Comparative analysis of carbon border tax adjustment and domestic carbon tax under general equilibrium model: Focusing on the Indonesian economy

Abstract

The carbon border tax adjustment policy is applied to mitigate the carbon leakage issue resulting from unequal carbon tax implementation and encourage associated nations' participation in domestic carbon reduction efforts. The high share of primary energy exports and the carbon emissions generates mean that a global carbon control policy will significantly affect participating countries. This study examines the effects of carbon border tax adjustment policy on developing countries, and evaluates the substitutability between domestic and inter-regional carbon control policies as a development of existing research investigation. The Global Trade Analysis Project energy-environmental version (GTAP-E) model and CGEBox, a global computable general equilibrium user interface tool, were utilized to address the impact of domestic and inter-region carbon policy on the economies, trade levels, and environmental conditions of the participating countries. By reviewing the evidence of the impact analysis, this study investigates the influence of carbon border tariff adjustment implementation on inducing domestic carbon tax participation in non-regulated countries, with Indonesia as a case study. In the scenario we develop, Indonesia imposes various carbon taxes and is subject to border carbon tariff by its trade partners. The analysis reveals that border tax adjustment brings negative trade and economic implications to the affected countries, with a small reduction in global carbon emission. The findings show that Indonesia's low domestic carbon tax levy helps mitigate the adverse economic and trade distortion effects of the carbon border tax adjustment imposed by its trading partners. Additionally, we estimate the level of carbon border tariffs levied on each country that achieves the same employment effects as a carbon tax in the analyzed country. The simulation results indicate that the impact of the carbon border tax imposed is not significant enough to induce carbon control policy implementation in affected countries. Hence, higher carbon border tariffs should be proposed to encourage non-regulated countries to adopt stringent carbon policy measures to maximize global carbon emission abatement.