Indonesia launched its first carbon emissions trading market in September 2023. The market allows businesses and financial institutions to offset emissions while supporting carbon reduction projects. Under the scheme, corporations that exceed their carbon quotas can purchase carbon credits from industries that emit pollution below a government-set limit or from renewable power plants. Over-emitting businesses can also purchase carbon credit certificates, which are given for actions or projects that remove carbon from the atmosphere, such as forest conservation.

The carbon trading market is designed to incentivize businesses to reduce emissions so that they can sell their carbon credits to the market. Conversely, emitters will be driven to switch from fossil fuels to renewable energy to avoid purchasing carbon credits. Carbon trading is currently available to coal plants that produce at least 100 megawatts of power and are connected to the state’s primary electrical grid, accounting for around 86% of the country’s coal capacity. The carbon market will gradually be extended to other sectors (forestry, agriculture, waste management, and industrial processes and product use) by 2025, depending on the sector’s readiness. The ETS will be implemented in three phases.

The first phase, from 2023 to 2024, will only include coal-fired power stations. The government intends to expand the ETS coverage to oil and gas-fired power plants, as well as other coal-fired power plants not connected to Perusahaan Listrik Negara’s grid, in the second and third phases (2025-2027 and 2028-2030, respectively). By 2025, Indonesia plans to transform the carbon trading system into a hybrid “cap-tax-and-trade” system. Facilities that fail to comply with the system’s requirements will be subject to a tax, the rate of which will eventually be tied to the domestic carbon market price.

The Co-ordinating Ministry for Maritime and Investment Affairs (CMMIA) is responsible for policy coordination and regulation oversight of carbon pricing implementation, as Presidential Regulation No. 98/2021 mandated. CMMIA chairs the steering committee. Various government ministries and agencies have backed CMMIA in carrying out its tasks. The Ministry of Environment and Forestry (MoEF) oversees NDCs and carbon-pricing policies. The Ministry of Home Affairs (MoHA) oversees regional coordination of ETS implementation. The new emission trading system uses blockchain technology to record carbon credit transactions.

On September 26, 2023, the market opened with the selling of 13 carbon credits totaling almost 460,000 metric tons of carbon dioxide equivalent (CO2e) from geothermal plants in North Sulawesi, run by state-owned PT Pertamina Geothermal Energy. Each metric ton of carbon credit costs 69,600 rupiah ($4.45), far less than comparable products in established carbon markets such as the European Union. Other buyers included the nation’s largest banks, Bank Central Asia and Bank Mandiri, and mining firms. The Indonesian Ministry of Energy and Mineral Resources anticipates a reduction of 500,000 tCO2e in the industry from the ETS in the first year alone.

Lessons learned:

Indonesia’s electricity sector is heavily regulated, making it difficult to transmit price signals efficiently, particularly for carbon pricing schemes such as an ETS. To adopt such policies, Indonesia must tailor them to its specific market structure, incorporating learning from other nations with similar circumstances. As Indonesia implements its cap-and-tax system, determining a suitable tax price is critical, with progressive increments required for effective incentivization. Furthermore, allocating revenue from ETS auctions or carbon taxes is critical, with possibilities ranging from additional climate mitigation initiatives to addressing distributional implications like assisting low-income households. ETS auctions must be designed by the country’s power market structure, with consideration given to alternative options.

Criticism:

Indonesia’s brave decision to create an emissions pricing system is crucial to meeting its 2060 net zero target. However, according to environmentalists, carbon trading may prevent corporations from decreasing emissions entirely, allowing for a “business as usual” mindset in which people and businesses buy carbon credits to continue polluting rather than changing their habits.

This Post was submitted by Climate Scorecard Indonesia Country Manager Netra Naik.

References:

https://www.oecd.org/environment/cc/cefim/indonesia/Indonesia-ETS-FGD-series-summary-report.pdf