Evaluating the efficiency of carbon emissions policies in a large emitting developing country

Abstract

Using the energy-environmental version of the Global Trade Analysis Project, this study compares the effects of three carbon emissions mitigation strategies – a carbon tax, a fuel tax and an emissions trading scheme (ETS) to combat the intended emissions target for Indonesia, a large emitting developing country. Although the fuel tax was found to raise economic growth by 0.29% in 2030, the carbon tax and ETS which reduce economic growth by about 0.11% have less adverse effects on inflation, welfare loss, wage decline, and employment loss. Unlike the fuel tax, the carbon tax and ETS are also likely to promote substitution towards renewable energy given the massive increase in the price of coal of over 100% due to the carbon tax and ETS. To meet Indonesia's emissions target, a carbon tax of US$36/ton of CO2 is needed. The carbon tax which is simpler and more swiftly implementable is the more practical choice compared to the ETS in the short to medium term for developing countries with political economy constraints in their energy and transportation sectors.