Distributional Impacts of Environmental Policies in Indonesia

Indonesia’s commitment to carbon emission reduction is aligned with its global responsibilities under the Paris Agreement. The country is also one of the 52 national jurisdictions in the world that have established carbon pricing regulations (World Bank, 2023). The primary goal of carbon pricing instruments implementation is to support Indonesia in achieving its Nationally Determined Contribution – which are commitments that countries make to reduce their greenhouse gas emissions as part of climate change mitigation.

In this context, the Government of Indonesia intended to introduce carbon pricing instruments on a voluntary basis from 2021 to 2024, with a shift to mandatory enforcement expected by 2025. Despite its modest start, the introduction of this tax marks a considerable advancement in Indonesia, particularly given the few low and middle income countries that have implemented a carbon tax. 

Using carbon pricing as a method to foster a decarbonised economy is a significant policy instrument, yet it can lead to uneven burdens across different societal groups. These measures, while environmentally beneficial, may inadvertently promote inequality. If these disparities are not addressed, the push towards global decarbonation could be hindered, achieving less impact or imposing uneven costs.

Using an analytical tool from Commitment to Equity Institute (CEQ Institute), this research project aims to improve the design of policies that can both deliver environmental goals whilst reducing the distribution burden, by ensuring a just transition.

This project is part of the Extension of the EU-AFD Research Facility on Inequalities. Coordinated by AFD and financed by the European Commission, the Extension of the Facility will contribute to the development of public policies aimed at reducing inequalities in four countries: South Africa, Mexico, Colombia and Indonesia over the period 2021-2025.

This research project also complements two studies carried out by the EU-AFD Research Facility on Inequalities in collaboration with the Indonesian government on Marine Protected Areas development policies and the production of a diagnostic on inequalities in the country.

The general objective of this research project is to assess the environmental (emission) and welfare-distributional effects (indicators of poverty and inequality) of trading and non-trading instruments (carbon price and revenue). Specifically, the study aims to incorporate heterogeneous cost and impact assessments across the archipelago of Indonesia. 

The study will focus on the impact of carbon pricing and other indirect fiscal instruments (taxes and subsidies) combined with direct taxes and social transfers that can assist in the mitigation of these instruments on welfare distribution and environment.

In order to design more effective policies that meet both environmental and distributive objectives, CEQ Institute has developed an analytical tool using micro data on household characteristics, behavioural science and a data analytical tool known as microsimulation modelling. It is an ex ante planning tool taking micro units, such as households, and simulating policy changes in advance of policy implementation. 

The framework incorporates the following discrete analytical dimensions: 

• Methodological frameworks to model the distributional impact of fuel related fiscal policies;
• An Input-Output framework to track the indirect impact of carbon prices;
• Behavioural implications of alternative environmental challenges using a demand system;
• Identifying just transition solutions using social protection instruments.

The dataset integrates two primary sources: the 2016 Table Input Output from the Central Bureau of Statistics (BPS) and the 2022 National Socioeconomic Survey (SUSENAS). Data and information from the Indonesian Directorate General of Taxes and from various relevant ministries are also used to conduct the study. 

You will find below the different research papers related to this project:

In progress

Contact: 

• Emmanuel Fourmann, Research Officer, AFD