Is the carbon tax a harmful tax? Evidence from Indonesia

Fidiana Fidiana; Endang Dwi Retnani Article Is the carbon tax a harmful tax? Evidence from Indonesia Economic Review: Journal of Economics and Business Provided in Cooperation with: Faculty of Economics, University of Tuzla Suggested Citation: Fidiana Fidiana; Endang Dwi Retnani (2024) : Is the carbon tax a harmful tax? Evidence from Indonesia, Economic Review: Journal of Economics and Business, ISSN 2303-680X, University of Tuzla, Faculty of Economics, Tuzla, Vol. 22, Iss. 2, pp. 73-90, https://doi.org/10.51558/2303-680X.2024.22.2.73 This Version is available at: https://hdl.handle.net/10419/323796 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Economic Review – Journal of Economics and Business, Vol. XXII, Issue 2, November 2024/// * Sekolah Tinggi Ilmu Ekonomi Indonesia Surabaya, Indonesia, [email protected]c.id ** Sekolah Tinggi Ilmu Ekonomi Indonesia Surabaya, Indonesia, [email protected] 73 /// IS THE CARBON TAX A HARMFUL TAX? EVIDENCE FROM INDONESIA Fidiana Fidiana* , Endang Dwi Retnani** DOI: 10.51558/2303-680X.2024.22.2.73 Abstract The uncertainty about the timing of the implementation of carbon tax regulations has drawn significant public attention. Does this attention represent public support? This research attempts to explore the public perspective on the government’s delay in implementing carbon tax. This study involves key societal stakeholders relatively closely connected to the carbon tax issue, including tax authorities, tax advisors, academics, as well as certain taxpayers.. Since there is no “one-size-fits-all“ carbon tax, developing nations should tailor their designs to the many economic, political, and administrative environments in which they operate. There are concerns about how carbon tax, as a form of green taxation, can affect productivity, equality, and competitiveness. However, this paper argues that these challenges can be resolved. For instance, output-based rebates can offer protection even though ETR (Environmental Tax Reform) may increase the productivity and competitiveness of impacted enterprises. This research found that governments often postpone carbon tax implementation due to low confidence in tax authorities. Even if the government actually does allocate a carbon tax to protect the environment, the public may remain sceptical. Tax authorities are responsible for implementing commitment tools to assure the public that carbon tax revenues will be used as promised. The government needs to reconsider existing carbon taxes to prevent overlap even when their goals align. Keywords: carbon tax, quasi environmental tax, government readiness JEL: D62, H23, Q50 1. Introduction Experts have made it clear that the emergence of infectious zoonotic diseases, including coronaviruses, is closely linked to human landuse change, deforestation, urbanization, ecosystem degradation (Gibb et al., 2020), live animal trade, intensive livestock farming, and biodiversity crisis. Viruses likely emerged from wildlife reservoirs disrupted by environmental disturbances, transmitted to humans through the wildlife trade, and spread by economic globalization (McNeely, 2021). Public health and environmental conservation experts urge governments to respond to this issue by implementing “green“ policies in social and economic development. Recovery from the pandemic must be environmentally friendly, taking into account climate change and biodiversity conservation. Environmental degradation is the root cause of the pandemic itself. The need to respond to the Covid-19 pandemic is at the top of the agenda for economists and global decision makers. According to economists, environment problems can be solved simply by imposing a uniform tax on harmful emissions (Hjøllund & Svendsen, 2001). Green taxes, as one of the means of environmental rescue policies, are levied by the state to achieve economic benefits and environment conservation (Deng & Huang, 2020). Global tax measures under consideration include carbon taxes, green tax incentives, and carbon border adjustments. At the same time, companies are trying to measure and reduce their carbon footprint, assess climate change risks, and communicate this information to investors, employees, customers, regulators, and beyond. A large amount of resources has been dedicated to green projects, but much less emphasis has been placed on tax policy opportunities (László, 2021). Carbon taxes can increase the burden on CO₂ producers, but they may be insufficient alone. A green tax reform focused on a Pigouvian approach is needed to correct distortions from climate-damaging activities. ///. Fidiana Fidiana, Endang Dwi Retnani /// 74 Economic Review – Journal of Economics and Business, Vol. XXII, Issue 2, November 2024 Green policies and carbon taxes have become fundamental regulations to reduce environment degradation (Chen et al., 2022). Tax policy instruments could drastically change price