Green tax on oil fuel can solve energy crisis

Green tax on oil fuel can solve energy crisis

Aziz
Munich

Vice President Jusuf Kalla once told reporters that imposing
taxes on oil products, to follow what other countries were doing,
was not feasible in Indonesia because the government considered
oil products "strategic", not commercial.

The Vice President perhaps must have been joking. Those
countries that impose taxes on oil fuel consumption were doing it
precisely because oil fuel to them is a strategic product. In
fact, they did it to avoid energy crises in the long term and to
reap the benefit of "double dividends" in shorter term. Indonesia
must seriously ponder this option (taxing oil fuel consumption)
as early as now, in part to solve the potential problem of energy
crises in the future, but also to enjoy the revenue benefits in
the meantime.

In industrialized countries, notably the European Union (EU),
environmental objectives of taxes on oil fuel are important
priorities, hence earn the name environmental, or ecological,
taxes. The primary goal is to reduce CO2 (carbon dioxide)
emissions from the burning of fossil fuels that pollutes the air,
water and other natural resources, and causes the greenhouse
effect and global climate change. Since the growth of population
and economy dictates growing consumption of oil fuel (the main
source of CO2 emissions), one of the instruments to control this
is to make the price as expensive as possible.

The basis of such a policy is the "polluters pay principle", a
very important principle that merited being explicitly named in
the European Treaty as a crucial way to achieve the European
Community's goal of high levels of protection and improvement of
the quality of the environment.

Another policy element is the "precautionary principle", one
which drove the adoption Kyoto Protocol because EU deemed it
inevitable to combat possible adverse effects of global climate
change (note the word "possible"). The necessity to protect and
improve the environment through these two principles paved the
way to curb the excessive use of fossil fuels by imposing tax on
them.

Other than environmental goals, there were also politically
driven goals to reduce dependency on oil imports (from the Middle
East) or oil revenue (for oil producing countries like Norway or
United Kingdom), which strengthens the policy to control
consumption by providing disincentives to use oil fuel more than
is prudent or rational.

For EU countries oil fuel is very strategic, very precious
and yet potentially dangerous when the consumption is unleashed.
To ensure the security of energy supplies, EU has intensively
developed renewable energy sources like wind, biomass and solar
power. There are externalities (such as air pollution, traffic
congestion, dependency on volatile oil markets etc.) that must be
included in the oil price and it is best reflected in the form of
a tax on oil consumption.

But that is just one side of the story. In every corner of the
world tax always sounds bad. It is a burden for those who pay it.
As most (western) European countries have adopted welfare state
concepts (in one way or another), the general tax rate is
relatively already high, much less being added to by tax on oil
fuel.

This is where the "double dividends" concept enters as the
solution. Why not shift the burden from labor (reducing high
personal income tax, high social security contributions) to the
environment (introducing tax on oil fuel)? That way the tax
revenue remains neutral (reduction in one part is compensated by
increase in other part) while it better protects and improves the
quality of environment. Moreover, it will spur the development of
renewable energy, it will encourage people to use public
transport and ultimately dependency on oil will diminish. To
date, all of these objectives are being met. In fact, double
dividends have turned into "multiple dividends"!

The skeptics might immediately dismiss such idea for Indonesia
simply for the reason that EU countries are developed countries
and Indonesia as developing country cannot afford it. Good point,
but not necessarily relevant. Under a parallel argument, then we
might as well want to abandon our cars or demolish the
skyscrapers or leave behind any other sophisticated thing that
might not be suitable for developing countries. The right
question should be whether we all agree that the "polluters pay"
and precautionary principles are good and necessary for
Indonesia.

And do we agree that anyone who consumes oil fuel and emits
greenhouse gases is a polluter (regardless of whether they are
rich or poor, individual or industry, government or private)? Can
we be honest in assessing whether oil fuel consumption is
efficient or being overused?

Consumers in Indonesia, and elsewhere in the world, have
become addicted to oil and while some countries have tried to
remedy this addiction by escalating prices to narrow access, do
we still want to satisfy this addiction by providing it at
"pseudo" cheap prices? As oil prices are volatile, there will be
times when it goes low and historical record had shown that
consumption will go crazy again when that happens.

But would not tax on oil fuel make the life of the poor worse?

In a word, no. And here is why: For every rupiah the poor
spend on the tax there is more available for government to give
back to them (from differential consumption by wealthier people).
Unlike subsidy removal where the government only has a little
room to maneuver, revenues from taxes on oil fuel will give more
opportunities to protect and improve the quality of life and the
environment.

But tax on oil fuel goes beyond serving such partial
interests. It is a representation of the 'polluters pay" and
precautionary principles to protect and improve the quality of
the environment. It provides a cushion in the state budget when
the revenue neutrality principle is adopted, yet flexibility to
earmark the revenue to eradicate poverty.

Revenue neutrality also means that business should not suffer
from such scheme because part of revenue can be used, for
example, to offset employer's portion of social security
contributions (Jamsostek). In short, we need to penalize what is
harmful to the natural and social environment, not through a
command and control instrument (which by definition is destined
to failure in a corrupt country like Indonesia) but through
incentive and disincentive mechanisms for the greater welfare of
society.

The writer is postgraduate student at the Technical University
of Munich and a Fellow at EEPSEA (Economy and Environment Program
for South East Asia). He can be reached at aziz9672@yahoo.com.
This is his personal opinion.