Optimal Carbon Emission, Automotive Carbon Tax, and Its Earmarking Policy:

Case Study of Indonesia

by:

Ardyanto Fitrady
Center for Energy Studies and Economics Department, Faculty of Economics and Business, Gadjah Mada
University, Indonesia

Tri Widodo
Center for Southeast Asian Social Studies (CESASS), and
Economics Department, Faculty of Economics and Business, Gadjah Mada University, Indonesia

Saiful Alim Rosyadi

Center for Energy Studies,
Gadjah Mada University, Indonesia


Corresponding author. Mailing Address: Faculty of Economics and Business, Gadjah Mada University, Jl.
Humaniora No. 1, Bulaksumur, Yogyakarta 55281, Indonesia. Phone: 62 (274) 548510; fax. 62 (274) 563 212. E-
mail address: [email protected] and [email protected]
 Optimal Carbon Emission, Automotive Carbon Tax, and Its Earmarking Policy:
Case Study of Indonesia

Abstract
The objective of Indonesian automotive CO2 emission tax should be for CO2 emission reduction, Commented [S1]: Seharusnya the Indonesian
not as state’s tax revenue source. Therefore, the tax must be derived from government’s CO2 Commented [S2]: a
emission reduction target (29 percent reduction from 2030 business-as-usual emission). By Commented [S3]: the state
applying the Global Trade Analysis Project Energy (GTAP-E) and Indonesian Social Accounting Commented [S4]: the government’s
Matrix (SAM) this research withdraws some conclusions. First, the optimal range of emission
Commented [S5]: the indonesian
reduction is 25-30% as BAU in 2030. Second, the marginal abatement cost of CO2 emission is
USD 42.75 per ton CO2. Third, pecific (monetary amount) tax is theoretically proper than ad Commented [S6]: specific
valorem tax. For simplicity in administration purpose, the tax can be incorporated into the Commented [S7]: purposes
reformed PPnBM (the luxury item tax). Fourth, tax earmarking policy should be implemented
for attaining three goals: (1) climate change mitigation, (2) government tax revenue, and (3)
automotive technological progress. This study argues that 50-50 division between earmarked Commented [S8]: the 50-50
expenditure and state revenue is the ideal composition which is projected to yield 0.55 percent Commented [S9]: a 0.55
growth in GDP.

Keywords: Carbon Emission Tax, Abatement Cost, Earmarking Policy, GTAP, SAM.
JEL Classification: Q52, Q53, Q58.

1. Introduction
Climate change mitigation requires concerted efforts between countries. During 21st Commented [S10]: the 21st
Conference of the Parties of the United Nations Framework Convention on Climate Change
(UNFCCC) in 2015, members of the UNFCCC agreed on global commitment and framework
towards climate change mitigation contained in Paris Agreement. The expected result is to
reduce the global average temperature to below 2oC above pre-industrial levels and limit the
temperature increase to just 1.5oC above pre-industrial levels. Each country is obliged to submit
their Intended National Determined Contribution (INDC) and communicate its progress on Commented [S11]: its
attaining the specified target. Indonesia submitted its INDC on September 2015, well before the
conference was held. Based on assessment of carbon emission at the time, it aims to reduce Commented [S12]: an assessment
greenhouse gas (GHG) emission by 29 percent of business-as-usual condition in 2030. The Commented [S13]: a business-as-usual
estimated business-as-usual is 2.881 GtCO2 in 2030 (UNFCCC, 2015). In addition, this goal
could be deepened to a 41% cut if Indonesia gets international support. As the tenth largest
polluter in the world and the fourth largest country by population, Indonesia’s contribution to the
global program could bring significant impact.
Generally, transportation has been playing an important role in the economy. Almost all
people in Indonesia use transportation modes such as motorcycle, car, train, and many other
modes. Increase in population has in turn resulted in higher energy demand. In 2000, total energy Commented [S14]: The Increase
consumption was merely 777,925,086 BOE. In only 11 years, this number had increased to Commented [S15]: , in turn,
1,114,766,960 BOE, contributed mostly by an increase in transportation sector’s energy Commented [S16]: the transportation
consumption. From 2000 to 2011, energy use by transportation sector alone grew 6.5% annually Commented [S17]: the transportation
from 139,178,658 BOE to 277,404,656 BOE. Apart from fast-growing energy consumption,
transportation sector also regarded as a significant contributor of greenhouse gas emission. Commented [S18]: the transportation
Currently, several efforts and programs have been done by the Indonesian government to meet Commented [S19]: to
its 2030 GHG emission reduction target, specifically pertaining to automotive emission. The
Low-Cost Green Car (LCGC) program was rolled in 2013 to promote use of less-polluting Commented [S20]: the use
vehicle. Besides the LCGC program, the Ministry of Industry also planned to introduce Low- Commented [S21]: a less-polluting
Carbon Emission Program (LCEP) in the form of developing Low Carbon Emission Vehicle Commented [S22]: a low
(LCEV). Based on the National Fiscal Bureau studied with LCS UK in 2015, there was a
proposal to introduce CO2 tax for vehicle in Indonesia as one of a measure to reduce CO2 Commented [S23]: a vehicle
Emission from Road Transport. Within the Ministry of Industry’s development roadmap, LCEP Commented [S24]: Emissions
was planned to be rolled first before any CO2 tax is introduced on automotive. However, the Commented [S25]: the automotive
implementation is met by several challenges. Development of LCEV certainly requires more Commented [S26]: with
time, while on the other hand, introduction of CO2 tax is quicker as it is only a matter of
Commented [S27]: the introduction
paperwork. LCEP will also result in higher price of LCEVs due to additional cost required to
Commented [S28]: a higher
develop low-carbon emission technology. Considering the above challenges facing LCEP, it is
predicted that introduction of CO2 tax on automotive will be done before LCEVs are rolled out. Commented [S29]: the additional

