![Introduction
Indonesia consists of over 17,000 Islands and thus, is very vulnerable to the effect of climate change such as the rising of sea level. Each year, the
sea level surrounding Indonesia rises by 0,8 – 1,2 cm.
Bappenas (2021)
Since 2010 – 2018, the green house effect emission has been climbing by 4,3% each year [source: KJHK (2020)]. That aside, since 1981 – 2018,
the temperature in Indonesia has been rising each year by 0,03oC.
BMKG (2020)
Risks of Climate Change
The increase in flood occurrences as well as draught will make clean water
scarce.
Forest fires are more likely to occur, and it will cause further damage or lost to
the ecosystem, wildlife, and natural resources.
The rise in temperature causes the sea water temperature to increase,
damaging coral reefs, marine life, and the whole ecosystem.
Draught will hinder food production and will dwindle supply for both people and
wildlife.
Temperature rise causes disease to rapidly multiply and spread, decreasing
health quality.
Climate change causes the increase likelihood of the occurrence
of hydrometeorology disasters which currently makes up of 80% of the
disaster that occurred in Indonesia.
Reference: NDC (2016)
The risk of Indonesia’s GDP lost of up to 3,45% by
2030. Reference: Roadmap NDC Adaptasi, 2020
International Effort to Mitigate Climate Change
1980 The World Climate Research Program was created.
1988 The United Nation sets up the Intergovernmental Panel on Climate
Change (IPCC) to prepare and publish reports on the current
scientific knowledge related to climate change.
1992 The Rio Earth Summit was held and 166 countries signed the
United Nations Framework Convention on Climate Change
(UNFCCC).
1997 Kyoto Protocol was adopted which goal was to reduce emission of
green-house gases by 5.2% in comparison to the level in 1990 by
2008-2012.
2005 The European Union sets up their Carbon Exchange policy which
states that companies are granted emissions allowance and if they
exceed that allowance, they have to purchase allowance from other
companies that does not exceed their allowance.
2015 The Paris Agreement was signed by all country, and it aims to limit
the rise in temperature to well below 2oC. It also regulates that
developed countries have to help developing countries to combat
climate change.
2019 The European Green Deal was adopted by the European Council
which goal is to achieve carbon neutrality by 2050 (net-zero
emissions). Other major countries such as China and the USA also
made similar pledge.
A H R P L e g a l B r i e f
2018 IPCC Climate Experts posted three reports on the devastating
effect of climate change in the ozone layer, land, and ocean. These
reports solidify the international community's commitment to curb
climate change.](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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The Implementation of Carbon Tax for Coal-Fired Steam Power Plant.pdf
- 1. Legal Brief The Implementation of Carbon Tax for Coal- Fired Steam Power Plant
- 2. Introduction Indonesia consists of over 17,000 Islands and thus, is very vulnerable to the effect of climate change such as the rising of sea level. Each year, the sea level surrounding Indonesia rises by 0,8 – 1,2 cm. Bappenas (2021) Since 2010 – 2018, the green house effect emission has been climbing by 4,3% each year [source: KJHK (2020)]. That aside, since 1981 – 2018, the temperature in Indonesia has been rising each year by 0,03oC. BMKG (2020) Risks of Climate Change The increase in flood occurrences as well as draught will make clean water scarce. Forest fires are more likely to occur, and it will cause further damage or lost to the ecosystem, wildlife, and natural resources. The rise in temperature causes the sea water temperature to increase, damaging coral reefs, marine life, and the whole ecosystem. Draught will hinder food production and will dwindle supply for both people and wildlife. Temperature rise causes disease to rapidly multiply and spread, decreasing health quality. Climate change causes the increase likelihood of the occurrence of hydrometeorology disasters which currently makes up of 80% of the disaster that occurred in Indonesia. Reference: NDC (2016) The risk of Indonesia’s GDP lost of up to 3,45% by 2030. Reference: Roadmap NDC Adaptasi, 2020 International Effort to Mitigate Climate Change 1980 The World Climate Research Program was created. 1988 The United Nation sets up the Intergovernmental Panel on Climate Change (IPCC) to prepare and publish reports on the current scientific knowledge related to climate change. 1992 The Rio Earth Summit was held and 166 countries signed the United Nations Framework Convention on Climate Change (UNFCCC). 1997 Kyoto Protocol was adopted which goal was to reduce emission of green-house gases by 5.2% in comparison to the level in 1990 by 2008-2012. 2005 The European Union sets up their Carbon Exchange policy which states that companies are granted emissions allowance and if they exceed that allowance, they have to purchase allowance from other companies that does not exceed their allowance. 2015 The Paris Agreement was signed by all country, and it aims to limit the rise in temperature to well below 2oC. It also regulates that developed countries have to help developing countries to combat climate change. 2019 The European Green Deal was adopted by the European Council which goal is to achieve carbon neutrality by 2050 (net-zero emissions). Other major countries such as China and the USA also made similar pledge. A H R P L e g a l B r i e f 2018 IPCC Climate Experts posted three reports on the devastating effect of climate change in the ozone layer, land, and ocean. These reports solidify the international community's commitment to curb climate change.
