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CARBON TRADING: LATEST DEVELOPMENTS & CHALLENGES IN INDONESIA

By: Wahyuni Bahar, Endraswari E. Sayekti, dan Jinan Raidangi


Carbon Trading Development in Indonesia

The climate system, which influences different aspects of changes in the environment and human existence such as the quality and quantity of water, habitats, forests, health, agricultural land, and coastal ecosystems, is also impacted by the rise in the earth's temperature.[1] This explanation can illustrate that climate change has a very broad impact on people's lives. The World Economic Forum Global Risk Report (2022) states that climate change in the next 10 years is considered a risk that poses the greatest long-term threat.[2]


The United Nations Framework Convention on Climate Change (UNFCCC) states that it is necessary to have several policy programs and cooperation between countries to prevent deforestation, determine forest carbon stocks, and implement sustainable forest management as a climate change mitigation measure. As stated in Article 17 of the Kyoto Protocol and Article 6 of the Paris Agreement, one of the important approaches in carrying out these mitigation measures is a market-based mechanism, namely emission trading.[3] Given that carbon dioxide (CO2) is one of the largest greenhouse gas ("GHG") emissions, carbon trading is one of the most discussed emission reduction measures.


Carbon trading is known as the process of purchasing and selling carbon credits in which the buyer generates carbon emissions in excess of the predetermined limit.[4] Meanwhile, a carbon credit is a term for tradable certificates or “rights” to emit certain amounts of carbon or other GHGs in industrial processes.[5] One unit of carbon credit is equivalent to 1 ton of CO2.


The said “rights” can be in the form of the right to release GHG or the right to reduce GHG emissions.[6] While the types of GHG that can be traded in the carbon market are generally the six types of greenhouse gases listed in the Kyoto Protocol, which include carbon dioxide (CO2), methane (CH4), nitric oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6).


Unlike other nations, such as the European Union Emission Trading System (EU-ETS) and the New Zealand Emission Trading System (NZ-ETS), Indonesia is currently still lacking an integrated domestic carbon market.[7] The carbon trading scheme in Indonesia still operates under a voluntary market mechanism[8] through the development of a GHG program named Skema Karbon Nusantara (SKN).[9] SKN is a voluntary certification and registration mechanism for GHG emission reduction activities.


One of the carbon trading projects in Indonesia is the Reducing Emissions from Deforestation and Forest Degradation (REDD+) project which is the product of the climate change mitigation efforts from the Bali Action Plan (2007).[10] This project is one of Indonesia's attempts to reduce emissions by allowing the state and industry to pay the country supplying the project not to deforest. Payments can be made in the form of direct payments for project development or exchanged for carbon credits, which represent GHG emission reductions to compensate for issued emissions. So that the majority of Indonesia's contribution to carbon trading, especially in the voluntary market, is as a provider of carbon credits.


Another project in Indonesia is the Katingan Mentaya Project which is the largest forest-based emission prevention project in the world.[11] This project is a peatland restoration and conservation project managed by PT Rimba Makmur Utama in Central Kalimantan Province with an area of 157,875 hectares. This program generates an average of 7.5 million certified carbon credits annually, equivalent to the emissions of 2 million cars each year.[12]


The latest development regarding carbon trading in Indonesia is the signing of Letters of Intent (LoI) on October 18, 2022, by several State-Owned Enterprises (“SOEs”) to conduct voluntary carbon trading trials.[13] It is claimed that in order to meet carbon emission reduction goals, SOEs possessing carbon credits can sell them to other SOEs that are in need of carbon credits. It is rumored that the value of carbon offsets being traded will be trialed at around 2-3 USD per unit of carbon emission.


Carbon Trading Regulation


There are currently no laws in Indonesia that comprehensively govern the carbon trading ecosystem. However, Indonesia has passed multiple laws that have enabled the country to implement carbon trading. Indonesia's journey in starting carbon trading mechanisms and policies began with the formulation of carbon market mechanisms and policies in Indonesia which were then mandated by the Government to the National Council on Climate Change (DNPI) as stated in Presidential Regulation Number 46 of 2008 concerning the National Council on Climate Change ("PR 46/2008").[14] In order to achieve this, the DNPI implemented a carbon market development strategy in three interrelated tracks, with the aim of developing national capabilities to utilize carbon markets effectively for Indonesia's development that is low carbon and adaptive to climate change.


