Low Carbon Policy in Makassar City: a CGE Analysis
Any Wahyuni
Graduate School of Environment and Life Science Engineering, Toyohashi University of TechnologyandYuzuru Miyata
Graduate School of Architecture and Civil Engineering, Toyohashi University of Technology
I. Introduction
Makassar is the capital city of South Sulawesi province in Indonesia and it is the largest city on theisland of Sulawesi as a metropolitan. Since 14th century, has known as sea port that has served trading
to China, India, Cambodia and the Europe (Spain and Portugal). Makassar became the center ofdevelopment in the eastern Indonesia. It is proven by the ever increasing growth in the economy of thecity of 8.75% and contribute of 31.42% of the economic growth of the South Sulawesi province.
On the other hand, Government of Makassar city is trying to keep the quality of the environment inorder to stay in livable city with healthy. These efforts to fruition lead to appreciation of the ASEAN
Environmentally Sustainable cities (AESC) as major cities in ASEAN countries with the quality ofclean air in 2011. Makassar is dedicated as a large city that is able to maintain the condition of the cityremains clean, green and livable despite being the center of economic activities and growth of theindustries. This condition becomes a huge task for government to continue to keep the city ofMakassar air quality without reducing the rate of urban growth and sustainable development of thecountry.
Air quality is related to the level of CO2 emissions generated by human activities. The increasing
population density will also increase the number of activities that will have an impact on the increasein the amount of CO2 emissions. Efforts to reduce CO2 emissions as the impact of economic growth
can be done through analysis of a computable general equilibrium (CGE) model. The main data usedin CGE is the Input-Output table of Makassar city in 2006.
The current most important subject in the environmental economics has been the carbon dioxide (CO２ ) emission problem. Several studies in natural sciences have warned us of a possible future
significant damage on our society (e.g. Houghton et al., 1996). Inheriting this global issue, many
economists have also attempted to measure the economic impacts of global warming on the earth,and/or evaluate the effects of economic measures to curb CO２ including carbon tax (e.g. Dornbuschand Poterba, 1991).
Looking at the global environmental issues from the viewpoint of regional competition, it would
become a serious problem as to which countries/regions and how much they should share theenvironmental burden shedding another light on the North and South problem.
II. The Model
II.1 Assumption of the Model
Our CGE model assumes:
1. All commodity markets are perfectly competitive in both the input and output market
2. Wages received by household equal to the marginal costs of labor
3. At the level of output, the price paid by consumers is the marginal production cost as constraints
5. Demand and supply for each economic agent is derived from the optimization of each activity that
affects to utility level and technology.
II.2 Model StructureThis study uses data Input-Output Table in 2006 of Makassar city. There are thirty two market
activities of thirty industrial market economies (see Table 1), and two factor of labor and capital
markets. All data is calculated in the Rupiah.
Sector classification in I-O table based on:-1-1. The similarity of input structures and produce a homogeneous output
2. Reference: International Standard of Industrial Classification for All Economic Activities (ISIC),Indonesia Commodity Classification (KKI) or Industrial classification of Indonesia (KLUI)Table 1: Classification of Industries
No
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.

Industries Sectors
Food Crops
Plantation Crops
Livestock
Forestry
Fishery
Mining of oil and gas and non-oil and gas
Quarrying
Manufacture of food, beverages and tobacco
Manufacture of textiles, clothing and leather
Manufacture of wood, bamboo and furniture
Manufacture of paper and paper product, printing and publishing
Manufacture of chemicals, petroleum, coal, rubber and plastic product
Manufacture of cement non-metallic mineral
Manufacture of basic metals
Manufacture of fabricated metal
Other manufacturing
Electricity, gas and water supply
Construction/building
TradeHotel
Restaurants
Highway transportation
Other transportation
Communication
Banks and other financial institutions
Rent, real estate and business services
General Government
EducationHealthSocial services and other services

Sources: BPS, Input-Output table of Makassar City 2006

Figure 1: Hierarchical Structure of the Model-2-CodeFCPC
LFoFi
MOG and NOG
Q
MFBT
MTCL
MWBF
MP and PP, P and P
MCPCR and PP
MCNMM
MBM
MFM
OM
EGWS
C/B
Tr
Ht
R
HT
OT
C
BOFI
LREBS
GG
E
He
SSOS

Besides the Input-Output table data, Social Accounting Matrix (SAM) data is also used. I-O table andSAM data should be used in the same year published. Basic framework in SAM table Makassar city as
interpretation towards Statistic of Indonesia data 2010.
Table 2: Basic Framework SAM Makassar City

II.2.1 Industries

Production structure illustrates that the combination of intermediate inputs and value-addedusing a Leontief function where demand is used as output directly. Cobb-Douglas function isused to combine thirty types of industry in the input and the combination of labor and capital.
Constant returns to scale are assumed in the technology. (see Figure 2).

