Indonesia could be the pioneer in market-based climate change mitigation at the global level toward a sustainable economic recovery. To support this, on 29 October 2021, President Joko Widodo enacted Presidential Regulation Number 98 of 2021 on Implementation of Carbon Pricing for Achieving Nationally Determined Contribution Targets and Control of Greenhouse Gas Emissions in the National Development Planning (“PR 98/2021”) that aims to regulate the reduction of greenhouse gas emissions, increase climate resilience, and boost the economic value of carbon.
Driven by green investment and financing, the regulation is expected to help the country achieve a carbon emission reduction of 29% with its own effort and 41% with international support by 2030. The regulation also sets the mechanisms for implementing carbon economic value through the three tools listed below:
Carbon trading may be conducted on cross-sector domestic and international trade through the Indonesian Carbon Market or direct business, by cap-and-trade and carbon offset mechanisms.
The cap-and-trade mechanism is chosen if a particular line of business has an Upper Limit for greenhouse gas emission and the emission of the parties of the trade exceeded such limit, in which the mechanism results in the transfer of carbon credit.
The carbon offset mechanism is for businesses that do not have an Upper Limit for greenhouse gas emissions to compensate for the emission production within another line of companies.
Performance-based payment is a form of carbon pricing implementation that gives incentives resulting from activities reducing greenhouse gas emissions, with the potential recipients being state institutions, regional governments, and business actors.
This mechanism does not result in the transfer of carbon credit.
Carbon taxing is carried out in the form of levies in the field of taxation both centrally and regionally, customs and excise, and other state levies based on carbon content and/or potential carbon emissions/or total carbon emissions of such business actors.
The issuance of PR 98/2021 reflects the Government of Indonesia’s commitment to the Paris Agreement. Although seen as a positive sign, there has been concerns that a tighter and more comprehensive regulation will be needed for an effective implementation of carbon economic mechanisms, for example the type of goods and activities that will be taxed under carbon tax have not yet been determined under PR 98/2021.
To address issues of initial implementations – particularly on carbon tax, the regulation shall be carefully conducted as it will directly put a price on greenhouse gas emissions and affect many carbon-intensive businesses and based on sector readiness and economic condition, among others, it is recommended that the carbon tax system be imposed in stages.