structures and serious incentives must be provided to shift consumers and producer behavior to green policy goals. Several green tax regulations have been rolled out, but whether carbon tax regulations have a real impact on saving the environment has not been widely discussed in the research agenda. This research fills this gap. Meanwhile, green tax is quite difficult to implement in some countries (Carattini et al., 2017). The Harmonization of Tax Regulations Act was passed two years ago Indonesia has recently established its legal framework for green taxation as mandated under Law 7/2021 (Harmonization of Tax Regulation) come into force on 1 April 2022 A carbon tax has been acknowledged under Indonesia’s constitution during this period. This shows that tax policy in Indonesia has so far focused more on the budgetary function, with very little emphasis on the regulatory function. In fact, many countries have implemented carbon taxes, butimplementation methods and obstacles have not been widely discussed in the research agenda. This research fills this gap. Several empirical studies have discussed the issues and determinants of green taxation, especially in developed countries. European countries initiated environmental taxes based on consumption and production, environmental performance, and governance quality (Castiglione et al., 2014). Convergence and divergence analysis in the context of environment and taxes is also discussed (Delgado et al., 2022; Villar Rubio et al., 2015; Vysochyna et al., 2020). In addition, environmental taxes are widely related to carbon emissions (Baranzini et al., 2017; Lai, 2021), energy consumption (Deng & Huang, 2020), and GDP perspective (Delgado et al., 2022). Recent studies have emphasized that environmental taxes not only act as incentives but also expand the tax base, traditionally focused on income and profit taxes (Radu et al., 2015), goods and services tax (Ling et al., 2016), capital tax (Amatong, 1968; Zodrow, 1995), and property to pollutant taxation (Markandya, 2012). The claim is that the shift in the tax base towards pollutant taxation creates benefits to a more efficient tax system and has a direct impact on the environment (Markandya, 2012). Green tax regulation is indeed very vital; without this tax, the government would struggle to implement environment policies aimed at preventing, controlling, and overcoming pollution and degradation. The main key to overcoming environmental problems is cost, here the polluter pays principle applies. The Polluter Pays Principle was first introduced by the Organisation for Economic Co-operation and Development (OECD) in 1972 and it holds polluters responsible for eliminating the pollution they produce (OECD, 1972; Wiesmeth, 2021). Green tax is a pollution control instrument that requires polluters to cover the government’s costs of managing and reducing pollution. This means that green taxes internalize environmental costs. Regulation in the form of green taxes alone is not enough without a real impact on saving the environment. In fact, in the OECD, CO₂ taxes for example, are highly differentiated and very profitable for industry because it is proven that the CO₂ tax rate for industry is on average six times lower than the rate for households (Hjøllund & Svendsen, 2001). Industry has greater lobbying power compared to households. Furthermore, it is proven that green taxes are only used to maximize the budget of environmental bureaucracy (Hjøllund & Svendsen, 2001). Emerging Countries (ECs), although they are responsible for lower average carbon emissions compared to developing countries, also contribute significantly to increasing carbon emissions, especially through the consumption of wealthy citizens. Thus, the idea of transitioning from a pro-carbon economy to a more sustainable business is becoming a development issue for many countries. The implementation of green taxes in developing countries such as Indonesia is an interesting phenomenon to study. Unlike developed countries, developing countries face Is the Carbon Tax a Harmful Tax? Evidence from Indonesia/// Economic Review – Journal of Economics and Business, Vol. XXII, Issue 2, November 2024 75 /// a more complex economic and political environment (Bird & Zolt, 2008), where culture, history, interests, and business behavior play a central role in shaping tax policy. The relevance of green tax to Sustainable Development Goals (SDGs) needs to be questioned. How is the carbon tax implemented in Indonesia? This question became the focus of this research. Tax law reflects nation’s history and ideology, culture, politics, and other interests so differences are not surprising. This diversity creates a variety of tax laws adopted and developed in each country, free from intervention from other countries. Indonesia’s commitment to reducing carbon emissions is important to implement, as Indonesia contributes 2% of the world’s greenhouse gas emissions (Aprilia, 