IESR: Opportunities and challenges in Indonesia’s carbon trading

Jakarta – The Institute for Essential Services Reform (IESR) says that it takes time to build a robust and mature carbon market ecosystem. While the launch of the carbon market is a positive step, regular monitoring and evaluation are essential to keep the carbon market on track. Cross-sector coordination and cooperation are also needed to achieve this goal.

IESR Executive Director Fabby Tumiwa said that “carbon markets provide an opportunity to promote green taxonomy principles to financial institutions, investors and project owners. By providing the right incentives, carbon markets can be an effective tool to address climate change and support sustainable projects”.

Indonesia has issued Presidential Regulation (Perpres) 98/2021 on the Value of Carbon Economy (NEK) as a foundation for developing infrastructure and a framework for carbon trading.

Fabby said the NEK regulation was born in response to Article 6 of the Paris Agreement, which allows carbon trading to reduce emissions. The regulation contains several instruments, including carbon trading, results-based payments, and a carbon tax, which is expected to be launched in 2025 after several delays.

“Of all these instruments, carbon trading is identified as the most mature. Carbon trading allows institutions to compensate for high emissions by purchasing carbon credits from activities that provide carbon stocks,” Fabby explained.

With the establishment of the carbon market, carbon quotas from eligible sectors and carbon credits will be traded. In this carbon exchange, all entities, whether they are emitters or not, must obtain a licence from the National Standard Registry (SRN) to ensure accurate emissions data.

To support the implementation of carbon trading, the Financial Services Authority (OJK) issued regulations and launched a carbon market in September 2023. This shows that financing plays an important role in achieving climate targets and raising awareness of the impacts of climate change, especially in the business sector.

Previously, Indonesia had a Voluntary Carbon Market (VCM) that operated for decades. Now, Indonesia is developing a mandatory carbon market to meet sector-specific Nationally Determined Contribution (NDC) targets. For example, the Sumatra Merang Peatland project sold three million carbon credits to major companies.

In the first phase of carbon trading, 99 coal-fired power plants accounting for 86% of Indonesia’s electricity generation participated. Each power plant has an emissions quota set based on previous performance. They can exchange the remaining quota with companies exceeding the maximum emission limit. However, if they exceed the quota, they must reduce emissions by purchasing carbon credits.

The success of this pilot programme encourages other sectors to consider carbon trading and expand its application in other sectors. Meanwhile, the government is developing a carbon trading roadmap that is being discussed at the Coordinating Ministry for Maritime Affairs and Investment. (Hartatik)

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