On the Distributional Effect of Carbon Tax in Developing Countries: The Case of Indonesia

This paper analyses the distributional impact of carbon tax in Indonesia, one of the largest carbon emitter developing countries. Using a Computable General Equilibrium (CGE) model with disaggregated households, the result suggests that in contrast to most studies from industrialised countries, the introduction of carbon tax in Indonesia is not necessarily regressive. Its structural change and resource reallocation effect, following the carbon tax, is in favor of factors endowed more proportionately by rural, and lower income households. In addition, the expenditure of lower income households, especially in rural area, are less sensitive to the prices of energy-related commodities. Revenue-recycling through uniform reduction in commodity tax rate may reduce the adverse aggregate output effect, whereas uniform lumpsum transfers may enhance the progressivity. This study demonstrates an example, that encouraging developing countries to reduce carbon emission, may not only increase the efficiency of carbon abatement globally, but also have desirable distributional implication in the developing countries themselves.