Climate Change

Carbon Trading in Indonesia

Part 1: General Overview of Carbon Trading in Indonesia

Indonesia officially started carbon trading on 26 September 2023 through the launch of the Indonesia Carbon Exchange (IDX Carbon). Carbon trading is one of the mechanisms to fulfill Indonesia's Nationally Determined Contributions (NDC), which are efforts promised by the country to comply with the Paris Agreement by reducing its carbon emissions. To understand how carbon trading is done, we need to understand the basic concept first which will be explained in this article.

In general, carbon trading occurs because of the need for companies to meet the threshold of carbon emissions that may be released from their business activities. As the Paris Agreement progresses, countries are asked to start limiting carbon emissions produced by existing companies through various mechanisms, one of which is through the regulation of thresholds (cap and trade). This threshold is regulated by the government of the country concerned through certain regulations. The results of this emission reduction are then reported as a commitment to meet the NDC.

Concretely, there are several ways to reduce carbon emissions. The most important and prioritized way is to stop activities that produce carbon emissions completely. However, this is difficult to do completely and quickly because there are several high-carbon emission activities that are crucial to meeting basic human needs, such as coal-fired power plants to meet electricity needs. Another way is to reduce emissions produced by these activities. For example, coal-fired power plants can be equipped with Carbon Capture,Utilization, and Storage (CCUS) installations. But installing such installations is also expensive and high risk with minimal returns. Another alternative is carbon trading, where activities that intensively produce high levels of carbon emissions, buy carbon credits from other companies (in a form of certificate that recognizes the validity of an activity's carbon reduction),to offset the emissions they make. Here is a simple illustration to understand carbon trading.

Carbon Trading Illustration

For example, A is a company that operates a coal-fired power plant with an emission permit of 100 tons of CO2e per year. However, in reality as the business progresses, A's production activities release 130 tons of CO2eemissions per year. This means that A has an excess of 30 tons of CO2e emissions per year and violates its permit. To remain compliant, A must either(1) reduce emissions from its own activities so that they do not exceed its permit limits, or (2) offset its emissions by purchasing carbon credits of at least 30 tons of CO2e per year or more from another company to comply with its permit.

Then there is B, a company that focuses on environmental and forest restoration. From the activities carried out by B, such as mangrove planting, it was calculated through Monitoring, Reporting, and Verification (MRV) processes that B's activities have succeeded in absorbing 200 tons of CO2e of carbon per year. This means that B can sell some of the carbon reduction (in the form of carbon credits) to companies in need. In this example, to A who needs an additional 30 tons of CO2e carbon credits per year.

If the transaction between A and B is successful, then B will only have carbon credit of 170 tons of CO2e per year (from the initial 200 then sold 30to A), while A is calculated to produce emissions of 130 tons of CO2 per year minus the carbon credit of 30 tons of CO2e per year that it bought from B. This Means that A's total emissions after carrying out the offset are now 100 tons of CO2e per year (130-30=100) in accordance and compliance with the provisions of the permit it has.

The example illustrates a simple mechanism for implementing carbon trading.Of course, this will be quite different in various countries, both in terms of the types of activities that must reduce emissions, activities that can produce carbon credits, valid carbon credit calculation mechanisms, carbon credit transaction mechanisms, and other applicable legal regulations.

Context of Indonesia

The main legal basis for carbon trading in Indonesia is Presidential Regulation No 98 of 2021 on Implementation of Carbon Economic Value for Achieving Nationally Determined Contribution Targets and Controlling Green house Gas Emissions in National Development (“PR 98/2021”) and Minister of Environment and Forestry Regulation No 21 of 2022 on Implementation Procedures for Carbon Economic Value (“MoEF Reg 21/2022”). There are several main elements of carbon trading implementation, including emission trading mechanisms and procedures, greenhouse gas emission offsets, approval and recording procedures,trading revenue sharing, implementation guidelines, and other mechanisms.[1]

In general, carbon trading in Indonesia is divided into two main mechanisms, namely (1) Emissions Trading and (2) GHG Emissions Offset,both of which can be carried out across sectors.[2]

(1) Emission Trading is carried out for activities or businesses that have an upper limit on GHG emissions and is carried out by transferring carbon units between business actors.[3]

