Journal of Cleaner Production 377 (2022) 134288

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Journal of Cleaner Production

journal homepage: www.elsevier.com/locate/jclepro

Comparative analysis of carbon border tax adjustment and domestic carbon

tax under general equilibrium model: Focusing on the Indonesian economy
Dwi Pangestu Ramadhani a, Yoonmo Koo a, b, *
a
Technology Management, Economics, and Policy Program, College of Engineering, Seoul National University, 1 Gwanak-ro, Gwanak-gu, Seoul, 08826, Republic of
Korea
b
Graduate School of Engineering Practice, Seoul National University, 1 Gwanak-ro, Gwanak-gu, Seoul, 08826, Republic of Korea

A R T I C L E I N F O A B S T R A C T

Handling Editor: Mingzhou Jin The carbon border tax adjustment policy is applied to mitigate the carbon leakage issue resulting from unequal
carbon tax implementation and encourage associated nations’ participation in domestic carbon reduction efforts.
Keywords: The high share of primary energy exports and the carbon emissions generates mean that a global carbon control
Carbon tax policy will significantly affect participating countries. This study examines the effects of carbon border tax
Border tax adjustment
adjustment policy on developing countries, and evaluates the substitutability between domestic and inter-
Multi-region CGE model
regional carbon control policies as a development of existing research investigation. The Global Trade Anal­
Carbon emission
Trade ysis Project energy-environmental version (GTAP-E) model and CGEBox, a global computable general equilib­
rium user interface tool, were utilized to address the impact of domestic and inter-region carbon policy on the
economies, trade levels, and environmental conditions of the participating countries. By reviewing the evidence
of the impact analysis, this study investigates the influence of carbon border tariff adjustment implementation on
inducing domestic carbon tax participation in non-regulated countries, with Indonesia as a case study. In the
scenario we develop, Indonesia imposes various carbon taxes and is subject to border carbon tariff by its trade
partners. The analysis reveals that border tax adjustment brings negative trade and economic implications to the
affected countries, with a small reduction in global carbon emission. The findings show that Indonesia’s low
domestic carbon tax levy helps mitigate the adverse economic and trade distortion effects of the carbon border
tax adjustment imposed by its trading partners. Additionally, we estimate the level of carbon border tariffs levied
on each country that achieves the same employment effects as a carbon tax in the analyzed country. The
simulation results indicate that the impact of the carbon border tax imposed is not significant enough to induce
carbon control policy implementation in affected countries. Hence, higher carbon border tariffs should be pro­
posed to encourage non-regulated countries to adopt stringent carbon policy measures to maximize global carbon
emission abatement.

1. Introduction competitiveness issue of the committed countries (Carbone and Rivers,

2020; Dechezleprete and Sato, 2017; Mörsdorf, 2022). The European
Climate protection measures require active global participation and Union (EU) and the United States (US) have proposed to impose a carbon
collaboration of all parties. Under the Paris Agreement, countries have BTA policy against countries without a suitable carbon control policy
set individual carbon mitigation targets and adopted carbon control (European Commission, 2021; United States Trade Representative,
measures to achieve the global low-carbon targets and climate resilience 2022).
(UNFCCC, 2021). However, the deployment of an unequal carbon price Although bilateral carbon tariffs have a role in increasing the global
strategy between nations induces carbon leakage problems and cost-effectiveness of unilateral climate policy, the magnitude is not
competitive disadvantage for domestic products (Felder and Rutherford, significant because of the shift in the financial cost of carbon policy from
1993; Antimiani et al., 2016). Carbon border tax adjustment (BTA) is developed countries to developing countries (Böhringer et al., 2018).
proposed as a policy tool to mitigate carbon leakage and support the The developing countries, specifically high carbon intensity countries

* Corresponding author.Technology Management, Economics, and Policy Program, College of Engineering, Seoul National University, 1 Gwanak-ro, Gwanak-gu,
Seoul, 08826, Republic of Korea.
E-mail address: [email protected] (Y. Koo).

https://doi.org/10.1016/j.jclepro.2022.134288
Received 10 December 2021; Received in revised form 1 August 2022; Accepted 19 September 2022
Available online 28 September 2022
0959-6526/© 2022 Elsevier Ltd. All rights reserved.
D.P. Ramadhani and Y. Koo Journal of Cleaner Production 377 (2022) 134288

subject to BTA, are concerned about BTA’s impact on their economy and be imposed by 2022, according to current drafts of general provisions
trade conditions (Mattoo et al., 2012). The economic distortion from and tax procedures. However, the proposed carbon tariff is lower than
BTA appears due to changes in the value of bilateral prices, determined the level recommended by the World Bank. The Indonesian government
by additional carbon tariffs depending on the volume of carbon emission has not yet made a final decision on setting the carbon tax value to
associated with the bilateral trade commodities. Effects on the cost of support the nationally determined contribution (NDC) target. In 2018,
imported commodities from non-regulated countries would adversely 23.3% of Indonesia’s exports consisted of fossil fuel products (World
affect the trade balance, particularly from a decrease in export rates, Bank, 2021). With a high level of primary energy exports from Indonesia
which directly changes the domestic production pattern and affects net to the world, the employment of carbon taxation and carbon BTA policy
loss in social welfare (Zhang et al., 2019). Several studies have shown by bilateral trade partners may indirectly impact Indonesia’s trade
that implementing BTA negatively impacts trade and economics in the flows, which further affects its economic and environmental conditions.
affected nations while positively lowering global carbon emission levels, To provide an overview for selecting the appropriate policy impli­
though the value was not significant (Dong and Whalley, 2009, 2012; Li cations that mitigate the negative impact of BTA, we provide empirical
and Zhang, 2012; Niu et al., 2013; McKibbin et al., 2018). As it relates to analysis to answer the following questions. First, how significant are the
the open global market, the amount of distortion and environmental effects of carbon BTA on Indonesia’s economy, trade, and environmental
improvement resulting from bilateral carbon tariffs still become the aspects? Second, how significant are the impact of imposing a domestic
subject of study by all nations. carbon tax, and could this approach become a potential option to miti­
Concerns about domestic economic impacts and the comparability of gate the negative impact of BTA? Third, how much is the BTA tariff limit
climate change mitigation efforts across jurisdictions are likely to grow interchangeable with the particular domestic carbon tax, and which
over time as climate change policies’ financial and political conse­ factors would affect the size of the BTA tariff limit? To answer these
quences become more significant (Balistreri et al., 2018). Recognizing questions, we employ a dynamic recursive multi-region computable
the crucial need to reduce climate change, researchers are still pursuing general equilibrium model to analyze the impact of several carbon
an effective carbon policy with the lowest global social cost. The best policy options.
carbon policy is designed by ensuring that all parties, both developed The rest of the study is organized as follows. Section 2 presents a brief
and developing, share equal benefits and obligations to reduce global literature review. Section 3 introduces the multi-region CGE model, data
carbon emissions (Aldy et al., 2011). The distortion that results from sources, and simulation scenarios. Section 4 and Section 5 respectively
BTA implementation encourages non-committed countries to lower discusses the simulation results and discussions. Finally, Section 6 pre­
their emission levels and actively employ a stringent carbon policy to sents the conclusions and policy recommendations.
avoid the threat of BTA imposed by regulated countries (Ismer and
Neuhoff, 2007). However, the effectiveness of BTA implementation in 2. Literature review
encouraging stricter carbon regulation is still being explored. Zhang and
Baranzini (2004) applied a multi-region dynamic CGE model to analyze The carbon pricing system is acknowledged as the most cost-effective
the impact of the US carbon tariff on China and found that BTA distorts instrument for controlling greenhouse gas (GHG) emissions and coping
foreign trade and social welfare levels. The employment of a domestic with climate change problems (Stiglitz et al., 2017). Carbon pricing
carbon tax mitigates the negative effect of the US tariff on China’s initiatives are currently in place or scheduled for implementation in 46
regional export structure. Zhu et al. (2020) simulated carbon emission countries and 32 sub-national regions worldwide to mitigate GHG
reduction scenarios that China could adopt to cope with the effects of emissions (World Bank, 2020). There are two types of market-based
carbon tariffs imposed by the US. The results show that by levying a carbon control policies: the emission trading system (ETS) and carbon
carbon tax of $9/tCO2, China could effectively handle the threats of the taxation. The carbon tax is acknowledged as a practical policy to reduce
US carbon tariff with a controlled effect on real GDP and residents’ carbon emissions because it incentivizes consumers to choose goods
welfare reduction. Sheng and Wang (2022) found that the carbon tariff produced with fewer carbon emissions by building the carbon cost into
deployment of the EU, US, and Japan against China affects in decreasing the price. Simultaneously, the tax produces government revenue that
export rate of China, especially for carbon-intensive goods. To boost the can be used to support green technologies (Avi-Yonah and Uhlmann,
competitiveness of the export goods, China should lower the carbon 2011).
attain in export products by levying a domestic carbon tax, fostering Carbon taxation is a market-based mechanism that can effectively
emerging industries, and bolstering the research and development of reduce carbon emissions (Nordhaus, 1992; Fang et al., 2013; Stram,
low-carbon technologies. 2014). The carbon tax has a Pigouvian form, such that the tax amount is
Although many studies on this topic have examined the impact of proportional to the carbon emissions generated from the production
BTA implementation on the economics and environmental conditions in process (Partnership for Market Readiness, 2017). Carbon tax rates
regulated and impacted countries, most of the analysis has been con­ levied vary across the countries that impose them. Based on World Bank
ducted in large economy countries such as the US, EU, and China. Ac­ (2020) data, carbon tax rates range from $3 to $130 per ton of CO2
cording to the quantitative study findings, the impacts of BTA are not emissions. Some countries have also proposed a yearly increase in car­
uniformly spread globally (Eicke et al., 2021). Hence, a study is needed bon tax rates. Carbon taxation policy causes the market to produce an
to observe the responses of unregulated countries to the bilateral carbon efficient and cost-minimizing level of consumption in the short run,
tariff regulation, focusing on developing countries nations as affected resulting in a significant emission reduction in the long run (Ahmed,
regions. In addition, exploratory research is required to assess the degree 2020). Carbon pricing policy directly impacts the economic and envi­
of substitutability between domestic and inter-regional carbon policies. ronmental sectors of the countries that employ the approach and indi­
In this study, we explore the impact of BTA by emerging nations on rectly affect other countries through changes in the international
Indonesia as a developing country. Indonesia is one of the world’s markets for goods and services.
largest carbon emitters, with an emission level of 0.563 Gt in 2016 The adoption of this voluntarily unilateral carbon policy creates
(World Bank, 2020). Therefore, Indonesia will be heavily affected by problems in its application. Non-committed countries can get an
other countries’ domestic carbon pricing and BTA policy implementa­ advantage by a free ride on emission mitigation efforts of other nations.
tion. To achieve the nationally determined contribution (NDC) target of (Müller et al., 2014). Therefore, there is growing concern about the
29% reduction in emissions compared to the business as usual scenario. effectiveness of carbon pricing policy in emission reduction efforts
The Indonesian government included a carbon tax policy in the mac­ because it creates a competitive disadvantage for implementing coun­
roeconomic framework and principles for fiscal policy year 2022 (Fiscal tries (Wang et al., 2011) and causes a carbon leakage problem (Felder
Policy Agency, 2021). The carbon tax of Rp 75,000/tCO2 ($5/tCO2) will and Rutherford, 1993; Gerlagh and Kuik, 2011). Carbon leakage has

