Indonesia has the largest geothermal potential resources in the world, however, its current utilization rate is about 6% of total geothermal potential. This paper investigates the impact of imposing the carbon taxation on fossil fuels and the tax is then allocated to incentivize the geothermal electricity supply. The results show that carbon taxation can effectively reduce the national GHG emissions. In the scenario of imposing the carbon tax only on coal consumption, the economy tends to improve better than imposing the tax on all types of fossil fuels. This finding indicates that the policy could only reduce the total production cost of electricity supply, but cannot offset the increased price of fossil fuels due to carbon tax. Our analysis also shows that a revenue-recycling scheme of carbon tax on coal uses by reducing the electricity price will lead to welfare improvements and inequality reductions since coal is only consumed in the industrial sector.
Keywords: Geothermal, subsidy, renewable energy promotion, carbon tax, hybrid CGE model, Indonesia