The sudden implementation of CO2 tax is projected to have significant impact to automotive Commented [S30]: the introduction
industry due to the decrease of domestic consumers’ purchasing power Commented [S31]: a CO2
There are three main objectives of this paper. First, it attempts to provide a review of
Indonesian government’s carbon abatement target specified in its INDC. Second, based on the
review, it derives a scheme for calculating automotive carbon tax based on carbon emission level
and marginal abatement cost. Third, it analyzes the economic impacts and the proposed
earmarking policy of the automotive CO2 emission tax. The rest of this paper is organized as
follows. Section 2 reviews relevant theories and previous literature pertaining carbon abatement
and marginal carbon abatement. Theories that underlie the derivation of tax scheme are also
reviewed. Section 3 presents the methods in obtaining both marginal abatement cost as well as
derivation of automotive carbon tax scheme. Section 4 discuss the results and highlights some
important findings. Conclusion is drawn in section 5.

2. Literature Review
Environmental problems, including carbon emissions, generate costs to society by
reducing social welfare. While the existence of carbon in the economy are inevitable, its level
should be monitored and controlled—meaning there is a level where carbon emissions is
optimum. The marginal benefit (MB) is getting smaller as the quantity of vehicles—as well as
the emissions—(Q) increases. Consuming more vehicles will generate higher utility for agents in
the economy. However, following to the law of demand, the marginal benefit is getting smaller
as an individual goes to the higher level of consumption.
On the other hand, the marginal private cost (MPC) is getting higher as an individual
goes to higher consumption levels. However, without taking into account the negative externality
produced (in the form of congestion, CO2, or other types of pollution), when a consumer decides
to use the car, the decision of a consumer is not optimum socially. Consequently, the government
needs to correct the market by imposing a carbon tax—also known as Pigouvian tax—to force
the consumers to internalize the externality into their decision-making process and make sure the
society will enjoy an optimum social welfare. By definition Pigouvian tax is an emission fee that
is exactly equal to the aggregate marginal damage caused by the emissions at the efficient level
of pollution. It is levied on each unit of externality-generator’s output in an amount equal to the
marginal damage at the efficient level of output (Rosen and Gayer, 2014).
In the case of emission, the tax should be imposed on emissions and set equal to marginal
damage evaluated at the social optimum. The agent will choose the optimum to equate marginal
abatement cost with the tax, i.e. her private optimum. When MAC reproduces the real social cost
of abatement, then the corrected private optimum implements the social optimum and we have
marginal abatement cost equal to marginal damage. It is crucial to note that setting an optimal
tax will not automatically reduce emissions by very much. Generally, if MAC is very steep then
emissions may only reduce by an insignificant amount in response to the optimal tax. It does not
mean that the tax is not useful or has failed in any sense. It still preserves the purpose to
internalize the negative externality caused by the emissions. Socially and economically, if the
cost of reducing emissions is very high, then it is efficient to tolerate a large volume of emissions
even if they are very damaging (as long as the costs produced by the damage is lower than the
costs of eradicating the damage). The objective is to promote efficiency; reducing emissions is
not an economic goal in itself.
The basic idea is: to optimize social welfare we need to internalize the externality (to
avoid market failure) by levying tax directly on potential damage from carbon. The size of the
tax should be different from one individual to another, depends on the level of carbon emission.
Conceptually, the individual should pay as much as the cost of the environmental damage he or
she creates from consuming the cars. However, some research show that environmental tax on
consumption goods generates revenue effect (positive effect) and interdependency effect
(negative effect) affecting welfare. Thus, the optimal level with full revenue cycling is 63-78% x
marginal damage cost (Parry, 1995).
Based on the discussion above, it is important to note that we must tax the carbon
emissions, not the car. In other words, it is not about the prices of the car1 but the costs (the
carbon emission) generated by the cars. Moreover, although carbon tax will increase the tax
revenue, the main goal of this tax is to bring the emission to the optimal level. Some economists
believe that this tax will generate two types of benefits that we call by ‘double-dividend
hypothesis’. First, it will induce a better environment by forcing the agents to consume less and
consequently produce less emission. Second, it can stimulate economy by reducing distortions,
especially in the labor market. 2 Although the empirical results of this hypothesis are still
debatable (see Fullerton and Metcalf, 1997;Bovenberg, 1999;Allan et al., 2014), most
economists believe that a carbon tax is a good thing. An ideal carbon tax is believed can be an
effective tool to reduce the risk or at slow down the climate change, reduce the cost of emissions,
encourage innovation in environmental-friendly technology, as well as increase government
revenues (Marron and Toder, 2014). Utilizing a dynamic Computable General Equlibrium
(CGE) model, Liu and Lu (2015) find that the carbon tax is an effective tool to reduce emissions
in China. Zhang and Cheng (2009) also find that Government of China can implement carbon
taxes without hurting economic growth in the long run. A CGE model is also used by Allan et al.
(2014) to investigate the economic and environmental impacts of carbon taxes in Scotland. They
find that imposing £50 of carbon tax per tonne of CO2 will help the government to meet the 37
percent emission reduction target. Moreover, their results support double-dividend hypothesis as
long as the revenue is recycled via income tax.

