Indonesia’s fight against climate change: Carbon taxes and beyond
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Indonesia’s fight against climate change: Carbon taxes and beyond

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Ichwan Sukardi and Sophia She of RSM Indonesia explain the fiscal steps that Indonesia, one of the largest greenhouse gas emitters in Asia, is taking to become a greener country.

Climate change has steadily increased in its urgency and can be said to be at the forefront of our concerns in the survival and continuation of the human race. As such, climate change needs to be confronted, addressed, and resolved as a collective. Its far-reaching impacts and effects will leave no facet of life as we know it untouched, and the rate of deterioration continues to increase exponentially.

For the uninitiated, climate change is referred to by experts in explaining the alterations to weather patterns and climate systems which are caused by greenhouse gas concentrations. These do not only cause global warming (or rising temperatures), but also affect a variety of adjacent issues such as agricultural sustainability, rising seas, and atmospheric liveability.

Since the days of the industrial revolution, enormous volumes of carbon dioxide (CO2) and other greenhouse gases (such as methane, nitrous oxide, and chlorofluorocarbons) have been, and continue to be, released by human activity into the atmosphere. The concentration of these is now higher than it has ever been in the past 800,000 years. The issue therefore faced by governments, international organisations, and society as a whole is how to reduce the emission of greenhouse gases into the atmosphere.

According to the Climate Change Performance Index (CCPI) in 2022, Scandinavian countries are recognised as the best performers, and such results have been attributed to their commitment and efforts in renewable energy, as well as having a very high rate of carbon taxes on CO2 emissions.

Other than focusing on renewable energy, solutions in addressing climate change have ranged from fiscal policies to ethically motivated ideas, and have caused a polarisation between all stakeholders. Unsurprisingly, the introduction of morality into the issue of climate change has been said to cause more harm than good, because the focus rests on blame and guilt rather than actually solving the issue at hand.

Fiscal policies fare better in discouraging emissions of greenhouse gases into the atmosphere, though it has been argued that (a) this is not a long-term solution, and more cynically (b) this is merely an opportunity for governments to create another taxable resource stream. Regardless of sentiments toward fiscal policies, they seem to have real and actual effects (intended or otherwise) on the populace, as they involve monetary concerns. They arguably play a critical role in tackling climate change.

According to a report by the International Monetary Fund (“IMF”) on Fiscal Policies to Address Climate Change in Asia and the Pacific (FPACCAP 2021), most of the countries in the region have implemented carbon tax and emissions trading systems as part of their commitments under the Paris Agreement. Only Indonesia, Thailand and Vietnam have yet to join this list.

Singapore and Japan have both implemented carbon tax schemes, but these are still relatively low compared to European countries.

The effect of global climate change in Indonesia

As an archipelagic country with more than 17,000 islands and the fourth-largest population in the world, Indonesia is both a contributor to and a victim of the current climate change threat. Its greenhouse gas levels have been steadily increasing over the past decade, and Indonesia is one of the top ten largest carbon emitters in the world. Statistic records show that Indonesia’s greenhouse gas emission levels have increased over 313% when compared to 1990 levels.

While Indonesia has always had its fair share of global disasters such as earthquakes, floods, and tsunamis, the government’s recent announcement to move the country’s capital signals the severity of the problem, with existing projections suggesting that almost all of North Jakarta will be submerged by 2050.

Beginning the battle against climate change

Indonesia demonstrated its commitment to tackle climate change by ratifying the Paris Agreement in April 2016 through Law No. 16 of 2016. It later developed the Nationally Determined Contribution (NDC) to reduce emissions – by 29% domestically and by a further 41% with international support – by 2030.

Achieving this target will not be an easy feat to accomplish, and it will require a substantial amount of spending because of the significant exposure of physical capital to climate risks. Nevertheless, the threat is real and urgent and shall only worsen for future generations, should it not be addressed presently. Education will also play a significant role in sounding the alarm and encouraging the population to cooperate. The imposition of fiscal policies against a backdrop of minimal understanding of the issue at hand among the public is a sure-fire recipe for socioeconomic unrest.

Therefore, a comprehensive system of policy instruments is required for Indonesia to battle against climate change. This will require both organic implementation and some market interfering in the form of taxation and incentives.

Building the framework and paving the roadmap

Carbon pricing had been considered by the government of Indonesia for several years – as early as 2017, a Government Regulation (“GR”) on Environment Pricing Instruments (GR-76/2017) was issued. GR-27 acted as the first basis for implementation of Emission Trading System -and set a mandate for the system to be implemented by 2024.

“The imposition of fiscal policies against a backdrop of minimal understanding is a sure-fire recipe for socioeconomic unrest.”

