Carbon Trade in Indonesia: Regulation, Potential, and Development

As a country which has a strategic position in global climate action, Indonesia has reinforced its commitment in reducing Greenhouse Gases (GHG) emissions as part of its climate action. Such commitment is reflected in its various national regulations and ratification in a number of climate-related international agreements. Besides, numerous climate-oriented development programs and initiatives have been carried out by Indonesia; among them is the carbon trade mechanism that marked another milestone for Indonesia’s climate action.

In Indonesia, the matters related to carbon trading are regulated by the Presidential Regulation Number 98 of 2021 on the Implementation of Carbon Pricing to Achieve the Nationally Determined Contribution Target and Control Over Greenhouse Gas Emissions in the National Development. Through this legal framework, carbon trading is defined as a market-based mechanism to reduce Greenhouse Gases (GHG) emissions through buying and selling carbon units. While GHG or carbon itself is construed as a universal performance indicator for climate action which has both essential economic value and international economic benefit.

Under such a concept, the Government of Indonesia has put carbon as one of the ways to accomplish its mandatory obligation in GHG emission reduction while commercializing its action results. On that account, carbon trading is set on a compliance-based market. This, in turn, signifies that the carbon pricing principles in Indonesia will further be streamlined in the implementing regulations.

Four mechanisms of carbon pricing are modulated by the Presidential Regulation Number 98 of 2021. They are carbon trading, result-based payment, carbon levy, and other mechanisms in accordance with the development of science and technology as determined by the Ministry of Environment and Forestry. Carbon trading is a market-based mechanism to reduce GHG emission through commercial carbon transactions. It can be done through either carbon exchange or direct trading and consists of emission trading and GHG emission cap. While result-based payment is a payment from a verified and/or certified GHG emission reduction and other validated benefits outside carbon. As for carbon levy means state levies, both central and local governments, imposed on goods and/or services that potentially have and/or have carbon content; and/or businesses and/or activities that potentially have carbon emissions and/or emit carbon that may have an adverse impact on the environment and/or mitigation actions.

Furthermore, Law Number 4 of 2023 on the Development and Strengthening of the Financial Sector has bolstered the regulation of carbon trading in Indonesia, among other, by assigning the Financial Services Authority (OJK) to establish and oversee carbon trading in the carbon market. Moreover, under this regulation, the carbon market of Indonesia was launched, in September 2023, with Indonesia Stock Exchange (IDX) as the official administrator. Thereupon, the carbon transaction process in Indonesia is set to be conducted through such a platform.

Further, all entities that will partake in carbon-trading activities in the country will be registered with the National Registry System (SRN), which is supervised by the Ministry of Environment and Forestry, the institution that also administers SRN database. In addition, SRN will assess upcoming projects to ascertain that their designs and implementation generate carbon credits with high integrity using the eligible method that is approved by Indonesian National Standards and United Nations Framework Convention on Climate Change (UNFCCC).

In terms of the carbon trading concept, as stipulated by the Law Number 4 of 2023 on the Development and Strengthening of the Financial Sector, carbon units constitute securities (efek) as the trading object. Despite its nomenclature as securities by virtue of law, its nature does not represent the conventional securities in the capital market. Rather, it is more regarded as intangible assets as per in the Indonesian Civil Code definition. Furthermore, Indonesia’s carbon market adopts an open market model, denoting that it allows foreign buyers to purchase credits to offset their emissions. Such a concept is embraced considering that Indonesia has a huge carbon potential. Additionally, the open carbon market will lay the foundations for international carbon markets as set in the Paris Agreement. It will also increase the linkages and coordination between the national market, foreign investment, and international trade.

In terms of carbon potential, Indonesia has immense economic carbon potential. The Indonesia Carbon Trade Association projected that the economic carbon potential of Indonesia could reach 8,488 trillion rupiah. Moreover, Indonesia has preeminence in nature-based solutions (NBS), one of the biggest economic carbon potentials, that mainly ranges from rainforest, mangrove, and peatland. NBS themselves have enormous potential to absorb carbon emissions on a large scale, while providing significant biodiversity and community impacts. Indeed, NBS is a major producer of carbon credits in the context of carbon trading.