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D.P. Ramadhani and Y. Koo Journal of Cleaner Production 377 (2022) 134288

become the major concern in designing the carbon control regulation constant parameters.
and convention of global climate change (Elliott et al., 2013). Carbon The impact analysis of the BTAs exists as an essential topic in this
leakage refers to the increasing carbon emission levels in non-regulated research area. Although bilateral carbon tariffs have a role in increasing
countries due to the relocation of production levels and increasing en­ the global cost-effectiveness of unilateral climate, the magnitude is not a
ergy demand in unregulated countries (Burniaux et al., 2011). The en­ significant cause for a shift in the financial cost of carbon policy from
ergy market generates carbon leakage due to distortion of fossil energy developed to developing countries (Böhringer et al., 2011). Zhong and
demand in regulated countries, which lowers the global energy price, Pei (2022) employed a multi-region IO approach to examine the
thus stimulating demand for fossil energy in non-regulated countries. competitiveness and welfare impact of the EU Carbon Border Adjust­
Carbon leakage from production relocation occurs due to the lower ment Mechanism (CBAM). The findings indicate that EU CBAM results in
competitiveness of domestic goods in regulated countries after carbon competitiveness redistribution among nations. Implementing CBAM at
costs are imposed, resulting in increased production levels in the $100 per ton of carbon increases EU output by 0.38 percent while
non-regulated nation. Carbon leakage rates are greater from carbon tax decreasing output in the rest of the world by 0.1 percent in the short run.
applied in countries with a substantial share of carbon-intensive in­ However, the adoption of a trade carbon border also creates a hidden
dustry in their economy (Babiker, 2005; Mehling et al., 2019). equality problem in the emissions calculation from bilateral trade. The
The use of a carbon BTA strives to increase domestic producers’ carbon cost compensated for importing countries does not give emission
competitiveness and solve the carbon leakage issue (Veenendaal and credits to exporter countries related to reporting national inventories for
Manders, 2008; Monjon and Quirion, 2011; Branger and Quirion, NDC mitigation targets (Zhou et al., 2013). Because of this detrimental
2014a). Moreover, bilateral carbon tariff implementation also poten­ effect, countries are striving to find an alternative policy design to
tially increases the global cost-effectiveness of climate policies and mitigate the negative effect of BTA policy.
supports the equity of international burden-sharing of climate protec­ Substantial emission reduction can only be obtained by a global
tion (Böhringer et al., 2022). The BTA works by imposing a carbon tariff coalition plan for mitigating emissions. Concerns were raised regarding
on imports from countries with lower environmental ambitions and the ability to trade the carbon adjustment policy to encourage no-
issuing a rebate to domestic exporters (Metcalf and Weisbach, 2009). So regulated countries to engage in carbon mitigation strategies. In his
that the comparative advantage resulting from disparities in climate study, Nordhaus (2015) argues that the implementation of moderate
policy between nations can be eliminated, hence, increasing the trade penalties can encourage a coalition of non-participating nations to
competitiveness of domestic firms in both domestic and international achieve the optimal level of abatement with a carbon price target of up
markets (Perdana and Vielle, 2021). to $50 per ton at current income and emission levels. The enforcement of
However, the implementation of the BTA policy has some challenges. trade sanctions serves as an incentive for non-abating nations to join the
First, the scope of emission coverage for carbon tariffs is imposed ac­ coalition for carbon mitigation initiatives. Mehling et al. (2019) explore
cording to WTO law because carbon pricing adjustments cannot be border carbon adjustment (BCA) design to maximize carbon leakage
employed on imported goods from industries unaffected by the domestic protection and incentivize non-regulated countries to strengthen their
carbon tax. (Bierbrauer et al., 2021). Second, the difficulty in deter­ mitigation efforts. The design considerations are as follows: First, the
mining the carbon embodied in imported goods. Therefore, the default BCA should be limited to additional import costs and not as export cost
emission rate must be calculated using industry-specific measurements rebates to avoid the emission increase from the export channel (de
of embodied carbon (Fischer and Fox, 2012). Third, the industries that Cendra, 2006). Second, BCA covers the high carbon cost and trade
are subject to carbon adjustment are yet to be discussed. Currently, the exposure to minimize the administrative and technical burden and bring
EU has issued a detailed carbon border adjustment mechanism for en­ significant environmental benefits (Böhringer et al., 2012). Third, BTA
ergy, intensive, trade-exposed industries, such as steel, chemicals, and must be imposed fairly without country exemption. Forth, an explicit
electricity industries (European Commission, 2021). carbon policy should implement to adjust the carbon price based on the
Questions have been raised concerning the efficiency of BTA in carbon content difference between domestic and imported goods. Fifth,
dealing with carbon leakage issues caused by the unequal climate pol­ the methodology for calculation and the scope of the emissions must be
icies that are used across different nations. Some researchers found that specified. Sixth, the emission calculation should include direct and in­
BTA regulation is inefficient in handling the carbon leakage issue. Dong direct emissions from the manufacturing process. Seventh, the emission
and Whalley (2011)built a multi-regional general equilibrium model data utilized in the simulation should be quantified using standardized
and concluded that BTA distorts economics despite reducing carbon methodologies.
leakage effects in not significant value. Niu et al. (2013) show that BTA
implementation resulted in adverse economic impact and has only 3. Methodology
accrued weak environmental benefits. Sakai and Barrett (2016) used
multi-regional input-output (MRIO) analysis to examine the effects of 3.1. Model description
BTA in addressing the carbon leakage issue. The result found that BTA is
an ineffective policy to control carbon leakage since it adversely impacts This study utilizes a multi-sector and multi-region Global Trade
welfare in afflicted countries with no proportional emission reduction Analysis Project (GTAP) computable general equilibrium (CGE) model.
effects. GTAP model has a wide-economic coverage that incorporates a global
However, several studies show different results and found that the database containing the yearly data of countries’ economic variables,
BTA policy is a practical tool for reducing carbon leakage incidence. including production, intermediate, and final use values for each
Böhringer et al. (2012) simulate carbon leakage occurrence under three country and international trade flows and transport margins (Corong
carbon policy approaches: border carbon tax adjustment, output-based et al., 2017). The standard GTAP model assumes a perfect competition
allocation of an emission allowance, and industry exemption from car­ market, and production holds a constant return to scale for input-output
bon policy. The findings indicate that carbon border adjustments are the flow. Each regional household collects the income, and then, distributes
most effective approaches to mitigating carbon leakage and increasing it to regional savings and for private and public consumption as a pri­
the global cost-effectiveness of climate policies but can significantly mary factor. The production functions for domestic supply are depicted
worsen regional disparities. Branger and Quirion (2014b) conduct a by the Constant-Elasticity-of Substitution (CES) approach and allow a
meta-regression analysis of 25 studies with 310 estimates of carbon flexible nesting approach with multiple nests that combine primary
leakage ratio under different assumptions and models. The BTA factors, intermediate, and other additional nests. Each household selects
approach covering emission scope from all industries and export rebates a bundle of commodities and services within the nested CES framework
is the most efficient model to reduce the carbon leakage ratio by 6% with to maximize the utility subject to budget constraints.

