Carbon Tax and the Mining Industry. Vol 130
Indonesia signs Paris Agreement on Climate change.
The representative of President Joko Widodo, the Minister of the Environment and Forestry, Dr. Siti Nurbaya, signed the Paris Agreement on Climate Change on the 22 April 2016. This action is in accordance with the 1945 Constitution that stipulates the need to provide a good environment for all the country’s citizens, as well as the importance of the support of the Indonesian House of Representatives (DPR RI). As of 2016, Indonesia had a number of supportive programs, such as the Peatland Restoration Agency (January 2016), restrictions on palm oil expansion, and the national program called PROKLIM (The Climate Village program). The Minister of Environment and Forestry concluded her remarks at the signing ceremony by saying, “History has noted that it is possible to achieve a reduction in greenhouse gas emissions while still achieving economic growth”. The commitment of individual countries is expressed through a Nationally Determined Contribution (NDC) for the period from 2020-2030, in addition to any action prior to 2020.
Webinar on Carbon Tax for the mining industry.
On the 18th August 2021, Petromindo.com and Coal Asia magazine hosted a webinar on “Exploring Carbon Tax on Mining Sector – opportunities and challenges in the Indonesian mining industry’, with PAMA providing generous sponsorship. The webinar was well balanced, with Ms Pande from the State Revenue Policy Centre stating the governments outlook and rational for introducing a carbon tax, while other speakers reflected a variety of industries concerns from the mining & energy user sectors. The webinar was very open, with excellent presentations and held in English.
Mr. Hendra Sinadia, executive director of the Indonesian Coal Mining Association, undertook the role of moderator, and provided some introductory comments. The provision for a carbon tax has been initiated through an article in a recent tax law. There have been several discussion groups on this topic, wherein this webinar is hoped to broaden and publicize the pros and cons of a carbon tax. This webinar may provide input on how the implementing regulations may balance the states opportunity to raise income and comply with the Paris Climate Initiative, against how to minimize the possible negative impact of a carbon tax on the people and the overall economy. There are concerns that the imposition of a broad carbon tax may be detrimental to Indonesia’s large-scale industries of steel, cement, paper etc, and the communities that rely upon these industries.
Ms Pande Putu Oka Kusumawardani, head of State Revenue Policy Center presentation “Carbon Tax – Implementation Plan in Indonesia” as prepared by Febrio Kacaribu, PhD. Chairman of Fiscal Policy agency, Ministry of Finance.
Indonesia’s climate change agenda is partly driven by the Paris Agreement to reduce carbon output by 29% through national efforts, and overall, 41% with international support. This 2030 target may include a carbon trading and or carbon tax [ Rp 75/kg CO2e, = US$5/ton CO2e] scheme. The underlying bases is “a just and affordable transition”. The state budget to support climate change policy will consider 1) tax and excise facilities, 2) ministry / agencies budgets, 3) various forms of fiscal programs, including village funds etc, 4) innovative financing such as green bonds etc. International support through the Green Climate Fund (GCF) is open for a number of projects, such as geothermal resource risk mitigation facility, urban bus systems, REDD forestry programs etc. The carbon pricing policy is being reviewed with regards to possible emission trading systems, emission offset, and non-trading instruments of a carbon tax or result based payment. A carbon tax may be selective, or uniformly applied to all sectors. Challenges of implementing a carbon tax include 1) the right timing, 2) targeting to ensure a just and affordable transition, 3) in harmony with other policies and ministries programs, 4) a simple, strong and fair accountable system. In-depth studies are ongoing before the finalization of the Presidential Regulation.
During discussion, Ms Pande mentioned that the carbon tax is still in an outline mode, requiring more consultation, integration with the national policy, and timing relative to economic recovery. The ministry of finance is open to more discussion. The main purpose is environmental, rather than a source of general revenue, wherein it may be likened to other luxury taxes similar to the motor vehicle tax on engine capacity. A carbon tax is not the only way to improve the environment, wherein the transition to a green economy shall also consider fairness and affordability. The Presidential Regulation will focus on the value of carbon, with the ministry of trade, and other ministries looking at trading emission permits, offsets and other regulations. The present focus is only on carbon, with other greenhouse gasses (methane, ammonia etc) not yet considered.