Following a voluntary trial programme that was place for a 12-month period, the government of Indonesia introduced its long-anticipated carbon tax through Law No. 7 of 2021, as the Harmonisation of Tax Regulations (Harmonisasi Peraturan Perpajakan/HPP) Bill was signed by the President on October 29 2021 (the HPP Law).

On the same day, and shortly before the 2021 United Nations Climate Change Conference, Indonesia issued President Regulation No. 98 of 2021 on the ‘Implementation of Carbon Economic Value to Achieve Nationally Determined Contribution Targets and Control over Greenhouse Gas Emissions in Relation to National Development’ (Regulation No. 98).

While Indonesia is the fourth country in Asiato implement a carbon tax, it is also the second country in Southeast Asia (after Singapore) to regulate its carbon market. This is undoubtedly a significant step forward in the history of Indonesia to embrace a greener economy, and a positive mark as the country gets ready to finally map out the actions in tackling this challenge faced around the world.

Carbon taxation under the HPP Law

The HPP Law provides a framework for the implementation of a carbon tax, where the scope of the tax covers carbon emissions that have a negative impact on the environment. Naturally, the scope will be gradually refined according to the roadmap, which will consider carbon emission reduction strategies, priority sector targets, the alignment with new and renewable energy development, and the alignment with various other policies.

The carbon tax will be levied on both individuals and corporations that purchase carbon-containing goods or engage in activities that generate carbon emissions within a specified period. The explanation given in the HPP Law provides that the carbon tax will prioritise corporations and, at the initial stage, will apply only to the coal-fired power sector(which is consistent with the voluntary trial period over the past 12 months). The scope covers both independent power producers (IPP) and Indonesia’s state-owned electricity distributor, the Perusahaan Listrik Negara (PLN).

The HPP Law sets the carbon tax rate to be higher than the carbon price in the domestic carbon market per kilogram of CO2e (CO2e signifies the amount of CO2 which would have the equivalent global warming impact). The price must also be higher than IDR 30 per kilogram of CO2e (approximately $2.10 per tonne of CO2e).

Facilities are available in the form of a carbon ‘offset’ whereby participants in carbon trading and emissions offsetting (as well as other mechanisms) can be granted a carbon tax reduction and/or other incentives for the fulfilment of carbon tax obligations.

The HPP Law also provides implementation milestones as the carbon tax programme is expected to be gradually rolled out:

  • Development of a carbon trading mechanism was expected to be completed within 2021;

  • Implementation of a tax mechanism based on emission limit: in other words,adopting a mixture of ‘cap and trade’ and ‘cap and tax’ formula.(The carbon tax will be imposed on carbon emissions above the carbon limit determined by the government or relevant ministry). This will be applied initially for coal-fired power plants from April 1, 2022 (this was subsequently delayed – see below);

  • Full implementation of a carbon trading mechanism and the expansion of carbon taxation will be carried out in stages from 2025 onwards, after considering the readiness of the relevant sectors or players, economic conditions and/or the overall scale of application.

HPP Law mandates the government to issue further regulation in stipulating the roadmap policy, tax objects and subjects, taxable events, and the allocation of carbon tax revenue for climate change matters. Ministry of Finance regulations will also be issued to stipulate key features including the tax rates, the tax base, the administrative mechanism, and the procedures aiming at reducing the carbon tax or the fulfilment of carbon tax obligations.

Carbon trading programme

While carbon tax constitutes a significant piece of the puzzle for the government, importance is also attributed to the carbon trading programme which was stipulated in both the HPP Law and Regulation No. 98 under the concept of the ‘carbon economic value’. However, it remains to be seen how policies governing carbon trading and carbon tax will interface with each other.

Nevertheless, based on Regulation No. 98 as well as the trial runs conducted by the Directorate General of Electricity (“DGE”) at the Ministry of Energy and Mineral Resources (“MoEMR”) since early 2021, we can make some sense of how the overall carbon pricing instrument might work. These points are summarised below.

Division of power plant categories as regulated entities

As we know, coal-fired power plants will be the initial target sector for a carbon tax or trading scheme. These coal-fired power plants are divided into three categories, with cap values of:

  1. Power plants with a capacity of over 400 megawatt-hours (MWh); cap value of 0.918 tonnes of CO2 per MWh

  2. Power plants with a capacity of between 100-400 MWh; cap value of 1.0131 tonnes of CO2 per MWh; and

  3. Power plants with a capacity of more than 100 MWh; 1.094 tonnes of CO2 per MWh.

This division and intensity-based cap (rather than an absolute cap) is likely to be imposed on regulated entities. The aim of the government at this stage is to help coal-fired power plants to reduce their greenhouse gas emissions per unit of output.

Free allocation and beyond

At the initial stage, permits will be given by the government to coal-fired power plants to cover some of their emissions at no cost. A simple formula of an intensity cap (with a different cap for each category of power plant) multiplied by the output planned will be used to determine the number of permits granted.

