The Importance of the Social Cost of Carbon for Indonesia

By: Muhamad Rifki Maulana

In recent years, discussions about climate change have continued to become dynamic, especially regarding the reduction of carbon emissions. One interesting example is that of the 2024 presidential and vice-presidential debates in Indonesia, where conversations on solutions to air pollution in Jakarta and carbon capture storage (CCS) have become increasingly popular. The increasing public interest in these matters is a positive indication of growing awareness of environmental issues. Therefore, it’s no surprise that all candidates are competing to offer ideas for reducing carbon emissions. However, before delving into efforts to reduce carbon emissions, it is crucial to understand the social cost of carbon first.

Social Cost of Carbon in Benefit-Cost Analysis

In brief, the social cost of carbon (SCC) is the cost estimation of the damage done for each marginal unit (usually per ton) of carbon emissions/CO2 released into the air. The concept of SCC becomes easier to understand when directly applied to benefit-cost analysis, a quintessential approach in the basis for policymaking.

For example, let us consider a factory construction project with a smokestack in city A, with a total cost of $100,000 and benefit estimation of up to $200,000. The factory seems to have a greater benefit than its cost in a simple benefit-cost analysis approach. However, this perspective might change when we include the SCC. Assuming the SCC is $200 per ton of CO2 and the factory’s operations release 500 tons of CO2 annually. When we account for the SCC in the cost-benefit assessment,  we estimate an additional $100,000, which then becomes an added cost in our estimation. The net benefit, which previously experienced a surplus, becomes zero when we include SCC and may even turn negative each year due to externalities such as pollution from the factory’s operations.

SCC can work the other way around. For instance, there is a public transportation project costing $200,000 that will provide $100,000 in benefits. The project seems to have a negative net benefit in a simple benefit-cost analysis approach. However, If we assume that the project could reduce CO2 emissions by 500 tons per year due to fewer people using private vehicles and the SCC is still $200 per ton of CO2, it means there would be a $100,000 additional cost reduction per year which technically turn into our additional benefit. Ultimately, the initial negative net benefit could become zero and even gradually turn positive because of the accumulated benefits of pollution reduction that happen every year due to people choosing public transportation.

SCC Relevance to Indonesia and The Challenges 

From the above example of the SCC implementation, it can be seen that this is highly relevant to Indonesia. Indonesia’s current stance is to progress towards becoming a developed nation by accelerating the development of numerous infrastructural and industrial projects that can potentially boost its economy. On the other hand, the Indonesian government consistently echoes its vision of becoming a green nation in various strategic global events, such as the G20 Summit and COP 28. The dichotomy between accelerating development and environmental preservation appears to be two opposing sides of the same coin. However, by incorporating SCC into the benefit-cost analysis of each strategic project in Indonesia, the government can assess each project’s broader and holistic impacts. 

However, the most significant challenge of SCC implementation lies in determining its value. In the United States, the SCC value is highly dynamic because it’s sensitive to political control. For instance, the Obama administration used a figure of $43 per ton, Trump’s used $3 to $5 per ton, and Biden’s figure is around $51. These differences are primarily due to two significant factors. First, there are different perspectives regarding the magnitude of damage caused by carbon emissions. While  Obama believed that every carbon emission produced by the U.S. would inevitably harm the global environment, Trump viewed the damage as only occurring on a smaller scale within the U.S.; thus, his number is much smaller. Second, there are differences in discount rates, which are closely linked to quantifying environmental damage arising in the future due to current actions. A lower discount rate means a higher SCC value because it reflects a greater concern for future environmental damage.

Calculating the SCC becomes even more complex on a global scale. The European Institute on Economics and The Environment (EIEE) estimates the global social cost of carbon with multiple scenarios. One of them is by using a fixed discount rate of 3%, which recorded global SCC ranges from $528/ton CO2 to $975/ton CO2, with the U.S., India, and China as the top three countries with the highest SCC, ranging from $48.5 to $181/ton CO2. Through the same scenario, Indonesia is estimated to have an SCC range of $32.6 – $38.8/ton of CO2, which is relatively lower than other major fossil-producing countries but higher than neighboring ASEAN countries.

Regardless of which SCC value is ultimately adopted, incorporating SCC into every benefit-cost analysis in each policy formulation signifies a high commitment by the government to integrate environmental factors into its economic policies. I hope the environmental issue continues to evolve, even after the political contestations end, as environmental justice and the suitability of living conditions are fundamental human rights for every citizen.


Biography of Author

Muhamad Rifki Maulana or “Rifki” is a graduate student at the University of Michigan, Gerald R. Ford School of Public Policy focused on International Economic Development Policy 2022- 2024

 

Edited By: Allison Hanley, MPP 2024