(2) GHG Emission Offset is carried out for activities/businesses that do not have an upper limit on GHG emissions, or activities/business where the achievement of its GHG emission reductions from climate change mitigation actions does not meet the established targets and baselines. This is carried out by providing a statement of emission reduction using mitigation actions from other activities or businesses.[4]

More technical provisions regarding carbon trading are specifically regulated in the sectors that are the focus of the NDC. For Indonesia, there are five sectors that are specifically targeted for carbon emission reduction,namely energy, forestry, waste, agriculture, and industrial processes and product use (IPPU). These five sectors can have different regulations according to their respective characteristics. Currently, only energy and forestry sectors have technical provisions and both will be discussed in the next part.

Part 2: Carbon Trading in the Forestry Sector in Indonesia

Carbon trading in the forestry sector in Indonesia is regulated through Minister of Environment and Forestry Regulation No. 7 of 2023 on Procedures for Carbon Trading in the Forestry Sector (“MoEF Reg 7/2023”). This provision is the implementing regulation of PR 98/2021 and MoEF Reg 21/2022 which have been previously discussed. MoEF Reg 7/2023 regulates that the implementation of climate change mitigation actions in the forestry sector can be carried out through carbon trading. While the mitigation actions in question include reducing GHG emissions and storing or absorbing forest carbon.[5]

There are at least 22 types of climate change mitigation action activities—defined as activities that can reduce GHG emissions, increase carbon absorption, and/or store or strengthen carbon reserves—in the forestry sector, that is:[6]

a. reduction of mineral land deforestation rate;

b. reduction of peat and mangrove land deforestation rate;

c. reduction of mineral land forest degradation rate;

d. reduction of peat and mangrove land forest degradation rate;

e. development of plantation forests;

f. sustainable forest management;

g. rehabilitation with rotation;

h. non-rotation rehabilitation;

i. peat restoration;

j. improvement of peat water management;

k. mangrove rehabilitation;

l. afforestation in ex-mining areas;

m. development of permanent nurseries;

n. rehabilitation of plants under 5 years;

o. biodiversity conservation;

p. social forestry;

q. assistance in customary forests;

r. introduction of ecosystem replication;

s. development of green open spaces;

t. ecoriparian (utilization of river or lake boundaries to reduce pollution load and establish environmental education tourism for the community);

u. supervision and law enforcement to support protection and security of forest areas; and

v. other activities in accordance with developments in science and technology.

Carbon trading in the forestry sector is carried out through the mechanism of emission trading and GHG emission offsets.[7]Specifically for emission trading, it can only be carried out on peat and mangrove areas, both those located within forest areas and those outside forest areas.[8] Meanwhile,GHG emission offsets can be applied in other forest areas regulated in MoEF Reg7/2023, including permanent production forest areas, convertible production forest areas, protected forest areas, peat and mangrove areas, conservation forest areas, customary forests, rights forests, and state forests that are not forest areas.[9]

For each type of area and rights, MoEF Reg 7/2023 regulates the conditions that must be met specifically.[10] In addition, there are additional requirements. For example, for PBPH holders (Forest Utilization Business Licensing, Perizinan Berusaha Pemanfaatan Hutan),management rights, and forest owners, they must have a sustainable forest management certificate, a forest product legality certificate, or a forest product declaration. For holders of social forestry management agreements, they must obtain a silver classification in their implementation. Meanwhile, for indigenous peoples, holders of social forestry management agreements, and communities that own private forests, they must receive assistance or partners who have experience and expertise related to carbon measurement, project planning and implementation, and carbon market access.[11]

Forestry sector Emission Trading is regulated through Article 10 MoEF Reg 7/2023,while GHG Emission Offsets are regulated through Article 11 MoEF Reg 7/2023.The series of mechanisms must be adhered to by business actors who wish to trade emissions or GHG emission offsets from their business activities. In addition, there is also a prohibition on carbon trading for activities that have received performance-based payments and activities for which there is an international cooperation agreement document or other written commitment that is considered the same.[12]

