On the distributional impact of a carbon tax in developing countries : the case of Indonesia

This paper, using a computable general equilibrium model with highly disaggregated household groups, analyses the distributional impact of a carbon tax in a developing economy. Indonesia, ont of the largest carbon emitters among developong countries, is utilized as a case study in this paper. The result suggests that, in contrast to most industrialised country studies, the introduction of a carbon tax in Indonesia is not necessarily regressive. The structural change and resource reallocation effect of a carbon tax is in favour of factors endowed more proportionately by rural and lower income households. In addition, the expenditure of lower income households, especially in rural areas, is less sensitive to the price of energy-related commodities. Revenue-recycling through a uniform reduction in the commodity tax rate may reduce the adverse aggregate output effects, whereas uniform lump-sum transfers may enhance progressivity.