1
In Indonesia, cars are subject to vehicle tax and luxury tax.
2
A tax in general will generate inefficiency (deadweight loss) as it will reduce the incentive for the labors to work
more and for the firms to produce more.
 Although political will is still the main problem in implementing carbon taxes, it is still
considered as a striking market-based instruments compared to command-and-control for the
abatement of carbon emissions (Herber and Raga, 1995).3 Yet, implementing Pigouvian tax in
practice is not an easy task as estimating the social cost of carbon is hard. However, we can rely
on standard principles in implementing this type of taxation. Heine et al. (2012) points out that it
should focus in exploiting emission-reduction opportunity and welfare gains, striking the right
balance of two above, and minimizing administrative complication. Imposing Carbon Tax can be
through market activities that will affect the production sector or through non-market activities
such as through driving behavior. Metcalf and Weisbach (2009) conjectures that there is a trade-
off between emissions coverage and administrative feasibility. So, finding the right balance
between those two will be challenging. Tax on quantity of emission (emissions fee) will reduce
output and tax on percentage emission/output will promote cleaner technology.
Using a CGE model for China, Guo et al. (2014) conclude that a moderate carbon tax
would substantially reduce carbon emission and slightly hamper the economic growth. Imposing
a carbon tax would increase output in production and distribution of clean power, manufacture
and processing of textiles and related products, services, and agriculture. However, it would
decrease output in sectors that use or are related to fossil fuels. They suggest that the Chinese
government has to implement the carbon tax as early as possible to meet its emission reduction
target. Utilizing difference-in-difference (DiD) method, Lin and Li (2011) show that carbon tax
has a negative significant impact on per capita carbon emission in Finland and do not have
significant impacts in Denmark, Sweden, and Netherland due to tax exemption for certain
policies on certain industries.

3. Methodology
3.1. Research Framework
This study applies the research framework as depicted in Figure 1. First, the aim of
imposing the automotive CO2 emission tax is mainly to reduce CO2 emission by 29% of business
as usual (BAU) in 2030 as the Indonesian Government target. Therefore, the magnitude of the
tax must reflex accurately this emission target. Second. by using the Global Trade Analysis
Project - Energy (GTAP-E) model simulation, this study examines whether CO 2 emission
reduction target set by the Indonesian government -i.e. 29% of business as usual (BAU) in 2030 -
is already an optimal level for Indonesian economy. Third, by using Global Trade Analysis
Project - Energy (GTAP-E) model simulation, this studyalso estimates marginal abatement cost
(MAC, USD/ton) for CO2 emission reduction of 29% of business as usual (BAU) in 2030. Fourth,
this study models the estimates annual and total (economic life) vehicle’s CO2 emission. Fifth,
after estimating each vehicle’s total economic life CO2 emission, this study then develops a
scheme of the automotive emission tax as derived from each vehicle’s CO 2 emission. Sixth, the
impact evaluation on earmarking policy of CO2 emission tax is conducted using Indonesian
Social Accounting Matrix (SAM) or Sistem Neraca Sosial Ekonomi (SNSE).

Figure 1. Research Framework

3
In term of distributional effects, Buchanan and Tolluck (1975) provide a discussion on positive theory of
externality control policy for this matter. As an opposed to Herber and Raga (1995), Buchanan and Tolluck pointed
out that producers would prefer command-and-control rather than carbon taxes because the former would generate
scarcity rents by making a barrier to entry. Additionally, they stated that the carbon taxes can be implemented well
by inventing good institutional arrangements.
 (2) Examine the
abatement target:
GTAP-E Model
simulation

(1) Target:
(5) Calculate the tax
Reduce (3) Estimate as derived from 29%
CO2 Abatement Cost of vehicle’s (6) Impact Evaluation SAM
Emission for the emission emission abatement Model: Fiscal and Earmarking
by 29% of target: GTAP-E cost
BAU Model simulation

(4) Estimate the

annual and the total
(economic life)
vehicle’s CO 2
Emission 29%:
Mathematical Model