Forestry Sector Carbon Trading Illustration

For example, there is PT C which operates in the forestry sector and wants to carry out carbon trading, whether to offset its own emission from other activities or to gain profit for selling its carbon credits (in a form of SPE-GRK, Sertifikat Pengurang Emisi Gas Rumah Kaca). The first step is to identify the type of permit held by PT C in the forestry sector, to check the eligibility to carry out carbon trading. For example, PT C has a PBPH in a permanent production forest area, part of which is an empty coast that can be planted with mangroves. Then based on the provisions of Article 6a, 6d, 7(1)and 7(4) MoEF Reg 7/2023, PT C can carry out carbon trading by choosing the climate change mitigation action that it wants to carry out from the list regulated in Article 3(3) MoEF Reg 7/2023 (in this case mangrove rehabilitation). To obtain an SPE-GRK, PT C must prepare a DRAM (Mitigation Action Plan Document, Dokumen Rencana Aksi Mitigasi) and follow the process and provisions in Article 10-11 MoEF Reg 7/2023.

If the entire series of registration and licensing processes are in accordance and have been approved, then PT C can start carrying out the mitigation action activities it has chosen, in this case mangrove rehabilitation in its own area. Over time when the mangroves have been rehabilitated, the MRV (Measurement, Reporting, and Verification) process will be carried out, that is activities to ensure that climate change mitigation action data and information have been carried out in accordance with procedures and standards that are guaranteed its validity. After verification is complete,PT C can participate in carbon trading activities through IDX Carbon, whether as a company that wants to make a commitment to offset GHG emissions from its own business activities, or as a manager of a climate change mitigation action project that will sell carbon units in the form of SPE-GRK that it obtains to other company.

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Part 3: Carbon Trading in the Energy Sector in Indonesia

Carbon trading in the energy sector in Indonesia focuses more on power generation installations, especially those that use coal as the main fuel such as coal-fired power plant. Through this policy, coal-fired power plants are encouraged to reduce their emissions through various means, one of which is through carbon trading. This provision is regulated through the Minister of Energy and Mineral Resources No 16 of 2022 on Procedures for Implementing the Carbon Economic Value of the Electric Power Generation Subsector (“MEMR Reg16/2022”)

Unlike the forestry sector provisions that clearly detail what types of activities are included in climate change mitigation actions. The energy sector does not explain in detail the types of activities that are allowed. MEMR16/2022 states that in implementing carbon economic value, power plants must carry out efficiency and prioritize GHG emission offsets.

The energy sector focuses more on the regulation and determination of PTBAE(Technical Approval of Upper Emission Limits, Persetujuan Teknis Batas Atas Emisi) for each type of power plant based on the (1) GHG emission baseline of the power plant sub-sector, (2) the NDC target of the power plant sub-sector, (3) the results of the GHG emission inventory of the power plant sub-sector, and (4) the time to achieve the NDC target of the power plant sub-sector.[13] Meanwhile,PTBAE for each type of power plant is implemented in 3 phases, including: the first phase 2023-2024, the second phase 2025-2027, and the third phase2028-2030.[14]

There are four categories of coal-fired power plants that must comply with PTBAE, with all connected to state electricity company (PLN) electricity network, namely:[15]

a. Mine-Mouth and Non-Mine-Mouth Coal-Fired Power Plant25-100 MW

b. Non-Mine-Mouth Coal-Fired Power Plant 100-400 MW

c. Non-Mine-Mouth Coal-Fired Power Plant > 400 MW

d. Mine-Mouth Coal-Fired Power Plant equal or more than 100MW

Thus, coal-fired power plants that fall into these categories have an obligation to reduce their emissions, in accordance with their PTBAE-PU (Technical Approval of Upper Limits of Business Actors’ Emissions, Persetujuan Teknis Batas Atas Emisi Pelaku Usaha).