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D.P. Ramadhani and Y. Koo Journal of Cleaner Production 377 (2022) 134288

In the GTAP model, each region has the same module structure with capture impact analysis on economic conditions, energy factors, and
specific parameters value that is linked to a global relationship with emission intensity heterogeneity across regions. These include Indonesia
bilateral trade flow. The bilateral trade between regions is controlled in (IDN), China (CHN), South Korea (KOR), Japan (JPN), India (IND),
the two-stage Armington approach (Armington, 1969). The top-level Singapore (SGP), the 28 countries of the European Union including the
nest determines the expenditure share between domestic and imported UK (EU), the United States (USA), and the rest of the world (ROW). The
input. The second nest determines bilateral import shares between regional disaggregation was chosen on the basis of their strong trade
countries. The economic interaction between countries is illustrated by relations with Indonesia, based on the level of export value from
the flow of bilateral trade which is determined by the level of export and Indonesia (World Bank, 2021).
import prices for both supply goods prices before taxes and border prices The model is disaggregated into ten output sectors to analyze the
that include taxes and transport margins. This model is suitable for sectoral effects of the carbon policy implementation (see Table 2). The
analyzing the potential impact of global trade and carbon policy output sectors include three primary fossil fuel sectors (Coal, Oil,
implementation. GasProd), the secondary energy sector (Elec), energy-intensive in­
The GTAP-E model is developed and described in GTAP Technical dustries (EITE), heavy manufacturing (HeavyMnfc), light manufacturing
Paper No. 16 by Burniaux and Truong (2002) to provide a more detailed (LightMnfc), and other services (Oth_ser). The model categorizes four
analysis of the impacts of carbon emission reduction efforts. GTAP-E is primary factors of production: capital, labor, land, and natural re­
an extension of the GTAP model that incorporates the energy market as sources. The emission data for the modeling use the GTAP-E database
an additional nest in production factor. The production structure of the included in the GTAP Database version 10.
GTAP-E model treats energy as a production factor that is substitutable
with other capital factors incorporated in the capital-energy composite
3.3. Data processing
in the value-added nest. The model includes coal, oil, gas, petroleum
products, and electricity as energy commodities for energy substitution.
The carbon emissions associated with the products cover the direct
Then, the energy commodities are correlated using a nested-CES struc­
emission from fossil fuels used in the production and indirect emission
ture for electricity and non-electricity, coal and non-coal under the
from secondary energy input. The calculation of the total indirect
non-electricity nest, and gas-coal-petroleum products in the non-coal
emission embodied in production for the multi-regional input-output
nest. The model also incorporates the CO2 accounting factors in pro­
model is adequately described with emissions originating from elec­
duction and mechanisms to trade emissions internationally within the
tricity input (Böhringer et al., 2011). The additional carbon price is
newer GTAP database.
The model analysis is implemented in CGEBox, which is a graphical
Table 2
user interface software package for the CGE model. CGEBox is an open-
GTAP sectoral aggregation.
source and open-access framework for regional and global CGE analysis
implemented with general algebraic modeling system modeling (Britz, New Sectoral Description Sectoral aggregation in GTAP 10
Aggregation database
2021). CGEBox provides the standard GTAP model version 7 and offers
flexibility to adjust the model’s structure by including additional mod­ Agr Agriculture, paddy rice; wheat; cereal grains n.e.c;
Forestry, Fishing vegetables, fruit, nuts; oilseeds; sugar
ules or modifying the functional form in final demand or aggregation in
cane, sugar beet; plant-based fibers;
the Armington agents. The construction of a basic multi-region GTAP crops n.e.c.; bovine cattle, sheep and
modeling that is used in this study is employed from the documentation goats; animal products n.e.c.; raw milk;
of the standard GTAP model in GAMS version 7 (Mensbrugghe, 2018) wool, silk-worm cocoons; forestry;
and CGEBox documentation in Britz and Mensbrugghe (2018) and Britz fishing
Coal Coal Mining Coal
(2021). The original GTAP module in CGEBox does not have a mecha­
Oil Crude Oil Oil
nism to capture the carbon border tax effects in the bilateral trade. In GasProd Natural Gas gas; gas manufacture, distribution
this study, we added the carbon border tariff nodes in the bilateral trade Extraction
module to examine the implications of inter-regional carbon control Oil_pcts Refined Oil petroleum, coal products
Products
policies. The increased price of imported goods with additional carbon
Elec Electricity Electricity
price will affect bundle selection in the manufacturing process. The En_int_ind Energy Intensive minerals n.e.c.; chemical products; basic
research framework is visualized in Appendix Fig. A-1. Industry pharmaceutical products; rubber and
plastic products; mineral products n.e.c.;
ferrous metals; metals n.e.c.;
3.2. Data sources LightMnfc Light Bovine meat products; meat products n.
Manufacturing e.c..; vegetable oil and fats; dairy
This study deploys a multi-regional CGE model for analysis using the products; processed rice; sugar; food
products n.e.c.; beverages and tobacco
GTAP 10 database (2014 base year). The GTAP database version 10
products; textiles; wearing apparel;
provides world economic data for four reference years (2004, 2007, leather products; wood products; paper
2011, and 2014), including 65 sectors in 141 countries/regions (Aguiar products, publishing; metal products;
et al., 2019). In this study, we disaggregate nine regions (see Table 1) to motor vehicles and parts; transport
equipment n.e.c.; manufactures n.e.c.;
HeavyMnfc Heavy Computer, electronic and optic;
Table 1 Manufacturing electrical equipment; machinery and
GTAP regional aggregation. equipment nec;
Oth_ser Other services water; construction; trade;
Regional Aggregation Regional aggregation in GTAP 10 database
accommodation, food and services;
IDN Indonesia transport n.e.c.; water transport; air
CHN China transport; warehousing and support
JPN Japan activity; communication; Financial
KOR South Korea services n.e.c.; insurance; real estate
IND India activities; business services n.e.c.;
SGP Singapore recreational and other services; public
EU European Union 28 administration and defense; education;
USA United States human health and social work activity;
ROW Rest of World dwellings

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D.P. Ramadhani and Y. Koo Journal of Cleaner Production 377 (2022) 134288

calculated by multiplying the CO2 emissions produced by the carbon tax ∑( ) ∑( )

rate. The simulations examine the effects of carbon tax implementation emidijr ∗ xdijr + emiiijr ∗ xmijr
on international trade using a uniform carbon tax rate of $40/tCO2 Cjr = i
∑ ∑i
(3)
xdijr + xmijr
across all regions. The carbon price level of $40/tCO2 is set as the i i

minimum rate to achieve the Paris temperature target from the Report of
where Cjr is the carbon intensity level per unit of production in industry
the High-Level Commission on Carbon Prices (Stiglitz et al., 2017).
j.
Indonesia also utilizes a scheduled carbon price of $5/tCO2 in one of the
Second, we measure the new import tariff and export subsidies
scenarios. The areas that impose carbon taxation vary by scenario. The
embodied in the BTA for carbon-containing goods. The BTA involves
carbon tax induces an increase in energy costs and significantly in­
applying an additional tariff on carbon-intensive imports and issuing a
creases the price of energy-intensive goods. The increase in the price of
rebate or subsidy on carbon-intensive exports. Government revenue
carbon-intensive goods has a subsequent impact on the terms of trade for
equation is rearranged to measure new adjusted import and export
each region.
taxes, which incorporate carbon BTA effects.
This study has several assumptions for simplification. First, the car­
In applying the BTA to imports, the carbon intensity varies with the
bon tax rate was assumed to be the same for all countries, at $40/tCO2,
goods in question. Thus, the value will vary according to the country of
to show the impacts on economic levels and terms of trade. It is chal­
origin because the energy intensity for the production of goods in each
lenging to analyze the impact of implementing different carbon tax
country will be different. Equation (4) shows the government revenue
values for each country, which should be adjusted according to the
from the import tax before the BTA was imposed, and Equation (5)
country’s carbon intensity. Second, this simulation assumed that the
shows the government revenue from BTA on imported goods.
ROW is made up of developing countries with inadequate carbon control
∑∑
policy implementation. Consequently, the outcome of this simulation Yir = imptxjsr ∗ pmcifjsr ∗ xwjsr (4)
does not precisely reflect the current real-world situation with carbon s j
policies based on each country’s regulations. However, the constructed ∑∑
simulations are adequate for analyzing the direction and effect of BTAir = btaxr ∗ Cjs ∗ xwjsr (5)
changes in the adoption of carbon control policies. s j

