Imposing green taxes on oil fuel

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.