Indonesia is the 6th largest carbon emitter in the world; it is also an archipelagic country with more than 17,000 islands and is vulnerable to climate change risks such as rising sea levels. According to Indonesian Ministry of Development (2021), Indonesia experiences a sea-level rise of 0.8-1.2cm/year while approximately 65% of the population lives in coastal areas. Climate change may increase the risk of hydrometeorological disasters which currently reach 80% of the total disasters that occurred in Indonesia.
In the recent discussion forum with the topic of Indonesia’s Carbon Tax Policy in April 2022, it is clear that Indonesia will continue to take concrete action to battle climate change by introducing a carbon tax. Despite originally planned to be implemented on 1 April 2022, there is a clear signal that the carbon tax is expected to be implemented this year as part of Nation’s sustainability target.
Carbon pricing is one of the policies introduced to reduce greenhouse gas emissions by encouraging low-carbon ecosystems for businesses and communities. Carbon pricing instruments comprises of trade instruments (Emission Trading System and Crediting Mechanism) and non-trade instruments (Carbon tax and Result Based Payment) and this will be regulated under Article 13 of the Law 7/2021. Under this law, the tariff charged is higher or equal to the rate of the carbon price in the carbon market with a minimum price of Rp30/kg of CO2e and this will certainly have an impact on Steel producers.
Key Challenges for Steel Industry
1. Timing of the Taxation
Additional tax will add to the cost of production for producers. This cost could be passed on through to the consumer, but it will affect the demand for domestic steel. Although the government has implemented import tariffs to protect domestic producers, the iron and steel industry remains vulnerable, and implementing Carbon Tax at this stage will greatly diminish the positive effect of these tariffs due to uncertain market conditions. For example, ArcelorMittal South Africa Limited (AMSA), a major player in the iron and steel industry, has incurred net losses of almost USD 0.8 billion since 2012 when the additional cost of Carbon Tax becomes part of the equation.
2. Current Lack of Alternative Technology
Secondly, Carbon Tax is essentially placed to change behaviour and force producers to use more environmentally-friendly technologies. Globally, there are two common environmentally friendly processes available to produce steel. Electric Arc Furnace (EAF) technology is electricity intensive, which is not as cost-effective compared to Blast Furnace technology under the current infrastructure. Another alternative is to use a natural gas-based technology, which is again dependent on the availability of natural gas and is not seen to be a viable option right now. It also needs to be kept in mind that neither of these alternatives is currently able to reduce carbon emissions to desired levels. Based on current technological advancement, Carbon Tax will not result in any behaviour changes for the iron and steel industry and will have the effect of being a penalty if producers are not adapting their production to lower carbon operations.
3. Global Trade Development of Carbon Border Adjustment Mechanism (CBAM)
Meanwhile on the trade side, imposing a matching border carbon adjustment tax has long been viewed as essential to avoid harming the competitiveness of domestic industries. Without CBAM, domestic producers will suffer. The report, written by CRU Consulting for the Climate Leadership Council, also found that applying a domestic carbon price and an equivalent tax on exporters who sell in the Indonesian market would deliver a competitive advantage to domestic steelmakers. Nonetheless, the development of carbon border adjustment tax in Indonesia is still lagging.
Key Opportunities for Steel Industry
Despite clear challenges for steel industries in the face of carbon tax, it’s not all doom and gloom for the industry as implementation of carbon tax will also create new business opportunities.
1. Cost Competitiveness
Despite the high initial capital expenditure, adapting to new technology will be beneficial for steel producers in the long run. Implementation of hydrogen-based direct reduction indicates a 20%-30% higher cost compared with conventional steel production, hydrogen direct reduction uses electricity instead of coking coal as the main energy input which means that their cost structure is exposed to a completely different energy market. These energy inputs also provide opportunities for producers as carbon tax will rise over time.
2. First-mover Advantage in Low-carbon Steel Production
Implementation of carbon tax and the changing customer preferences to environmentally friendly products, steel producers able to produce low carbon steel are expected to benefit from a higher demand as it supports the transition to green energy, in line with the global net-zero emissions goal in 2050. Currently, steel producers with Electric Arc Furnace (EAF) mills hold the advantage over producers with Blast furnace (BF) mills as EAF production is characterized by 38%-53% lower CO2 emissions than BF production.
Steel producers will have a good chance of surviving under the new market norms and regulations if they manage to run their business sustainably and adhere to global climate goals where carbon tax is expected to play a significant role. In reality, the current global climate crisis has put into perspective that new technology is needed for a sustainable business future or manufacturing assets will soon become stranded assets if the players fail to adapt.