Carbon-tax implementation in Indonesia: a social accounting matrix analysis

As the adverse effects of climate change intensify, numerous countries are making several efforts to reduce their carbon-dioxide (CO2) emissions. One of the widely adopted strategies is the implementation of a carbon tax. This study analyzed the potential impact of a carbon tax on fuel usage on sectoral price changes and distributional impacts on households’ living expenses. Three types of simulations were employed: levying the tax only on the electricity sector, the top-10 emitter sectors, and all sectors. Using the Indonesian Social Accounting Matrix (SAM) 2015, as well as the price-multiplier matrix in the simulations, the results show that, of all production sectors, the carbon tax had the most substantial impact on the electricity sector, followed by energy-intensive sectors and rail transportation. We found that the impact of the carbon tax is more detrimental to urban households than rural households. In addition, regressiveness is stronger in urban households than in rural households. Different tax scenarios have varying impacts. Taxing all sectors leads to significant price increases across all sectors and higher living and labor costs for all groups. Government decisions on emissions taxes should carefully consider their economic effects on essential industries and vulnerable populations.