3.2. GTAP-E Model

The GTAP-E is an energy-environmental version of Global Trade Analysis Project (GTAP)
Model, a global computable general equilibrium (CGE) model developed by Center for Global
Trade Analysis, Purdue University, United States. Burniaux and Truong (2002) extended the
original GTAP model by including energy substitution mechanism, CO2 emission, worldwide
emissions trading, and calculation of emissions tax. The model came with corresponding global
database of social accounting matrices (SAM) along with energy and environmental data to aid
in calibration process. In brief, the model has the following properties. First, households are
grouped as a single unit called “regional household” comprising private household, government
household, and savings expenditure. Both private and government household maximize their
utility subject to budget constraint derived from their receipt of factor endowment use (for
private household) and government revenue (for government household). Second, firms are
assumed to behave in a perfectly competitive market and minimize their cost subject to CES
production technology. Third, sourcing of goods i-th demand are governed by Armington
substitution elasticity parameter. Fourth, savings are spent as a purchase of fictitious capital
goods. However, GTAP model does not have a proper macro closure that links investment with
improvement in capital stocks of firms. Fifth, international transport sector represents
transportation cost between region. Energy “composite” commodity (coal, electricity, natural gas,
oil, refined oil) are a substitute to capital in firm production structure. In household consumption,
it is a substitute to “non-energy composite”.

Calculating CO2 Abatement Cost and Impact of Abatement

CO2 abatement cost is defined as a cost that the society should borne in order to obtain less
emission. The amount of abatement cost varies according to how much do the society desire less
CO2 emission. Since carbon abatement will induce large economy-wide effect, a CGE model
simulation is deemed to be suitable. In this study, CGE model simulation using GTAP-E Model
(Burniaux and Truong, 2002; Golub and McDougall, 2007) will be conducted to (See the
Appendix 1 for the detail database aggregation mapping: sector, factor and regional):
  measure various percentage amount of emission abatement’s impact to Indonesia’s GDP
(used as a measure of overall economic gain or benefit) in order to prove whether current
emission abatement target is efficient,
 calculate the amount of marginal abatement cost in Indonesia—in terms of US$ per ton
CO2—, and lastly,
 calculate the amount of marginal abatement cost for Norway, United States, United
Kingdom, Japan, China, India, and Philippines as a benchmark for various countries’
abatement cost.
The analysis in this section will refer to general economy-wide emission abatement, not specific
to automotive sector only.

GTAP-E Model Simulation Method

The macroeconomic assumptions were obtained from EconMAP 2050 Reference Dataset
(Fouré, Jean, Bénassy-Quéré, Agnès and Fontagné Lionel, 2012; 2013), a dataset containing
global macroeconomic historical data and projection from MaGE model by CEPII. In conducting
the above database update simulation, it is assumed that all factors of production except natural
resources are mobile. Current account is also set to be constant by setting the parameter
RORDELTA equals to 0. The post-simulation value represents 2030 business-as-usual economic
condition and is used as the baseline for CO2 abatement simulation scenarios.
The 29 percent reduction in CO2 is presented as the shock to the GTAP-E model. By
default, the CO2 emission is represented as an endogenous variable within the model. Therefore,
it will be swapped by an exogenous variable RCTAX (real carbon tax rate). The model calculates
the amount of carbon tax required for the economy to move into the prescribed percentage
change in CO2 emission. It is assumed that there are no emissions trading between countries.

Simulation Scenarios
First simulation: measuring optimal level of carbon abatement for Indonesia
A series of simulations are conducted against various percentage change in Indonesia’s CO2
emission with 5 percent increments. Shock to GTAP model variable gco2t (percentage change in
CO2 emissions) is introduced. Variable vgdp (percentage change in Value of GDP) and RCTAX
(real carbon tax) are observed to see the relationship between the impact of abatement to overall
economic condition and the marginal cost of abatement.
Second simulation: obtaining marginal emission abatement cost for Indonesia
In the second simulation, a shock of 29 percent reduction in Indonesia’s CO2 emission is
introduced to the model. The model then solves for variable RCTAX that provides disincentive
for economy to pollute at such that overall emission will be reduced by 29 percent.
Third simulation: obtaining marginal abatement cost for several other countries
In the third simulation, a shock of 29 percent reduction in CO2 emission is introduced for
Norway, United States, United Kingdom, Japan, China, India, and Philippines. Similar to second
simulation, the model will then solve for variable RCTAX representing the disincentive required
for each economy to move into less pollution.

3.3. Mathematical Model for Automotive CO2 Emission

To estimate the vehicle is annual and total (economic life) CO2 emission and abatement cost, this
study applies the following mathematical models:
 (1)
(2)

(3)
(4)

3.4. Social Accounting Matrix

SAM Model is used to analyze economy-wide impacts of the proposed earmarking policies. This
impact evaluation approach is more suitable as it observes market for inputs and commodities
across sectors. Figure 2.3 shows that the general equilibrium approach can capture both direct
and indirect effects in consumption and production.
Figure 2. Direct and Indirect Effects of CO2 Emission Tax and Earmarking Policy

Source: Modified from Breisinger, et al. (2010).

Automotive CO2 emission tax will certainly cause impact on the economy, specifically
on output, national income, employment, as well as various economic sectors. Breisinger et al.
(2010) suggested that any exogenous shock introduced to the model will impose direct and
indirect effects. Direct effects are represented by effects to sectors directly affected by the shock.
Hypothetically, imposition of CO2 tax would have direct impact on cost of production. Indirect
effects of CO2 tax will be determined by relationship between transportation sectors and other
sectors in the economy.
This study utilizes Indonesian Social Accounting Matrix (SAM), published by the Central
Bureau of Statistic (BPS), to construct the applied general equilibrium model. SAM is a skeletal
system data presented in matrix form, which gives a broad overview of the economic and social
conditions of society and the interrelationship between the two in a comprehensive, consistent
and integrated form (Thorbecke, 2003). BPS (2010) explains that as a system framework of
comprehensive and integrated data, SAM covers a wide range of economic and social data. This
data is consistent because it ensures that the balance of transactions in each balance sheet is
contained in it (Figure 3).

