Designing an Effective Carbon Tax Regime in Indonesia

Aligning Fiscal Strategy with Climate Commitment

Abstract

Carbon tax policy reflects a strategic mechanism to align fiscal reform with climate goals. While previous research has extensively examined the political and economic implications of carbon pricing, limited attention has been paid to the strategic design of carbon tax policies towards balancing internal fiscal priorities with external environmental commitments, particularly in developing countries. This is particularly important in developing countries, where fiscal constraints and urgent development needs make the alignment with climate commitments extremely challenging. Therefore, this study addresses the research question: How do governments in developing countries navigate the strategic alignment between fiscal priorities and climate commitments in the design of carbon tax policy?. Using a qualitative case study approach, the research draws on in-depth interviews with 15 key informants involved in the design and implementation of the carbon tax policy in a developing country, Indonesia. Indonesia is a suitable case for this study because, despite having committed to reducing emissions through the Paris Agreement, implementation of carbon policy has experienced significant delays due to the slow policy design process. To address the research question, this study identifies a theoretical gap in the limited application of the Strategic Fit framework in fiscal–climate public policy in developing countries. Our findings show that fiscal alignment and climate commitments are hampered by short-term revenue interests, weak inter-ministerial coordination, and institutional capacity limitations, while international pressure and the push for fiscal reform are actually driving factors. Theoretically, this study extends Strategic Fit beyond corporate strategy to the public policy domain by incorporating fiscal-climate dynamics relevant to developing countries. Practically, it underscores the need for carbon tax designs that balance fiscal demands with climate commitments through stronger institutional coordination and credible instruments.