Simulation of Carbon Tax Impact on the Competitiveness of the Manufacturing Industry in Indonesia Using a System Dynamics Approach

Abstract

This study investigates the impact of carbon tax on the competitiveness of Indonesia’s manufacturing sector using a System Dynamics (SD) approach. The analysis explores how different carbon tax levels—0, 30, and 200 IDR/kg CO2e—affect production inputs, outputs, and added value. The results show that manufacturing inputs remain low and stable at 0 IDR/kg CO2e due to the lack of financial pressure to reduce fossil fuel consumption. However, input costs increased slightly at 30 IDR/kg CO2e, prompting industries to adopt energy-efficient technologies to manage costs. The highest tax level, 200 IDR/kg CO2e, significantly raises input costs, compelling manufacturers to invest in low-carbon technologies to mitigate the cost burden. The study also assesses the impact of carbon taxes on output and value-added in the manufacturing sector. While carbon taxes initially reduce value added due to increased input costs, investments in green technologies can help companies recover and improve productivity over time. Higher tax rates, such as 200 IDR/kg CO2e, push industries towards significant technological shifts, potentially enhancing long-term competitiveness. The research highlights the importance of supportive policies, including subsidies for renewable energy and efficiency incentives, to facilitate the transition to greener production methods. Overall, the study concludes that well-designed carbon tax policies can drive industrial sustainability while maintaining economic growth in Indonesia.