Indonesia’s carbon trading expectations rise as climate change impacts increase

President Joko Widodo launches and opens the Indonesia Carbon Exchange at the IDX, in Jakarta, Tuesday, 26 September. (Source: Agung/Cabinet Secretariate Press Office)

by: Hartatik

Indonesia now officially has a carbon exchange. At the end of September, President Joko Widodo (Jokowi) launched the inaugural carbon trading, known as the Indonesia Carbon Exchange (IDX Carbon), at the Indonesia Stock Exchange (IDX).

The value of carbon buying and selling transactions at closing cannot be underestimated, reaching IDR 29.2 billion (USD 1.86 million). The total volume of carbon traded was 459,953 tonnes of CO2.

However, the transaction value was inversely proportional on the second day IDX Carbon opened. Because no transactions were recorded. Director of Development of the Indonesia Stock Exchange (IDX), Jeffrey Hendrik, assessed that the transaction on the carbon exchange is still quiet. According to him, carbon exchange transactions are not as liquid as the stock exchange.

“The number of users of carbon exchange services is also not large enough. Currently, Pertamina New and Renewable Energy (PNRE) is the only carbon unit provider on IDXCarbon,” said Hendrik, Friday, 29 September.

Previously, President Jokowi said that the presence of IDX Carbon is one of the effective policy instruments to increase efforts to mitigate climate change through carbon market schemes. Moreover, the rate of climate change in recent decades is increasingly worrying.

“Global emission reduction mitigation efforts must be made to reduce the rate of global warming that causes climate change. Although not the first in Asia, the presence of a carbon exchange in Indonesia has been anticipated by many parties,” he said when inaugurating IDX Carbon on 26 September.

Carbon exchanges in other parts of the world include the European Union, which started a carbon exchange in 2006, Switzerland since 2008, and South Korea in 2015. Neighbouring Singapore and Malaysia have also recently launched carbon exchanges.

Yoyok Prasetyo, an economic observer and lecturer at the Faculty of Economics of Universitas Islam Nusantara Bandung, believes that the presence of IDX Carbon is a breath of fresh air in the green economy ecosystem in Indonesia.

Moreover, Indonesia has vast tropical forests, giving it an advantage over other countries. The presence of a carbon exchange in Indonesia aims to reduce greenhouse gas emissions, through the buying and selling of carbon.

“The establishment of this carbon exchange is in line with the Indonesian government’s target which has set a Nationally Determined Contribution (NDC) to achieve a reduction in greenhouse gas emissions by 26 per cent with its own efforts, or up to 41 per cent with external support by 2030,” Prasetyo said in a release.

International treaty demands

Associate Professor and Carbon Trading Expert of Prasetiya Mulya University, Rio Christiawan revealed that the urgency to immediately prepare and realise the carbon exchange is that the 196 countries participating in the World Climate Change Conference (COP) must achieve their emission reduction targets by 2030. One of those countries is Indonesia.

In addition, the Paris Agreement is legally binding and applies to all countries with the principle of shared responsibility that is differentiated and based on their respective capabilities, including in this case Indonesia has ratified the COP through Law Number 16 of 2016 concerning Ratification of the Paris Agreement to The United Nations Framework Convention On Climate Change (UNFCCC).

“Indonesia has the third largest forest area in the world and in the COP only targets carbon emission reductions equivalent to 835 million tonnes of CO2, so in addition to Indonesia’s NDC portion which logically can almost certainly be fulfilled, there is also enormous economic potential for Indonesia,” said Christiawan.

Despite this huge economic potential, Rio considers there are three challenges in carbon trading in Indonesia. The first is the mechanism for setting the reference price of the carbon unit to be traded. According to him, setting an appropriate and competitive price index for Indonesia’s carbon exchange is important because one of the essences of Presidential Regulation No. 98/2021 on the Economic Value of Carbon (NEK) is carbon pricing.

“Accurate pricing is important, as the carbon exchange price will be the reference for non-exchange carbon trading (both mandatory and voluntary markets),” explained the investment and sustainability expert.

The second challenge is to accelerate the Forest Tenure Business Licence (PBPH) in the field of restoration and carbon trading designation. If the PBPH, registration and authorisation process is ‘convoluted’, it is feared that the carbon exchange will be under-traded or dominated by foreign companies selling carbon not originating from Indonesia.

If this happens, the carbon exchange in Indonesia will only place Indonesia as a buyer or as a broker/trader, not as a direct seller of carbon through the exchange mechanism.

The third challenge is that the government must take into account the limited number of companies with emission reduction certificates registered in the national registration system, which may have implications for carbon trading through the exchange.

Emission reduction certificates are internationally known as verified carbon units (VCUs) that can be legally transferred through verified carbon unit purchase agreements (VCUPAs) or Emission Reduction Purchase Agreements (ERPAs), which are the basis for carbon trading through carbon exchanges. This is regulated by Law No. 4/2023 on the Development and Strengthening of the Financial Sector (P2SK), which is managed by OJK.

The emission reduction certificates that can be traded through the exchange can be obtained through various mechanisms, for example through Forestry and Other Land Use (FOLU), Agriculture, Forestry and Other Land Use (AFOLU), to the Clean Develop Mechanism (CDM) which is already in the national registration system.

Christiawan also assessed that the government needs to learn from the establishment of South Korea’s Emissions Trading Scheme (KETS), which was ultimately not optimal in carbon trading through the exchange, due to the low volume of trading, so it was unable to form a reference price for carbon as a commodity.

“KETS is only open two days a week with limited trading hours because there is still a very limited amount of carbon traded through the exchange,” he said.


Banner photo: The transaction value of the carbon exchange traded by the Indonesia Carbon Exchange (IDX Carbon) on the IDX on the first day it was officially launched by President Jokowi, 26 September. (Source: Indonesia Stock Exchange Youtube channel)


Like this article? share it

More Post

Receive the latest news

Subscribe To Our Weekly Newsletter

Get notified about new articles