The role of energy tax in CO2 emission reduction from the power sector: a factor decomposition analysis

A decomposition model has been developed to examine the factors which affect the change in CO₂ emission due to considering energy tax in the Indonesian power sector during 2006-2025. There are two factors which affect the change in CO₂ emission due to energy tax, i.e., technological substitution effect and demand side effect. The results show that the reduction of CO₂ emission would increase from 3.5% to 73.5% if the energy tax is increased from US$0.5/Mbtu to US$10.0/Mbtu. At lower energy tax rates (i.e., at tax rate US$2.0/Mbtu and lower), the CO₂ emission reduction is mainly due to demand side effect. However, the role of technological substitution effect is more influential at tax rates higher than US$2.0/Mbtu. The results also show that the SO₂ and NO_x mitigation would also increase from 3.5% to 85.0% and from 3.3% to 70.9% respectively if the energy tax is increased from US$0.5/Mbtu to US$10.0/Mbtu.