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Indonesia’s new carbon tax signals higher power costs amid calls for clarity By Reuters

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© Reuters. FILE PHOTO – Steam and smoke billow from Indonesia Power’s coal-fired power station, which is located near an area that will be used for Java 9 & 10 Coal-Fired Steam Power Plant Project, Suralaya in Banten, Indonesia. July 11, 2020. REUTERS/Willy Kurniawan/File photo

Bernadette and Fathin Ungku

SINGAPORE/JAKARTA – Indonesia will soon become Asia’s fourth nation to implement a carbon tax. However, analysts anticipate opposition from sectors that have previously warned about implementation issues and increased power costs which could impact manufacturing competition.

Parliament approved the introduction of this tax as part of a tax overhaul that included raising VAT next year and canceling a corporate tax cut.

A carbon tax of minimum 30 rupiah (0.0021) will be implemented per kilogram of CO2 equivalent. This is less than the 75 rupiah rate originally planned.

The carbon floor rate will apply to coal-fired electricity plants starting in April, while the carbon trading system is set up. The carbon market will be operational by 2025.

Indonesia is the top global exporter of heat coal, and eighth biggest carbon emitter.

Part of a strategy to cut carbon output, the new tax will be included in a plan that includes setting a net zero emission goal for 2070-2060.

Although the carbon tax is generally well received, some analysts in the industry have raised questions about the logic behind the government taxing the carbon emissions of utilities and subsidizing the production of electricity.

Elrika Haidi, an analyst from the Institute for Energy Economics and Financial Analysis said that “it sure is a move in the right direction.”

If electricity is being subsidised, how will coal-power producers feel the impact of the carbon tax?”.

The largest economy in Southeast Asia is expected to spend $61.5 trillion rupees ($4.32billion) this year on subsidies for electricity, and $56.5 trillion in 2022.

SMOOTHER TRANSITION

Producers of coal and suppliers of electricity say that consumers will be charged more for electricity.

Bob Saril (Director at Indonesia’s State Utility PLN) stated that power prices would rise as 87% of Indonesian electricity is generated from non-renewable energie. Of course, subsidies and compensation for those who do not increase the tariff will be increased.

Hendra Sinadia (executive director, Indonesia Coal Miners Association) stated that he hopes the tax will be postponed to facilitate more talks with the coal industry.

Sinadia stated that a carbon tax will be imposed on coal-fired power stations. This will impact electricity prices as well as the competitiveness in Indonesian manufacturing.

Analyst said that the 30 rupiah lower initial rate could help ease the pain and stimulate industries to move to cleaner energy.

Nuomin Han, analyst at consultancy Wood Mackenzie, stated that the recently announced rate would incentivise smoother transitions to lower emission and avoid shocks to economy during recovery from coronavirus.

Hamdi said that it is still necessary to determine how market demand and supply for carbon are determined, given the way energy prices are currently subsidised.

Her words: “Developing good carbon pricing mechanisms can take many years, so it is important to do proper analysis and not rush.”

“The government does really need a comprehensive road map.”

According to the government, it wants to set a limit on entities’ carbon emissions. Any output that exceeds it will have its carbon trading or tax offset. Industry claims that the government hasn’t clearly defined its plan.

Sinadia from the coal association stated that this synchronisation was not crystal clear.

($1 = 14,225.0000 Rupees).



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