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

Author

Listed:
  • 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.

Suggested Citation

  • Arief Anshory Yusuf & Arief Ramayandi, 2008. "Reducing fuel subsidy or taxing carbon? Comparing the two instruments from the economy, environment, and equity perspective for Indonesia," Working Papers in Economics and Development Studies (WoPEDS) 200808, Department of Economics, Padjadjaran University, revised Oct 2008.
  • Handle: RePEc:unp:wpaper:200808
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    File URL: http://ceds.feb.unpad.ac.id/wopeds/200808.pdf
    File Function: First version, 2008
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    References listed on IDEAS

    as
    1. Peter Warr, 2006. "The Gregory Thesis Visits the Tropics," The Economic Record, The Economic Society of Australia, vol. 82(257), pages 177-194, June.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. Tao Kong & Arief Ramayandi, 2008. "Survey Of Recent Developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 44(1), pages 7-32.
    Full references (including those not matched with items on IDEAS)

    Citations

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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.
    2. Opeyemi Akinyemi & Philip. O. Alege & Oluseyi. O. Ajayi & Henry Okodua, 2017. "Energy Pricing Policy and Environmental Quality in Nigeria: A Dynamic Computable General Equilibrium Approach," International Journal of Energy Economics and Policy, Econjournals, vol. 7(1), pages 268-276.

    More about this item

    Keywords

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

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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