system into the
taxation as a preparation towards ETS
France • Applies since 1st of April 2014, for putting carbon tax on the fossil
fuel not covered by EU-ETS.
• The tax gradually increase from €7/tCO2e in 2014 to €14.5/tCO2e
in 2015 and €22/tCO2e in 2016
• In 2015, France formally adopted Law on the Energy Transition to
Green Growth. This law sets a trajectory for the country carbon
tax level to rise to €56/tCO2e in 2020 and €100/tCO2e
• The augmentation in the carbon tax rate will be revenue neutral
as other taxes will be lowered

25. Carbon Tax Implementation (3)
Jurisdiction Features
Mexico • Since 2008 Mexico has implemented several climate policies
• In 2013, carbon tax has been officially implemented aims on the
fossil fuel production
• The unique feature is that the utilization of Certified Emission
Reduction (CER) from the domestic projects is allowed
• In November 2013, it established a voluntary carbon exchange
“MexiCO2” to trade carbon credits, including CERs as a potential
means to comply with the carbon tax
• The initial tax was set at MXN$ 39.8 (US$ 3.50)/tCO2e of fossil fuel
excluding natural gas
• The tax rate was caped at 3% of the sales price of fossil fuel and
is expected to collect approximately US$1 billion a year
Norway • Norway is one of the few countries in which a carbon tax and an
ETS significantly overlapped
• Carbon tax is implemented since 1991 and are among the
highest in the world
• The scope of the tax including gasoline, light and heavy fuel oil,
oil and gas in north sea, pulp and paper, fish meal, domestic
aviation and domestic shipping
• In 2005, the tax covered 68% of CO2 emissions and 50% of GHG
emissions

26. Carbon Tax Implementation (4)
Jurisdiction Features
Portugal • Carbon tax implementation started on the 1st January 2015
• Applies to all energy product used in non-EU ETS sectors and
covers approximately a quarter of the country's GHG emissions
• Tax rate is determined annually based on the average EU
allowance auction clearing price in the preceding years
• The 2015 tax rate is €5/tCO2e and expected to yield
approximately €95 million in revenue
• The full green tax package aims to be fiscally neutral and the
revenue from carbon tax and other taxes will be distributed in
the form of tax income relief to lower-income families
Sweden • Carbon tax covers all fossil fuel for heating that are not covered
by the EU-ETS and motor fuel
• Previously, non-EU ETS installations as well as agriculture and
forestry sector receive tax rebates for their use of fossil fuel
heating. Under the new rule, the aforementioned tax rebates
would be abolished by the 1st January 2016

27. Carbon Tax Implementation (5)
Jurisdiction Features
Switzerland • From the period of 2008-2012, Switzerland has applied both ETS and
carbon tax (levy)
• Firms covered by levy had two choices: (1) Pay the CO2 levy (2) voluntary
set absolute emission reduction target and associated allowance
allocation and participate in Swiss ETS, which exempted them from paying
CO2 levy
• CO2 levy functioned as a hard price ceiling for covered entities
• ETS allows entities to potentially pay a lower rate for emission reduction
• In the period of 2008-2012, a company was covered by CO2 levy if its
emission exceeded a set percentage of its 1990 fuel combustion.
• In 2009: 90% of its 1990 emission in 2007 is covered by the levy; In 2010:
86.5% of its 1990 emission in 2008 is ; In 2011: 85.5% of its 1990 emission in
2009 and so on
• Based on the CO2 Act Altered Future, 1/3 of the revenue from CO2 levy or
maximum CHF 300 million annually may be used to finance measures to
reduce emissions from building
• In addition, a maximum of CHF 25 million annually are may be allocated
to technology fund
• On top of the ETS and carbon levy, Switzerland is also implements tax on
transport fuel levied by mineral oil, action plan for renewable energy and
energy efficiency, CO2 limit for new cars, full compensation of emission for
combined cycle power plant

28. Carbon Tax Implementation (6)
Jurisdiction Features
South Africa • In 2006, the South African government introduced Environmental
Fiscal Reform Policy Paper which marked the implementation of
several fiscal measure to mitigate the climate change adverse
impact
• These fiscal measures include: fuel levy on petrol and diesel,
electricity generation levy, a depreciation allowance for biofuel
production, R&D tax incentive and so on
• As a measures to fulfilled the Copenhagen pledge, it finalized
the plan to implement carbon tax starts in January 2016
• The carbon tax will cover only emissions that result directly from
fossil-fuel combustion and gasification, and from non-energy
industrial processes
• The tax rate will start at US$10/tCO2
• As a measure to reduce the impact of the tax to trade intensive
sector and the sector where the potential to reduce emission is
limited, the SA government introduce tax free threshold, for
which company will not have to pay for a fixed percentage of
their emission. From 2016-2020 the rate will be 60%
• The utilization of offset is allowed to be combined with tax free
threshold