More options are available for entities to pay for those emissions not included in the free allocation as the government introduces a hybrid form of carbon pricing. Essentially, while regulated entities can account for their excess emissions by purchasing permits from a carbon market, they may also invest in new or renewable energy to generate offset credits to balance out their carbon footprints.

For non-regulated entities, or entities that are not able to purchase permits or generate offset credits for emissions above a certain cap, a carbon tax will be levied on the excess emissions (as covered above).

Integrated monitoring system

An integrated monitoring system linked to a national registry system will be set up to monitor and capture emissions data submitted by regulated entities through their annual reports. The information recorded will be the basis for calculating the number of available permits for initial allocation.

Administrative sanctions

Regulated entities that fail to register or report their emission activities may face administrative sanctions in form of government warnings, coercion, fines, and the suspension or revocation of emissions permits.

As this will be the initial pilot phase, meant to be a ‘learning-by-doing’ period, no fiscal sanctions have been announced by the government.

Looming uncertainty and postponement of carbon pricing

Presently, many of the elements regarding the carbon trading scheme remain unknown. No indication has been given as to the commencement of such schemes.

Meanwhile, further details are expected to be made publicly available regarding areas such as the emission intensity cap, the overall carbon emission cap, the use of banking and borrowing mechanisms, and the method of controlling fluctuation in permit prices.

As carbon pricing is so complex, its implementation under the HPP Law has been postponed from April 2022 to July 2022. In a virtual event held in late March 2022, Indonesia’s Minister of Finance, Sri Mulyani, addressed the difficulties in carbon pricing and said that more time is needed to coordinate in synchronising the road map and harmonising the rules. Such a move has also been seen as an attempt by the government to support businesses and help its economic recovery amid surging energy prices.

Despite the delay, the launch of the carbon tax is still on track. The Indonesian government will be under the spotlight due to its role in the upcoming G20 summit, which is set to be held in Bali in November 2022. It is critical for Indonesia to showcase itself as an example for the decarbonisation part of the global economy.

Looking to the future

It is promising to see some effort and action from the Indonesian government in contributing to the global fight against climate change. While such issues require urgent attention, a cautious approach may have longer-term success rates.

It will be interesting to observe the means and methods through which the government will achieve its commitment under the Paris Agreement. According to the FPACCAP 2021 report, carbon taxes are more effective than non-tax mitigation measures such as emissions trading schemes, feebates, and regulation, which are better as complementary schemes to support carbon taxes.

Meanwhile, It remains to be seen, how carbon tax will interfere with existing conventional types of taxes such as VAT and income tax – questions such as whether carbon tax paid will become a deductible tax items, any income derived thereof will be taxable, and which government agency will be managing or administering the dispute matters, need to be addressed by the tax authorities as soon as the government steers the wheel.

No doubt Indonesia will need to pull its weight here. In order to build a sustainable and impact making carbon pricing system, the government needs to ensure transparency, accountability and clarity. Transparency is particularly vital in the process of enforcement and allows fairness amongst regulated entities.

While hopes come in many forms, the fight has just begun.

Ichwan Sukardi



RSM Indonesia

T: +62 21 5140 1340


Ichwan Sukardi is a tax partner, who heads the tax practice at RSM Indonesia. With almost 25 years of experience, he provides tax advisory services to a wide range of multinational and domestic companies, mostly in the energy sector.

Ichwan is the engagement partner for leading international oil and gas firms, and regularly assists his clients in achieving efficient tax structures for restructurings, dividend distributions, financings, and exit strategies.

Ichwan serves as the chairman of the Indonesian branch of the International Fiscal Association (IFA). He regularly speaks and writes on matters concerning the taxation of oil and gas, mining, investments, and other general tax issues.

Ichwan holds master’s degrees in international tax law from Leiden University, and in business administration from Prasetiya Mulya Business School, Indonesia. He obtained his bachelor’s degree in law from the University of Indonesia.

Sophia She


Senior manager

RSM Indonesia

T: +62 21 5140 1340


Sophia She Jiaqian is a senior manager at RSM Indonesia. With more than six years of professional experience in providing corporate compliance and advisory services, she has served clients with a business background in both Singapore and Indonesia.

Sophia is experienced in a range of international tax issues, and possesses in-depth knowledge on the application of treaties, withholding taxes, and tax restructuring. She has handled tax cases for a wide range of multinational companies in sectors including oil and gas, manufacturing, and pharmaceuticals.

Prior to joining the firm, Sophia was based in Singapore and worked with other tax consulting firms including one of the Big Four firms.

Sophia holds a bachelor’s degree in applied accountancy from Oxford Brookes University. She is fluent in both Chinese and English.

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