The Impact of Carbon Tax on Agricultural Output, Employment, and Rural Income in Indonesia: Insights from an Energy Input-Output Model

Abstract

The agricultural sector in Indonesia is crucial for the national economy, contributing significantly to Gross Domestic Product (GDP) and sustaining the livelihoods of millions in rural areas. In light of increasing global environmental concerns, this study examines the potential impacts of a proposed carbon tax on agricultural production, employment, and rural household income in Indonesia. Utilizing the Miyazawa energy input-output model, this research integrates data from the 2016 Indonesian input-output table with carbon emissions profiles to evaluate both direct and indirect effects of a carbon tax set at Rp 30 per kg CO2e. The findings indicate that the implementation of this tax could lead to a substantial decline in agricultural production, estimated at IDR 16.37 billion in a cross-sector scenario, particularly affecting the non-food crops and forestry subsectors. Employment losses could reach approximately 17,884,082 jobs, predominantly impacting rural households highly dependent on agriculture for their livelihood. Moreover, the analysis reveals regressive effects on income distribution, where lower-income households experience a greater intensity of income reduction compared to higher-income groups. This inequality underscores the necessity for effective mitigation strategies to protect vulnerable populations from the adverse consequences of carbon taxes. The study recommends recycling tax revenues to support affected households and investing in subsidies for sustainable agricultural practices. These measures are essential to ensure a just transition that balances environmental goals with economic stability, thereby promoting resilience in the agricultural sector. In conclusion, while a carbon tax represents a significant step toward reducing greenhouse gas emissions, its implications for agricultural output, employment, and income distribution require careful consideration and proactive policy design to preserve social and economic stability in rural Indonesia.