A decomposition model has been developed to examine the factors which affect the change in CO 2 emission due to considering external cost in electricity development in Indonesia during 2006-2025. There are two factors which affect the change in CO 2 emission due to external cost, i.e., technological substitution effect and demand side effect. The results show that the reduction of CO 2 emission would increase from 3.7% to 82.5% if the external cost is increased from low-to high-level. At low and medium external cost rate, the CO 2 emission reduction is mainly due to demand side effect. However, the role of technological substitution effect is more influential at high level of external cost. The results also show that the SO 2 and NO x mitigation would also increase from 3.5% to 85.0% and from 3.3% to 70.9% respectively if the external cost is increased from low-to high-level.Index Terms-External Cost, CO 2 Emission, Technological Substitution Effect, Demand Side Effect. C. O. P. Marpaung is with the

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