2022). The commitment to a green economy is constituted in the 2021 Harmonization of Tax Regulations Act (HPP). The HPP governs that as of April 2022, carbon emissions that have an adverse effect on the environment may be subject to a carbon tax by the government. The HPP further stipulates that carbon tax is payable when purchasing products that contain carbon or while engaging in carbon-generating activities. However, its implementationwas postponed at the time when this research was carried out. Aiming to provide insights on in environmental tax development in developing countries, this study reviews tax bases, tax rates, and pollutant calculation methods. Implementation constraints are also discussed. Our paper contributes to the very active research literature on how developing countries such as Indonesia implement the complexity of carbon taxes and the monetary incentives inherent in the tax system. This study highlights delays in carbon tax implementation that reflects pressures from various parties, especially economic actors close to the bureaucracy on the one hand and global commitments to environmental issues on the other. This paper attempts to explore this gap. Attractive tax incentives for environmental protection in theory may not work in practice if certain economic actors fail to address negative externalities unless forced by the authorities. 2. Literature Review Environmental tax is not a new type of tax. It was initiated in Denmark in 1917 (Markandya, 2012). Environmental taxes include taxes on energy, transportation, pollution, and resources. Carbon tax is a specific component of green taxes that focuses on reducing carbon emissions as part of a green economy strategy. Green taxes include fiscal instruments to encourage environmentally friendly practices, while carbon tax is a concrete implementation that targets greenhouse gas emissions. It encourages more environmentally friendly behavior by taxing environmentally damaging activities, such as greenhouse gas emissions, pollution, and unsustainable resource use. Carbon taxes are an important part of the transition to a green economy, an economy that improves human well-being and social equity while reducing environmental risks and ecological scarcity. A carbon tax is a subset of the green tax family because it is a specific environmental tax targeting carbon dioxide emissions, one of the many forms of environmental harm addressed by green taxes (Ahmad et al., 2024). Carbon tax works by charging emitters a fee for every ton of CO₂ emit, particularly from burning fossil fuels like coal, oil, and natural gas. The aim is to reflect the social cost of carbon, encouraging cleaner energy use and more efficient technologies. The carbon tax aims to reduce carbon emissions by providing incentives for businesses and communities to switch to clean energy and more environmentally friendly production practices (Nazarkevych & Sych, 2023). Carbon taxes encourage businesses to take responsibility for the carbon emissions they produce, thereby significantly reducing greenhouse gas emissions and supporting national emission reduction (NDC) targets. The OECD recommended the “polluter pays principle“ in 1972 (OECD, 1972) which was then legalized through the Rio Declaration on Environment and Development in 1992 (Tokuç, 2013). This environmental tax scheme has been adapted by several countries such as Denmark, the Netherlands, Sweden, and Norway. The polluter pays principle asserts that polluters bear the costs of environmental ///. Fidiana Fidiana, Endang Dwi Retnani /// 76 Economic Review – Journal of Economics and Business, Vol. XXII, Issue 2, November 2024 conservation reflected in the output and/or residues of production (Meyer, 2017). Naturally, humans respond more to price stimuli than to compliance pressures. A carbon tax increases the cost of carbon-based products, thereby correcting the quantity of goods and services produced. The carbon tax price mechanism is more effective at changing economic behavior than other punishments. In addition, there is a consensus among economists that green taxes are the most efficient or cost-effective environmental instrument, due to its profound global effects on the decisions of low-cost agents (Baranzini et al., 2017). The history of environmental tax can be traced from two perspectives, namely the economic perspective and the tax perspective (Sandmo, 2009), both of which propose the Pigouvian taxation scheme as an environment policy tool (Pigou, 1928). Carbon taxes are imposed on business activities that create negative externalities (Saputra, 2021) and are referred to as a manifestation of Pigouvian tax. The costs of negative externalities that were previously not accounted as non-private and free, are now the responsibility of the perpetrators. In Indonesia, carbon tax is a strategic initial step in implementing green taxes more broadly, which also includes taxes on fossil fuel consumption and goods that have an environmental impact. Furthermore, carbon taxes are incentives that can be collected from negative externality actors (Mankiw, 2012). Pigouvian tax balances economic activities that damage the environment by imposing additional social costs on carbon-intensive actors through carbon tax levies to finance climate neutrality. Furthermore, Musgrave (1959) recommends a Keynesian view of public finance, in which the government can intervene in environmental damage and other public interests through various policies including carbon taxes. 