10 Nov 2023
OJK Aims to Boost Indonesia’s ‘Green’ Credentials via Newly Opened Carbon Exchange

A. What exactly is carbon trading?

With climate change becoming an increasingly urgent issue, 196 countries adopted the Paris Agreement at the UN Climate Change Conference (COP21) on 12 December 2015, and it came into force on 4 November 2016. It is critical that countries that signed up to the Paris Agreement now fulfill their obligations to contribute to the reduction of greenhouse gas emissions in order to limit the increase in global average temperatures to below 2°C (1.5°C) from pre-industrialization temperatures.

Indonesia, a party to the Paris Agreement, is now taking action to transition from fossil to non-fossil fuels and new or renewable energy sources. In recent years, the Government has issued a series of regulations on renewable energy, carbon tax, and carbon trading to stimulate and accelerate the transition to greener energy.

In 2021, the Government issued Presidential Regulation No. 98 of 2021 on Carbon Pricing for the Achievement of Nationally Determined Contribution Targets and the Control of Greenhouse Gas Emissions in National Development (“PR 98/2021”)[1], which sets out the ways and means to achieve Indonesia’s nationally determined contribution (“NDC”) targets based on the country’s Paris Agreement commitments, and puts in place an underlying framework for onshore and offshore carbon trading that consists of emissions trading (cap and trade)[2] and emissions offsetting.[3]

In August 2023, as mandated by PR 98/2021, the Indonesian Financial Services Authority (Otoritas Jasa Keuangan / “OJK”) finally issued long-awaited OJK Regulation No. 14/2023 on Carbon Trading on Carbon Exchanges (“Reg. 14”)[4] to enable the introduction of carbon trading as part of Indonesia’s goal of achieving its NDC targets under the Paris Agreement.

The key feature of Reg. 14 is that carbon units are now defined as securities,[5] thus allowing them to be traded on the capital markets.

The Indonesia Stock Exchange (“IDX”) was recently designated as the operator of the country’s first carbon exchange (“IDXCarbon”) by virtue of OJK Board of Commissioners Resolution No. KEP-77/D.04/2023, dated 18 September 2023.[6] Since then, the IDX has issued a series of regulations governing the operation of IDXCarbon, including the registration, trading and monitoring of carbon units, and IDXCarbon’s users.

A business that wishes to engage in carbon trading in Indonesia should register at www.idxcarbon.co.id.

B. How does carbon trading work under Reg. 14?

The carbon trading mechanism established by Reg. 14 may be broadly described as follows:

Reg. 14 classifies tradeable carbon units as “securities” (which includes derivative financial products that use them as their underlying assets). This aligns with the provisions of Law No. 4/2023 on the Development and Strengthening of the Financial Sector,[7] under which carbon trades are recognized as financial sector transactions conducted on the capital markets.

Reg. 14 defines a “carbon unit” as a proof of ownership of one tonne of carbon dioxide that is registered with the Indonesia Climate Change Control National Registry System (Sistem Registri Nasional Pengendalian Perubahan Iklim/ “SRN PPI”). Such proof of ownership may take the form of:

1. a Business Emissions Cap Technical Approval (Persetujuan Teknik Batas Atas Emisi bagi Pelaku Usaha / “PTBAE-PU”); or
2. a Greenhouse Gas Emissions Reduction Certificate (Sertifikat Pengurangan Emisi Gas Rumah Kaca  / “SPE-GRK”).

In line with the above distinction between a PTBAE-PU and an SPE-GRK, Minister of Environment and Forestry Regulation No. 21 of 2022 on Carbon Pricing Procedures[8] provides for two types of emissions trading mechanism:

1. Emissions trading based on PTBAE-PU

Emissions may be traded by businesses and/or for activities that have been assigned a carbon emissions cap by virtue of an Emissions Cap Technical Approval (Persetujuan Teknik Batas Atas Emisi (“PTBAE”). A PTBAE is issued by the relevant minister, depending on the economic sector/ sub-sector involved.[9]

A PTBAE provides the basis for the relevant minister to subsequently issue a business or activity with a PTBAE-PU, which is the carbon emissions cap determination for that particular business or activity and/or a determination of their emissions quota for a particular period.