Figure 2: Structure of Production

Industries employ intermediate goods, labor, and capital, and then produce commodities
discharging CO ２ . The amount of CO ２ emissions by each industry is assumed to be
proportional to its intermediate inputs.

Min30∑ p x + (1 + tp )(w ⋅ L + r ⋅ K )i =1i ij

jjj

( j = 1,⋅ ⋅ ⋅,30)( xij , L j , K j )subject to-3-(1)X j = Min{

11 30 aijf j ( L j , K j ),∏ x1 j }aoj
A2 j i =1α(2)(1−α j )f j ( L j , K j ) ≡ A1 j L j j K jaoj , A2 j > 0,30

∑a =1i =1ij

(3)(aij ≥ 0)

Where pi : price of commodity I; xij : intermediate input of industry i's product in industry j; tpj : net
indirect tax rate imposed on industry j’s product (indirect tax rate - subsidy rate); w : wage rate; r :capital return rate; Lj : labor input in industry j; Kj : capital input in industry j; Xj : output in industry j;
a0j : value added rate in industry j; aij : share parameter on intermediate input xij; Aij ,αij : technicalparameters in industry j.

It is assumed that the industry so as to minimize the cost of using no more than the input(intermediate goods, labor, and capital).
II.2.2 Household
Household are assumed to be a single consumer and maximize a single utility function. In
this model, the function of household utility described in below:

Figure 2: Structure of Household
The utility is considered as a function that combines the commodity of goods, leisure andsavings by a Cobb-Douglas function. Households consumed goods and leisure to utility
maximize. Then the composite goods are divided into thirty sub-types of commodities tomaximize sub-utility.
The budget constraints imposed on households. Household income is the full income if thehousehold consists of providing entire labor endowment, post depreciation capital income,current transfers from the government, labor income, property income, and current transfersfrom the external sector. A part of wage and capital incomes is transferred to the externalsector.
∞Max ∫ 0G,H

σ[{(1 − β )1/v C ( v −1) / v + β 1 / v F ( v −1) / v }v /( v −1) ](σ −1) / σ e −η (t ) dt
σ -1(4)

Subject to••KS = (1 − ty ) FI / p I − ( p / p I )C − (1 − ty )(1 − lo )( w / p I ) F − ( E/ E ) KS

(5)

FI ≡ (1 − lo ) w + (1 − k 0 )(r − p I δ ) KS + LI + KI + TrGH + TrOH

(6)tη (t ) ≡ ∫ 0 ξ ( s )ds(7)

Where σ: intertemporal elasticity of substitution; β: share parameter; ν: elasticity of substitution; C:
composite consumption good; F: leisure; η(t): subjective discount rate; KS: capital stock endowed perhousehold; ty: direct tax rate; FI: household full income; pI : price of capital good; p: price ofcomposite consumption good; w: wage rate; lｏ: rate of wage income transferred to the external sector;
E : total labor endowment of households ( = population ); k０: rate of capital income transferred to theexternal sector; δ: capital depreciation rate; LI : wage income transferred from the external sector-4-

(exogenous variable); KI : capital income transferred from the external sector (exogenous variable)
TrGH : current transfers from the government to household; TrOH : current transfers from the externalsector to household (exogenous variable); ξ(s) : instantaneous subjective discount rate at time s.
II.2.3 CO２ Emissions
CO ２ emissions are assumed produced from industry and household activities. Therefore CO ２emissions can be denoted as follows:30

30

i =1i =1

CO2 = ∑ α 1 X i + ∑ β i Ci

(8)

For absorption by green area surrounding area

ACO2 = γη 2(9)Supply of CO2 emissions rightCS = CO2 − ACO2

(10)Demand for CO2 emissions in other region :CD = CD(P)(11)

And revenue by selling CO2 emissions rightCS = CD(P)(12)