- 3. Indonesia’s Effort to Combat Climate Change Indonesia has ratified the Paris Agreement to The United Nations Framework Convention on Climate Change (“The Paris Agreement”) with Law of Indonesia Number 16 of 2016 on The Ratification of The Paris Convention (“Law 6/2016”). All countries party to the convention are required to commit to reduce their greenhouse gas (“GHG”) emissions. To show its commitment, Indonesia has promulgated Regulation of The President of The Republic of Indonesia Number 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 (“PR 98/2021”). Indonesia has conveyed its commitment through stating the Enhance National Determined Contribution (“NDC”) to the UNFCCC on 23 September 2022. Enhance NDC is a transition to Second NDC that will be adjusted with the Long-Term Low Carbon and Climate Resilience Strategy (LTS-LCCR) 2050 that aims to achieve Net Zero Emission by 2060 or earlier. Law and Regulation In order to facilitate its commitment to reduce its GHG emission, - specifically in the Coal-Fired Steam Power Plant [Pembangkit Listrik Tenaga Uap (PLTU) Batu Bara] - the Indonesian Government has enacted the following (but not limited to) regulations: Law 6/2016. Law Number 7 of 2021 on the Harmonization of Tax Regulation (“Law 7/2021”). PR 98/2021. Coal-Fired Steam Power Plant Carbon Tax Map 2021 2022 2025 Enactment of Law 7/2021. Enactment of Regulation of PR 98/2021. Technical development of Carbon Tax and carbon exchange mechanism. Piloting of carbon trade in the power plant sector to be set at Rp30.00/kgCO2e. Synchronization of the ‘Cap and Trade’ and ‘Cap and Tax’ in the Electrical Sector. Setting the carbon emission limit (cap) of coal-fired steam power plant. Implementation of Carbon Tax in a limited scope on coal-fired steam power plant at Rp30.00/kgCO2e. Preparation of the MRV System to support carbon trading. Preparation of the technical regulation on carbon trading. The full implementation of carbon trading via the carbon exchange. The expansion of the ‘Cap and Trade’ policy to other sectors. A H R P L e g a l B r i e f In addition, the Indonesian Government is currently drafting other technical implementation regulations for Law 16/2016, such as Ministry of Finance Regulation on the Fare and Basis for Carbon Tax, Ministry of Finance Regulation on the Mechanism to Charge Carbon Tax, Government Regulation on Carbon Map, and Government Regulation on the Subject and Usage of Carbon Tax. Reference: Pajak Karbon di Indonesia – Ministry of Finance of the Republic of Indonesia (2021) Reference: Circular Letter of Ministry of Environtment and Forestry Number SE.5/MENLHK/SETJEN/PPI.3/5/2023
- 4. Overview of Carbon Taxation under Law 7/2021 Carbon Tax is applied on carbon emissions that give negative impact to the environment. The term "carbon emissions" refers to emissions of carbon dioxide equivalents (CO2e). An individual or a corporate that acquired goods containing carbon and/or carrying out activities causing carbon emission is subject to Carbon Tax. Reference: Art. 13 (1) and Art. 13 (5) Law 7/2021 Carbon Tax is to be payable: at the time the goods containing carbon is acquired; at the end of the calendar year period when the activities that resulted in certain amount of carbon emissions occurred; or at another time, which shall be further regulated by a Government Regulation. Reference: Art. 13 (7) Law 7/2021 Definition of Carbon Tax & Carbon Tax Subject A H R P L e g a l B r i e f Carbon Tax is payable on the acquisition of goods containing carbon or activities resulted in carbon emission in a certain amount and for a certain period. The Carbon Tax rate is proposed to be higher than or equivalent to the carbon price rate at the carbon market per kilogram of carbon dioxide equivalent (CO2e) or its equivalent unit. If the carbon price rate at the carbon market is lower