2.1. Green Taxes Studies in Several Countries. As explained earlier, this research is a preliminary study that seeks to explore the implementation of green taxes in Indonesia. Admittedly, there is a lot of empirical literature that studies this topic in developed countries. However, each country’s tax regulations should be unique due to differences in political and economic environment. Although Indonesia has not widely implemented green tax , the review was conducted on regulatory efforts that have been initiated, specifically carbon tax. The application of carbon taxation to internalize negative externalities on the environment has been carried out for decades in developed countries (Tan et al., 2022). The countries that have implemented carbon taxes include (Lai, 2021) the European Union (27 countries), Canada, Argentina, Denmark, Chile, Japan, China, Colombia, Korea, Kazakhstan, Singapore, Mexico, Sweden, New Zealand, South Africa, Norway, Ukraine, and the United Kingdom. Indonesia, a developing country, implemented a carbon tax in 2022. The carbon pricing initiative was expected to cover 21.5% of global greenhouse gas emissions by 2021 (Lai, 2021). Several countries in the European Union, increased fuel taxes in 2020 (Enache, 2020). Latvia increased gasoline tariffs by 7% and diesel by 11% , while Lithuania increased transport fuel taxes by 7%, and Finland also increased transport fuel taxes. Aviation taxes were introduced in the Netherlands in 2021 and Germany in 2023. South Africa, Sweden, the Netherlands, and Ireland have increased carbon and fossil fuel taxes. In addition, several countries such as Ireland and the Netherlands have implemented green taxes by increasing electricity and energy taxes for industry but cutting electricity tariffs for households that consume electricity below 10,000 kWh per year. On the other hand, tax incentives are given to zero-emission vehicles (hybrid and electric) as implemented in Lithuania, Poland, Ireland, and Israel. Taxes are also applied to activities that cause fluorinated greenhouse emissions such as plastic bag use and waste incineration, as done by Sweden. Denmark and Italy have increased taxes on shopping bags and disposable cutlery, while Poland, imposes specific taxes on silver and copper extraction (Enache, 2020). Although the measurement of the success of carbon tax implementation in reaching zero Is the Carbon Tax a Harmful Tax? Evidence from Indonesia/// Economic Review – Journal of Economics and Business, Vol. XXII, Issue 2, November 2024 77 /// carbon emissions is difficult to obtain, many countries have started transitioning to renewable energylike wind, solar PV, renewable gas-balancing tax benefits with the need to maintain tax revenues (Fernandes & Moreira, 2022). The United Arab Emirates (UAE) regulates environmental issues through non-tax issues. In 2016, the UAE launched a 12-month green program which included awareness campaigns, community engagement, and green initiatives. In addition, to reduce vehicle emissions, the UAE educates the public to use more sustainable transportation. Singapore announced the implementation of a carbon tax starting in 2019. It also provides tax incentives for renewable energy-oriented corporations and tax reductions for innovation in carbon emission activities. Slightly different from other countries, Malaysia manages green tax under two jurisdictions (Saad & Ariffin, 2019). Malaysia’s green tax incentives are managed by the jurisdiction of the Malaysian Investment Development Authority and the Inland Revenue Board of Malaysia (IRBM), while the penalty mechanism for green tax violations is managed by the Department of Environment. 