Decentralised Environmental Taxation in Indonesia: A Proposed Double Dividend for Revenue Allocation and Environmental Regulation

Abstract

This article proposes a means for implementing environmental taxes in Indonesia at the sub-national government level, as a mechanism for correcting resource misallocation and negative externalities, specifically environmental protection and clean-up. The concept of environmental taxation is first reviewed, in general terms. The ongoing fiscal decentralisation in Indonesia is then discussed as a potential legal framework for environmental taxes at a sub-national level. It is suggested that a combination of environmental taxation with fiscal decentralisation would give provincial and local governments in Indonesia a much-needed increased revenue stream. It would also provide a further green dividend of effectively regulating and ameliorating negative environmental effects. Implementation of the Indonesian fuel tax beginning in 1997 is considered briefly as an actual case study of such environmental taxation at the sub-national level, with discussion of the effectiveness and efficiency in its (limited) administration by regional governments rather than the central government. Finally, within the context of fiscal decentralisation, widespread corruption and other potential hindrances to implementing environmental taxes at the provincial and local government level in Indonesia are discussed and areas for further research and study are suggested.