II.2.4 The Government
The government obtains its income from direct and net indirect taxes, and current transfers from theexternal sector, and then it expends the income on government consumption, current transfers tohouseholds, and current transfers to the external sector. The difference between income andexpenditures are saved. Nominal consumption expenditures on commodities/services are assumed to
be proportional to the government revenue with constant sectoral share. These are expressed as thefollowing balance of payments.
3030i =1i =1ty ⋅ Y + ∑ tpi ( w ⋅ LDi + r ⋅ KDi ) + TrOG = ∑ pi CGi + TrGH + TrGO + SG(13)where CGi: government consumption expenditures on commodity I; TrGH: current transfers tohouseholds; TrGO: current transfers to the external sector; SG: government savings; TrOG: current
transfers from the external sector.
II.2.5 The External Sector
The external sector gains its income from Indonesia's imports, current transfers from the government,labor income transfers, and property income transfers. And then it expends the income on Makassar'sexports, current transfers to households and the government, labor and property income transfers toMakassar. Quantity of exports of commodities are exogenously given, and that of imports is assumed
to be proportional to the domestic commodity demand. These are also described as the following
balance of payments.
3030i =1i =1∑ pi EM i + TrGO + KIO + LIO = ∑ pi EX i + TrOH + TrOG + KI + LI + SO

(14)

where EXi : export of commodity I; EMi: import of commodity I; SO: savings of the external sector( =-national current surplus); LIO: labor income transfers to the external sector (= lｏ· w ·LS ); KIO:
property income transfers to the external sector (= k0 · r · KS ).
II.2.6 Balance of Investment/Savings
In the model, private capital accumulation is internalized by maximizing the integration of present
value of the utility function. In the real economy, however, there are other investments including
public and housing investments etc. Here other investments are supposed to be financed by savings ofthe government and the external sector.

-5-30∑ p I = SG + SO
i =1(15)i iwhere Ii: demand for commodity i by other investments; SG: savings of the government; SO: savingsof the external sector.
II.2.7 Prices
Wage and capital return rates, and commodity prices satisfy some price equation in temporalequilibrium because of the zero profit condition. The relationship between the commodity price andproduction costs in industry i in temporal equilibrium is denoted.
Constant returns to scale ensure that marginal cost equals average cost, thus we have the following
commodity price equation.
30

p j = [∑ pi xij + (1 + tp j )( w ⋅ LD j + r ⋅ KD j )] / X ji =130

= ∑ pi aij + (1 + tp j )( w ⋅ ld j + r ⋅ kd j )(16)( j = 1,⋅ ⋅ ⋅,30)

i =1

in which aij≡xij /Xj , ldj≡LDj /Xj , and kdj≡KDj /Xj .
where P: vector of commodity prices.
II.2.8 Derivation of Equilibrium
Temporal and intertemporal general equilibrium conditions in the model can be summarized asfollows:commodity market７30

X i + EM i = ∑ xij + Ci + CGi + Ipi + I i + EX i(i = 1,⋅ ⋅ ⋅,30)(17)

i =1labor market
30

LS = ∑ LD j(18)

i =1capital rental market
30

KS = ∑ KD j(19)i =1

In numerical computation, iteration for the equilibrium prices is made on the capital return rate
letting labor be the numeraire (w=1 ).

III.
References
Central Bureau of Statistics Indonesia, 2006. Makassar, Central Bureau of Statistic Indonesia.
K. Conrad and M. Schröder, >> The Control of CO２ Emissions and its Economic Impact: An AGE
Model for a German State <<, Environmental and Resource Economics, 1991, 1, 289-312.
R.Dornbusch and J.M. Poterba eds., >> Global Warming: Economic Policy Responses <<, The MITPress, 1991
J.T. Houghton, L.G. Meira Filho, B.A. Callander, N. Harris, A. Kattenberg, and K. Maskell eds.,>>Climate Change 1995 -The Science of Climate Change- <<, The Cambridge University Press,1996.
Y. Miyata, >> A General Equilibrium Analysis of the Waste-Economic System - A CGE ModelingApproach - <<, Infrastructure Planning Review, 1995, 12, 259- 270.
Y. Miyata, >> An Intertemporal General Equilibrium Analysis of the Waste-Economic System <<,Infrastructure Planning Review, 1997, 14, 421-432.

-6-