2.2 Carbon Taxes Study in Indonesia. Indonesia has scheduled a transition step towards a green economy by implementing a carbon tax under the 2021 “Tax Harmonization Law”. This strategic step is part of environmental tax reform to realize cleaner production, investment in energy-efficient technology, sustainable development, and greener habits to support intergenerational justice. The carbon tax agenda is vital, because without a carbon tax, the government will have difficulty implementing environmental policies. Traditional regulations such as permits and minimum usage requirements are very easy to circumvent and prone to noncompliance. On the other hand, the main key to overcoming environmental damage is cost (Makmun, 2009), so it is more appropriate to use the polluter pays principle strategy. In Indonesia, carbon tax is an important first step in realizing a sustainable green economy and addressing climate change with the principles of justice and affordability for the community and business actors. Thus, carbon tax is a real manifestation and integral part of green tax in the transition to a more sustainable and low-carbon economy. Until 2022 Indonesia postponed the implementation of carbon tax with various arguments. This paper explores the obstacles and challenges that caused Indonesia to postpone its commitment to implementing green taxation twice in 2022. This delay marks many economic and political pressures on the authorities in implementing carbon tax. Despite this, Indonesia, as G20 President for 2022, has committed to being a strategic policy driverand to making carbon tax a strategic priority on the G20 Presidency agenda. Indonesia is. Attractive and positive tax incentives for environmental protection in theory may not work in practice if economic actors fail to respond to negative externality issues unless forced by the authorities. 3. Method To understand how carbon tax is implemented, a qualitative exploratory research approach was adopted. Exploratory research is an appropriate way to establish a field at an early stage of an emerging topic, especially in studying the mindset of policy makers. From an ontological and epistemological perspective, we adopted an interpretive research paradigm. (Miles et al., 2014). The core goal of the interpretive research stance is not to “find the truth”(Gephart, 2004) but to understand the meanings and concepts applied by social actors (authorities) in their practice settings as a means to uncover different versions of reality for each social actor. Based on this statement, social actors (tax authorities) are considered subjective (Guba & Lincoln, 1994). Our methodological approach is appropriate because both social actors (researchers and auditors) are under the constant influence of social interactions that imprint existing and changing realities by reflecting their beliefs and values (M. Power, 1999; M. K. Power & Gendron, 2015). ///. Fidiana Fidiana, Endang Dwi Retnani /// 78 Economic Review – Journal of Economics and Business, Vol. XXII, Issue 2, November 2024 Given the novel nature of this phenomenon (carbon tax), semi-structured interviews were conducted as an instrument to collect data directly from social actors (tax authorities). Semi-structured interviews, being flexible in nature, are considered more appropriate for collecting insights from tax authorities (Horton et al., 2004). Purposive sampling was appropriate as it enabled the selection of information-rich cases relevant to the study objectives (Nyimbili & Nyimbili, 2024). Further, purposive sampling is appropriate when the research aims to focus on specific characteristics or attributes within a population, rather than generalizing findings to the entire population. It is particularly useful in qualitative research where in-depth data collection is needed on specific groups or individuals. The informant criteria refer to the opinion of Meuser and Nagel (2009) who consider an expert who is responsible for a concept, has relevant certain knowledge, information, or privileged access to information. Our expert selection process placed less emphasis on the informant’s biography (Mergel et al., 2019), as we were more interested in their perspectives and roles as heads of tax authority offices who have access to the decision-making process (Mergel et al., 2019). Heads of regional tax offices were selected as informants for their policy making expertise and technical and interpretive knowledge about carbon tax implementation. We also included academician, as speakers at various tax-related seminars, webinars, and conferences, tax advisors who often accompany taxpayers, and selected taxpayers from oil and gas companies,who have implemented carbon tax. The strength of the expert interview research method depends on the number of interviews conducted and the quality of the experts participating (Mergel et al., 2019). Glaser and Strauss (1967) suggested a minimum of 10 interviews, while Guest et al. (2006) advocated 12 interviews as the threshold at which one can gain insight into the phenomenon being studied. We had 16 informants as interviewees. In-depth interviews lasting from 40 minutes to 1 hour and 50 minutes were carried out during February and March of 2024. Both WA video calls (Goh & Binte Rafie, 2024) and Zoom platforms (Archibald et al., 2019) were used to gather qualitative data. Table 1 Summary of the informants ID Role Date Minutes Medium H1 Head of regional tax office Feb 8, 2024 53.15 WA call H2 Head of regional tax office Jan 5, 2024 59.51 Zoom H3 Head of regional tax office Feb 23, 2024 48.12 WA video call H4 Head of regional tax office Jan 9, 2024 43.44 WA video call A5 Academics March 4, 2024 49.50 