By Wilson Arafat
Climate change poses a significant challenge for this Republic. The recent spate of disasters—flash floods in West Sumatra, landslides in North Sumatra, and tidal surges that struck Aceh and coastal areas—underscore that the climate crisis has clearly become a major threat to social and economic resilience. Climate Change & Global Warming
These various natural disasters are no longer merely a matter of weather forecasts, but a wake-up call regarding the neglect of climate crisis risk mitigation in national development management.
Throughout 2024, the National Disaster Management Agency (BNPB, 2025) recorded significant disaster impacts: 540 deaths, 63 people missing, 11,531 injured, and 8,136,271 people affected or displaced, along with damage to 80,304 homes, hundreds of public facilities, and 445 bridges. These conditions underscore the need for stronger policy instruments, one of which is a carbon tax.
The goal of a carbon tax is to reduce carbon emissions, particularly from sectors that contribute significantly to the carbon footprint. To that end, the government issued Presidential Regulation No. 110 of 2025 (Perpres 110/2025), which essentially regulates the implementation of the economic value of carbon (NEK) and the control of greenhouse gas (GHG) emissions.
Thus, this policy seeks to place a price on carbon emissions. Pollution is no longer viewed as something that can simply be discarded; rather, there are significant economic consequences that must be borne.
BPS (2025) estimates that direct economic losses from disasters amount to tens of trillions of rupiah, though only 60 percent of the actual losses have been recorded. Disasters also put downward pressure on GDP per capita through contractions in the trade, manufacturing, and construction sectors.
On the other hand, Indonesia has reaffirmed its commitment to climate risk mitigation through its Enhanced Nationally Determined Contribution (NDC, 2022) to the United Nations Framework Convention on Climate Change (UNFCCC), by raising its emission reduction target to 31.89 percent (unconditional) and up to 43.20 percent (conditional) by 2030 compared to a business-as-usual scenario, which is projected to reach 2.869 GtCO₂eq.
The question is: to what extent can a carbon tax serve as an instrument for climate risk mitigation and yield significant long-term impacts? This is a critical question that warrants collective consideration and managed mitigation efforts. Finance & Audit
Climate Risk Mitigation
If we agree that climate risk is also an economic risk, then the policy of “pricing” emissions can be viewed as a risk mitigation tool. Its aim is to encourage behavioral change, guide investment, and strengthen industrial resilience.
As described above, the government has updated its legal framework through Presidential Regulation No. 110 of 2025, which governs the implementation of the Carbon Economic Value (NEK) instrument and the control of national greenhouse gas (GHG) emissions.
The NEK instrument includes carbon trading, performance-based payments, carbon levies, and other instruments in line with business developments. Another important point to understand is that Presidential Regulation No. 110 of 2025 governs the management of transactions. Carbon trading is conducted through carbon exchanges and/or direct trading.
Every carbon trade must be recorded in the Carbon Unit Registry System (SRUK), ensuring that all transactions and claims of emission reductions have a transparent and auditable record. Thus, this is not merely an administrative detail; it is the foundation of market integrity to prevent overlap.
Meanwhile, in the energy sector, the policy direction has been clarified. Government Regulation No. 40 of 2025 on National Energy Policy states that the central government may gradually impose a carbon tax on the use of non-renewable energy, taking into account social, economic, and environmental impacts.
The scope of the carbon tax is also outlined, targeting the transportation and industrial sectors, including power generation and commercial activities.
So, how is the carbon tax rate designed? The Directorate General of Taxes (DJP, 2025) explains the key principle that the carbon tax rate is set to be at least equal to or higher than the market price of carbon. If the market price of carbon is lower, the rate is set at Rp30.00 per kilogram of CO₂e. The market price of carbon serves as the anchor. Meanwhile, the tax acts as a backstop to ensure that the carbon price does not become too low and lose its ability to drive behavioral change. Chemistry
However, a carbon tax is ineffective if it stands alone or is perceived as adding to the burden. The carbon tax must be positioned as part of a coordinated NEK framework: credible carbon trading, robust measurement, reporting, and verification (MRV), and clear utilization of government revenue. Progress in the market ecosystem is evident in the development of the Indonesia Carbon Exchange (IDXCarbon).
In a press release (January 20, 2025), the Ministry of Environment, the Financial Services Authority, and PT Bursa Efek Indonesia explained that 1,780,000 metric tons of CO₂e in carbon units have been authorized for international trading. In the same release, the number of registered participants as of 2024 reached 100, and cumulative trading volume reached one million metric tons of carbon units.
In terms of integrity, the government emphasized the need for safeguards. The press release also mentioned safeguards to prevent double counting, double payments, and double claims. The carbon market must first be trusted; only then can a carbon tax serve as a reinforcing signal.
So, what needs to be done to ensure that a carbon tax truly functions as a climate risk mitigation measure? First, strengthen credibility through MRV and an auditable registry.
Presidential Regulation No. 110/2025 mandates the recording of transactions in the SRUK and the governance of emissions trading. The challenge lies in implementation: data standards, independent verification, and transparency—ensuring that every ton of emissions claimed is actually reduced.
Second, ensure a just transition through transparent design of government revenue mechanisms. BPS (2025) shows that the impacts of disasters are unevenly distributed, and vulnerable groups may bear a heavier burden. Therefore, carbon tax revenue—when implemented—must include a clearly designated portion for protecting vulnerable groups and funding adaptation efforts, so that it does not merely serve as a way to plug budget gaps without a clear purpose. Accidents & Disasters
Third, integrate the tax as a “price safety net” aligned with the carbon market. The DGT’s principle—market price as a benchmark, tax as a floor—is indeed appropriate; it is simply a matter of ensuring the sequence of implementation and the readiness of priority sectors, as the DGT has stated that the initial phase will focus on the energy sector, specifically the power generation subsector.
Ultimately, although a carbon tax is not a panacea (a magic cure), it is a robust risk mitigation tool. A carbon tax is a “price” paid now so that future generations do not have to bear even greater losses. Now or never!
The author is a senior banker with more than 28 years of experience in the banking industry, specializing in Governance, Risk & Compliance (GRC), ESG, and transformation management. This article reflects the author’s personal views.