A PTBAE-PU may be traded from the beginning of the prescribed compliance period[10] through domestic carbon trading and/or with other PTBAE-PU holders.

2. Carbon Emissions Offsetting based on SPE-GRK

Carbon emissions offsetting may be undertaken by businesses and/or for activities that have not been assigned a carbon emissions cap. In carrying out a carbon emissions offset, a business is required to prepare a Climate Change Mitigation Action Plan (Dokumen Rancangan Aksi Mitigasi Perubahan Iklim (“DRAM”)) to be validated by a third party (a “validator”) certified by the National Accreditation Committee to carry out validation for carbon pricing purposes. The validation report is then recorded in the SRN PPI to be reviewed by a committee established by the Directorate General of Climate Change Control (Director General). If the review finds that all of the requirements have been satisfied, the Director General will issue an SPE-GRK.

In order to be traded, a carbon unit must be registered in the SRN PPI and with a carbon exchange (i.e., IDXCarbon, in Indonesia)

Additionally, Reg. 14 allows an Indonesian carbon exchange to host the trading of offshore carbon units by foreign parties or carbon units issued by foreign countries / parties – whether or not registered with the SRN PPI – as long as this does not conflict with Indonesian law.

Offshore carbon units that are not listed on the SRN-PPI must meet the following requirements:

1. be registered, validated, and verified by an institution that is accredited by an international registration system;
2. satisfy the requirements for trading on an offshore carbon exchange; and
3. satisfy such other requirements as may be set by the OJK.

C. Commentary

Indonesia faces some serious challenges in achieving its NDCs -- not least that it is one of the world’s largest producers and exporters of coal, and invested heavily in coal-fired power plants over the last 20 years. In addition, the country’s tropical rain forests (some of the most extensive and bio-diverse in the world) are under continuous threat from the expansion of plantation agriculture, as well as rapid population growth. Recent complaints by Indonesia that the world’s rich nations are not standing by their financial commitments to wean the country off coal are also worrisome.

For their part, environmentalists argue that both carbon trading and carbon offsetting are phony solutions to climate change. For example, they claim that carbon trading actually discourages leading polluters from reducing their emissions as they can simply buy carbon credits to “atone for their sins” (this would be particularly tempting if carbon is priced too low). Further, the environmentalists say, carbon offsets are frequently nothing more than “junk”, such as carbon credits that are granted for passive forest conservation (i.e., if you refrain from actively cutting down the forest, you will be provided with a certificate that can then be used to offset your excessive carbon emissions).

There are also a number of issues that are specific to Indonesia. It has been reported, for example, that the SRN PPI currently only has a certification procedure for the public sector but not for the private sector. Further, doubts have been expressed about the qualifications and expertise of carbon-credit certification auditors in Indonesia. However, teething problems are bound to occur but these should be capable of being ironed out over a relatively short space of time.

Overall, the introduction of carbon trading is to be welcomed as it should go at least some way towards supporting the country to achieve its NDC goals, and thus help contain global climate change, given that Indonesia is currently one of the top greenhouse gas emitters in the world. However, the government will need to at least impose strict emissions caps in a transparent manner and ensure that corruption does not gain a foothold in the certification process.

ABNR is a leading Indonesian law firm for environmental issues. Should you need any further information or require any assistance regarding carbon trading in Indonesia, please do not hesitate to contact ABNR partner Ms. Serafina Muryanti (smuryanti@abnrlaw.com), senior associate Mr. Novario Hutagalung (nhutagalung@abnrlaw.com) or associate Ms. Adya Sepasthika (asepasthika@abnrlaw.com).