Furthermore, the Government issued Law Number 32 of 2009 concerning Environmental Protection and Management (“Law 32/2009”) as an update to Law Number 23 of 1997 concerning Environmental Management. Law 32/2009 requires the Central Government and Regional Governments to apply environmental instruments which include development planning and economic activities, environmental funding, and incentives or disincentives. The development of an emission trading system is one of the matters discussed in the regulation as an economic incentive instrument for environmental management.


Then there is Government Regulation Number 46 of 2017 concerning Environmental Economic Instruments (“GR 46/2017”) which stipulates that local governments and corporate entities will receive incentives when they succeed in reducing emissions. One of the regulated incentives is the basis for developing emission trading based on market mechanisms. Taking into account national priorities, institutional readiness, and mechanisms and support systems, the implementation of emission trading must be enforced no later than seven years after the enactment of the regulation, that is in 2024.


Presidential Regulation Number 77 of 2018 concerning the Management of Environmental Funds (“PR 77/2018”) then regulates the establishment of the Environmental Fund Management Agency (BPDLH), an institution that mobilizes funding sources from waste management incentives, including in the fields of forestry, energy and mineral resources, carbon trading, environmental services, industry, transportation, agriculture, and marine and fisheries.


The journey of developing carbon trading in Indonesia then headed in a better direction when the Government issued Presidential Regulation Number 98 of 2021 concerning the Implementation of Carbon Pricing to Achieve a Nationally Determined Contribution Target and Control Over Greenhouse Gas Emissions in The National Development (“PR 98/2021”). This regulation serves as the foundation for the implementation of carbon pricing, guidelines for reducing GHG emissions, achieving NDC targets, and controlling GHG emissions at the national level.[15] Additionally, PR 98/2021 also states that, in broad outline, the implementation of Carbon Pricing (NEK) is carried out through the mechanism of carbon trading, result-based payments, carbon tax, and other mechanisms pursuant to science and technology development as determined by the Minister of Environment and Forestry (MOEF).[16]


On October 20, 2022, the Minister of Environment and Forestry passed Regulation Number 21 of 2022 concerning the Guidelines on the Implementation of Carbon Economic Values (“MOEF Regulation 21/2022”), which is a derivative regulation from PR 98/2021. MOEF Regulation 21/2022 provides detailed provisions for the execution of NEK. Basically, the implementation of NEK in this regulation is also carried out through 4 (four) mechanisms, namely (i) carbon trading; (ii) result-based payments; (iii) carbon tax; and/or (iv) other mechanisms pursuant to science and technology development as determined by the Minister of Environment and Forestry (MOEF).


Issues and Challenges of Carbon Trading


The carbon market as a commodity requires several components to be able to maintain market balance so that it runs effectively. Starting from the preparation of government policies such as the carbon trading road map, capacity building to prepare competent and professional human resources, to supporting infrastructure that needs to be developed as a basis for carrying out carbon trading.


Even though PR 98/2021 is the basis for implementing carbon pricing, guidelines for reducing GHG emissions, achieving NDC targets, and controlling GHG emissions at the national level, derivative regulations are still needed to regulate technical implementation in a more comprehensive manner.


Another problem in carbon trading is related to carbon pricing instruments. Based on the nominal carbon price data for April 2021, the World Bank shows that carbon prices in developing countries are mostly below US$10/tCO2e, still much lower than developed countries with carbon prices in the range of US$18-137/tCO2e.[17] As mentioned above, even trials of carbon trading between SOEs are only around 2-3 USD per unit of carbon emission. This low selling value can have an impact on the reluctance of business actors to implement carbon trading schemes.


With regard to carbon price instruments that are not competitive in Indonesia, PR 98/2021 and MOEF Regulation 21/2022 stipulate that carbon trading can be carried out through domestic trade or foreign trade.[18] However, the Indonesian Renewable Energy Society (METI) encourages carbon trading to be carried out domestically first so that the calculation of GHG emissions achieved will still be counted as Indonesia's contribution.[19] But, if carbon prices in Indonesia cannot compete competitively, it is possible that domestic carbon trading will not attract the interest of business actors and investors.


