Taxing Coal to Hit the Goals: A simple way for Indonesia to reduce carbon emissions

The Government of Indonesia is considering options for carbon pricing to reduce greenhouse gas emissions. Carbon pricing is an effective and economically efficient way to reduce emissions, but details on operation and implementation could take years to resolve. As an interim and immediate measure, we recommend the government simply increase taxes on coal as a de facto form of carbon taxation. A coal tax would immediately cover 40% of Indonesia’s energy-related emissions, be relatively easy to administer (applying to one fuel at one rate), and generate significant revenue. A tax of IDR 78,700 (USD 5.50) per tonne of coal—equivalent to a carbon tax of around IDR 32,000 (USD 2.20) per tonne CO2—would generate around IDR 49 trillion (USD 3.6 billion) per year. The revenue could be used to compensate vulnerable households and sectors for higher energy prices, encourage investment in clean energy, and assist coal workers and communities.

India has demonstrated that such a tax is politically and economically feasible. Like Indonesia, India has a large domestic coal industry, substantial electricity subsidies, significant poverty, and rapidly growing electricity demand. Despite these challenges, India imposed a coal “cess” (special tax) in 2010, which is now equivalent to USD 5.50 per tonne and raised USD 3.7 billion in 2019. A special coal tax in Indonesia would help deliver the government’s goals to reduce carbon emissions and toxic air pollution, promote renewable energy, and increase revenue.