Indonesia's Carbon Trading System
Updated: Apr 26
As part of the plan to achieve Indonesia's Nationally Determined Contribution (NDC) in combating climate change. The Government of Indonesia implemented Presidential Regulation No. 98 of 2021 (“PR 98/2021”) which regulates the Carbon Law. The regulation also stipulates Carbon Trading Framework in Indonesia.
What is Carbon Trading?
According to PR No.98/2021, Carbon trading is a market-based mechanism to deliberately reduce Greenhouse Gas (GHG) Emission through buying and selling carbon units through the emission trading scheme or GHG emission offset scheme via carbon market or direct trading. “Carbon units’ as referred to on PR 98/2023 means the evidence of carbon ownership in a form of certificate or technical approval recorded in the National Registry System on Climate Change Control (SRN PPI).
The scheme in the Article 43 (3) Undang-Undang Perlindungan dan Pengelolaan Lingkungan Hidup: Instrumen Ekonomi Lingkungan Hidup that mandetes emission trading, environmental tax, environmental result based payment, and other environmental economic instruments.
Carbon Trading Framework
According to PR No.98/2021, The Carbon Law has provided a framework that allows carbon trading so that business entities are able to trade carbon credits both locally or internationally, through Emission Trading.
Emission Trading is a transaction mechanism between two businesses, with one business producing emissions exceeding the allowed cap in a certain period and the other business producing less than the allowed cap, hence creating the possibility for the prior business entity to use the later business entity’s remaining emission cap.
GHG Emission Offset can be implemented on business entities and/or activities that do not have Maximum GHG Emission limits, to compensate emissions in other business sectors.
Carbon trade will be based on the relevant SRN PPI or the usage of emission reduction certificates that are produced through national emission reduction certification.
The Indonesian Government has provided Skema Karbon Nusantara (SKN) as one of the alternative mechanisms to reduce GHG emission. SKN gave the private sector an opportunity to actively participate in reducing GHG emission through selling or buying carbon credits between businesses. The Government will also provide incentives for companies selling or companies buying carbon. According to Art. 50 PR 98/2021, carbon trading can be done on cross-sectoral businesses.
According to Art. 1 section 20 PR 98/2021, Result-Based Payment is incentives or payments earned from results of withdrawal of GHG emissions that have been certified and/or certification and other benefits validated carbon.
Result-Based Payment can be carried out on the benefits of reducing GHG emissions produced by the ministry or bodies, local government and business actors. The mechanism can be carried out based on the results of verification of the achievement of reducing GHG emissions and/or conserving/increasing carbon stocks carried out by businesses or activities. The scope of Result-Based Payment includes:
International Result-based Payments
Payments made by the international parties to the central or regional government, approved by the central government
National Result-based Payments
Payments made by the central government to regional and local government, business and/or community groups; and
Provincial Result-based Payments
Payments made by regional/provincial governments to local governments, business and/or community groups.
Levies on Carbon (Pungutan atas Karbon)
State levies (pungutan negara), both central and regional, are imposed on goods and/or services that have potential and/or carbon content and/or businesses and/or activities that have potential carbon emissions and/or emit carbon that can have a negative impact on the environment and/or performance of Mitigation Actions.
Currently Indonesia already has the body responsible for climate financing, Badan Pengelola Dana Lingkungan (BPDLH), which is responsible to manage and mobilize finance for the environment from various sources such as international, public and private sources, or bilateral or multilateral agreements.
The funds for NEK implementation, Climate Change Mitigation, and Climate Change adaptation will be provided from the state annual spending budget, businesses or activities that produce emissions and participate in the NEK implementation, benefits allocation towards NEK Implementation, especially for Climate Change Adaptation activities, or other legitimate sources. These funds will be used to expedite technology development and transfer, payment for performance, technical cooperation, and access to financial resources to support Indonesia's climate and adaptation effort.
The stakeholders who runs the NEK Implementation are the ministry or bodies, local government, business actors, and the public.
Indonesia’s Carbon Law has provided a framework that allows carbon trading through Emission Trading and GHG Emission Offset. Despite having its own challenges, it is believed that Indonesia is heading towards the right path to reach its goal.