Carbon Trading in Indonesia

Carbon trading is one of the mechanisms that grants a country the right to engage in the buying and selling of carbon units (tradable emission rights). Carbon units are proofs of ownership of carbon in the form of certificates, with one carbon unit equivalent to one ton of carbon dioxide equivalent. In Indonesia, according to Presidential Regulation (Perpres) No. 98 of 2021, carbon trading is defined as a market-based mechanism to reduce greenhouse gas emissions through the buying and selling of carbon units. The presence of carbon trading is expected to contribute to the reduction of national carbon emissions.

Carbon trading unit in Indonesia is dominated by the subsector of power generation. Currently, there are 99 coal-fired power plants (PLTU) potentially participating in carbon trading, accounting for 86% of the total coal-fired power plants. In the future, the government hopes that the forestry, agriculture, waste, oil and gas, general industry, and marine subsectors will also participate in carbon trading.

There are several urgencies for a company to purchase carbon units:

• Meeting Environmental, Social, and Governance (ESG) standards, which are currently global standards to secure funding from investors or obtain funding from banks or investors at lower interest rates.
• Company commitment to achieving net-zero emissions.
• The impending carbon tax in Indonesia in 2025. If a company produces carbon emissions exceeding the government-set limit, it has two options: buying carbon units or being subject to a carbon tax.

Carbon trading is not significantly different from general buying and selling, with the main difference lying in the traded commodity, which is carbon emissions. Essentially, emission trading applies to businesses and/or activities with a government-set upper limit for greenhouse gas emissions, where companies pay a certain price to engage in activities that produce emissions, known as carbon credits. Meanwhile, offset or greenhouse gas reduction (GRK) mechanisms apply to businesses and/or activities without a set upper limit for GRK emissions, but voluntarily strive to achieve specific emission reduction targets outside government-regulated sectors.

Typically, buyers of carbon emissions are developed countries and large industries, while sellers are certificate sellers in developing countries with significant carbon-absorbing forests.

Minister of Environment and Forestry Regulation No. 21 of 2022 on the Implementation of Carbon Economic Value (“KLHK No. 21/2022”) stipulates that carbon trading in Indonesia can be conducted domestically and internationally, through emission trading and GRK emission reduction. Both mechanisms are implemented through carbon markets and/or direct trading.

To engage in carbon trading, businesses must first register through the National Registry System for Emission Reductions (SRN PPI). Once registered, businesses can use the following mechanisms to participate in carbon trading, in accordance with the government’s carbon trading action plan:

1. Obtain GRK-Emission Reduction Certificates for cross-sector carbon trading.
2. Achieve Nationally Determined Contributions (NDC) targets.
3.  Obtain approval from the Ministry.

Before participating in international carbon trading, sellers must obtain approval from the Minister. Sellers need to submit an application to the ministry, along with proposals and cooperation agreements related to carbon trading. Business applications for international carbon trading will be approved based on the achievement of domestic NDC targets and whether the project is deemed suitable for international sale. Ministerial approval is not required for domestic carbon trading.

Carbon Exchange in Indonesia

The establishment of a Carbon Exchange in Indonesia is an implication of the expanded authority of the Financial Services Authority (OJK), regulating and overseeing carbon trading through the Carbon Exchange as mandated by law. OJK issued Regulation No. 14 of 2023 regarding carbon trading through the Carbon Exchange and OJK circulars on the procedures for trading through the Carbon Exchange. OJK appointed the Indonesia Stock Exchange (BEI) as the operator of the carbon exchange in Indonesia.

The commodities traded on the Carbon Exchange in Indonesia are Greenhouse Gas Emission Reduction Certificates (SPE-GRK) and Technical Approval of Emission Upper Limits for Business Actors (PTBAE-PU). SPE-GRK serves as evidence of emission reduction by businesses and/or activities that have undergone measurement, reporting, and verification, and are recorded in the SRN PPI with a registration number and/or code. On the other hand, PTBAE-PU is the determination of the upper limit of GRK emissions for business actors and/or the allocation of emission quotas during specific compliance periods for each business actor.

BEI is obligated to establish rules regarding service users, traded carbon units, and trading and supervision of trading. On September 20, 2023, BEI issued and enforced a Decision Letter ( Kep-00297/BEI/09-2023) regulating the rules of Carbon Exchange Service Users (“PJBK”). Generally, PJBK can take the form of Indonesian or foreign legal entities.

PJBK can be categorized into four types:

1. Emission Trading Business Actors

Entities engaged in specific sectors allocated with PTBAE-PU through auction markets. They can trade PTBAE-PU in the Regular and Negotiation Markets, trade SPE-GRK in the Regular and Negotiation Markets, purchase SPE-GRK in the Auction Market and Non-Regular Market, and surrender PTBAE-PU and retire SPE-GRK.

2. Non-Emission Trading Business Actors

Entities engaged in specific sectors without PTBAE-PU allocation. Unlike Emission Trading Business Actors, Non-Emission Trading Business Actors cannot trade PTBAE-PU but can only retire SPE-GRK. However, they can trade SPE-GRK in the Regular and Negotiation Markets and purchase SPE-GRK in the Auction Market and Non-Regular Market.

3. Project Owners

Entities conducting the first sale or having the right to the first sale of SPE-GRK on the Carbon Exchange. Project Owners must register SPE-GRK according to the Carbon Unit registration rules and can sell SPE-GRK in the Auction Market and Non-Regular Market.

4. Other Parties Approved by OJK

Entities or business actors voluntarily committed to reducing GRK emissions can become Carbon Exchange Service Users by registering as PJBK and purchasing available Carbon Units. The requirements for prospective PJBK are as follows:

1. The company has a person responsible for using the facilities provided by the Carbon Exchange.
2. The company undergoes training related to the Carbon Exchange provided by the Carbon Exchange.
3. The company has an email address using the company’s domain name.
4. The company has at least two users representing PJBK who have undergone training provided by the Carbon Exchange.
5. The company pays the registration fee as PJBK.
6. The company has an account in a bank connected to the BI-FAST and BI-RTGS systems.
7. The company has the latest annual financial statements.
8. The company has additional documents for local service users such as articles of association, tax identification number (NPWP), and business identification number (NIB).
9. The company has additional documents for foreign service users or has a Legal Entity Identifier (LEI) registered with the Regulatory Oversight Committee (ROC).

The operation of the Carbon Exchange is part of Indonesia’s commitment to contribute to global efforts to reduce greenhouse gas emissions by 45% by 2030 and ultimately achieve net-zero emissions by 2050.