Distributional implications of carbon taxation policy in Indonesia

• Carbon policy reform in Indonesia tends to be progressive. • Households are mainly affected by the price increases in electricity and fuel. • The distribution of carbon tax impacts are more influenced by the taxation and revenue recycling scenarios than by the rate of carbon tax. • The Indonesian government would need to recycle at least 25 % of the tax revenue to shield the poorest 40 % of households from inflationary pressure. We combine the Environmentally-Extended Multi-Regional Input-Output (EE MRIO) analysis with a microsimulation analysis to estimate the distributional implications of carbon policy reform, a combination of carbon tax and revenue recycling initiatives, on households in Indonesia. We consider two relevant scenarios: an “economy-wide” carbon tax versus an “electricity-only” carbon tax. The impact of carbon policy reform is measured by the net impact of carbon tax and cash transfer relative to initial expenditure. Carbon policy reform in Indonesia tends to be progressive, meaning the relative net impact on households decreases as income increases. Carbon tax in Indonesia primarily affects households through the price increase in electricity and fuel products. The distributional impacts of a carbon policy reform are determined more by the percentage of tax revenue recycled and taxation scenario and less by the tax rate. In order to protect the poorest 40 % of Indonesian households from inflationary pressure, the Indonesian government needs to recycle 25 % of tax revenue.