The impact of carbon taxation application on the economy is

calculated by multiplying the sum of all emissions produced by the With the rearrangement of Equations (4) and (5), we can obtain the new
imposed carbon price. The total emission level is calculated for each total import tax rate in Equation (6), which includes an additional BTA
production sector based on the intensity of carbon in domestic and im­ on import goods.
ported goods aggregate input. All of the parameters that are used in the ( )
btaxr ∗ Cjs
calculation were obtained from the GTAP 10 database. The emissions NEWimptxjsr = imptxjsr + (6)
pmcifjsr
associated with bilateral trade flows are estimated by calculating the
country-specific CO2 emissions per unit of output by industry. The total
where Yir is the government revenue from import tax, imptxjsr is the
carbon emissions embodied in export goods include direct emissions
import tax rate for import goods from country s to r, pmcifjsr is the border
from fossil fuel combustion and industrial processes and indirect emis­
sions associated with electricity used in the production process. price of import products j from country s to r, xwjsr is the bilateral import
To measure the additional revenue obtained from the imposed car­ demand from country s to r, BTAir is government revenue from BTA on
bon taxation, we need to calculate the total CO2 emissions from do­ imported goods, btaxr is the BTA tariff in the country r, Cjs is the carbon
mestic production and multiply it by the carbon tax rate. The analysis of intensity of product j from country s, and NEWimptxjsr is the new import
total emissions at the regional level is shown in Equation (1). tax rate with adjusted BTA.
∑∑ ∑∑ Meanwhile, the BTA implementation for exports is treated as a price
Er = emidijr ∗ xdijr + emiiijr ∗ xmijr (1) reduction for export products. Thus, the carbon intensity used in the
j i j i
calculation depends on the products in the exporting country. Equation
(7) is the pre-existing set of export subsidies before the BTA is levied,
where Er is the total emission level in country r, emidijr is the CO2
and Equation (8) is the total government subsidies for BTA on export
emission coefficient per unit of domestic consumption, xdijr is the de­
goods.
mand for domestic goods in production, emiiijr is the CO2 emission co­ ∑∑
efficient per unit of imported consumption, and xmijr is the demand for Yer = exptxjrs ∗ pejrs ∗ m xwsjrs (7)
imported goods used in production. The coefficients per unit of domestic s j

and imported goods are provided in the GTAP database. ∑∑

Equation (2) shows the government revenue generated by carbon BTAer = btaxr ∗ Cjr ∗ m xwsjrs (8)
emission taxation.
s i

Yemisr = Er ∗ emisPr (2) With the rearrangement of Equations (7) and (8), the new adjusted
export tax rate is shown in Equation (9).
where Yemisr is the government revenue from carbon emission tax for ( )
country r, and emisPr is the carbon price rate. NEWexptxjrs = exptxjrs +
btaxr ∗ Cjr
(9)
The impact analysis for carbon BTA policy employment is carried out pejrs
by quantifying the carbon intensity level for each production sector and
multiplying it by the BTA rate for carbon emissions. First, we have to where Yer is the government expense from export subsidy, exptxjsr is the
measure the carbon emission intensity level for each sector based on export tax rate for export goods from country r to s, pejrs is the bilateral
carbon emissions in the aggregate of domestic and imported goods from trade price of export products j from country r to s, m xwjrs is the
the primary energy and electricity industry. Country-specific CO2 bilateral flow of exports from country r to s, Cjr is the carbon intensity of
emissions per unit of output by industry are calculated as shown in product j from country r, BTAer is government expense from the BTA on
Equation (3). export goods, and NEWexptxjrs is the new export tax with the BTA for
exports from country r to s. All sets and variables list can be seen in
Appendix Table A-1.

5
D.P. Ramadhani and Y. Koo Journal of Cleaner Production 377 (2022) 134288

3.4. Simulation scenario results in a lower export price from the application of the BTA export
rebate, which can increase the product’s competitiveness in interna­
3.4.1. Simulation scenario for the carbon tax and carbon BTA policy tional markets.
To examine the effects of a carbon tax and carbon BTA on Indonesia’s Countries must consider that even if they do not implement carbon
export destination countries, we run six simulations in the model (see control policies on domestic goods (i.e., a carbon tax), they may suffer
Table 3). The scenarios were built with varied carbon tax settings in adverse effects from the implementation of BTA carbon policies in other
Indonesia and different carbon BTA implementations on import and countries, both directly and indirectly. Therefore, regardless of the
export goods by Indonesia’s trade partners. We set the carbon tax rate environmental control targets that must be achieved, the country can
for the rest of the world (ROW) region at $0/tCO2 in all scenarios to choose to implement a domestic carbon tax policy or accept the effects of
sharpen the analysis of the effect of Indonesia and international trade procedures carried out by their trade partners.
partners’ carbon control policies. Hence, to evaluate the impact of the carbon BTA policy in a given
The first simulation is the reference simulation, which allows relative country, we compare several BTA levels implemented globally. The BTA
assessment of the other scenarios. In the first scenario (BaU), no policy tariff analysis setting is similar to the simulation for the carbon tax and
adjustment is implemented in the model. The model runs with the carbon BTA analyses. The carbon BTA analysis incorporate direct and
standard configuration from the GTAP model without any shocks. In the indirect carbon emissions and using the disaggregation of the nine re­
second scenario (CTAX_IDN0), Indonesia and ROW do not impose a gions. However, in the BTA tariff analysis, the effects of the ROW policy
carbon tax policy, but the other regions charge a carbon tax of $40/tCO2 are considered. The countries under study will be subject to different
for emissions produced. The difference between BaU and CTAX_IDN0 levels of carbon BTA imposed by other regions. Thus, the BTA tariff level
can reveal the effect of the carbon tax policy in export destination re­ that produces the same effect as implementing a carbon tax in a given
gions on Indonesia’s economy, environment, and trade balance. country can be determined.
In the third scenario (CTAX_IDN5), Indonesia imposes a carbon tax of
$5/tCO2, and other regions implement a carbon tax of $40/tCO2. By 4. Results
comparing CTAX_IDN0 and CTAX_IDN5 scenarios, we can address
whether there is difference between Indonesia’s implementation of no 4.1. Economic impact
carbon tax and implementation of a carbon tax that is smaller than the
tax applied in other regions. From the simulation runs, we can analyze the macroeconomic effects
In the fourth scenario (CTAX_IDN40), all regions apply a uniform on each region which are shown in Table 4. In the CTAX_IDN0 scenario,
carbon tax of $40/tCO2 on emissions from domestic production. This when all of Indonesia’s trade partners implement a uniform carbon tax
allows us to analyze the outcome of Indonesia imposing a carbon tax of $40/tCO2, Indonesia’s GDP level is reduced by 0.005% from BaU. The
that is sufficiently high to avoid carbon BTA implementation by other reduction in Indonesia’s real GDP comes from the indirect effect of the
regions. In the fifth scenario (BTA_I), all of Indonesia’s trade partners carbon control policy implemented in other countries. Moreover, real
employ a carbon tax and a BTA for imports from Indonesia. GDP in other countries will decrease because of the direct impact of the
The sixth scenario (BTA_IE) adds rebates on exports to Indonesia carbon tax they impose.
from its trade partners to complete the scenario analysis. Based on the In the BTA_I scenario, when Indonesia’s export destination countries
simulation results, we can identify the optimal policies for Indonesia and impose a carbon tariff on imports, Indonesia’s real GDP falls by 0.025%.
other countries globally by assessing international trade’s economic, The greater reduction in Indonesia’s economy in BTA_I compared to the
environmental, and capacity effects. CTAX_IDN0 scenario shows the direct effect of the BTA on imports and
the indirect effects of carbon tax policy implementation in other regions.
3.4.2. Simulation of the carbon border tax adjustment (BTA) tariff levels However, after other countries implement a BTA that includes a carbon
The carbon BTA is imposed on imported products from countries that tariff on imports and rebates on the export of carbon containing goods in
have not implemented carbon control policies; it also includes a rebate the BTA_IE scenario, Indonesia’s real GDP level slightly increases by
on exports to these countries. The impact of the carbon BTA depends on 0.0003%. Comparing the BTA_IE to the BTA_I scenario, the global GDP
the BTA rate, the carbon intensity level of imported goods, and the terms also increases by 0.0004% after the BTA policy and export rebates policy
of trade of each county. Higher BTA rates for import goods intuitively are imposed.
increase the competitiveness of domestic goods in the domestic market Indonesia can avoid the negative impact of a BTA that is imple­
and lower the spillover effect of carbon emissions. Higher abatement mented by its trade partners if it levies a carbon tax on domestic pro­
duction. In the CTAX_IDN40 scenario, Indonesia’s real GDP falls sharply
Table 3 by 0.161% when it sets a carbon tax of $40/tCO2. However, the real GDP
Scenario for analysis. of Indonesia’s trade partners increases slightly compared to CTAX_IDN0.
When Indonesia imposes a lower carbon tax of $5/tCO2 in the CTAX_­
Scenario Detailed description
IDN5 scenario, its real GDP falls by 0.01205% from BaU. Moreover,
BaU Business as Usual scenario with no carbon tax and no carbon BTA
slight changes in real GDP values occur in other countries. A more sig­
implementation.
CTAX_IDN0 • Indonesia does not impose a domestic carbon tax.
nificant economic impact occurs when Indonesia levies a higher carbon
• Other countries impose a carbon tax rate of $40/tCO2 on domestic tax rate. Under the CTAX_IDN5 scenario, a lower carbon tax rate can be
products. used to avoid the effect of BTAs and dampen economic changes
CTAX_IDN5 • Indonesia levies a carbon tax of $5/tCO2 on domestic products. compared to CTAX_IDN40.
• Other countries impose a carbon tax of $40/tCO2 on domestic
products.
CTAX_IDN40 All countries impose a $40/tCO2 uniform carbon tax rate on carbon 4.2. Industry trade impact
embodied in domestic products.
BTA_I • Indonesia does not impose a domestic carbon tax. The changes in trade balances associated with each scenario are
• Other countries impose a $40/tCO2 domestic carbon tax.
shown in Table 5. The implementation of the carbon tax policy mainly
• The carbon border tax is levied on imports from Indonesia by its
trade partner countries. affects countries’ export and import levels when they have a high pro­
BTA_I-E • Indonesia does not impose a domestic carbon tax. portion of carbon-intensive goods in their market. The levied carbon tax
• Other countries impose a $40/tCO2 domestic carbon tax. raises the prices of energy-intensive goods and reduces demand for
• Other countries impose a carbon BTA on imports from Indonesia energy-intensive goods in the domestic market. Furthermore, it causes
and provide rebates on their exports to Indonesia.
an increase in import demand for fossil fuels. Comparing the BTA_I and

