Many environmental-based tax opportunities, why are they not yet optimal?

● The implementation of Indonesia's green tax instruments has not been optimal. ● Green taxes can be an instrument for behavioral change, not merely a source of state revenue. ● Green taxes can provide dual benefits for the state coffers and environmental preservation.

Almost every day, most people, perhaps including us, buy bottled drinking water in plastic bottles to take to campus or to work.

After a single use, the bottle is usually thrown away immediately. Some may be recycled, but many also end up in rivers and the sea. Data shows that around 45% of Indonesia's plastic waste is not properly managed.

Read more: The fossil industry is the main cause of the Earth getting hotter; placing responsibility on individuals is truly unfair

The companies that produce bottles or drinking water almost certainly do not bear the cost of cleaning up that waste. Their role ends after the product is sold or reaches the consumer's hands.

The story would be different if the government started imposing levies on plastic. Levy revenue could be used for waste management.

Through regulations and certain assumptions, the amount of the levy can be adjusted to match the cost of environmental management, thereby increasing the selling price.

Because bottled drinking water made of plastic becomes more expensive, of course people will think twice before buying it and begin switching to bringing their own tumbler, so plastic waste pollution can be reduced.

On the other hand, companies are also encouraged to reduce plastic use so that their selling prices are lower. They can consider using alternative raw materials, and receive incentives if their production is more environmentally friendly.

That is roughly the concept of an environment-based tax or green tax. This policy aims to incorporate environmental damage into prices—something that has so far been hidden in 'negative externalities.' The goal is to suppress consumption of goods or services that have the potential to damage the environment through price increases.

In Indonesia, there are already several green tax policies that have and will apply, but their implementation has not covered all potential sectors.

Many green tax opportunities

Green taxes are generally applied in four areas, namely natural resources (resource taxes), energy (energy taxes), transportation (transportation taxes), and pollution (pollution taxes).

Their implementation includes all state levies, both Tax Revenues and Non-Tax State Revenues (PNBP), based on their collection basis (physical unit).

Read more: Study: Indonesia's environmental costs are nearly one thousand trillion a year, these are the 10 biggest causes

In the context of Indonesia today, this green tax can take the form of a new type of tax or be attached to certain existing tax policies, for example VAT, which is directed toward environmental purposes.

The newest example of a green tax is the carbon tax, with the legal basis for its collection being Law Number 7 of 2021 concerning the Harmonization of Tax Regulations (UU HPP).

The carbon tax can be considered the best example of a green tax because its levy can be directly attributed to the damage caused. This tax is calculated from the volume of emissions (ton CO₂e) multiplied by the rate per ton CO₂e that contributes to global warming.

The proceeds from the carbon tax can also be specifically allocated to restore the environment or increase renewable energy capacity.

Unfortunately, the regulation has not been implemented to date.

Potential types of green levies from mining

Besides the carbon tax, there are actually other levies that can be applied in Indonesia. One example is excise, which can be imposed on goods whose use is indicated to pollute the environment.

Plastic can be included in this regulatory framework, but so far its implementation is still only a discourse.

Adding a new type of tax, such as a carbon tax, or expanding the objects of levies, such as a plastic excise, must indeed go through careful consideration because it will affect the economy. Moreover, the finance minister has stated that there will be no new taxes before the economy grows 6% for several consecutive quarters.

Alternatively, policymakers can optimize existing types and schemes of taxes, for example on sectors that are the largest emitters, such as forestry.

The levy schemes that already exist in this sector, for example the certain-rate VAT for timber and non-tax state revenue (PNBP), may not yet be effective enough at slowing the pace of deforestation. This is compounded if the capacity of the supervising institutions is not yet optimal.

Another sector that contributes large emissions is energy, especially fossil-based/extractive energy.

So far, oil, gas, and coal companies have indeed already paid various tax levies as well as non-tax state revenue (PNBP) when extracting. However, these levies seem not yet able to restrain the pace of exploitation, which often is directly proportional to environmental damage.

The contradictory arrangement is precisely on the coal commodity. Government Regulation No. 49 of 2022 does not designate coal as a good that receives the VAT-exempt facility (input tax/PM cannot be credited), unlike oil and natural gas, even though both are taxable goods.

As a result, when coal companies export (with output tax/PK at 0%), their input tax can be credited under the general mechanism (PK-PM), so it is very likely to be overpaid.

This contradiction was the topic of discussion between the Minister of Finance and the DPR some time ago, when coal company tax restitutions (refunds of tax already paid because of overpayment) reached Rp 25 trillion per year. The reason is, the government appears to be giving a “subsidy” to coal companies.

Finally, as a “compensation,” the government plans to impose a coal export duty.

Potential types of levies from the consumption side

From the consumption side, there is also an opportunity to optimize levies on motor vehicle fuel (BBKB) for gasoline, diesel, and gas through VAT and local taxes (pollution taxes).

The nature of this fuel tends to be inelastic, even subsidized. Its implementation requires comprehensive thinking so that it can reduce consumption while also serving as a source of revenue.

On this matter, the government still seems to be calculating whether to implement policies that have an impact on price increases, especially fuel, given the potential socio-economic risks, and even electability.

Regarding transportation (transportation taxes), more aggressive taxation can be applied to vehicles, for example through the Motor Vehicle Tax (PKB).

At present, we know progressive vehicle tax rates for second and subsequent ownership. There is also calculation based on certain weights and coefficients.

This calculation mechanism can actually be strengthened, for example by directly incorporating emission characteristics, as implemented in Norway and France.

Read more: Carbon tax could be one solution for Indonesia to achieve the sustainable development goals (SDGs)

Pursuing economic growth does not have to sacrifice the environment

The government is currently pursuing a 6-8% economic growth target through a deregulation strategy and the reduction of bureaucratic barriers.

However, efforts like this often get caught between the dilemma of growth and weak environmental oversight. In fact, ignoring environmental aspects for the sake of instant economic stimulus can have fatal consequences.

We see the effect in last year’s Sumatra flood disaster, which claimed more than 1,200 lives and caused economic losses of up to Rp 68.67 trillion, not including social-political losses, such as public dissatisfaction.

It is in this context that market-based disincentive policies, such as green taxes, are present as a relevant alternative. Some research also shows that simplifying the process of doing business is more effective in encouraging investment than low tax rates (tax incentives).

Rather than relying on a long chain of permits, green tax policies have the potential to be more effective in suppressing destructive consumption by directly incorporating environmental cost calculations into the price component.

The key to its success is simplifying the collection mechanism and administration, as well as certainty. To be clear, business licensing could be made easier considering the deregulation program, but state levies (green taxes) can be expanded and/or increased to reduce consumption and environmentally destructive behavior.