This post was originally published by the Jakarta Post.
President Joko “Jokowi” Widodo’s administration has been busy this year, announcing several new policy packages to strengthen the economy in a few months. Then in November the President declared a radical shift in peatland management, with policies designed to halt agricultural expansion into peat forests while facilitating the rehabilitation of already degraded peatlands.
In December, Indonesia made a commitment at the Paris climate change negotiations to reduce emissions by 29 percent by 2030.
This tension between economic growth and environmental protection requires skillful balancing across Indonesia’s economy and particularly, in the expanding agriculture sector.
The proposed economic packages offer tried and true approaches to encouraging business growth. But they lack consideration of how fiscal adjustments could encourage environmental protection while encouraging growth.
Our analysis shows big potential, uncovering inefficiencies in fiscal policies in the land use sector, and suggesting that reforms in this area may be a win-win for better, cleaner growth.
For example, currently, 93.5 percent of all government revenue related to land use comes from levies based on production volume instead of land size.
The more you produce, the more you pay, and there are neither penalties nor rewards to use less land. Only for the land and building tax and a few state taxes are levied in proportion to land used — the more land in play, the more tax you pay.
However, even these taxes create little correlation between the value of the land and the amount paid. So, for now, with land undertaxed, businesses have every reason to use more land to increase production, rather than improving the productivity of land already in play.