Mr. Bill Sullivan, senior foreign counsel with Christian Teo & Partner and advisor to Stephenson Harwood LLP, presented on “Carbon Tax Proposal – Possible solution to multiple problems?”. The carbon tax proposal is included in the Ministry of Finance 2022 Macro Economics Framework & General fiscal Policies, and will require an amendment to the 1983 tax law. The draft tax regulation is being deliberated by Parliament [DPR]. The benefits of a carbon tax are to reduce greenhouse gas emissions and to raise further government revenue. The approach includes a tax on both the demand & supply sides, with options on point of payment being considered. Details will require further implementing regulations. Several industry associations have made preliminary statements that include concerns about delayed implementation, impact on inflation, government to provide environment friendly alternatives, negative impact on industries viability and international competitiveness, and more broad discussion required. The carbon tax may have a positive impact on reducing greenhouse gases and raising tax revenue, though it is clear that this is a complex matter where much care is needed in its determination and implementation. Some of the obstacles to a carbon tax are 1) that SOE’s [PLN, PT.BA, Pertamina etc] are major greenhouse gas emitters.2) Indonesia’s rise in poverty due to the impact of Covid. It would seem the concept of a carbon tax is a good concept, but implementation should be later, and well managed.
Ms. Liana Bratasida, executive director of Indonesian Pulp and Paper Association presented on “Lessons learned on carbon pricing instruments; Design and implementations in other countries”. Globally there are 25 countries and 7 sub-district jurisdictions that have a carbon tax, and 36 countries plus 28 sub-district jurisdictions that have a carbon trading scheme. Lina provided a 3-line summary on the nature of each scheme in ASEAN and other countries. A common feature is that each scheme takes considerable time and planning to implement, and that there is a slow and gradual introduction of such schemes. Most countries rate of a carbon tax is around $3.50 – 5.0/ton CO2e, while Europe and a few at a much higher rate. The EU is adopting a more aggressive Carbon Border Adjustment Mechanism (CBAM) to effectively impose an import tax on goods that have a lesser carbon tax rate than the EU. This CBAM will initially be imposed on cement, iron & steel, fertilizer and electricity and later extended to other products. USA, Canada, Japan are planning similar initiatives. Linda outlined the legal and administrative steps, and design considerations, the government needs to take to develop the regulations for a carbon tax and carbon trading system. The way forward shall consider 1) strong institutions and understanding of the rules, 2) mechanisms and procedures for monitoring, reporting, verification 3) legally binding rules, 4) mechanism and rules for international and national government actors, 5) concern that some Paris Agreement international rules are not yet established.
Mr. Ali Mardi, tax partner of Deloitte Touche Solutions, presented on the proposed carbon tax. The Indonesian coal sector already has a number of fees and taxes in the non-state revenue and tax state revenue areas. The mining industry generate significant greenhouse gasses through their fuel consumption, logistics, smelting and power generation activities. The mining industry is now in a phase where efficiencies can no longer hold down ever-increasing costs. The imposition of a new carbon tax will be an added burden to the mining industry. Ali presented some preliminary estimates of the cost impact of a carbon tax rate of Rp75/kg CO2e, for example PLN’s costs will increase by around 6.7% and the carbon tax could add US$ 5.0 per ton to coal production. Key issues include how to deal with the increase cost of energy, and encourage energy insensitive manufacturing to stay in Indonesia.
Mr. Dendi Ramani, economist at Bank Mandiri, presented on “What are the challenges for carbon tax initiatives?”. Indonesia is a relatively small producer of Green House Gas (2% of global emissions), while less than 25% of countries have carbon initiatives. The cost to grow renewable energy is more expensive per KWH than fossil-based energy. A key concern is how to manage the income from a carbon tax and what will this tax be spent on – subsidize renewable energy, fix environment damage, reforestation and coral reef restoration, compensate native people? Should the tax be levied on the upstream industries (miners) or downstream users (consumers of electricity)? Banks will support only profitable projects, including mining and energy, provided they comply with the many regulations – including a possible future carbon tax.