6
D.P. Ramadhani and Y. Koo Journal of Cleaner Production 377 (2022) 134288

Table 4
Changes in real GDP (relative to the BaU scenario).
CTAX_IDN0 CTAX_IDN5 CTAX_IDN40 BTA_I BTA_IE

Real GDP
World − 0.15234% − 0.15226% − 0.15292% − 0.15218% − 0.15176%
Indonesia − 0.00505% − 0.0120% − 0.16014% − 0.02557% 0.00035%
China − 0.49923% − 0.49915% − 0.49870% − 0.49975% − 0.49854%
Japan − 0.10141% − 0.10106% − 0.09917% − 0.10523% − 0.10527%
Korea − 0.15238% − 0.15197% − 0.15009% − 0.15397% − 0.15412%
Singapore − 0.03904% − 0.03870% − 0.03605% − 0.04449% − 0.04667%
India − 0.58270% − 0.58177% − 0.57612% − 0.58051% − 0.57491%
EU − 0.09539% − 0.09505% − 0.09290% − 0.09525% − 0.09537%
USA − 0.18394% − 0.18393% − 0.18374% − 0.18381% − 0.18382%
ROW − 0.00876% − 0.00867% − 0.00810% − 0.00686% − 0.00730%

BTA_IE scenarios shows that the export and import levels are higher in implemented the carbon price policy and are only subject to the effects
BTA_IE. This result indicates that implementing rebates on exports can of carbon BTAs imposed by other regions. The variables for analysis of
increase domestic products’ competitiveness in international markets. BTA effects are shown in Table 8. The results are shown in Fig. 1, with
Table 6 shows the changes in Indonesia’s trade balance for each in­ the X-axis illustrating the economic implications of implementing a
dustry. When all of Indonesia’s trade partners impose a carbon tax on carbon tax rate of $40/tCO2. The main factor influencing the size of the
domestic production in the CTAX_IDN0 scenario, Indonesia’s total ex­ carbon tax impact is the carbon intensity level or the level of carbon
ports decrease by 0.7% relative to BaU. The highest reduction in exports emissions required to generate one unit of GDP. Countries with higher
occurs in coal mining, crude oil, refined oil products, and heavy carbon intensity experience more negative abatement effects on GDP
manufacturing industries. In contrast, there is an increase in exports by after the implementation of the carbon tax policy. The carbon taxation
energy-intensive industries in Indonesia. This represents the carbon levied on carbon emissions produced from domestic manufacturing
leakage problem where carbon-intensive goods production is relocated processes. However, Singapore and the United States do not follow this
to countries without a carbon pricing policy. Indonesia’s energy- pattern. Even though the carbon intensity level of Singapore is relatively
intensive goods producers have a comparative advantage relative to high, the impact of a carbon tax on its real GDP changes is relatively low.
producers in countries that face an additional carbon tax. Meanwhile, according to an examination of its international trade
Under the BTA_I scenario, the exports of carbon-intensive goods from flows, Singapore has a high level of imports. Thus, the implementation of
Indonesia fall significantly from BaU. In comparison, the import value of the carbon tax policy does not have a significant negative impact on the
energy-intensive products in Indonesia is increasing under the BTA_IE economy, given its high reliance on imports. The carbon intensity of the
scenario. Thus, after Indonesia implements a carbon taxation policy in United States is relatively low compared to the economic impact of a
CTAX_IDN5 and CTAX_IDN40 scenarios, the domestic production of carbon tax. This is due to the fact that its economy relies on imports only a
carbon-intensive goods significantly decreases, especially for coal min­ little and produces a high proportion of its output domestically. As a result,
ing, the gas industry, and the electricity industry. The reduction of the carbon tax has a significant adverse effect on the US GDP level.
carbon-intensive goods production is more substantial when a higher The Y-axis shows the BTA tariff level that other countries would have
carbon tax rate is imposed. to levy on each country to obtain the same economic effects as imple­
menting a uniform carbon tax of $40/tCO2. The United States has the
highest BTA tariff level of $683/tCO2, followed by China ($322/tCO2), the
4.3. Environment impact
EU ($294/tCO2), Japan ($221/tCO2), Indonesia ($213/tCO2), ROW
($201/tCO2), India ($148/tCO2), Korea ($133/tCO2), and Singapore
The environmental effects of the simulation are shown in Table 7.
($48/tCO2). The graph also represents the sensitivity level of countries’
Under the CTAX_IDN0 scenario, global carbon emissions are reduced by
economies to the carbon BTA rate levied. A lower BTA tariff can be
14.08%. However, in this scenario, Indonesia’s carbon emissions level
interpreted as higher economic sensitivity to carbon control policies
increases by 1.271%. This situation demonstrates the carbon leakage
implemented in export destination countries. Factors such as carbon in­
issue that occurs when other countries enact carbon pricing policies.
tensity and export levels influence the significance of carbon BTA tariffs.
Under the BTA_I scenario, global carbon emissions drop by 14.101%,
We can identify variables that have significant BTA effects by
and Indonesia’s carbon emissions level increases by 1.367%. The BTA_IE
comparing countries that experience similar carbon tax impacts on their
scenario with the implementation of BTA for imports and rebates for
economies. For example, China and India experience similar carbon tax
exports reduces global carbon emissions by 14.098%, while increasing
policy impacts. However, the BTA tariff that would be equivalent to a
Indonesia’s carbon emissions by 1.288%. Under the BTA_IE scenario, the
carbon tax is significantly higher for China than for India. This dem­
emission reduction is lower than that in the BTA_I scenario. This
onstrates that India’s economy is more susceptible to BTAs imposed by
outcome occurs as a result of cost rebates on exports that increase the
other countries. A contributing factor to this situation is that the carbon
competitiveness of BTA country exports in the international market.
intensity of Indian exports is significantly higher than that of China. As a
When Indonesia employs a lower carbon tax than other regions
result of policy changes in the export market, India will experience a
(CTAX_IDN5), its carbon emissions decrease by 1.748%, and global total
larger economic distortion.
carbon emissions are reduced by 14.122%. When Indonesia employs the
Based on the results, we can see that the United States has a relatively
same carbon tax rate as other regions in the CTAX_IDN40 scenario, its
low carbon intensity level compared to the ROW and Indonesia. The
carbon emissions drop significantly by 13.917%, and global carbon
United States also has the lowest export rates compared to other regions.
emissions fall by 14.292%. This scenario generates the largest reduction
As a result, the impact of BTAs imposed by other regions is negligible for
in emissions of all of the scenarios.
the United States, which explains why a very high carbon BTA tariffs
would be required to produce the effect of a carbon tax, as shown in
4.4. BTA effects Fig. 1. On the contrary, for Singapore, even though their exports have a
low carbon intensity level, their export share is the highest compared to
We developed the BTA simulation to examine the impacts of carbon all regions. As a result, the BTA tariff that produces the same impact as
tax and border tax policy. The countries we analyze have not