Figure 3. Circular Flow Diagram

Source: Breisinger et al. (2010)

4. Results and Discussion

4.1. Optimal Carbon Abatement Level
In reviewing the carbon abatement target, this paper mainly concerns whether the specified
level is already optimal—that is, whether the negative impact of the carbon abatement efforts can
be justified by its benefits. While the benefits of carbon abatement can be defined as having
cleaner environment, the negative impact has not been defined. Therefore, this paper will use the
change in GDP level caused by carbon abatement efforts as a measure of the associated negative
impact. GDP is chosen due to it being a measure of overall well-being of Indonesian economy.
The optimum level is thus defined as the level of carbon abatement target in which it will not
lead to negative change in GDP. Carbon abatement measures is expected to induce economy-
wide effect. A CGE model simulation is deemed to be suitable to analyze such issue as it models
the economy as an interconnected market where an impact in one market can extend to other
markets.
Table 1 shows the GTAP-E model simulation results for various rates of carbon abatement.
The aim of this simulation is to determine whether carbon abatement will incur large losses to
the economy, as measured by change in value of GDP. In theory, the optimal rate of carbon
abatement will be at the point where the change in carbon abatement equals the increase of cost
associated with abatement. Here, we can assume that the cost of having cleaner environment is
reflected in the loss of GDP. By using this assumption, the optimal rate of carbon abatement is
evaluated at the point where it yields least amount of GDP loss. Simulation results show that for
a rate of carbon abatement below 30 percent, an increase in the rate of carbon abatement will be
met by a positive marginal increase in value of GDP. However, after the rate of abatement goes
above 30 percent, an additional increase in the rate of abatement will result in less increase in
value of GDP. The current rate of carbon abatement target (29 percent less emission) lies
somewhere between the -25 and -30 percent category in the above table, and is predicted to bring
about 0.16 percent increase in value of GDP.
The simulation results confirm the fact that 29 percent carbon abatement target set by the
government is already optimal. If implemented, carbon abatement will not incur large losses to
the economy, nevertheless, causing a slight increase in overall economic activity by 0.16 percent.
At a glance, the result contradicts our common sense: how come does having less carbon-
emitting economic activities yield an increase in overall economic activities? Considering that
most of economic activities in Indonesia are pollution-intensive (low-tech manufacturing
activities, non-environmentally friendly transportation vehicles, etc.), the result sounds
counterintuitive. To seek out the answer, deeper investigation to simulation result is required.
Simulation results predicted that as rate of carbon abatement gets larger, domestic demand of
energy commodities (notably coal, gas, oil, refined oil) will decline deeper. The decline in
domestic demand of these commodities causes prices of these products to drop. Lower price of
these products causes foreign demand to increase, causing an increase in export of these
commodities. The increase in export demand is met by increasing output of coal and oil
production, although gas and refined oil production remains declining.
Table 1. Impact of various rate of carbon abatement to GDP
Marginal
Rate of Carbon Impact: Abatement Cost:
Abatement: % change in Value of GDP due to Real carbon Tax
% of abatement carbon abatement (US$ per ton CO2)
-5 0.04 3.13
-10 0.07 7.35
-15 0.11 13.09
-20 0.13 20.92
-25 0.16 31.58
-30 0.16 45.98
-35 0.15 65.21
-40 0.11 90.51
-45 0.01 123.46
-50 -0.15 166.11
-55 -0.39 221.55
-60 -0.71 294.7
-65 -1.09 393.88
-70 -1.52 533.89
-75 -1.95 742.22
-80 -2.41 1072.11
-85 -3.33 1627.88
-90 -7.3 2577.02
-95 -23.01 4058.31
Source: Simulation output from GTAP-E Model (2017), processed
 Another source of GDP increase is from increasing amount of capital input purchases
made by firms. In its production model, GTAP-E model regard energy commodities as a
substitute for capital goods. It is assumed that higher-priced machineries or factory equipment
are more advanced than those with lower price, therefore require less amount of energy to
operate. A tax imposed to bring about less emission will increase price of energy commodities,
prompting firms to purchase more capital goods. Household earns more income from increasing
purchase of their capital goods endowment, thus allowing them to purchase more final goods
produced by firms. However, as carbon abatement rate gets larger than 30 percent, the above
economic effect is overshadowed by negative impact of widening carbon tax. Carbon tax
becomes a significantly large burden to society, reducing domestic consumption of energy
commodities and firms’ production in general. Rate of carbon abatement of over 45 percent is
deemed as too large and suboptimal as it yields negative positive impact to value of GDP.
4.2. Marginal Abatement Cost for Indonesia and Other Countries
In this study, GTAP-E Model simulation is also used to measure the impact of various
percentage amount in emission abatement to Indonesia’s GDP. The model is specifically used in
this research due to it contains a model for interconnected multi-sector economy and treatments
for carbon emission. In the model, carbon emission is calculated as a byproduct of consumption
of energy products, namely coal gas, crude oil, and refined oil. The GTAP-E database is
aggregated using the scheme described in Appendix 1. For regional aggregation, Indonesia is
represented as a single regional group while the rest of others are grouped as “Rest-of-the-
World”. This study utilizes GTAP-E database version 9 with reference year 2011. However,
since the emission abatement target is stated in terms of 2030 business-as-usual level, this study
obtains projection of economic condition in year 2030 by simulating the GTAP-E model under
the following assumptions.