29. Carbon Tax Implementation (7)
Jurisdiction Features
South Africa
(continue)
• The revenue recycling measures include: (1) funding for energy
efficiency tax incentive; (2) reduction in electricity levy; (3)
additional tax relief for roof top solar PV; (4) credit for the
premium charged for renewable energy; (5) additional free
support for basic electricity to low-income household; (6)
additional allocation for public transport

30. Is carbon tax can be implemented in Indonesia?
Carbon tax can support Indonesia NDC target achievement, but
it will need a lot of effort and new economic regimes.
Some possible scenarios that can be implemented in Indonesia:
1. Carbon tax in industries and power generation
• Carbon tax can be implemented in energy intensive industries, e.g.
cement, metal, petrochemical.
• It will need strong policy and commitment, both from government
and industries.
• Carbon tax may cause price increases in the products.
2. Carbon tax in transportation
• Can be used both for the vehicles or the fuel.
• More simple, but still need strong policy and commitment, both from
government and industries.

31. Step by step of carbon tax implementation in
Indonesia
1. Study of the most potential sub-sectors to be taxed.
a. Decide which sub-sector to cover.
b. Decide which gases to cover.
c. Choose the point of regulation.
d. Choose the entity to regulate and set thresholds.
2. Designing and modelling a mechanism for carbon tax and distribution
of tax revenues as well as to predict the effects of different tax rates
on meeting the policy objectives.
a. Determine the basis for setting the tax rate
b. Determine how the rate will be develop over time.
3. Address the potential unwanted effects of carbon taxes.
a. Asses the risk of the tax leading to carbon leakage or producing negative
distributional effects.
b. Consider the costs and benefits of the adjustment of other policies that related
to carbon tax.
4. Government regulation for carbon tax implementation.
5. Trial implementation of carbon taxes.
6. Improvement of the carbon tax mechanism after evaluation.
7. Distribution of tax revenue for the emission reduction activities in the
related sub-sectors.

32. Possible scenario of carbon tax in Indonesia
Carbon tax for private car
Every new car will be taxed based on
their fuel consumption per year
The tax revenues will be used for the
public transport and road improvement
Carbon tax for gasoline
Every litre of gasoline sold will be taxed
The tax revenues will be used for the
renewable energy development
Carbon tax for coal power generation
The coal power generation will be taxed
for every kwh generated
The tax revenues will be used for
renewable energy feed in tariffs
Carbon tax for big coal boilers
The oil boilers above 100 tons per hour will
be taxed
The tax revenues will be used for the high
efficient boilers discount and biomass boilers

33. SWOT analysis
Strengths
•Help to achieve climate change
target
•Source of revenue for the
government
•Price certainty
•Trigger development of clean
energy
Weaknesses
•Potentially slower the economy
(temporarily) due to
competitiveness
•As taxes is more concern on the
price, the emission reduction target
might not achieved
Opportunities
• Tax fund can be used for developing
low-carbon sector (Revenue recycling)
• Product is more competitive in the case
of carbon border adjustment is
implemented
• Increase company efficiency
• Increase involvement of private entities.
Threats
•Carbon leakage
•Governance in tax fund
management
Carbon
Tax

34. How do we deal with the weaknesses
and threats?
The emission reduction is
potentially not meeting the
target
The degree of certainty in meeting the
environmental targets can be
increased through dynamic
adjustment to changing circumstances
(e.g. Tax rate can be altered to reflect
the level of progress in emission
reduction)
Potentially slower the
economy (temporarily) due
to competitiveness
Implementation of tax-free
thresholds (SA), reduced tax
rate for industry (Denmark),
reducing current energy
taxes, reducing bad taxes
(salary, VAT)
Governance in tax fund management can be done through a new
bureau/office which is directly supervised by the Ministry of
Finance and collaborates with the international organization to
ensure the transparency

35. Conclusion
• Carbon tax is the most feasible to implement in
Indonesia as it does not require complicated
infrastructure
• The implementation of the taxes, however have to
be done gradually to increase the reception from
all sectors
• It is required to provide assistance for the energy
intensive industry as it will be hit the hardest by the
implementation of carbon tax
• To ensure the transparency of the carbon tax fund
management, it is suggested to establish a new
body/bureau