Addressing Climate Change: A Call for Sustainable Development Policies

Oleh: Wisnu Saka Saputra, the Directorate General of Taxes officer

Sustainable development has become a pressing global agenda amidst increasing concerns about climate change and environmental degradation. Scientists predict that the Earth's temperature will surpass the critical 1.5-degree Celsius threshold by 2027. This signifies a 1.5-degree Celsius increase compared to the latter half of the 19th century, before fossil fuel emissions and industrialization escalated (BBC, 2023).

The International Energy Agency (IEA) reports that global CO2 production reached a record high in 2022. The volume of greenhouse gas emissions caused by energy production increased by 0.9%, reaching 36.8 gigatons. According to the National Aeronautics and Space Administration (NASA), one gigaton is equivalent to about 10,000 fully loaded aircraft carriers.

Surprisingly, Indonesia plays a significant role in influencing global environmental changes due to carbon emissions. Indonesia ranks fifth as the country with the highest cumulative carbon emissions in the world, reaching 102,562 GtCO2 (Katadata, 2022).

The industrial sector contributes the most to climate change and environmental damage. A shift towards the green industry has become an urgent necessity. The concept of green industry emerges as a solution that can redirect the industry's focus from a conventional model that neglects environmental impact to a paradigm focused not only on economic growth but also on environmentally sustainable economic development.

Fiscal policy instruments, such as providing environmental tax incentives, can be crucial tools to motivate positive changes towards sustainable development, such as the implementation of carbon taxes, green taxes, tax holidays, and tax allowances.

Carbon Tax in the Harmonization of Tax Regulations Law

A carbon tax is imposed on fuel usage based on its carbon content. The government has implemented a carbon tax in Law Number 7 of 2021 concerning the Harmonization of Tax Regulations, targeted to be effective in 2025.

In this law, the lowest carbon tax rate is Rp 30 per kilogram of carbon dioxide equivalent (CO2e). Indonesia employs a cap-and-tax scheme, a combination of cap-and-trade and tax. This scheme serves as an incentive for carbon trading but becomes a penalty if industries fail to meet their emission limit obligations.

In contrast to other countries that universally apply carbon taxes, Indonesia is cautious about imposing carbon taxes. The government does not apply the carbon tax to all emission-producing sectors simultaneously but gradually imposes it on specific sectors. The power plant-coal-fired power plant (PLTU) sector is the first sector subject to carbon tax, followed by an expansion to other sectors (EB Barus and S Wijaya, 2021:274).

The carbon tax will be a new source of revenue while supporting sustainable development. This is supported by a study in Australia conducted by John Humphreys (2007) in "Exploring a Carbon Tax for Australia," stating that a carbon tax of A$15 per ton would increase government revenue by about A$6.5 billion, and A$30 per ton would generate government revenue of A$13 billion.

Implementing a Green Tax

Unlike carbon tax, green tax has a broader scope, covering not only greenhouse gas emissions but also environmental issues such as water pollution, hazardous waste, deforestation, and other environmental problems. The government can implement green taxes in several provinces, as exemplified by China.

China proves the effectiveness of environmental taxes, or green taxes. Several empirical findings state that consistent enforcement of environmental regulations can bring economic growth as well as an improvement in environmental quality (Rahmawati, 2019).

There are two common discourses about green tax, namely the concept of environmental tax application and tax credit. The concept of environmental tax application states that every company worsening environmental conditions will be subject to mandatory levies (the polluter pays principle).

The concept of tax credit is very effective in the United States, where public awareness is high. For example, if a business buys a hybrid car or an electric-powered vehicle, they are given more tax credit, for instance, 30% of the car's price, with a maximum reduction of Rp 10 million. Another example is for consumers of non-CFC air conditioners, who are given a 10% tax reduction from the AC price (EM Pratiwi and Gadhang S, 2014:449).

Tax Holiday and Tax Allowance

The third option for tax incentives is the granting of tax holidays and tax allowances to productive industries to maintain environmental sustainability. Providing tax allowances and tax holidays to green industries can stimulate investment in sustainable technologies and innovations.

The government must be selective in granting tax holidays and tax allowances to investors, not only considering the Break Even Point (BEP) and Internal Rate of Return (IRR) aspects but also examining the externalities generated by the industry. Thus, the granting of tax incentives encourages the growth of investment in green industries.

Research conducted by Dzulfan H. et al. (2022:59) states that the illustration of tax allowance and tax holiday incentives implies corporate cash savings of up to 100%. These incentives have been regulated through the Minister of Finance Regulation (PMK) Number 130/PMK.010/2020 concerning the Provision of Income Tax Reduction Facilities for Corporations.

Incentives for green industries must pay attention to revenue productivity and the Green Industry Standard (SIH) regulated in Law Number 3 of 2014 concerning industry. The selective application of tax incentives is implemented to anticipate the potential shortfall in tax revenue due to the granting of tax holiday and tax allowance incentives.

In economic principles, it is known as the principle of individual response to incentives, where everyone does something because of incentives. Providing tax incentives such as green tax, carbon tax, tax allowance, and tax holidays plays a central role in promoting sustainable development towards the vision of a green constitution.

The green constitution is an idea from Prof. Jimly Asshiddiqie that can serve as a legal guide and a symbol of Indonesia's commitment to sustainable development. With wise tax incentives, Indonesia can shape a sustainable business climate and have a positive impact on the environment while maintaining a balance between economic growth and environmental protection for future generations.

*) This article represents the author's personal views and does not represent the stance of the institution. The Indonesian version of this article has been published on DDTC News on September 13th, 2023.

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