Effect of Carbon Tax on Emission Reduction and Renewable Energy Promotion in Indonesia: A Preliminary Analysis

Abstract

As a developing country with the world’s fourth-largest population, and as one of the largest global emitters of carbon, Indonesia’s policy in energy conservation and transformation, particularly in the power plant sector, is likely impacting global environmental targets. Also, Indonesia’s current policy seems inadequate to achieve its national energy targets. Implementing a carbon tax may be suitable for promoting an energy transformation towards becoming environmentally friendlier since it will discourage fossil-based energy while financing renewable energy development. This study attempts to identify the potential efficiency of a carbon tax implementation by simulating different carbon tax implementations and relocation policies using dynamic computable general equilibrium modeling. Despite many simulations being unfavorable to the economic situation, investing carbon tax revenue into biofuels may offer the best overall impact compared to the other simulations. However, as the results show, the implementation of a carbon tax may not achieve the desired energy mix targets. None of the carbon tax simulations has the benefit of a double dividend.