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Illustration of greenhouse gas emissions
Illustration of greenhouse gas emissions (source: pexels/pixabay)

Reducing greenhouse gas emissions is essential to mitigate climate change and keep the average earth temperature rise below 1.5 degrees Celsius. As one of the top global emitters, Indonesia has set its climate target to reduce emissions by 29% independently and 41% with International aid and reach net zero emissions by 2060. To achieve this target, Joko Widodo has issued presidential regulation No. 98 of 2021 on carbon pricing. 

Carbon pricing is a mechanism to impose a fee on emitters and offer an incentive to those who emit less or absorb emissions. Carbon pricing policy in Indonesia uses polluters-pay-principle. With this principle, those who produce greenhouse gas emissions through their activities would be charged for polluting the environment. Carbon pricing consists of several instruments: carbon trading (emission trading system & carbon offset) and non-trading instruments (carbon tax & result-based payment). 

What is Carbon Trading?

Carbon trading is the sales of carbon credit between parties whose emission has exceeded the quota and parties who absorb or produce fewer emissions. There are two types of carbon trading: emission trading system (ETS) and carbon offset. 

The emission trading system (ETS) is also commonly known as cap and trade. It is the sales of emission permits between organizations, private sectors, and countries. In the beginning, all parties involved in ETS will get a quota of how much emissions they can produce in a certain period. If a party exceeds their emission quota, they have to buy an emission permit from a party whose emission quota has not reached the limit. Hence, this system incentivizes organizations, private sectors, and countries to reduce their emissions. 

The other type of carbon trading is carbon offset, or it is also usually known as baseline-and-crediting. Under this mechanism, a buyer can buy carbon credit from an institution that has a carbon offset project such as reforestation. This carbon offset project aimed to absorb carbon. The buyer usually uses this carbon credit to reach net-zero emission or carbon-neutral. 

Carbon Tax and Result-Based Payment

Besides carbon trading, carbon pricing policy also includes non-trading instruments such as carbon tax and result-based payment. Carbon tax has been regulated through the Harmonization of Tax Regulation bill that recently has been passed by the House of Representatives. This carbon tax regulation uses a cap and tax system. In other words, the government will tax any party whose emissions have exceeded their limit or cap of IDR 30 per Kg CO2e. The carbon tax policy will be firstly imposed on coal power plant sectors by 1 April 2022.

The last instrument of carbon pricing is result-based payment (RBP). It is a policy that gives incentives or rewards to any party that succeeds in reducing emissions. Their success indicator is verified and assessed by the UNFCCC.

How Carbon Pricing Contributes to Climate Change Mitigation

Illustration of a seedling
Illustration of a seedling (source: pexels)

Carbon pricing policy would incentivize all parties, particularly corporations, to reduce their emissions. This policy would also invite investors to invest in green development or business that can absorb more emissions. Moreover, a carbon pricing policy would also help the country to overcome the difficulties in financing climate actions. 

However, carbon pricing is also not exempt from criticisms. Some environmental organizations argue that carbon offset is a false solution to climate change. It is because this solution will only give justification for corporations to keep clearing forests by exchanging their emission at another place. This solution becomes problematic because we cannot ensure whether the amount of emission that would be absorbed in other places would be equivalent or not. Furthermore, biodiversity in a particular area cannot be exchanged easily. 

Asides from that, the carbon tax rate is also considered too low. This rate is significantly lower than the carbon tax rate in Singapore that costs IDR 56.89 per kg CO2e. Previously, the Harmonization of Tax Regulation bill set a carbon tax rate of IDR 75 per kg CO2e, but this cost was negotiated into IDR 30 per kg CO2e. 

Despite the controversies that are still being debated, carbon pricing policy provides a green light for green development that is in line with sustainable consumption and production. Yet, as climate-conscious citizens, we need to keep being critical in its implementation.

Written by: Siti Aisyah Novitri

References

  • https://fiskal.kemenkeu.go.id/fiskalpedia/2021/10/06/18-nilai-ekonomi-karbon-carbon-pricing accessed on 17 October 2021. 
  • https://www.icdx.co.id/news-detail/publication/apa-yang-dimaksud-dengan-perdagangan-karbon accessed on 17 October 2021. 
  • https://www.kemenkeu.go.id/publikasi/berita/pajak-karbon-sebagai-instrumen-pengendali-perubahan-iklim/#:~:text=Tujuan%20utama%20dari%20pengenaan%20pajak,ekonomi%20hijau%20yang%20rendah%20karbon.&text=Tarif%20Rp30%20per%20kilogram%20karbon,yang%20melebihi%20cap%20yang%20ditetapkan accessed on 17 October 2021. 
  • https://tirto.id/pajak-karbon-di-uu-hpp-langkah-maju-tapi-tarif-terlalu-rendah-gkfz accessed on 17 October 2021.
  • https://www.wri.org/insights/interactive-chart-shows-changes-worlds-top-10-emitters accessed on 17 October 2021.
  • https://unfccc.int/about-us/regional-collaboration-centres/the-ci-aca-initiative/about-carbon-pricing#eq-1 accessed on 17 October 2021.

References

https://fiskal.kemenkeu.go.id/

fiskalpedia/2021/10/06/18-nilai-ekonomi-karbon-carbon-pricing accessed on 17 October 2021. 

https://www.icdx.co.id/news-detail/publication/apa-yang-dimaksud-dengan-perdagangan-karbon accessed on 17 October 2021. 

https://tirto.id/pajak-karbon-di-uu-hpp-langkah-maju-tapi-tarif-terlalu-rendah-gkfz accessed on 17 October 2021.

https://www.wri.org/insights/interactive-chart-shows-changes-worlds-top-10-emitters accessed on 17 October 2021.

https://unfccc.int/about-us/regional-collaboration-centres/the-ci-aca-initiative/about-carbon-pricing#eq-1 accessed on 17 October 2021.

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