On the Distributional Effect of Carbon Tax in Developing Countries: The Case of Indonesia

Arief Yusuf and Budy Resosudarmo

No 200705, Working Papers in Economics and Development Studies (WoPEDS) from Department of Economics, Padjadjaran University

Abstract: This paper analyses the distributional impact of carbon tax in Indonesia, one of the largest carbon emitter developing countries. Using a Computable General Equilibrium (CGE) model with disaggregated households, the result suggests that in contrast to most studies from industrialised countries, the introduction of carbon tax in Indonesia is not necessarily regressive. Its structural change and resource reallocation effect, following the carbon tax, is in favor of factors endowed more proportionately by rural, and lower income households. In addition, the expenditure of lower income households, especially in rural area, are less sensitive to the prices of energy-related commodities. Revenue-recycling through uniform reduction in commodity tax rate may reduce the adverse aggregate output effect, whereas uniform lumpsum transfers may enhance the progressivity. This study demonstrates an example, that encouraging developing countries to reduce carbon emission, may not only increase the efficiency of carbon abatement globally, but also have desirable distributional implication in the developing countries themselves.

Keywords: Carbon Tax; Climate Change; Distribution; CGE; Indonesia (search for similar items in EconPapers)
JEL-codes: D30 D58 Q40 Q48 Q54 Q56 Q58 (search for similar items in EconPapers)
Pages: 33pages
Date: 2007-05, Revised 2007-08
New Economics Papers: this item is included in nep-ene, nep-env, nep-pbe and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (42)

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