Amidst the global wave of change, humanity grapples with complex challenges. The World Economic Forum's Global Risks Report 2022-2023 highlights the cost of living crisis as the biggest short-term threat, while the failure to address climate change, natural disasters, biodiversity loss, and environmental damage loom as long-term issues. Governments worldwide face the daunting task of balancing societal demands, environmental protection, and national security. These dilemmas underscore the urgent need for decisive action in navigating the intricate web of priorities.
The Risks of Climate Change and Its Impact on the Indonesian Economy
Indonesia, home to over 270 million people and 17,000 islands, grapples with the profound challenges of climate change. The nation faces devastating forest fires, coastal areas threatened by rising sea levels, worsening water scarcity, degraded land and marine ecosystems, declining health standards, and food insecurity. Greenhouse gas emissions (GHG) in Indonesia have shown an upward trend, increasing by around 4.3% annually between 2010 and 2018 (Ministry of Environment and Forestry, 2020). With approximately 65% of its population living in coastal areas, Indonesia is particularly vulnerable to rising sea levels, which are currently escalating at a rate of 0.8-1.2 cm per year (National Development Planning Agency, 2021). Moreover, the country has experienced an average annual temperature rise of approximately 0.03°C from 1981 to 2018 (Meteorology, Climatology, and Geophysics Agency, 2020).
The impacts of climate change cannot be ignored, particularly the increased risk of hydrometeorological disasters that make up 80% of all disasters in Indonesia (NDC, 2016). Climate change risks also pose significant economic losses, estimated to reach 0.66% to 3.45% of the GDP by 2030 (NDC, 2020). Insufficient mitigation efforts can lead to devastating infrastructure damage, crop loss, livelihood disruption, and substantial economic harm. This exacerbates the existing cost of living crisis, with higher expenses for food, energy, fuel, healthcare, and the potential for mass migration, social instability, and conflicts.
Budget Tagging for Climate Change Control in Indonesia
The National Medium-Term Development Plan (RPJMN) 2020-2024 recognizes climate change control as the 6th priority, highlighting environmental development and climate resilience. Indonesia's commitment to addressing climate change has been evident since the ratification of the Paris Agreement in 2016. To meet set targets, specific budget tagging for climate change is essential. The state budget (APBN) plays a crucial role in promoting low-emission and climate-resilient national development. Between 2016 and 2020, 74% of the state budget was allocated to mitigation, while 26% was allocated to adaptation, aligning with the urgent need, as emphasized in the Global Risks Report, to address the long-term challenges of mitigating and adapting to climate change.
Climate change mitigation programs in Indonesia prioritize sectors such as forestry and land, energy and transportation, agriculture, industrial processes & product use (IPPU), and waste. The adaptation program focuses on health, settlements and infrastructure, food security, biodiversity of forest ecosystems, coastal areas, small islands, and research and development. Budget tagging for climate change involves 7 ministries for mitigation and 16 ministries/agencies for adaptation. From 2016 to 2021, the government allocated Rp562.34 trillion for climate change, with an average of Rp93.72 trillion annually. Notably, tax revenue is the largest contributor to the state budget, highlighting the significant role of taxes in fostering a sustainable economy and addressing climate change in Indonesia.
Taxation in Climate Crisis Commitments and Sustainable Economy
Tax collection, as a vital economic pillar, carries the responsibility of engaging in all aspects of national issues, including climate change. Indonesia has entered a significant new phase in climate crisis control with the implementation of Law Number 7 of 2021, introducing a carbon tax scheme for coal. The initial stage of the coal carbon tax, based on emission limits (cap and tax), was scheduled to commence on April 1, 2022, but was later postponed. As per the Reference Price Delivery Law (UU HPP), the tariff for the carbon tax is set at a minimum of Rp30 per kilogram of CO2e. This initiative aligns with Indonesia's commitment to reduce greenhouse gas emissions by 29%, equivalent to 834 million tons of CO2e by 2030.
Carbon taxes can bolster economic stability by incentivizing innovation and sustainable technology development. When companies face such taxes, they are motivated to find energy-efficient and carbon-reducing solutions, driving research and the adoption of environmentally friendly technologies like renewable energy and energy efficiency. Sweden's effective carbon tax implementation is a prime example. Since 1991, they've achieved a 26% decrease in per capita carbon emissions and 25% in absolute emissions, while enjoying a 69% economic growth. Carbon taxes in Sweden have boosted renewable energy and energy efficiency, fostering sustainable economic development. Indonesia can learn from Sweden's success to safeguard the environment and foster sustainable economic growth.