WA video call A6 Academics March 6, 2024 48.07 WA video call A7 Academics March 18, 2024 42.33 Zoom A8 Academics March 11, 2024 50.05 WA video call T9 Tax advisor Jan 30, 2024 55.32 WA video call T10 Tax advisor Jan 23, 2024 50.45 Zoom T11 Tax advisor Jan 10, 2024 51.33 WA video call T12 Tax advisor March 22, 2024 1.32 Zoom T13 Tax advisor Feb 12, 2024 40.56 Zoom P14 Taxpayer from oil & gas Feb 18, 2024 40.22 WA video call P15 Taxpayer March 21, 2024 1.08 WA video call P16 Taxpayer Jan 11, 2024 1.50 Zoom Source: my own resume The majority of our questions centered on comprehending the legal and practical framework of the carbon tax. The primary queries were: Does a carbon tax help protect the environment? Do you think a carbon tax should be implemented? Are taxpayers treated fairly by the carbon tax implementation? Is the carbon tax clearly regulated? What do you think should be done about the carbon tax? What do you think is causing the delay in the carbon tax implementation? Every participant gave written consent and were not compensated to participate. To address ethical concerns during the collection, analysis, and distribution of data (Allen, 2017), written . Economic Review – Journal of Economics and Busines, Vol. XIX, Issue 2, November 2021/// 79 /// consent was obtained from each participant (Byrne, 2001; Ittenbach et al., 2015). The low and slow interview response was mainly due to advisors’ busy work schedule after the pandemic. Determining the minimum number of interviews to be conducted in qualitative research is a never-ending question (O’Reilly & Parker, 2013). The main principle we followed was to achieve theoretical saturation (Guest et al., 2006; O’Reilly & Parker, 2013), when no further insights come from new interviews, theoretical saturation can be claimed. The interview sessions were recorded and transcribed. The transcripts were then analyzed using thematic analysis, following Braun and Clarke (2006). In addition, relevant documents were reviewed to strengthen the findings. Documents provide data about the context in which social actors operate (Mills et al., 2006). Document analysis helps researchers uncover meaning, develop understanding, and find relevant insights about the phenomenon being studied (Merriam, 1998)and can even contextualize data collected during interviews. We applied document analysis as a complementary research method to triangulate the research findings (Bowen, 2009). This study employed an interpretive technique to analyze the interview data using content analysis, classifying informants’ responses into themes. According to Krippendorff (2019), content analysis is a research method for drawing reliable conclusions from texts (or other relevant material) about the settings in which they are used. We took action to make sure the interview data was reliable. To ensure high external validity, we emphasized empirical observations rather than the preconceived theories (Miles et al., 2014), with reference to the informants’ perceptions and comprehension their own reality. This approach seeks to avoid bias and aims for objective and representative results (Miledi, 2021). Triangulation is employed in research in order to validate findings and enhance the overall validity and dependability of the research; it entails collecting data from many sources and literature. 4. Results and Discussion 4.1 Lack of Serious Tax Policies The Indonesian government regulated carbon tax by authorizing the Harmonization of (HPP in 2021. The carbon tax regulation in the HPP Law proves the strong commitment of the Indonesian government to realize climate control in accordance with the polluter pays principle. The polluter pays mechanism is expected to accelerate climate change mitigation efforts. Carbon tax is expected to be an instrument that changes people’s economic behavior to shift to low carbon activities or green economic activities. However, the government’s commitment remains at the regulatory stage, not yet the implementation stage. In fact, even the initial and limited implementation of the carbon tax in the electricity sector has also been delayed. The carbon tax has been postponed several times. Law Number 7 of 2021 mandates the implementation of the carbon tax as of April 1, 2022. However, at the time of writing (February 2023), the implementation of the carbon tax has not been realized. Several arguments have been put forward by the government regarding the reasons for the postponement, mainly market readiness and carbon market mechanisms. The government continues to encourage the development of a carbon market and investment that is more environmentally friendly and carbon efficient. Carbon tax regulation marks a serious commitment and action to climate mitigation. Although no industry has been subject to carbon tax, the authorization of carbon tax regulation is set as a strategic achievement (deliverables) for Indonesia in 2022. In addition to carbon tax goals, the