than Rp30 per kilogram CO2e, the law sets a Carbon Tax floor of Rp30 per kilogram of CO2e or its equivalent unit. Reference: Art. 13 (8) and Art.13(9) Law 7/2021 Taxpayer that participates in the carbon emission trading, carbon emission balancing and/ or other mechanism according to the prevailing laws in the environment sector can be given Carbon Tax reduction and/ or other treatment on its Carbon Tax obligations. Rate of Carbon Tax Reference: Art. 13 (13) Law 7/2021 When is the Carbon Tax due? Carbon Tax Applicability The Carbon Road Map requires the Carbon Tax to be implemented in the following stages: 2021 : Development of a carbon-trading mechanism. 2022 to 2024: The Carbon Tax will initially be applied from 1 April 2022 only to coal-fired steam power plants, with an initial rate of 30 rupiah per kilogram of CO2 equivalent and will then be subject to a carbon emission cap and tax system. 2025 onwards: The Carbon Tax will be expanded to cover all other relevant carbon producing sectors, including the other Priority Sectors, by taking into account the economic conditions, impact and scale of implementation of the Carbon Tax. Reference: Explanation of Art. 13 (3) Law 7/2021 Reference: Art. 13 (6) Law 7/2021
- 5. A H R P L e g a l B r i e f Choice of Tax Base The most important consideration in choosing the base of Carbon Tax is to maximize the coverage of emissions sources (thereby avoiding implicit or explicit exemptions to significantly polluting activities), although beyond some point, further extensions to the tax base may not justify the additional administrative and compliance complexities. All potential CO2 emissions across different fuel types and fuel users should be taxed at the same rate, as they all cause the same environmental damage regardless of how they are generated or in which location. Reference: Ian Parry, et al. , “How to Design a Carbon Tax,” Fiscal Policy to Mitigate Climate Change: A Guide for Policymakers, International Monetary Fund, University of Oxford, University of Maryland and Resources for the Future, pg. 29. Reference: Juris Justitio Hakim Putra, et al., “Comparing “Carbon Tax” and “Cap and Trade” as Mechanism to Reduce Emission to Indonesia”, International Journal of Energy Economics and Policy, Vol 11, Issue 5, 2021, pg. 110. The Precautionary Principle This principle presents the possibility of potential long-term environmental impact that cannot be adequately measured at the point of decision-making, preventative steps should be taken. The Principle of Common but Differentiated Responsibilities The principle assumes that all country accept accountability for preventing environmental destruction, albeit at varying degrees of commitment based on their social and economic growth. The Polluter-pays Principle It promotes the internalization of environmental costs by the usage of economic tools, based on the principle that emissions should be borne by the polluter rather than shifted to the population. The Preventive Principle It notes that, in compliance with the United Nations Charter and international law standards, states have the sovereign right to exploit their own resources in line with their own environmental and development policies, as well as the duty to ensure that actions under their authority or influence do not affect the environment of other States or areas outside their reach The strategy for introducing Carbon Tax in Indonesia is denoted as Cap and Tax. This approach integrates a trading system (Cap and Trade) with a Carbon Taxation system (Carbon Tax). Consequently, the government, acting through the Ministry vested with the appropriate authority and expertise, will define and establish the highest allowable threshold for carbon emissions for each company. This upper limit represents the entitlement of these companies to produce emissions up to that specific quantity, commonly known as the "Cap." Reference: Dani Ramdani, “Indonesia’s Economic Impact of the Carbon Tax”, Jurnal Penelitian Ilmu Ekonomi, Vol. 13, March 2023, pg. 70. Carbon Tax Implementation Plan in Indonesia Carbon Tax Concept and Principles The Principles of Carbon Tax
