Carbon Pricing In Indonesia: Ideally and The Regulation

By Donke Ridhon Kahfi & Justin Huang



In 2021, Indonesia has enacted the Tax Regulation Harmonization Law (Undang-Undang tentang Harmonisasi Perpajakan / UU HPP), in which the carbon tax is stipulated in this law. We will delve deeper on how carbon tax policy is regulated and implemented. In which, The carbon tax regulation application in Indonesia should be as an environmental tax and be a form of compensation for polluting the environment. This article will discuss carbon tax policy in Indonesia and whether it is a just policy as an environmental tax. Therefore several points of discussion to answer this question includes: 1) carbon pricing in general, 2) Purpose of implementing carbon pricing/carbon tax vis-a-vis developing countries, 3) Carbon tax policy in Indonesia.


What is Carbon Pricing?

Carbon pricing is an approach to reduce carbon emissions (greenhouse gas or GHG) or an instrument used to determine the external cost of greenhouse gas emissions that uses market mechanisms to pass the cost of emitting on to emitters. The cost of emissions is the cost that the public pays for, such as damage to crops, heat waves and droughts, and loss of property from flooding and sea level rise and connects them to their sources through a price, usually in the form of a price on the carbon dioxide (CO2) emitted.

Carbon pricing can be broadly categorized into two approaches: one is a carbon tax that regulates the price of carbon; and the other is cap-and-trade.[1] The former can send a predetermined price signal but cannot strictly control emissions, while the latter can achieve predetermined emission levels but cannot strictly control carbon price.[2] Essentially carbon tax is a taxation of carbon emission emitted by industries, while cap-and-trade is a model in which industries are given quotas for allowed carbon emission to be emitted by each one respectively. The quotas then are transactable or tradeable, which ultimately create a “carbon market”.


Purpose of implementing carbon pricing/carbon tax vis-a-vis developing countries

Carbon taxation should have a different approach to developing countries. Carbon taxation policies for developing countries need to be followed by financial incentives for investment in low carbon technologies.[3] Thus, carbon taxation is not simply used to collect funds similar to general taxation, especially in countries where due to lack of options must rely on industries that emit high levels of carbon. By providing incentives for investment in the development of low-carbon technologies for developing countries, the global transition and low-carbon climate will be achieved at a faster pace. Which is the main purpose of addressing the global climate change issue. 


Carbon Tax Policy in Indonesia

             Moving on to the discussion on Carbon Tax Policy in Indonesia, in Law No. 7 of 2021 Concerning Harmonization of Tax Regulations, the government enacted a carbon tax (UU HPP). The HPP Law’s Article 13 mandates, among other things, that carbon emissions that harm the environment must be subject to a fee.[4] A person or business that purchases carbon goods and/or engages in activities that cause carbon emissions is the target of the carbon tax. While purchasing products or engaging in activities that result in a specific level of carbon emissions is the goal of the carbon tax, The carbon tax rate is set at a minimum of IDR 30.00/CO2e and is intended to be higher than or equal to the carbon price in the carbon market.

More specifically, it is contained in paragraphs (12) and (15) of Article 13 which state that there is an allocation of revenue from carbon taxes for climate change control. In the HPP Law, this revenue allocation is not specified in the law. Meanwhile, it needs to be regulated in laws and regulations in regulating schemes for allocating revenue from carbon taxes for carbon climate situations and forgetting that it is also necessary to provide incentives for investment in the development of low-carbon technologies for developing countries. Regulations regarding these matters have so far not been regulated in implementing regulations derived from this law.

The implementation of the carbon tax does not only refer to the HPP Law. Carbon tax is one of the Carbon Economic Value instruments, so this instrument is related to Presidential Decree no. 98 of 2021 concerning Implementation of Carbon Economic Value for Achieving Nationally Determined Contribution Targets and Control of Greenhouse Gas Emissions in National Development. This presidential decree does not regulate carbon taxation, but it is only the basis for setting carbon economic value as the basis of implementing carbon tax. As this far, there is yet to be an implementing regulation vis-a-vis carbon tax regulation as mandated in UU HPP, which implies the purpose of imposing carbon tax on developing countries has not been achieved.



            Based on the discussions on this article, there are several points that we can conclude along the carbon tax in Indonesia, ideally and the actual regulation thus far. Essentially, carbon pricing and taxation policies in developing countries should be accompanied by financial incentives to support investment in low-carbon technologies. This approach can help to accelerate the global transition to a low-carbon economy and address climate change. In Indonesia, the government has enacted a carbon tax through UU HPP, but regulations regarding revenue allocation and incentives for investment in low-carbon technologies have not been specified in implementing regulations. As a result, the full purpose of implementing the carbon tax in Indonesia has not been achieved.



[1] Kojima, Satoshi, and Kenji Asakawa. “Carbon Pricing: A Key Instrument to Facilitate Low Carbon Transition.” Institute for Global Environmental Strategies, 2016.

[2] Ibid

[3] Ibid

[4] UU HPP, Article 13