7
 Table 5
Changes in trade balances.
D.P. Ramadhani and Y. Koo

Country Import Export Domestic use

CTAX_IDN0 CTAX_IDN5 CTAX_IDN40 BTA_I BTA_IE CTAX_IDN0 CTAX_IDN5 CTAX_IDN40 BTA_I BTA_IE CTAX_IDN0 CTAX_IDN5 CTAX_IDN40 BTA_I BTA_IE

World 0.11% 0.12% 0.12% 0.10% 0.12% 0.17% 0.17% 0.18% 0.15% 0.17% − 0.41% − 0.41% − 0.42% − 0.41% − 0.41%
Indonesia 0.11% − 0.05% − 1.14% − 1.73% − 0.23% − 0.70% 0.21% 2.57% − 1.16% − 0.51% 0.21% − 0.06% − 0.84% 0.51% 0.41%
China − 0.40% − 0.39% − 0.37% − 0.42% − 0.39% 1.28% 1.28% 1.27% 1.27% 1.29% − 1.14% − 1.14% − 1.14% − 1.14% − 1.14%
Japan − 0.47% − 0.46% − 0.42% − 0.50% − 0.51% − 1.67% − 1.69% − 1.78% − 1.75% − 1.74% − 0.31% − 0.31% − 0.30% − 0.31% − 0.31%
Korea − 1.02% − 1.02% − 1.01% − 1.06% − 1.06% − 0.54% − 0.54% − 0.57% − 0.58% − 0.57% − 0.54% − 0.53% − 0.53% − 0.54% − 0.54%
Singapore − 0.30% − 0.30% − 0.32% − 0.42% − 0.41% − 0.40% − 0.40% − 0.46% − 0.50% − 0.48% − 0.20% − 0.20% − 0.19% − 0.21% − 0.22%
India − 2.82% − 2.81% − 2.74% − 2.83% − 2.66% 1.14% 1.14% 1.13% 1.12% 1.31% − 2.18% − 2.18% − 2.17% − 2.18% − 2.19%
EU − 0.23% − 0.23% − 0.22% − 0.23% − 0.24% − 0.68% − 0.69% − 0.72% − 0.69% − 0.69% − 0.12% − 0.12% − 0.12% − 0.12% − 0.12%
USA 0.67% 0.67% 0.68% 0.66% 0.66% 2.81% 2.81% 2.80% 2.79% 2.80% − 0.55% − 0.55% − 0.55% − 0.55% − 0.55%
ROW 0.69% 0.69% 0.71% 0.73% 0.72% − 0.40% − 0.40% − 0.42% − 0.38% − 0.38% 0.10% 0.10% 0.11% 0.10% 0.10%

8
Table 6
Changes in Indonesia’s trade balance for each commodity.
Industry Import Export Domestic use

CTAX_IDN0 CTAX_IDN5 CTAX_IDN40 BTA_I BTA_IE CTAX_IDN0 CTAX_IDN5 CTAX_IDN40 BTA_I BTA_IE CTAX_IDN0 CTAX_IDN5 CTAX_IDN40 BTA_I BTA_IE

ALL 0.11% − 0.05% − 1.14% − 1.73% − 0.23% − 0.70% 0.21% 2.57% − 1.16% − 0.51% 0.21% 0.06% − 0.84% 0.51% 0.41%
Agr − 0.43% − 0.39% 0.00% − 0.21% 2.67% 0.81% 0.65% 0.81% − 1.62% − 0.81% − 0.21% − 0.13% 0.29% 0.30% 0.15%
Coal 0.00% 16.13% 87.50% 0.00% 0.00% − 4.67% − 3.64% 0.74% − 4.16% − 4.19% 3.72% − 4.37% − 33.72% 3.72% 3.49%
Oil 0.47% 0.14% − 2.96% − 7.33% − 7.80% − 1.35% − 0.65% 4.42% − 17.44% − 17.20% 0.11% − 0.03% − 1.41% 6.45% 6.17%
GasProd 0.00% 13.17% 300.00% 0.00% 0.00% 0.13% 0.26% 7.78% − 10.44% − 10.50% 0.15% − 1.31% − 10.11% 1.49% 1.12%
Oil_pcts − 0.11% − 0.18% − 1.29% − 2.21% − 1.66% − 2.06% − 2.70% − 5.15% 2.06% 2.06% 0.25% − 0.15% − 3.36% 1.87% 1.54%
Elec 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1.04% − 1.82% − 15.60% 1.63% 1.50%
En_int_ind − 1.46% − 1.28% − 0.25% − 3.54% 0.38% 3.27% 2.82% 0.03% − 0.16% 0.57% 0.83% 0.72% 0.01% 1.79% 0.41%
LightMnfc 0.49% 0.21% − 1.54% − 1.31% − 0.27% − 0.75% 0.36% 3.42% 2.25% 3.24% − 0.19% − 0.16% 0.00% 0.24% 0.24%
HeavyMnfc 1.13% 0.79% − 1.31% 0.34% 0.75% − 1.51% − 0.20% 3.35% 1.75% 3.35% − 0.18% − 0.16% 0.00% 1.66% 1.57%
Oth_ser 0.42% 0.12% − 1.80% − 1.48% − 0.18% − 0.85% − 0.34% 2.87% − 0.48% − 0.48% 0.25% 0.13% − 0.73% 0.10% 0.24%
Journal of Cleaner Production 377 (2022) 134288
D.P. Ramadhani and Y. Koo Journal of Cleaner Production 377 (2022) 134288

Table 7
Changes in carbon emission levels.
CTAX_IDN0 CTAX_IDN5 CTAX_IDN40 BTA_I BTA_IE

World − 14.080% − 14.122% − 14.292% − 14.101% − 14.098%

Indonesia 1.271% − 1.748% − 13.917% 1.367% 1.280%
China − 24.923% − 24.926% − 24.939% − 24.920% − 24.910%
Japan − 8.309% − 8.297% − 8.243% − 8.345% − 8.348%
Korea − 10.426% − 10.410% − 10.337% − 10.473% − 10.472%
Singapore − 4.438% − 4.429% − 4.387% − 4.698% − 4.693%
India − 25.269% − 25.261% − 25.223% − 25.264% − 25.211%
EU − 10.302% − 10.299% − 10.282% − 10.307% − 10.308%
USA − 24.179% − 24.176% − 24.163% − 24.167% − 24.168%
ROW 0.357% 0.376% 0.413% 0.286% 0.281%

Table 8
Analysis of results.
Real GDP changes under CBTA tariffs Carbon intensity [carbon Carbon intensity on export [carbon Export share Import share
carbon tax $40/tCO2 ($/tCO2) emission (Mt)/real GDP (billion emission (Mt)/real GDP (billion $)] [export value/ [export value/GDP]
$)] GDP]

Singapore − 0.015% 48.452 0.260 0.152 96.825% 108.422%

EU − 0.036% 294.203 0.137 0.155 36.532% 40.336%
Japan − 0.057% 220.807 0.188 0.136 14.736% 21.405%
Korea − 0.088% 133.464 0.329 0.199 44.968% 45.814%
ROW − 0.157% 200.755 0.339 0.459 28.852% 31.670%
Indonesia − 0.155% 213.472 0.480 0.472 23.956% 23.686%
USA − 0.181% 683.119 0.278 0.303 11.826% 15.234%
China − 0.485% 322.298 0.745 0.284 32.850% 19.849%
India − 0.518% 147.980 0.909 0.912 23.656% 26.895%

Fig. 1. Changes in real GDP and BTA tariffs for each country.

the introduction of the carbon tax in the domestic market when imposed increases in regulated countries and decreases in Indonesia as an
on Singapore is extremely low. It may be inferred that Singapore is very impacted country. In terms of environmental improvement, the
sensitive to the bilateral trade policies imposed by its trading partners. increasing value of carbon taxes and BTA rates has resulted in a global
higher reduction of emissions. The increase of BTA rates impacts the
reduction of import in most countries, except for the US and ROW. This
4.5. Sensitivity analysis
finding reveals that BTA improves domestic industries’ competitiveness
in regulated nations.
4.5.1. Changing carbon tax and carbon BTA rates
The sensitivity analysis with changing a carbon tax and carbon BTA
4.5.2. Changing the Armington elasticity value
rates is performed concerning the uncertainties of the carbon tax and
In Appendix Table A-3, we report sensitivity results for the
carbon BTA rates imposed in the real application. We develop four
Armington elasticity analysis. We choose three cases for the simulation:
scenarios using the carbon tax and carbon BTA rates of 20, 40, 60, and
no BTA, Indonesia imposing carbon tax by $5/tCO2e, and with BTA
80 $/tCO2e. The results show that the BTA’s effects on macroeconomic
imposed. In all scenarios, the carbon price of $40/tCO2 assumes to be
levels, emission reduction flows, domestic goods competitiveness in
levied by all countries except Indonesia and ROW. In order to evaluate
international markets, domestic goods competitiveness in domestic
the robustness of the simulation’s results, a sensitivity analysis was
markets, and shifting import rates are robust to all tested tax rates (see
conducted for each of the simulation’s schemes, with the Armington
Appendix Table A-2).
elasticity rate increased by 50 and 100 percent. The aggregate results of
With the increase in carbon price and BTA rates, the regional income