- 6. Carbon Tax Implementation Scheme in Carbon Trading ii. While emitters that produce emissions above the cap, but cannot purchase and offset all excess emissions, the remaining emissions will be taxed. Emitters that produce emissions above the cap are required to purchase from emitters that produce emissions below the cap and also offset. Above the cap and buy Bellow the cap and sell Above the cap and pay tax Cap Cap a B Buy/ Offset Sell Buy/ Offset Tax Carbon Tax Implementation Scheme in Carbon Trading In the event the company manages to change its behavior to be more environmentally friendly so that the total carbon emissions produced are still below the given stamp, then the difference is an asset for the company. This difference is what became known in Indonesia as GHG Emission Reduction Certificate (Sertifikat Pengurangan Emisi Gas Rumah Kaca or “SPE-GRK”). SPE-GRK is a form of proof of emission reduction by businesses and/or activities that have gone through Measurement, Reporting, and Verification or Verification or Measurement, Reporting, and Verification, and recorded in the National Registry System for Climate Change Control in the form of a number and/or code Climate Change Control in the form of a registry number and/or code [Art 1 (18) of Minister of Environment and Forestry Regulation Number 21 of 2022 on Procedures for Implementing the Value of Carbon Economy (“MoE&F Regulation 21/2022”)]. Restrictions on the acquisition of SPE-GRK are limited to 2 (two) years after issuance and after that SPE-GRK cannot be sold again [Art. 12 (7), 12 (8) MoE&F Regulation 21/2022]. The reduction in the amount of carbon tax owed is regulated in Art. 13 (13) Law 7/2021, where this paragraph states that every taxpayer who participates in trading carbon emissions in the carbon market can be given a Carbon Tax reduction. This means that in the event a company that produces emissions exceeds the stamp succeeds in purchasing a credit or SPE-GRK from another company that produces emissions under the stamp, this SPE-GRK will be used as a deduction from the Carbon Tax. Reference: Directorate General of Electricity Ministry of Energy and Mineral Resources Republic of Indonesia, Seminar Material for Webinar on the Implementation of Carbon Economic Value in the Electricity Subsector, Carbon Trading Trial at Coal Power Plant, 2 December 2021 A H R P L e g a l B r i e f
- 7. Illustrations of Carbon Tax Implementation Against Coal- Fired Steam Power Plant (1/3) A H R P L e g a l B r i e f Power plant capacity : 800 MW Cap on emissions : 0,918 tCO2/Mwh Gross electricity production : 6.100.000 MWh Total GHG Emissions : 5.800.000 tCO2 Emission cap : 0,918 X 6.100.000 = 5.599.800 tCO2 Power Plant B does not participate in carbon emissions trading or carbon emissions offsetting. Calculation on Carbon Tax Tax Base : Total GHG Emissions – Emission cap : 5.800.000 tCO2 – 5.599.800 tCO2 : 200.200 tCO2 Tax Payable : Tax Base X Tax Rate : 200.200 tCO2 X Rp30.000/tCO2 : Rp6.006.000.000 Deduction : Rp0 Carbon Tax : Tax Payable – Deduction : Rp6.006.000.000 – Rp0 : Rp6.006.000.000 [assumption that no deduction on Carbon Tax payable is given]. Tax Carbon Tax Payable 200.200 tCO2 Power Plant A Power Plant B Total GHG Emissions Emission Cap Sell Power Plant B Reference:: Fiscal Policy Agency of the Ministry of Finance of the Republic of Indonesia, ‘Carbon Tax in Indonesia - Efforts in Climate Change Mitigation and Sustainable Economic Growth’, https://gatrik.esdm.go.id/assets/uploads/download_index/files/2bb41- bahan-bkf-kemenkeu.pdf.
