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Reducing fuel subsidy or taxing carbon? Comparing the two instruments from the economy, environment, and equity perspective for Indonesia

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Author Info

  • Arief Anshory Yusuf

    ()
    (Department of Economics, Padjadjaran University)

  • Arief Ramayandi

    ()
    (Center for Economics and Development Studies Dept. of Economics, Padjadjaran University)

Abstract

Reducing fuel subsidy and taxing carbon have a tendency toward reducing energy consumption and carbon emissions. However, both instruments may have differing impacts in their magnitudes of the emissions reduction and on the economy as a whole. Using INDONESIA-E3 (Economy-Equity-Environment) model, a computable general equilibrium (CGE) model which includes carbon emissions, carbon taxation, as well as, strong feature in distributional analysis, this paper compares and contrast the two instruments to find which policy is better in improving the three pillars of sustainable development: economy, equity, and the environment. The result suggests that given the same amount of government budget saving, carbon tax is relatively superior to using a fuel subsidy reduction instrument, because it can accelerate the decline in CO2 emissions with a lower cost on the economy in terms of GDP reduction with more favorable distributional effect. This has not taken into account the economic incentives it creates for the economy to be less reliant on carbon-intensive energy.

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File URL: http://lp3e.fe.unpad.ac.id/wopeds/200808.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by Department of Economics, Padjadjaran University in its series Working Papers in Economics and Development Studies (WoPEDS) with number 200808.

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Length: 12 pages
Date of creation: Oct 2008
Date of revision: Oct 2008
Handle: RePEc:unp:wpaper:200808

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Keywords: Carbon Tax; Fuel Subsidyc Climate Change; CGE; Indonesia;

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References

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  1. Arief Anshory Yusuf, 2006. "Constructing Indonesian Social Accounting Matrix for Distributional Analysis in the CGE Modelling Framework," Working Papers in Economics and Development Studies (WoPEDS) 200604, Department of Economics, Padjadjaran University, revised Nov 2006.
  2. Tao Kong & Arief Ramayandi, 2008. "Survey Of Recent Developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 44(1), pages 7-32.
  3. Philip D. Adams & J. Mark Horridge & Brian R. Parmenter, 2000. "MMRF-GREEN: A Dynamic, Multi-Sectoral, Multi-Regional Model of Australia," Centre of Policy Studies/IMPACT Centre Working Papers op-94, Victoria University, Centre of Policy Studies/IMPACT Centre.
  4. Peter G. Warr, 2001. "Welfare Effects of an Export Tax: Thailand's Rice Premium," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 903-920.
  5. Peter Warr, 2006. "The Gregory Thesis Visits the Tropics," Departmental Working Papers 2006-03, The Australian National University, Arndt-Corden Department of Economics.
  6. Mark Horridge, 2000. "ORANI-G: A General Equilibrium Model of the Australian Economy," Centre of Policy Studies/IMPACT Centre Working Papers op-93, Victoria University, Centre of Policy Studies/IMPACT Centre.
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Cited by:
  1. Arief Anshory Yusuf, 2008. "INDONESIA-E3: An Indonesian Applied General Equilibrium Model for Analyzing the Economy, Equity, and the Environment," Working Papers in Economics and Development Studies (WoPEDS) 200804, Department of Economics, Padjadjaran University, revised Sep 2008.

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