9
D.P. Ramadhani and Y. Koo Journal of Cleaner Production 377 (2022) 134288

sensitivity analysis confirm the robustness of our qualitative findings. BTA tariff limits are more susceptible to policy changes that affect ex­
Higher Armington elasticity effects on increasing adverse economic ports. The simulation results enable us to examine the various policies
impact, lowering emission reduction level, and increases trade flow. As that each country can adopt to avoid the threat of economic distortion
proven by lower import rates, the BTA increases the competitiveness of from bilateral carbon control policies.
domestic goods in regulated countries. The implementation of BTA has For example, in Singapore, where the minimum BTA tariff value is
minimal impact on economic growth on a global scale. Considering the $48/tCO2, it is preferable to implement a domestic carbon tax to miti­
economic and environmental levels, it is determined that Indonesia gate the risk of CBTA tariffs imposed by other regions. The economic
would be better off imposing a modest carbon tax rate (in this case, $5/ impacts of a domestic carbon tax in Singapore are similar to those of
tCO2) than being impacted by trading partners’ adoption of BTA. Under being subject to BTA tariffs on bilateral trade. Meanwhile, carbon tax
a low carbon price scenario, Indonesia’s real GDP and emission reduc­ policy implementation has a greater positive impact on the environ­
tion level is greater. ment, with a higher reduction in carbon emissions. For the United States,
without considering the national emission reduction target, we can
5. Discussion conclude that it is more beneficial not to implement a carbon pricing
policy in the domestic market because the negative effects of BTAs are
Based on the analysis of the CTAX_IDN0 scenario, the implementa­ relatively small.
tion of a carbon tax policy by Indonesia’s trade partners has negative These findings can be used as a foundation to evaluate the impact of
economic and environmental impacts on Indonesia. The indirect eco­ BTA adoption on the global market. The impact study implies that
nomic effects arise as a result of the reduction in export demand for fossil countries with a high reliance on bilateral trade flows of the carbon-
energy products from Indonesia. This reduction occurs due to a decrease intensive industry for economic growth should apply a low-rate do­
in the production of energy-intensive goods in regulating countries. mestic carbon tax policy to counteract the effects of the BTA’s adoption.
However, the carbon leakage problem occurs due to increased demand This research also yielded a recommendation for the BTA trade-off value
for energy-intensive goods produced in Indonesia. Evidence of carbon that can be imposed to achieve the same economic impact as a domestic
leakage is shown in Indonesia’s increasing carbon emissions under the carbon tax at a particular value (in this case, simulation uses a uniform
CTAX_IDN0 scenario. The carbon emissions shift from the country that carbon price of $40/tCO2). These data can be used as a benchmark for
implements the carbon tax policy to other countries that do not adopt determining the BTA rate’s level of implementation to encourage other
carbon control policies. When the carbon control policy is not imple­ countries to participate and develop domestic regulations to mitigate
mented for domestic products, Indonesia can be subject to BTAs levied carbon emissions.
by its trade partners (BTA_I).
The BTAs imposed by importing countries distort international trade. 6. Conclusion
They increase the competitiveness of domestic products in the domestic
market and lower imports as a result. However, negative trade and This study utilized a dynamic recursive multi-region CGE model with
economic impacts will appear in countries that are subject to BTAs. The CGEBox program using GTAP10 database to analyze the economic and
significant reduction in Indonesian exports occurs mainly in the carbon- environmental effects of carbon and border tax adjustment policy. The
intensive industry and further lessens Indonesia’s GDP. However, GTAP-E model structure captured the carbon emissions from the pro­
countries with BTA policies experience reduced competitiveness of their duction and linked them to the economy and trade module. Six simu­
products in international markets. Regulating countries use export lation scenarios were developed to compare several strategy options for
subsidies to counteract this effect of carbon taxes and BTA policy Indonesia as a case study, with an emphasis on the economic, trade, and
enforcement. Under the BTA_IE scenario, there is an increase in exports environmental impacts expected to occur from 2021 to 2030. Several
in countries implementing the policy compared to the BTA_I scenario. findings are drawn up as follows.
The use of carbon taxes greatly influences Indonesia’s trade struc­ First, Indonesia will be subject to BTAs levied by their trade partners
ture, negatively impacts its economy, and induces carbon emission when they do not implement carbon taxes. The BTA policy imposed on
reduction in the domestic market. The tax rate directly affects Indo­ Indonesia adversely impacts the export level, especially on carbon-
nesia’s trade structure due to an increase in production in the carbon- intensive goods. The distortion of the market balance effects on
intensive industry. When Indonesia imposes the same carbon taxes as lowering of the economic level. The global emission level is decreased by
other trade partner countries by $40 (CTAX_IDN40), the Indonesian a small number, which indicates the adverse carbon leakage incidence.
carbon emission levels fall sharply, and the global carbon emissions This finding supports the previous literature’s result and shows a similar
reach the lowest point of all scenarios. In addition, the reduced pattern of the effects of BTA employment (Dong and Whalley, 2009,
competitiveness of domestic products in the domestic and international 2012; Li and Zhang, 2012; McKibbin et al., 2018; Niu et al., 2013)
markets will cause significant economic contraction. Indonesian and Second, the implementation of the domestic carbon tax policy in
global carbon emissions would decrease if Indonesia imposed lower Indonesia reduces the level of carbon-intensive goods produced in the
carbon taxes than its trade partners (CTAX IDN5), though not as much as country. Hence, it can be an effective tool for mitigating domestic car­
implementing a $40 carbon tax. However, the tax’s economic harm bon emissions. However, when Indonesia imposes a carbon tax of $40/
would be lower, and the impact on the national economy would be tCO2, it has a significant negative economic impact and reduces the
better than the effect of BTA on imports (BTA_I). Furthermore, under the trade competitiveness of goods produced domestically. When Indonesia
CTAX_IDN5 scheme, the trade level would be better with higher do­ levies a lower carbon tariff than other countries, the negative impact on
mestic product use and a lower import level than in the CTAX_IDN40 GDP can be maintained while minimizing the risk of BTAs imposed by
scenario. other countries. Apart from that, despite its low level, it has a net effect
Based on the results and without considering the national GHG of reducing GHG emissions in the country. In summary, a small domestic
emission reduction target, we can conclude that CTAX_IDN5 is the best carbon price policy can be a suitable policy option to mitigate the risk
policy option that Indonesia can adopt to avoid threats from BTA pol­ posed by BTA imposed by trading partners with minimal economic
icies imposed by other countries and to minimize economic distortions. disruption and stronger emission reduction effects for Indonesia. This
To pursue a higher carbon emission reduction target globally, the BTA statement support similar finding in previous literature by Zhang and
tariffs should be set higher to force Indonesia and other countries that Baranzini (2004); Zhu et al. (2020); and Sheng and Wang (2022).
have not introduced a carbon control policy to do so. Third, variables affecting bilateral trade sensitivity to carbon control
The result of the BTA tariff simulation can be used as a reference to policies include the carbon intensity of export products and the export
assess the carbon control policy on bilateral trade. Countries with lower share in the local economy. Countries with a low BTA tariff limit are

10
D.P. Ramadhani and Y. Koo Journal of Cleaner Production 377 (2022) 134288

particularly vulnerable to changes in carbon control policy by their trade manufacturing sector.
partners. Consequently, it is preferable for them to implement a do­
mestic carbon pricing policy to avoid distortions caused by their trading CRediT authorship contribution statement
partners’ BTA policy implementation.
Based on the simulation results, we offer the following policy rec­ Dwi Pangestu Ramadhani: Methodology, Software, Formal anal­
ommendations: first, without considering the national carbon emission ysis, Visualization, Writing – original draft, Writing – review & editing.
target, the affected countries should implement a lower carbon tax on Yoonmo Koo: Conceptualization, Validation, Supervision, Funding
the domestic market to avoid the negative impact of BTAs that are acquisition.
imposed by other countries. Second, a higher BTA rate should be pro­
posed to accelerate global carbon mitigation efforts and force other Declaration of competing interest
countries to have stricter carbon control policies.
The analysis in this study is structured with limitations on investi­ The authors declare that they have no known competing financial
gating the policy impact primarily from the macroeconomic perspective interests or personal relationships that could have appeared to influence
and does not explicitly consider CO2 reduction technologies in related the work reported in this paper.
industries. For future studies, the carbon taxation and carbon BTA
module should be incorporated into the global top-down and bottom- Data availability
hybrid model to analyze the technological change implication result­
ing from the introduction of the carbon price and BTA. The extended Data will be made available on request.
global hybrid model development will follow the references model
structure on a single country’s energy system hybrid model. For refer­ Acknowledgements
ence (Lee et al., 2022), developed a hybrid energy system model to
evaluate the impact of CCS technology in the Korean steel industry, and This study was supported by the Basic Science Research Program
Lee et al. (2020).integrated the bottom-up energy system model and [NRF-2020R1C1C1010152] through the National Research Foundation
top-down CGE model to assess the effect of climate policy in the (NRF) of Korea, which is funded by the Ministry of Science and ICT.

