Climate change refers to long-term shifts in temperatures and weather patterns.1 Climate change is caused by the release of greenhouse gases (“GHG”) such as carbon dioxide (CO2), nitrous oxide (N2O), methane (CH4), and other gases into the atmosphere, which can heat up the Earth.
Indonesia’s commitment to addressing climate change is demonstrated, in part, by the ratification of Paris Agreement through Law Number 16 of 2016 on the Ratification of the Paris Agreement to the United Nations Framework Convention on Climate Change (“Law No. 16/2016”) which addresses Indonesia Government’s obligation to reduce Indonesia’s GHG emissions as stipulated under the country’s nationally determined contribution (“NDC”) to limiting any increase in global average temperature to the 2°C to 1,5°C range above pre-industrial levels.
In 2022, the Indonesian government submitted an enhanced NDC (“ENDC”) to the United Nations Framework Convention on Climate Change. In this ENDC, Indonesia commits to increasing GHG emissions reduction target from 29% to 31.89% unconditionally and from 41% to 43.2% with international assistance by the year of 2030.2
To fulfill Indonesia’s commitment to addressing climate change and achieve NDC targets, the government has taken several measures, including the issuance of the Presidential Regulation Number 98 of 2021 on The Implementation of Carbon Economic Value to Achieve Nationally Determined Contribution Targets and Control Over Greenhouse Gas Emission in Relation to National Development (“PR 98/2021”) and was further regulated through the Minister of Environment and Forestry Regulation Number 21 of 2022 on Procedures for the Application of Carbon Economic Value (“MoEF Reg 21/2022”). Based on both regulations, carbon trading has become one of the alternatives that can be pursued to address climate change and achieve NDC targets.
General Provisions on Carbon Trading in Indonesia
Carbon trading is a market-based mechanism for reducing GHG emissions through the purchase and sale activities of carbon units.3 Carbon units are evidence of carbon ownership in the form of certificate or technical approval. One carbon unit is equivalent to 1 (one) ton of carbon dioxide. Each carbon unit must be registered in the National Registry System for Climate Change Control (Sistem Registri Nasional Pengendalian Perubahan Iklim – “SRN-PPI”).4 Carbon trading may be conducted through domestic carbon trading and/or foreign carbon trading.5 In conducting carbon trading, the following provisions must be fulfilled:
- In accordance with the carbon trading roadmap
- Provide emissions reduction reserves (buffers).
- In the form of GHG Emissions Reduction Certificate (Sertifikat Penurunan Emisi GRK – “SPE-GRK”).
In addition to complying with these provisions, international carbon trading must also meet the following requirements:
- Conducted after the relevant minister determines and submits plans and strategies for the achievement related to NDC in sector and sub-sector.
- Have achieved NDC target in sub-sectors or sub-sub-sectors for foreign carbon trading.
- Secure authorization from the Ministry of Environment and Forestry (“MoEF”).
Carbon Trading Mechanisms
Carbon trading may be carried out through the following mechanisms6:
- Emissions Trading
Emissions trading is a transaction mechanism between business actors who have emissions exceeding the specified upper GHG emissions limits.7 This mechanism shall be applied to business and/or activities that have upper GHG emissions limits which have been determined through Technical Approval for Upper Emissions Limit (Persetujuan Teknis Batas Atas Emisi – “PTBAE”).8 Business actors with emissions below the limit can sell their surplus quotas to others.
- GHG Emissions Offset
GHG emission offsets is GRK emissions reduction that is conducted by businesses and/or activities to compensate for emissions which are made in other places.9 In this mechanism, the object that being traded are certifications of carbon emission reduction resulting from the implementation of carbon emission reduction projects. This mechanism aimed at businesses and/or activities with the following conditions:
Emission reduction will be certified into SPE-GRK which can be sold to others with emission reduction deficit.
Carbon Trading Methods
Carbon trading in emission trading or GHG emission offset mechanisms, shall be conducted through:
- Carbon Exchange
Carbon exchange is a system that regulates carbon trading and/or carbon unit ownership record. Carbon trading through carbon exchange is further regulated by the Financial Services Authority Regulation Number 14 of 2023 on Carbon Trading Through Carbon Exchanges.
- Direct Trading
Direct trading is carbon trading that is conducted outside of carbon exchanges between sellers and buyers who need carbon unit.