However, if we pay close attention to foreign carbon trading as stipulated in MOEF Regulation 21/2022, we must first comply with several domestic trade provisions and also meet special provisions such as[20]:


(a) Must be carried out after the relevant ministers[21] have determined and announced a plan and strategy for achieving the NDC target to the MOEF;


(b) Must have achieved the NDC target for the relevant subsector or sub-subsector for cross-border carbon trading; and


(c) Must be authorized by the MOEF.


From the provisions above, it can be said that the Government is indirectly trying to further encourage domestic carbon trading and 'complicate' foreign carbon trading by providing additional requirements. This was also acknowledged by the Minister of Finance, Sri Mulyani, who emphasized that the government would not allow cross-border carbon trading until the national GHG emission reduction target was achieved.[22] However, the government needs to pay attention to the trend and interest in domestic carbon trading, especially with the price per unit of carbon emissions which is still relatively low.

In addition, another problem related to carbon trading is the fact that not all forest areas can be used as land for carbon projects. The CEO of PT Rimba Makmur Utama stated that there are 3 (three) basic principles to evaluate the feasibility of a carbon project area, namely[23]:



  1. Permanency: consistency of project activities within the area of carbon assets for at least the next twenty years.

  2. Additionality: Forest areas that can be used as projects are areas that are threatened with deforestation or land conversion so the presence of a project developer can prevent this.

  3. Leakage: the project developer must ensure that community mobility in the carbon project area will not carry out deforestation activities in other areas.


Solutions for Implementing Carbon Trading in Indonesia


In practice, there are issues and challenges in implementing carbon trading in Indonesia. However, the existence of government regulations and several pilot projects opens opportunities for Indonesia to continue learning and creating solutions to deal with these issues and challenges.


In order to create efficient carbon trading, the government needs to formulate comprehensive regulations related to carbon trading mechanisms. Policies regarding the price of carbon credits also need to be maximized with more sectors involved to avoid overlapping sectoral regulations.


The government needs to prepare long-term energy transition projects in the economy and provide incentives that can attract the industry’s interest to make the transition towards the use of environmentally friendly and low-cost technologies. Policy and law reforms supported by institutional infrastructure will encourage a standardized carbon trading scheme and accelerate the development of carbon markets.[24]


The government also needs to encourage the formation of competitive market prices which also aims to reduce carbon emissions. Reflecting on the EU-ETS scheme which uses a "market-based" mechanism, the trading price of emissions is determined based on the supply and demand of the emission allowance itself so that it can change every week. As of 1 December 2022, the recorded price of carbon credits is EUR 85.22 per metric ton of CO2 and reached its highest price on 19 August 2022 with a value of EUR 98.01 per metric ton of CO2.[25]


This article is not intended to constitute legal advice or legal opinion on any particular action nor is it intended to create a legally binding document for anyone. If you wish to follow up on a related topic of discussion, please contact the Bahar Office via busdev@bahar.co.id.


Bibliography


1 Knowledge Centre Perubahan Iklim, “Dampak & Fenomena Perubahan Iklim”, http://ditjenppi.menlhk.go.id/kcpi/index.php/info-iklim/dampak-fenomena-perubahan-iklim, diakses pada 14 Desember 2022.


2 Katadata Insight Center, “Indonesia Carbon Trading Handbook”,

https://cdn1.katadata.co.id/media/filespdf/2022/Indonesia_Carbon_Trading_Handbook.pdf, hlm.


3, diakses pada 14 Desember 2022. 3 Ibid, hlm. 8.


4 Kementerian BUMN, “Siaran Pers: BUMN Mulai Uji Coba Perdagangan Karbon”, https://bumn.go.id/media/press-conference/bumn-mulai-uji-coba-perdagangan-karbon-qk, diakses pada 14 Desember 2022.


5 Btari Nadine dan Girta Yoga, “Apa yang Dimaksud dengan Perdagangan Karbon?”, https://www.icdx.co.id/news-detail/publication/apa-yang-dimaksud-dengan-perdagangan-karbon, diakses pada 14 Desember 2022.


6 Partnership for Market Readiness Indonesia, “Pasar Karbon: Pengantar Pasar Karbon untuk Pengendalian Perubahan Iklim”, http://jcm.ekon.go.id/en/uploads/files/Document%20JCM/Media/Buku_pasar_karbon.pdf, hlm. 22, diakses pada 15 Desember 2022.


7 Ibid, hlm. 39.


8 Ella Ivanescu, “Three Steps Indonesia Can Take to Create a Solid Domestic Carbon Market”, https://theconversation.com/three-steps-indonesia-can-take-to-create-a-solid-domestic-carbon-market-172237, diakses pada 14 Desember 2022.