- 8. Illustrations of Carbon Tax Implementation Against Coal- Fired Steam Power Plant (2/3) A H R P L e g a l B r i e f Power plant capacity : 800 MW Cap on emissions : 0,918 tCO2/Mwh Gross electricity production : 6.100.000 MWh Total GHG Emissions : 5.800.000 tCO2 Emission cap : 0,918 X 6.100.000 = 5.599.800 tCO2 Power Plant B participates in carbon emissions trading or carbon emissions offsetting in which Power Plant B obtains SPE-GRK. Calculation on Carbon Tax Tax Base : Total GHG Emissions – Emission cap : 5.800.000 tCO2 – 5.599.800 tCO2 : 200.200 tCO2 Tax Payable : Tax Base X Tax Rate : 200.200 tCO2 X Rp30.000/tCO2 : Rp6.006.000.000 Deduction : 200.200 tCO2 x Rp30.000 : Rp6.006.0000.000 Carbon Tax : Tax Payable – Deduction : Rp6.006.000.000 – Rp6.006.0000.000 : Rp0 [assumption that deduction on Carbon Tax payable is given on all submitted SPE-GRK]. Buy Carbon Tax Payable 200.200 tCO2 Total GHG Emissions SPE-GRK 200.200 tCO2 Sell Power Plant A Power Plant B Emission Cap Power Plant B Reference: Fiscal Policy Agency of the Ministry of Finance of the Republic of Indonesia, ‘Carbon Tax in Indonesia - Efforts in Climate Change Mitigation and Sustainable Economic Growth’, https://gatrik.esdm.go.id/assets/uploads/download_index/files/2bb41- bahan-bkf-kemenkeu.pdf
- 9. Illustrations of Carbon Tax Implementation Against Coal- Fired Steam Power Plant (3/3) A H R P L e g a l B r i e f Buy Carbon Tax Payable 200.200 tCO2 Power Plant A Power Plant B Total Greenhouse Gas Emissions SIE/SPE 100.100 tCO2 Carbon Tax 100.100 tCO2 Emission Cap Tax Power Plant B Power plant capacity : 800 MW Cap on emissions : 0,918 tCO2/Mwh Gross electricity production : 6.100.000 MWh Total GHG Emissions : 5.800.000 tCO2 Emission cap : 0,918 X 6.100.000 = 5.599.800 tCO2 Power Plant B participates in carbon emissions trading or carbon emissions offsetting in which Power Plant B obtains SPE-GRK in the amount of 100.1000 tCO2 which act as the Carbon Tax deduction. Calculation on Carbon Tax Tax Base : Total GHG Emissions – Emission cap : 5.800.000 tCO2 – 5.599.800 tCO2 : 200.200 tCO2 Tax Payable : Tax Base X Tax Rate : 200.200 tCO2 X Rp30.000/tCO2 : Rp6.006.000.000 Deduction : 100.100 tCO2 x Rp30.000 : Rp3.003.0000.000 Carbon Tax : Tax Payable – Deduction : Rp6.006.000.000 – Rp3.003.000.000 : Rp3.003.000.000 [assumption that deduction on Carbon Tax payable is given on all submitted SPE-GRK]. Sell Reference: Fiscal Policy Agency of the Ministry of Finance of the Republic of Indonesia, ‘Carbon Tax in Indonesia - Efforts in Climate Change Mitigation and Sustainable Economic Growth’, https://gatrik.esdm.go.id/assets/uploads/download_index/files/2bb41- bahan-bkf-kemenkeu.pdf
- 10. Conclusion 01 Carbon Tax is applied on the emissions of CO2e that give negative impact to the environment. The imposition of Carbon Tax is closely related to carbon trading which means that Carbon Tax will be imposed on emissions that exceeds the Cap or the remaining emissions that exceeds the cap after emission reductions due to the implementation of SPE-GRK. The rate of Carbon Tax is set at the minimum of Rp30,00/kgCO2. 02 The implementation of Carbon Tax against coal-fired steam power plant varies depending on whether the coal-fired steam power plant is participating carbon emissions trading or carbon emissions offsetting. The non-involvement of said coal-fired steam power plant in carbon trading or carbon offsetting when it has exceeded the cap would naturally result in higher value of Carbon Tax payable. Meanwhile, the value of Carbon Tax payable becomes lower when said coal-fired steam power plant participates in carbon trading or carbon offsetting, in correlation to obtaining the SPE-GRK from other coal-fired steam power plant. 03 Climate change is a serious issue that is currently being tackled globally. To ensure the fulfilment of Indonesia’s commitment in reducing its GHG emission, several regulations such as Law 16/2016 and Law 7/2021 have been enacted. One of effort in the early stages of its GHG emission reduction is the implementation of the ‘Cap and Trade’ system for coal-fired steam power plant. A H R P L e g a l B r i e f
- 11. We will continue to follow the developments on this topic and provide additional information as it becomes available. If you have any questions on this topic, please contact: Stacia Faustine Santoso stacia@ahrplaw.com Marion Mutiara Matauch marion@ahrplaw.com Christian Chandra Lim christian@ahrplaw.com This publication has been prepared by AHRP for educational and informational purposes only. The information contained in this publication is not intended and should not be construed as legal advice. Due to the rapidly changing nature of law, AHRP makes no warranty or guarantee concerning the accuracy or completeness of this content. You should consult with an attorney to review the current status of the law and how it applies to your circumstances before deciding to take any action. World Capital Tower 19th floor Jl. Mega Kuningan Barat No.3, Kuningan Jakarta 12950 Indonesia P: +6221 50917915 +6221 50917916 E: office@ahrplaw.com www.ahrplaw.com