Table 2. Macroeconomic Projection Assumptions used in Simulation

2011 - 2030 Projection (% change)
Variables Country Rest-of-the-World
Indonesia
Total Factor Productivity 18.40 38.01
Capital Endowment 102.90 81.44
Economically Active Population (Labor Endowment) 33.46 6.00
Population 20.38 20.19
GDP 75.68 69.36

United States
Total Factor Productivity 19,14 44,33
Capital Endowment 48,51 92,94
Economically Active Population (Labor Endowment) 5,20 4,98
Population 15,15 20,44
GDP 41,94 78,82

China
Total Factor Productivity 135,74 29,29
Capital Endowment 290,34 63,23
Economically Active Population (Labor Endowment) -1,94 6,94
Population 6,20 23,76
GDP 238,65 54,51

India
 Total Factor Productivity 71,78 37,02
Capital Endowment 162,51 79,48
Economically Active Population (Labor Endowment) 33,52 5,50
Population 20,90 20,04
GDP 168,44 66,81

United Kingdom
Total Factor Productivity 25,78 38,49
Capital Endowment 52,08 83,03
Economically Active Population (Labor Endowment) 5,20 6,27
Population 9,94 20,29
GDP 47,22 70,48

Japan
Total Factor Productivity 31,00 41,62
Capital Endowment 33,57 86,31
Economically Active Population (Labor Endowment) -7,46 7,56
Population -5,26 20,68
GDP 34,36 72,84

Norway
Total Factor Productivity 22,08 38,00
Capital Endowment 83,18 81,60
Economically Active Population (Labor Endowment) 12,67 6,18
Population 18,09 20,20
GDP 57,92 69,48

Philippines
Total Factor Productivity 50,75 37,87
Capital Endowment 151,25 81,42
Economically Active Population (Labor Endowment) 50,17 6,10
Population 34,45 19,99
GDP 158,59 69,18
Source: Author’s own calculation from EconMAP 2050 Reference Dataset

The above macroeconomic assumptions were obtained from EconMAP 2050 Reference
Dataset (Fouré, Jean, Bénassy-Quéré, Agnès and Fontagné Lionel, 2012; 2013), a dataset
containing global macroeconomic historical data and projection from MaGE model by CEPII. In
conducting the above database update simulation, it is assumed that all factors of production
except natural resources are mobile. Current account is also set to be constant by setting the
parameter RORDELTA equals to 0. The post-simulation value represents 2030 business-as-usual
economic condition and is used as the baseline for CO2 abatement simulation scenarios. The 29
percent reduction in CO2 is presented as the shock to the GTAP-E model. By default, the CO2
emission is represented as an endogenous variable within the model. Therefore, it will be
swapped by an exogenous variable RCTAX (real carbon tax rate). The model calculates the
amount of carbon tax required for the economy to move into the prescribed percentage change in
CO2 emission. It is assumed that there are no emissions trading between countries.
In general, abatement cost is defined as the cost of reducing environmental negatives such as
pollution. Marginal cost is the cost for an additional unit of a good. The marginal abatement
(MA) cost - as described in Figure 4.1- refers to the cost of reducing one more unit of pollution.
The marginal abatement (MA) cost of CO2 emission measures the cost of reducing one unit of
CO2 pollution. This part describes the results of estimation of the marginal abatement (MA) cost
of CO2 emission in Indonesia and several countries by using the GTAP-E model. To achieve the
intended rate of emission abatement, a form of carbon tax must be imposed. The value of carbon
tax can be regarded as marginal cost of carbon abatement because it equals to monetary amount
that society must pay to obtain less pollution. GTAP-E model is able to estimate the amount of
carbon tax required to attend the 29 percent carbon abatement set by the government. It does so
by swapping the previously endogenous variable gco2t (a variable within the model representing
percentage change of CO2 emission) as exogenous and endogenizing RCTAX (real carbon tax).
The model will thus solve for carbon tax required to attain the intended gco2t value. The
following is the RCTAX value as predicted from model simulation.