Appendix

Fig. A-1. Research framework

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D.P. Ramadhani and Y. Koo Journal of Cleaner Production 377 (2022) 134288

Table A-1
Sets and variables list

Set Description

r Regions
s Regions in current analysis
i, j Products
Variable Description Indices

Yemis The government revenue r

from carbon emission tax
Yi The government revenue r
from import tax
Ye The government expense r
from export subsidy
E The total emission level r
C The carbon intensity level j,r
per unit of production
emisP The carbon emission r
price rate
emid The CO2 emission i,j,r
coefficient per unit of
imported goods
emii The CO2 emission i,j,r
coefficient per unit of
domestic goods
xd The demand for domestic i,j,r
goods used in production
xm The demand for imported i,j,r
goods used in production
xw The bilateral import j,s,r
demand
m xws The bilateral export j,r,s
supply
pmcif The border price of j,s,r
import goods
pe The bilateral trade price j,r,s
of export goods
imptx The import tax rate j,s,r
exptx The export tax rate j,r,s
NEWimptx The new import tax with j,s,r
adjusted BTA for import
NEWexptx The new export tax with j,r,s
adjusted BTA for exports
btax The BTA tariff r
BTAi The government revenue r
from BTA on imported
goods
BTAe The government expense r
from BTA on export
goods

Table A-2
Sensitivity analysis of changing carbon tax and BTA tax rates.

BTA $20/tCO2e BTA $40/tCO2e BTA $60/tCO2e BTA $80/tCO2e

1. Regional income
World 0.47% 0.85% 1.18% 1.48%
Indonesia − 0.68% − 0.96% − 1.18% − 1.38%
China 0.57% 0.97% 1.31% 1.62%
Japan 0.54% 0.97% 1.37% 1.78%
Korea 0.47% 0.51% 0.45% 0.39%
Singapore 0.55% 0.94% 1.25% 1.52%
India 0.66% 1.14% 1.53% 1.88%
European Union 0.75% 1.38% 1.91% 2.38%
United States 0.51% 0.92% 1.28% 1.60%
Rest of World 0.38% 0.74% 1.03% 1.28%

2. CO2 emission
World − 14.10% − 14.10% − 18.29% − 21.26%
Indonesia 1.05% 1.37% 1.51% 1.62%
China − 14.63% − 24.92% − 31.95% − 37.03%
Japan − 4.53% − 8.34% − 11.47% − 14.09%
Korea − 5.71% − 10.47% − 14.30% − 17.44%
Singapore − 2.50% − 4.70% − 6.68% − 8.47%
(continued on next page)

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Table A-2 (continued )

BTA $20/tCO2e BTA $40/tCO2e BTA $60/tCO2e BTA $80/tCO2e

India − 13.62% − 25.26% − 33.77% − 39.94%

European Union − 5.73% − 10.31% − 13.89% − 16.79%
United States − 24.17% − 24.17% − 30.98% − 35.54%
Rest of World 0.31% 0.29% 0.31% 0.45%

3. Import
World 0.05% 0.10% 0.11% 0.07%
Indonesia − 1.02% − 1.73% − 2.31% − 2.84%
China − 0.18% − 0.42% − 0.73% − 1.07%
Japan − 0.23% − 0.50% − 0.78% − 1.06%
Korea − 0.55% − 1.06% − 1.53% − 1.96%
Singapore − 0.22% − 0.42% − 0.60% − 0.78%
India − 1.62% − 2.83% − 3.79% − 4.60%
European Union − 0.12% − 0.23% − 0.35% − 0.46%
United States 0.33% 0.66% 0.78% 0.70%
Rest of World 0.37% 0.73% 1.02% 1.25%

4. Domestic use
World − 0.20% − 0.41% − 0.61% − 0.79%
Indonesia 0.28% 0.51% 0.70% 0.86%
China − 0.53% − 1.14% − 1.73% − 2.29%
Japan − 0.15% − 0.31% − 0.46% − 0.61%
Korea − 0.27% − 0.54% − 0.80% − 1.05%
Singapore − 0.10% − 0.21% − 0.34% − 0.49%
India − 1.03% − 2.18% − 3.26% − 4.23%
European Union − 0.06% − 0.12% − 0.19% − 0.26%
United States − 0.29% − 0.55% − 0.77% − 0.95%
Rest of World 0.05% 0.10% 0.14% 0.20%

Table A-3
Sensitivity analysis of carbon tax and BTA scheme to Armington elasticities

sigmam 100% (base case) sigmam 150% sigmam 200%

no BTA IDN CTAX $5/tCO2 BTA no BTA IDN CTAX $5/tCO2 BTA no BTA IDN CTAX $5/tCO2 BTA

1. Real GDP
World − 0.15% − 0.15% − 0.15% − 4.20% − 4.19% − 4.20% − 4.20% − 4.19% − 5.63%
Indonesia − 0.01% − 0.01% − 0.03% − 2.43% − 2.44% − 2.46% − 2.43% − 2.44% − 3.34%
China − 0.50% − 0.50% − 0.50% − 8.11% − 8.11% − 8.11% − 8.11% − 8.11% − 10.84%
Japan − 0.18% − 0.18% − 0.18% − 1.64% − 1.64% − 1.64% − 1.64% − 1.64% − 2.14%
Korea − 0.58% − 0.58% − 0.58% − 3.44% − 3.44% − 3.44% − 3.44% − 3.44% − 4.50%
Singapore − 0.10% − 0.10% − 0.11% − 1.58% − 1.58% − 1.58% − 1.58% − 1.58% − 2.12%
India − 0.15% − 0.15% − 0.15% − 5.05% − 5.05% − 5.05% − 5.05% − 5.05% − 6.71%
European Union − 0.04% − 0.04% − 0.04% − 3.59% − 3.59% − 3.60% − 3.59% − 3.59% − 4.85%
United States − 0.10% − 0.10% − 0.10% − 6.39% − 6.39% − 6.39% − 6.39% − 6.39% − 8.64%
Rest of World − 0.01% − 0.01% − 0.01% − 3.57% − 3.57% − 3.57% − 3.57% − 3.57% − 4.83%

2. CO2 emission
World − 14.08% − 14.12% − 14.10% − 12.88% − 12.92% − 12.91% − 12.88% − 12.92% − 13.20%
Indonesia 1.27% − 1.75% 1.37% 0.69% − 2.16% 0.82% 0.69% − 2.16% 0.48%
China − 24.92% − 24.93% − 24.92% − 23.81% − 23.82% − 23.81% − 23.81% − 23.82% − 23.87%
Japan − 24.18% − 24.18% − 24.17% − 25.84% − 25.84% − 25.83% − 25.84% − 25.84% − 27.46%
Korea − 25.27% − 25.26% − 25.26% − 24.14% − 24.14% − 24.14% − 24.14% − 24.14% − 23.84%
Singapore − 8.31% − 8.30% − 8.34% − 5.30% − 5.29% − 5.33% − 5.30% − 5.29% − 4.35%
India − 10.43% − 10.41% − 10.47% − 9.41% − 9.40% − 9.46% − 9.41% − 9.40% − 9.16%
European Union − 4.44% − 4.43% − 4.70% − 4.55% − 4.54% − 4.84% − 4.55% − 4.54% − 4.93%
United States − 10.30% − 10.30% − 10.31% − 2.10% − 2.09% − 2.10% − 2.10% − 2.09% 0.81%
Rest of World 0.36% 0.37% 0.29% 1.39% 1.40% 1.30% 1.39% 1.40% 0.47%

3. Import
World 0.11% 0.12% 0.10% 0.38% 0.38% 0.36% 0.38% 0.38% 0.23%
Indonesia 0.10% − 0.05% − 1.73% − 0.96% − 1.13% − 3.34% − 0.96% − 1.13% − 4.80%
China − 0.40% − 0.39% − 0.42% − 11.84% − 11.83% − 11.87% − 11.84% − 11.83% − 20.50%
Japan 0.67% 0.67% 0.66% 0.21% 0.21% 0.19% 0.21% 0.21% − 0.24%
Korea − 2.82% − 2.81% − 2.83% − 0.79% − 0.77% − 0.80% − 0.79% − 0.77% 0.37%
Singapore − 0.47% − 0.46% − 0.50% − 0.89% − 0.89% − 0.94% − 0.89% − 0.89% − 1.82%
India − 1.02% − 1.02% − 1.06% − 2.33% − 2.33% − 2.38% − 2.33% − 2.33% − 4.09%
European Union − 0.30% − 0.30% − 0.42% 0.31% 0.31% 0.16% 0.31% 0.31% 0.21%
United States − 0.23% − 0.23% − 0.23% 1.11% 1.11% 1.10% 1.11% 1.11% 1.83%
Rest of World 0.69% 0.69% 0.73% 3.02% 3.02% 3.06% 3.02% 3.02% 4.40%

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