In 13 January 2023, MEMR has enacted first phase of PTBAE through Minister of Energy and Mineral Resources Decree No 14.K/TL.04/MEM.L/2023 on Technical Approval of the Upper Limit of Greenhouse Gas Emissions for Coal-Fired Steam Power Plants Connected to the Electricity Grid of PT Perusahaan Listrik Negara(Persero) Phase One, with limit as follows:

a. Mine-Mouth and Non-Mine-Mouth Coal-Fired Power Plant25-100 MW: 1,297 ton CO2e/MWh

b. Non-Mine-Mouth Coal-Fired Power Plant 100-400 MW: 1,011ton CO2e/MWh

c. Non-Mine-Mouth Coal-Fired Power Plant > 400 MW: 0,911ton CO2e/MWh

d. Mine-Mouth Coal-Fired Power Plant equal or more than 100MW: 1,089 ton CO2e/MWh

For coal-fired power plants that fall into this category and wish to conduct carbon trading, there are several prerequisites that must be met.First, they must have a GHG emission monitoring plan in the form of a gross production plan and a target GHG emission level.[16] Without this document, the coal-fired power plant cannot conduct carbon trading, thus potentially violating the emission limit. Second, they need to submit the monitoring plan to the Minister of Energy and Mineral Resources and submit it through APPLE-Gatrik (Emission Calculation and Reporting Application Electricity).[17] Once these prerequisites are met, the Minister determines the PTBAE-PU for each power generation unit by considering (1) the PTBAE for each type of power plant, (2)average GHG emission intensity data based on the power plant's GHG emission report, and (3) average GHG emission data based on the power plant's GHG emission report.[18]

Based on Annex II of MEMR Reg 16/2022, PTBAE-PU (in tonnes CO2e) is determined based on PTBAE (in tonnes CO2e/MWh) divided by the average GHG emission intensity of the previous year (in tonnes CO2e/MWh) and multiplied by the average GHG emissions of the previous year. However, if the average GHG emission intensity data and average GHG emission data are not yet available,PTBAE-PU is calculated proportionally by comparing the operating power generation units for the same type, equivalent installed capacity, and the same technology.

In order to remain compliant with the emission limits imposed on them,coal-fired power plant business actors can conduct domestic and international carbon trading, using the emission trading mechanism or GHG emission offset,through the carbon market mechanism or direct trading.[19]

What Should Coal-Fired Power Plant Business Actors Do?

Regulations on emission reductions, emission restrictions, and even the push for early retirement of coal-fired power plants are increasingly inevitable. Over time, the operational costs of running coal-fired power plants will increase, from the cost of installing newer technology, the cost of carrying out climate change mitigation actions, including buying carbon credits to remain compliant with the permits held, and cost to pivot to other businesses. This creates uncertainty and new risks for coal-fired power plant business actors.

The implementation of carbon trading can be a short-term solution to ensure that coal-fired power plants can continue to operate while complying with emission reduction and limitation provisions. Business actors can immediately prepare a climate change mitigation action plan, one of which is by off setting GHG emissions from their coal-fired power plants. Another alternative is to prepare the prerequisites to be able to conduct carbon trading in the carbon market, especially by prepare the GHG emission reports and validate them through regulated mechanisms.[20] Thus,before participating in carbon trading, business actors must prepare and submit: (a) the results of the implementation of PTBAE-PU, (b) evidence of the implementation of GHG emission offsets, and (c) GHG emission reports that have been verified and validated.[21]

However, aside from the short-term proposed solution, a long-term sustainable plans must still be prepared. It is important to immediately switch to renewable power generation since renewable energy is the future, not only for the environment but also for the future generation, with the potential for profitability that is also more sustainable. In the context of carbon trading,switching to renewable power plants is also included in activities that can reduce GHG emissions and obtain SPE-GRK. This kind of transition provides double benefits for coal-fired power plant business actors, by ensuring the sustainability of their business activities with renewables, and “additional time” from the carbon trading. (AE)

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[1]Article 48(2) PR 98/2021.

[2]Article 49(2) and 49(3) PR 98/2021.

[3]Article 50, 51(1), and 51(2) PR 98/2021.

[4]Article 52(1) and 52(2) PR 98/2021.

[5]Article 3(1) and 3(2) MoEF Reg7/2023.

[6]Article 3(3) MoEF Reg 7/2023.

[7]Article 5 MoEF Reg 7/2023.

[8]Article 7(4) and 7(5) MoEF Reg7/2023.

[9]Article 6 MoEF Reg 7/2023.

[10]Article 7 MoEF Reg 7/2023.

[11]Article 8 MoEF Reg 7/2023.