Table 3. Marginal Abatement Cost in Various Countries

Marginal Abatement Cost
(RCTAX, US$ per Ton
Country CO2)
Indonesia 42.75
United States 50.87
United Kingdom 92.48
Norway 331.29
Japan 126.51
China 9.89
India 2.79
Philippines 52.15
Source: Output from GTAP-E Model Simulation (2017); processed

For Indonesia, an abatement cost in the form of carbon tax equal to US$ 42.75 per ton CO2
is required to achieve 29 percent carbon abatement by 2030. The marginal abatement cost of CO2
emission for other countries are also estimated to serve as a benchmark for this study. In theory,
marginal abatement cost is increasing, meaning that the value will increase as the rate of
emission is already at a much lower position, i.e. the environment is already in a “cleaner” state.
From the above simulation results, it is evident that marginal abatement cost for Indonesia is still
higher than other “highly-polluted” industrial countries such as China and India. This indicates
that India and China is relatively more polluted than Indonesia, such that marginal cost of having
29 percent cleaner environment is still cheaper than Indonesia. Other than United States,
abatement cost for developed countries are generally higher than those for developing countries
are. These countries have lower carbon emission than developing countries in general, making Commented [S32]: emissions
their abatement cost even more expensive.

4.3. Proposed CO2 Emission Tax Scheme

How to calculate the amount that a car user should compensate for pollution? In this
section, the scheme for determining amount of emission excise tax for automotive is presented. Commented [S33]: the amount

This study is rooted from the concept that any excise tax levied on CO2 emission must reflect the Commented [S34]: in

costs associated with pollution. In other words, an automotive user should also “pay” the amount
of emission caused by his/her use of automotive to compensate for the pollution. In economics,
this concept is referred to as internalization. So far, this study had obtained the marginal
abatement cost equivalent of having 29 percent less pollution than BAU condition in 2030. This
marginal abatement cost is used as an anchor to represent the cost of emission that Indonesian
society should borne if they want to have 29 percent less pollution in 2030. Since automotive use Commented [S35]: bear

is one of activities emitting significantly large CO2, automotive consumer should also pay this Commented [S36]: the activities

amount. However, the exact amount of CO2 emission excise tax for automotive should be Commented [S37]: an automotive

calculated based on each car’s emissions during its lifetime use. Under this scheme, a car user
will theoretically only be required to pay for automotive emission specific to user’s car make and Commented [S38]: the user’s

model he/she is using. The amount will vary differently according to each car’s combustion
efficiency and carbon footprint.
This study proposes the following stages for formulating automotive CO2 emission tax.
Firstly, marginal abatement cost derived from Indonesian government’s CO2 emission reduction Commented [S39]: the marginal

target (i.e. 29 percent lower than BAU condition in 2030) is used as an anchor for calculating Commented [S40]: the indonesian

automotive excise tax amount. As described in section 5.2 above, this study estimates that the Commented [S41]: the automotive

marginal abatement cost for Indonesia is US$ 42.75 per Ton CO2. This dollar amount is
equivalent to Rp555.750 per ton CO2 if calculated with an exchange rate of Rp13.000/USD.
Secondly, since a user should only pay the emission that his/her car makes, CO2 emission of each
car sold in the market is estimated. Mathematical equation number 4 in Section 2.5 above is
evaluated to obtain each car’s annual CO2 emission. Thirdly, abatement cost for each car’s CO2 Commented [S42]: the abatement

emission is evaluated by multiplying marginal abatement cost (US$42.75 / Ton CO2) with car’s
annual CO2 emission evaluated in step 2. This number serves as the basis for estimating emission
abatement cost during a vehicle’s lifetime use. Fourthly, each car has varying degree of Commented [S43]: a varying

combustion efficiency and carbon footprint rate across its lifetime use. As car ages, its Commented [S44]: degrees

combustion process will become less efficient, therefore, will emit more CO2. The concept used
in this study is that a car owner should pay all of emission abatement cost during the car’s Commented [S45]: the emission

lifetime. Total lifetime abatement cost (AC) is estimated using the concept described in Figure 4.
It is assumed that (1) A car’s lifetime is 30 years, (2) combustion efficiency reduces by 0.9
percent annually (PSE, 2016). Emission is assumed to expand following a linear pattern as
shown in Figure 4. Alternative patterns such as constant pattern is less realistic while non-linear Commented [S46]: are

pattern was found to under-estimate actual emission expansion of a vehicle. Therefore, towards Commented [S47]: the non-linear

the course of a car’s lifetime use in 30 years, its emission will increase following a linear pattern
of 0.9 percent annual increase of its CO2 emission.
 Figure 4. Total CO2 Emission for Lifetime Use of Cars
Fithly, the formula for automotive CO2 emission excise tax goes as follows. AC is the Commented [S48]: Fifthly

CO2 emission abatement cost that had been adjusted to its lifetime emission expansion path Commented [S49]: the automotive

described in step 4. The amount of excise tax will be equal to 29% of total automotive CO2 Commented [S50]: the total

emission abatement cost4. Using this concept, a car user is only obliged to pay 29 percent of
his/her car’s lifetime emission abatement cost.
30
𝑇𝑎𝑥 = 29% × × (𝐴𝐶1 + 𝐴𝐶30 (1 + 0.009)30 )
2
Table 4 presents the calculation results for the proposed CO2 emission excise tax derived mainly
from the above scheme.