Carbon Trading in Sectors and Sub-Sectors
Based on MoEF Reg 21/2022 the procedures for carbon trading in sectors or sub-sectors shall be determined by the relevant minister in accordance with the authority. Currently, there are already several ministerial regulations issued by the government, namely:
- Minister of Energy and Mineral Resources Regulation Number 16 of 2022 on Procedures for The Implementation of Carbon Economic Value Within the Power Plant Subsector (“MoEM Reg 16/2022”)MoEM Reg 16/2022 further specifies the requirements for conducting carbon trading in the sub-sector of power plant. MoEM Reg 16/2022 prohibits carbon trading to be implemented between power plants located within a single power-plant area unit. Additionally, businesses actors engaging in carbon trading in this sub-sector are also obligated to submit report on (i) results of the issuance of SPE-GRK or emissions certificates and (ii) results of the implementation carbon trading through APPLE-Gartik.13
- Minister of Environment and Forestry Regulation Number 7 of 2023 on Procedures for Carbon Trading in The Forestry Sector (“MoEF Reg 7/2023”).MoEM Reg 7/2023 sets out the procedures for carbon trading in the forestry sub-sector and peat and mangrove management sub-sector. MoEM Reg 7/2023 obliges certain parties must be complied with the following requirements:
- Holders of Forest Utilization Licensing (Perizinan Berusaha Pemanfaatan Hutan)14, right-to-manage, and ownership right forest owner shall have (i) sustainable forest management certificates, (ii) forest product legality certificates, and (iii) forest product declaration certificates.
- Holder of the Society Forestry Management Approval shall obtain at least silver classification in the organization of social forestry.
- Customary law communities, holder of Social Forestry Management Approval, and private forest owner who engage in GHG emissions offset businesses and/or activities must be accompanied by experienced partners with relevant expertise in carbon measurement, planning, and the implementation of projects or carbon market access.
MoEM Reg 7/2023 also sets out further regulation regarding the provision for conducting international carbon trading in these sub-sectors.
Carbon trading is one of the effective mechanisms for climate change mitigation because it combines economic and environmental interests. Generally, the implementation of carbon trading is regulated by PR 98/2021 and MoEF Reg 21/2022, with further details to be specified by the relevant ministries in each sector and sub-sector.
- What Is Climate Change? – United Nation https://www.un.org/en/climatechange/what-is-climate-change; (Accessed on 11 September 2023)
- Enhanced Nationally Determined Contribution Republic of Indonesia – UNFCC. https://unfccc.int/sites/default/files/NDC/2022-09/23.09.2022_Enhanced%20NDC%20Indonesia.pdf (Accessed on 11 September 2023)
- Article 1 number 17 PR 98/2021; Article 1 number 19 MoEF Reg 21/2022
- National Registry System for Climate Change Control (referred to as SRN-PPI), is a system for the management, provision of web-based data and information on actions and Resources for Climate Change Mitigation, Climate Change Adaptation, and carbon economic value in Indonesia.
- Article 48 paragraph (1) PR 98/2021; Article 4 paragraph (1) MoEF Reg 21/2022
- Article 5 paragraph (1) MoEF Reg 21/2022
- Article 1 number 23 MoEF Reg 21/2022
- Article 9 paragraph (1) MoEF Reg 21/2022
- Article 1 number 14 MoEF Reg 21/2022
- GHG Emission Baseline is the estimation of emission levels and projections of GHG in identified sectors or activities within determined periods without policy interventions and/or mitigation technologies (Article 1 number 15 MoEF Reg 21/2022)
- Article 14 paragraph (1) letter a and paragraph (2) MoEF Reg 21/2022
- Article 14 paragraph (1) letter b and c MoEF Reg 21/2022
- Electricity Emissions Calculation and Reporting App (referred to as APPLE-Gatrik), is a web-based app at the Directorate General of Electricity which is used to calculate and report the level of GRK Emissions and GRK mitigation actions from power plants. (Article 1 number 20 MoEM Reg 16/2022)
- Forest Utilization Licensing (Perizinan Berusaha Pemanfaatan Hutan), is a business license granted to Business Actors to start and operate businesses and/or forest utilization activities. (Article 1 number 10 MoEF Reg 7/2023)