9 Dewan Nasional Perubahan Iklim, ”Pengantar Pasar Karbon untuk Pengendalian Perubahan Iklim”, http://jcm.ekon.go.id/en/uploads/files/Document%20JCM/Media/buku_carbon_isi.pdf, hlm. 77, diakses pada 15 Desember 2022.


10 Katadata Insight Center, Op.Cit, hlm. 46.


11 Katingan Mentaya Project, https://katinganproject.com/impacts/1/climate, diakses pada 14 Desember 2022.


12 Katadata Insight Center, Op.Cit, hlm. 46.


13 Kementerian BUMN, “Siaran Pers: BUMN Mulai Uji Coba Perdagangan Karbon”, https://bumn.go.id/media/press-conference/bumn-mulai-uji-coba-perdagangan-karbon-qk, diakses pada 14 Desember 2022.


14 Dewan Nasional Perubahan Iklim, Op.Cit, hlm. 71.


15 Pasal 2 (1) Perpres 98/2021.


16 Pasal 47 (1) Perpres 98/2021.


17 CNBC Indonesia, “Menyikapi Isu Kritis Perdagangan Karbon Global”, https://www.cnbcindonesia.com/opini/20210909093905-14-274852/menyikapi-isu-kritis-perdagangan-karbon-global, diakses pada 15 Desember 2022.


18 Pasal 48 ayat (1) Perpres 98/2021 jo. Pasal 4 ayat (1) PermenLHK 21/2022.


19 Verda Nano Setiawan, “Perdagangan Karbon Sebaiknya di Dalam Negeri Dahulu, Mengapa?”, https://katadata.co.id/happyfajrian/ekonomi-hijau/619790c17f664/perdagangan-karbon-sebaiknya-di-dalam-negeri-dahulu-mengapa, diakses pada 15 Desember 2022


20 Pasal 4 ayat (3) PermenLHK 21/2022.


21 Pasal 1 angka 44 PermenLHK 21/2022: Menteri Terkait ialah Menteri yang menjadi koordinator pada Sektor atau penanggung jawab pada Sub Sektor dalam Tata Laksana Penerapan NEK.


22 Verda Nano Setiawan, “Perdagangan Karbon Sebaiknya di Dalam Negeri Dahulu, Mengapa?”, https://katadata.co.id/happyfajrian/ekonomi-hijau/619790c17f664/perdagangan-karbon-sebaiknya-di-dalam-negeri-dahulu-mengapa, diakses pada 15 Desember 2022.


23 Katadata Insight Center, Op.Cit, hlm. 61.


24 Katadata Insight Center, Op.Cit, hlm. 63.


25 Statista, “Weekly European Union ETS Carbon Pricing in 2022”, https://www.statista.com/statistics/1322214/carbon-prices-european-union-emission-trading-scheme/, diakses pada 15 Desember 2022.


Peraturan Pemerintah Nomor 46 Tahun 2017 tentang Instrumen Ekonomi Lingkungan Hidup.


Peraturan Presiden Nomor 46 Tahun 2008 tentang Dewan Nasional Perubahan Iklim.


Peraturan Presiden Nomor 77 Tahun 2018 tentang Pengelolaan Dana Lingkungan Hidup.


Peraturan Presiden Nomor 98 Tahun 2021 tentang Penyelenggaraan Nilai Ekonomi Karbon untuk Pencapaian Target Kontribusi yang Ditetapkan Secara Nasional dan Pengendalian Emisi Gas Rumah Kaca dalam Pembangunan Nasional.


Statista, “Weekly European Union ETS Carbon Pricing in 2022”, https://www.statista.com/statistics/1322214/carbon-prices-european-union-emission-trading-scheme/, diakses pada 15 Desember 2022.


Undang-Undang Nomor 32 Tahun 2009 tentang Perlindungan dan Pengelolaan Lingkungan Hidup.


Verda Nano Setiawan, “Perdagangan Karbon Sebaiknya di Dalam Negeri Dahulu, Mengapa?”, https://katadata.co.id/happyfajrian/ekonomi-hijau/619790c17f664/perdagangan-karbon-sebaiknya-di-dalam-negeri-dahulu-mengapa, diakses pada 15 Desember 2022.




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