Java-Bali power system dominates the national installed capacity and will contribute to about 76% of the national CO2 emissions from the electricity sector in the future. Thus, minimizing CO2 emission from the Java-Bali system can help Indonesia to reduce the national CO2 emissions level. We apply optimization approach to investigate this problem by including carbon tax into the cost function. We analyzed data based on electricity generating system in 2008. In general the optimization showed that diesel and gas turbine is not needed in the power plant system. Further, the simulation showed that if Indonesia adopted carbon tax by US$56/ton CO2 – USD 86/tCO2; it will lead to three major changing. First, carbon tax will increase the cost of power plant or equivalently increase tax revenue to about 2.1% of GDP in a year. Second, combine cycle has important role to offset decreasing output in steam power plant. Finally, by implementing carbon tax, daily CO2 can decrease by 77,586 ton per day. By applying sensitivity analysis, we also found a structural break in marginal cost when carbon tax is higher than US$ 50/tCO2. There are some weaknesses from this study such as not use strong assumption for availability factor and generating costs. This study proposed that government needs to optimize utilization of combine cycle power plan to offset steam power and implement carbon tax above US$ 50/ ton CO2, to reduce CO2 emissions significantly.

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