Carbon Trading in Indonesia

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Jack Wiston

Indonesia, as one of the world’s largest emitters of greenhouse gases, has committed to achieving net-zero emissions by 2060 to combat climate change and align its objectives with global sustainability goals. Central to this strategy is the establishment of carbon trading, a market-based mechanism designed to reduce greenhouse gas emissions. 

Understanding Carbon Trading:
Carbon trading is a market-based system where entities buy and sell carbon credits. It sets a cap on greenhouse gas emissions by companies or entities. These carbon credits are generated when greenhouse gas emissions are reduced below certain benchmarks. Companies or entities whose emissions surpass their allocated cap can buy credits from those who’ve managed to reduce their emissions, thus creating a fiscal incentive for reduction efforts. This approach encourages the reduction of emissions and fosters a financial ecosystem around carbon credits that rewards sustainable efforts. This strategy also aligns with global standards, helping to meet international treaty obligations.

International Commitments:
Indonesia’s commitment to environmental sustainability is anchored in its ratification of significant international treaties:

  • United Nations Framework Convention on Climate Change (UNFCCC)
    • A seminal treaty that institutionalised the global counteraction to climate change.
    • Serves as a basis for Indonesia’s climate commitments and strategies, ensuring alignment with global efforts.
  • The Paris Agreement
    • Committed to cutting down emissions and aiding developing countries in climate mitigation.
    • Indonesia has specific targets under this agreement. Its carbon trading ambitions are directly influenced by the need to meet these targets and provide transparency in tracking progress.
  • The Kyoto Protocol
    • Introduced Indonesia to carbon markets through the Clean Development Mechanism.
  • The Marrakesh Accords
    • Outlines international carbon trading rules.

Regulatory Landscape:
Indonesia’s latest regulations augment and in certain instances, replace older norms, reflecting the nation’s evolving stance on environmental sustainability. Several regulations shape the carbon trading domain in Indonesia:

  • Law No. 4 of 2023 on Mineral and Coal Mining:
    • Realigns the mining sector’s objectives with sustainable practices.
    • Places emphasis on the reduction of emissions from mining operations.
    • Stipulates guidelines for sustainable mining practices.  
  • Government Regulation No. 76 of 2021:
    • Implements the Economic Value of Carbon
    • Gives methods to calculate, report, and verify emissions.
  • Regulation of the Minister of Environment and Forestry No. 7 of 2023:
    • Establishes the framework for carbon trading.
    • Lays out directives for entities engaging in carbon trading. 
  • Regulation of the Financial Services Authority No. 14 of 2023:
    • Provides guidelines for carbon trading through the Carbon Exchange.
    • Sets forth requirements for entities looking to participate.

Key Elements of Carbon Trading in Indonesia:

  1. Carbon Units: These represent a metric ton of CO2 equivalent emissions reduced/removed.
  2. Cap-and-trade system: Sets emission caps. Entities exceeding their cap must buy carbon units, incentivizing overall reduction.
  3. Carbon Exchange: Supervised by the Financial Services Authority (OJK), this platform facilitates carbon unit trading.

Current Status and Challenges:
Still in early stages, the carbon trading system in Indonesia is shaping up, with pilot projects underway, such as the Carbon Tax.

Challenges include determining emission caps, initiating the carbon exchange and ensuring broad market accessibility. A lack of infrastructure and market maturity may also result in a steep learning curve. 

Research-backed Insights:

  • Institute for Essential Services Reform (IESR): Envisages carbon trading to potentially mitigate emissions by 29% by 2030. Also, foresees significant economic benefits like job creation and GDP growth.
  • World Bank’s Perspective: Projects carbon trading as a catalyst for Indonesia to meet its NDCs under the Paris Agreement. Moreover, it can be an attractive proposition for foreign investments, particularly in renewable energy.

Future Outlook:
As Indonesia refines its carbon trading mechanisms, we anticipate:

  • Evolving regulations to address current challenges.
  • Technological advancements in carbon capture and trading.
  • Enhanced public-private partnerships, especially within the energy domain.

Stakeholder Implications:
Different players in the energy sector, from renewable energy producers to fossil fuel industry leaders, will experience varied impacts. For instance:

  • Renewable Energy Producers: They stand to gain from increased investments and a favourable regulatory environment that promotes cleaner energy sources. The ability to sell carbon credits to offset other companies emissions also provides an additional revenue stream.
  • Traditional Energy Companies: They’ll be faced with the dual challenge of adapting to new regulations and potentially pivoting towards more sustainable practices. Carbon trading revenue could be used to finance the transition to cleaner energy sources.
  • Carbon Credit Market Players: With the establishment of a Carbon Exchange, there’s potential for a vibrant market in carbon credits, benefitting both sellers who’ve undertaken emission reduction measures and buyers needing to offset their emissions.

It’s imperative that these stakeholders not only understand the changing regulatory environment but also the underlying market dynamics and technological advances.

Technical Aspects:
Professionals in the energy sector must stay updated on:

  • Emission Benchmarks: These benchmarks will influence operational strategies and investment decisions in technologies that aid in reducing emissions.
  • Carbon Capture Technology: Emerging technologies in carbon capture, utilisation, and storage (CCUS) can be game-changers. Understanding the efficacy, scalability, and economic feasibility of these technologies is essential.
  • Data Management: Carbon trading relies on verifiable emissions data. Robust data collection, management, and verification systems will be critical. This will ensure accurate reporting and compliance with regulatory requirements.

For energy companies to thrive in this evolving scenario:

  1. Continuous monitoring of emission data.
  2. Invest in renewable energy sources.
  3. Collaborate to leverage technological innovations in carbon reduction.

The Global Scale
Globally, the European Union, New Zealand, and California have successfully implemented carbon trading systems, among others. The European Union’s Emission Trading System (EU ETS), the largest of its kind, focuses on sectors with the highest emissions (power and industrial sectors), demonstrating the economic viability of such systems. Some Indonesian companies already participate in the EU ETS and Japan’s Joint Crediting Mechanism (JCM). Indonesia, with its rich natural resources and burgeoning energy sector, holds unique challenges and opportunities. Drawing parallels, Indonesia’s efforts echo global momentum but are tailored to its distinct socio-economic landscape.

Indonesia’s journey towards achieving net-zero emissions is both challenging and promising. Carbon trading, backed by strategic regulations and global commitments, offers an innovative pathway. Energy professionals, equipped with the right knowledge and adaptability, can play a pivotal role in steering this vision to fruition.

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