This study examines the implications of carbon tax for power sector development, demand-side management programs and environmental emissions in the case of Indonesia from a long-term integrated resource planning perspective. Introduction of carbon tax is found to result in improvements of system load factor, system reliability and overall efficiency of thermal power generation while the capacity utilization factor deteriorated. At low tax rates, CO, mitigation due to changes in electricity price is found to be higher than that due to technological substitution and fuel switching while the opposite was the case at medium and high tax rates. It is also found that tax revenue need not always increase with carbon tax.