4 𝑛
Arithmetic Series : 𝑆𝑛 = (𝑎1 + 𝑎𝑛 ),where 𝑆𝑛 is series, 𝑎1 and 𝑎𝑛 are first and n-th elements, respectively.
2
 Table 4.1 Proposed CO2 Emission Excise Tax
(a) Gasoline Engine (b) Diesel Engine

4.4. Fiscal Impact and Earmarking Policy

From imposing the above automotive CO2 emission excise tax scheme, potential
government revenue is estimated to be Rp19,311 billion. Conversely, automotive consumers will
have to spend extra Rp19,311 billion on automotive purchase due to the excise tax. This section
describes estimation of net impact due to additional automotive consumers spending and Commented [S51]: the estimation

government revenue by using Indonesian Social Accounting Matrix (SAM or Sistem Neraca Commented [S52]: theindonesian

Sosial Ekonomi, SNSE). Figure 4.4 describes the framework in obtaining the estimated economic Commented [S53]: for

impact. Figure 4.5 shows that the net impact of the extra spending and government revenue will
be negative in terms of changes of output (-0.09%) and GDP (-0.08%). Commented [S54]: in

This study further argues that emission tax will result in negative impact on GDP, output, Commented [S55]: a negative

and employment, unless it is being earmarked into environment enhancing-related programs. Commented [S56]: employment

Therefore, to mitigate the negative impact, earmarking is compulsory, preferably on automotive

sector-related programs. Automotive-related spending is preferable since the tax specifically
aims at emission reduction on automotive use, therefore, a form of environment-enhancing
programs on automotive sector is needed. Commented [S57]: the automotive
 Figure 4. Fiscal Impact for CO2 Emission Excise Tax

It is estimated that CO2 emission excise tax on automotive will bring negative impact on Commented [S58]: a negative

output and GDP growth if it is imposed without earmarking policy. However, a higher
earmarking portion will instead create positive impact on output, GDP, and employment (see Commented [S59]: a positive

Figure 5).

Figure 5. Simulations of Earmarking

 Figure 5 shows that if all of tax revenues are used entirely to finance government budget Commented [S60]: the tax

without putting an earmark of government spending in automotive sector, GDP will decline by Commented [S61]: the automotive

0.08 percent. However, if 25 percent of tax revenues are spent as earmarked spending in
automotive sector, GDP will increase by 0.23 percent. The increase in GDP will be higher if Commented [S62]: the automotive

earmarking portion of emission tax revenue is increased. Aside from resulting in higher impact Commented [S63]: the earmarking

to GDP, earmarking policy also ensures that the imposition of emission tax can result in Commented [S64]: a higher

improvement of automotive sector. Commented [S65]: on

Commented [S66]: the earmaking
The earmarking policies could be in the form of extra spending on: (1) clean fuel,
Commented [S67]: the improvement
gasoline or diesel; (2) specific measures; (3) cross-subsidy on fuel for passenger vehicle; (4)
Commented [S68]: an automotive
incentives for BBG (automotive liquefied gas fuel) development; or (5) incentive for low-
emission vehicle development.

5. Conclusions and Policy Recommendations

The aim of automotive CO2 emission tax is for CO2 emission reduction, not for state’s tax Commented [S69]: an automotive

revenue source. Therefore, the tax must be derived from government’s CO2 emission reduction Commented [S70]: the state’s

target (29 percent reduction from 2030 business-as-usual emission). Specific (monetary amount) Commented [S71]: the government’s

tax is theoretically proper than ad valorem tax. For simplicity in administration, the tax can be
incorporated into the reformed PPnBM. Tax earmarking policy must be implemented for
revenues collected from automotive CO2 tax to attain these three goals: (1) climate change
mitigation, (2) government tax revenue, and (3) automotive technological progress. From the
estimated potential of Rp19.311 billion tax revenue, the earmarked portion should be at least 10
percent to ensure neutral impact towards GDP growth. As earmarking portion gets higher, its Commented [S72]: a neutral

impact to GDP will be larger and positive. This study argues that 50-50 division between Commented [S73]: the earmaking

earmarked expenditure and state revenue is the ideal composition which is projected to yield Commented [S74]: on

0.55 percent growth in GDP. Commented [S75]: the 50-50

Commented [S76]: a 0.55

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Appendix 1. Database Aggregation Mapping

The GTAP-E database is aggregated using the following scheme.

Sector Aggregation
No Sector Code Contents Description
1 Agr Pdr wht gro v_f osd c_b pfb ocr ctl oap rmk wol frs Primary Agriculture, Forestry, and
fsh Fisheries
2 Coal Coa Coal
3 Oil Oil Oil
4 Gas Gas gdt Gas
5 Oil_pcts P_c Refined Oil products
6 Electricity Ely Electricity
7 En_int_ind Omn crp nmm i_s nfm Energy intensive products
8 Manuf Fmp otn ele ome omf Manufacturing
9 Auto mvh Motor Vehicle
10 Oth_ind Cmt omt vol mil pcr sgr ofd b_t tex wap lea lum Other industries
ppp
11 Serv Wtr cns trd otp wtp atp cmn ofi isr obs ros osg dwe Services

Factors of Production Aggregation

No Factor Code Contents ETRAE
1 Land Land -0.01
2 Labor Tech_aspros clerks service_shop Mobile
off_mgr_pros ag_othlowsk
3 Capital Capital Mobile
4 NatRes NatlRes -0.001

Regional Aggregation
In each of respective country’ simulation scenarios, each country is represented as a single
country while the rest of others are grouped as “Rest-of-the-World”.