Mr. Harry Kristino, chief operating officer of PT. Medco Energi Mining Indonesia (MEMI), presented on “Exploring carbon tax on the mining sector – miner perspective”. The long game is that renewable energy will continue to grow, but the long transition period cannot do without fossil energy that not only produces power, but also produces many chemical products (plastic etc) that our society rely upon. Numerous studies need to examine the options of a carbon tax on the B30 biofuel initiative, potential for double taxation, define point of emission, feedstock for the cement / power sectors, wherein many prefer higher CV coals etc.
General webinar discussion & further considerations.
A slow implementation of a carbon tax / carbon trading system may be best to allow the Indonesian economy to gradually adjust, but the ongoing uncertainty over a carbon tax may be seen as adding to “country risk” for investors and financiers (local and international).
Indonesia is a country of islands, where domestic shipping relies upon marine oil. The European and North American continental highways and rail freight may give them a competitive edge when carbon tax is factored in.
Options for offsetting carbon emissions to be considered. Perhaps PLN’s hydroelectricity units may offset some coal power units, if the enterprises total emissions are to be considered rather than individual projects.
Perhaps ASEAN may consider their earlier initiation of the Non-Aligned Movement during the cold war, and break away from the Paris Agreement, like some other countries have done. A different approach may change from a target of carbon emissions to a nett carbon position, wherein the growth of coral reefs and peat swamps as long-term carbon sinks could be included in the formula. Therein Indonesia might be a nett carbon sink, while Europe and North America continue to be nett carbon producers. Satellite technology has advance significantly since the Paris Agreement, wherein such carbon sinks may be more accurately measured and monitored. Any rise in sea level would be accompanied by growth of coral and peat swamps.
Coal Downstream projects, such as Bukit Asam’s coal to DME, may wish to revise their feasibility studies to include considerations of a future CO2 tax or carbon trading scheme. The future of many planned new nickel smelters are already beginning to factor in carbon position.
Post webinar article.
After the webinar, an article by Sergey Belozerov (16 Aug 2021) titled “Carbon intensity of coal per KWh” was circulated. This article shows that CO2 emission levels are not directly dependent on fixed carbon levels, if CO2 emissions are calculated per unit of energy produced (KWh). In order to produce an equivalent amount of energy, less high-calorific coal needs to be burned than low-calorific coal, wherein high-calorific coal leaves behind less of a carbon footprint per unit of energy produced. Australian and Russian coals (0.950 CO2, Kg/KWh) are considered as clean coals, whereas typical Indonesian coal (0.965 CO2 Kg/KWh) is a relatively dirty coal. See Insights | Carbon intensity of coal per KWh | Coaltrans
Coal Miners Initiative.
Aside from a future carbon tax, global good mining practices and finance intuitions are already incentivizing a reduction in CO2 in the mining industry. A number of coal mining companies have implemented measures to define their CO2 footprint, and therein design measures to reduce their CO2 output. Bukit Asam’s CO2 reduction programs include reduce energy needs [changing night lighting, electrification of mine equipment, electrical vulcanization etc] along with expanded revegetation of past mining areas to increase CO2 adsorption. Adaro is trailing solar cells in remote operational sites to reduce the need for solar diesel generation.
Conclusion.
Since Indonesia signed the Paris Agreement on Climate Change, the world has continued to move forward, with technical research and debates on climate change. There are now different politicians to those that signed the agreement, who are now charged with the actual implementation for the targeted period of 2020 to 2030. The unforeseen global pandemic has changed many nations priorities and capabilities. Ms. Liana Bratasida’spresentation showed that nearly all countries take several years in the development of a carbon tax. They have a gradual, and highly selective implementation process, with great care to consider the economy and peoples welfare. This global step-by-step cautious approach is also reflected in President Jokowi recent policy statements that Indonesian would implement its commitment to the Paris Agreement in its own way, and its own time frame. All of the speakers at this webinar reflected this cautious, inclusive and measured approach to implementing a carbon tax / carbon trading system for Indonesia.
The approaching Presidential Regulation on carbon tax is to focus on setting the carbon rate (Rp75/kgCO2e). It is herein hoped that some other key factors will be defined, to improve investors’ perceptions of country risk in regards to the gradual development of the carbon tax implementing regulations.