Indonesia takes ‘low and slow’ path to carbon tax and trade

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.

Southeast Asia’s largest economy, which relies on coal for 70% of its electricity, will set an official limit starting April 1, with those emitting above the cap required to purchase offsets or pay a tax of 30,000 rupiah ($2.10) per metric ton of carbon dioxide equivalent, fiscal policy chief Febrio Kacaribu said in an interview on Wednesday.

“We want to start it low and slow,” Kacaribu said. It’s a necessary compromise to get buy-in from lawmakers amid “challenging” talks about the energy transition and its potential toll on jobs, he added. The nation will become the second country in Southeast Asia to price carbon, after Singapore, which imposes a S$5 ($3.72) levy per ton of CO2e.

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In a pilot run this year, 32 coal-fired power plants face 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,” 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 doesn’t disrupt the economy before raising the emissions tax.

Indonesia, also a major source of the world’s palm oil, has been vocal at the COP26 climate talks about its need to protect its economic interests while addressing global warming. While the archipelagic nation has experienced firsthand the danger of rising water levels and extreme natural disasters, it is well aware of the importance of fossil fuels both to its power supply and its exports.

Key Funding

International and private-sector financing is key to helping Indonesia meet its climate targets, with President Joko Widodo calling on rich countries to make good on their pledge of $100 billion in annual financing for poorer nations’ green transition.

The government is preparing ways for that funding to come in. It could open its market to global carbon trading once nations agree on the ground rules, Kacaribu said. On Sunday, COP26 set down a broad framework for trading emissions in bilateral deals and in a United Nations-supervised marketplace. The Indonesia Stock Exchange and its London counterpart have said they will work together on a carbon bourse. 

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

First Steps

Indonesia needs $270 billion to meet its commitment to cut emissions by 29% against the business-as-usual scenario in 2030. Of that, $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,” Kacaribu said. “We offer projects. Are they going to come with similar intentions and start collaborating with us?”

(Updates with COP26 emissions trading agreement in eighth paragraph)

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