Graduate School of Architecture and Civil Engineering,
Toyohashi University of Technology, Japan


Graduate School of Environment and Life Science Engineering,
Toyohashi University of Technology, Japan


Graduate School of Architecture and Civil Engineering,
Toyohashi University of Technology, Japan


Makassar is the capital of South Sulawesi and the largest metropolitan city in eastern Indonesia. This city is an established of economic development for eastern Indonesia, which is characterized by a high degree of industrial development. Therefore, the carbon dioxide (CO2) emissions generated in the city will increase. However, the government has attempted to maintain environmental quality to ensure a livable and healthy city. Unfortunately, the government’s budget to support the economic development is limited, despite the increased level of economic activity in the city. As a result of these conditions, the government has elected to economize resource use by improving the efficiency of resource allocations. To this end, the government imposed a carbon tax in the city.

The purpose of this study is to analyze the impacts on the economy in Makassar resulting from the introduction of carbon taxes to reduce energy consumption in all sectors of the economy that generate CO2 emissions. The imposition of a carbon tax is expected to reduce CO2 emissions and to improve the city’s economic potential. The study investigates the possibility of transferring carbon tax revenue to transfer to household to generate increased household income. A computable general equilibrium (CGE) model was the primary analytical methodology employed to measure the impact of the imposition of a carbon tax across all sectors of the economy. The model examined the impact of the carbon tax based on the 2006 input-output (I-O) table for Makassar City and estimated of a social accounting matrix (SAM) table the same year. In CGE models, general equilibrium is achieved via the price mechanism. The model assumes a static economy with no time-related elements. A total of twenty eight industrial sectors and two production factors, labor and capital, are used in this study. The model economy contains a single representative household that sets its consumption to maximize its utility subject to its budget constraint. The utility function used is  the constant elasticity of substitution (CES) type, where the household maximizes utility subject to a budget constraint. Every industry uses an intermediate input to produce one commodity for each sector without commodity by-product. The firms are assumed to maximize their profits by managing inputs and outputs subject to their production technology. Firms are assumed to be perfectly competitive and to achieve equilibrium in 2006 through flexible price adjustments.

The carbon tax policy is assessed in two simulations. In the first simulation, a carbon tax is imposed on all industries without household transfer, and in the second simulation, the tax revenue is transferred to households. The government transfers funds to household in amount equal to the carbon tax revenue. In theory, the implementation of a carbon tax will reduce CO2 emissions and increase government revenues. Furthermore, household welfare will also increase, output prices will increase, and the household will reduce its consumption.

The results of all simulations of the CGE model indicated that a carbon tax can reduce the volume of CO2 emissions by 8 %. In general, output prices and production volumes decline. The demand for capital tendeds to be fixed, and labor demand declined after tax revenues were transferred  to the representative household. Household consumption declined following the imposition of carbon taxes but increased in response to the transfer of carbon tax revenues. Therefore, household welfare increased after receiving transfers from the government.

It is crucial to effectively manage efforts to reduce CO2 emissions. The such management involves not only production-side efforts concerning environmental-friendly technology; but prevention of a decline in commodity consumption preferences.

read more