government has initiated climate change mitigation actions by phasing out and retiring several coal-fired power plants (PLTUs). Through the carbon tax scheme, the government intends to impose additional costs on the high-emission electricity sector. Carbon tax has two mechanism options, namely setting a maximum emission limit for industry and levying carbon tax on industry or activities that emit carbon beyond the maximum emission capacity. This scheme is called cap and tax. Unlike many countries that ///. Fidiana Fidiana, Endang Dwi Retnani. /// 80 Economic Review – Journal of Economics and Business, Vol. XXII, Issue 2, November 2024 implement cap and trade (Chai et al., 2018; Han et al., 2022), the cap and tax scheme (Carl & Fedor, 2016; Putra et al., 2021)was implemented in Indonesia to accommodate differences in industrial ecosystems in each region and community responses to new carbon tax regulations. The government has already postponed the execution of the laws outlined in the HPP twice. The government delayed implementation due to a lack of readiness, preventing it from being accomplished. Up to this point, the government’s commitment remains at the planning stage, with various justifications for the postponement. This means that the government’s seriousness in implementing a green economy through a carbon tax is still questionable. Most failures in implementing a green tax are generally caused by the government’s lack of seriousness (Feng et al., 2022). The following sub-chapter presents various findings that are the reasons for the delay in the carbon tax in Indonesia. 4.2 Global Economic Uncertainty Post Covid-19 Pandemic This research found that the uncertainty of carbon tax implementation can be caused by several factors, both domestic and international. Global economic uncertainty after Covid-19 was still the main cause of the delay in carbon tax. There is still a Covid-19 pandemic going on in 2022. The existence of Covid-19 in 2022 in Indonesia led to a concrete increase in the world economic uncertainty (Al‐Thaqeb et al., 2022). Economic uncertainty has a negative impact on real and financial markets and its potential for growth. They may also have negative implications on the fiscal policy (Ispriyarso & Wibawa, 2023), including carbon tax. As a response to the economic crisis during the pandemic, the Indonesian government postponed the carbon tax to support the economic well-being. In line with this situation, H2, A6, T11, and P15 give consideration, “The implementation was postponed due to consideration of the global and domestic economic situation” (H2). “Economic conditions are not yet possible” (A6). “Global uncertainty is increasing especially regarding the surge in energy prices (T11). “Russia is no longer exporting oil and gas to western countries due to economic sanctions due to the Russia vs. Ukraine war” (P15). Decline in energy demand due to reduced mobility and economic activity led to lower energy demand. Reduced transport demand directly impacted the unprecedented drop in global crude oil prices, making it inappropriate to tax carbon (Zakeri et al., 2022). Energy transition has been severely hampered by the Covid-19 pandemic (Li et al., 2022). Many people are concerned that the energy transition is being overlooked in favor of a green economic recovery on a global scale. In this regard, different studies have different results. During the Covid-19 crisis, China took the opportunity to advance its low-carbon energy transition (Li et al., 2022). While the pandemic caused disruption in every part of life, it accelerated efforts to reduce carbon emissions in the electricity sector and shift the power mix toward renewable energy sources. Renewables need a sustainable mid and longterm policy strategy since they will be crucial to advancing the low-carbon energy transition and meeting various carbon targets. On the other hand, the pandemic has created opportunities for the global energy transition (Tian et al., 2022). However, one of the energy transition challenges during the pandemic was the lack of government support. 4.3 Global Energy Price Hike The next global uncertainty is associated with the increase in global energy prices (Kuzemko et al., 2022), including in China (Mo & Wang, 2022). In Indonesia, several tax authorities (TA1 and TA2) confirmed that the adjustment of carbon policy implementation was due to the increase in global energy prices and was mainly associated with the Ukrainian war. Energy issues are closely related to the current battle that can obscure and/or undermine other energy policy goals, raising several challenging issues for decision-makers aiming to promote long-lasting equitable and sustainable transitions (Kuzemko et al., 2022): “The government’s resistance to enact a carbon tax has been exacerbated by the rise in energy prices worldwide associated with the conflict in Ukraine” (H1). . 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