Instagramming

Indonesia’s Carbon Market – Navigating New Landscape of Opportunity

By Riyan Al Fajri

 

The Green Economy is an important part of Indonesia's plan to transform its economy after the COVID-19 pandemic. With a growing GDP of about $1.3 trillion, Indonesia plays a significant role in the global economy and is also home to a large portion of the world's carbon sinks, holding between 75% to 80% of the total. The country's mangrove forests and peatlands are especially valuable, as they store 20% and 37% of global carbon credits, respectively. Additionally, Indonesia's rainforests absorb around 25 gigatons of carbon. This unique position makes Indonesia a potential leader in the carbon market, which, if valued at $5 per ton of CO2, could generate around $150 billion in revenue. To take advantage of this opportunity, Indonesia has set ambitious goals to reduce greenhouse gas (GHG) emissions by 31.89% without help and by 43.2% with international support by 2030. Implementing carbon pricing and market systems is crucial to achieving these goals, along with other strategies like results-based payments.

In February 2023, Indonesia started the first phase of mandatory carbon trading for coal power plants, involving 99 facilities that traded emission allowances. This initial phase is a crucial step toward a broader market, as the government plans to create a roadmap that will set emission limits for other sectors, including forestry, industrial processes, agriculture, and waste management. Additionally, a carbon tax will be applied to emissions that go over the set limits, although a specific timeline for these changes has not yet been announced. The government hopes these regulations will encourage companies to cut their emissions and that the money raised through the market can be reinvested into further emission reduction efforts.

The Indonesian carbon market works by trading two main items: carbon quotas and carbon credits. In this system, companies in certain industries have limits on how much they can emit, which corresponds to a total limit for their sectors. If a company exceeds its emissions limit, it must buy unused carbon quotas from companies that emit less than their limit. This cap-and-trade approach encourages companies to lower their emissions while allowing them some flexibility in how they comply.

On September 26, 2023, Indonesia launched its carbon exchange, called IDX Carbon, marking a significant step in the country's efforts to combat climate change. This launch came just seven weeks after the Indonesian Financial Services Authority (OJK) released rules for carbon trading through the exchange. Given that Indonesia is one of the top ten emitters of greenhouse gases in the world, creating a structured carbon market is a long-awaited development that aims to help reduce emissions while supporting economic growth.

At the opening of the IDX Carbon exchange, 13 carbon credits representing nearly 460,000 metric tons of carbon dioxide equivalent (CO2e) from PT Pertamina Geothermal Energy's projects in Sulawesi were traded at a price of 69,600 rupiah (about $4.51) per ton. The price of carbon credits will vary by project, as project owners can set their own prices. During the February trial for coal power plants, carbon allowances traded between $2 and $18 per ton. In comparison, carbon prices in the European Union have risen above $80 per ton, while Singapore's CIX exchange recently assessed nature-based avoidance credits issued between 2019 and 2022 at $5.36 per ton.

Currently, emissions limits have only been set for the power sector, so regulators expect that utilities will be the most active buyers in the market at first. However, as limits are introduced for other sectors, more companies are likely to join the trading platform. Notably, banks, the state energy company Pertamina, and mining companies were among the buyers during the first trading session, showing a growing interest in Indonesia's new carbon market.

IDXCarbon

Indonesia has two main types of carbon trading systems: a compliance-based market and a voluntary market. The compliance-based carbon market is still developing but has made significant progress recently. It officially started in February 2023, with the power generation sector being the first to participate. In September 2023, the Financial Services Authority (OJK) launched IDXCarbon, a compliance-based carbon market that operates under the Indonesian Stock Exchange (PT. Bursa Efek Indonesia).

Transactions on IDXCarbon involve trading carbon units and keeping records of ownership. According to the IDXCarbon website, there are two types of carbon units that can be traded:

1.  Persetujuan Teknis Atas Batas Atas Emisi – Pelaku Usaha (PTBAE-PU), or the allowance market. This is a cap-and-trade system where the government sets a limit on emissions for certain businesses. If a business exceeds its limit, it can buy carbon units from other businesses that have unused allowances.

 

2.  Sertifikat Pengurangan Emisi - Gas Rumah Kaca (SPE-GRK), or the offset market. In this system, businesses trade carbon units that come from reducing or removing greenhouse gases through various climate actions. Companies can buy these units to meet their emission reduction goals and work towards being carbon-neutral or achieving net-zero emissions.




To facilitate carbon trading, IDXCarbon offers four trading mechanisms:

  1. Auction: In this process, potential buyers submit requests to purchase carbon units, stating how much they want and the price they are willing to pay. The carbon units are then sold to the highest bidders through regulators or project developers.
  2. Regular Trading: This allows all participants to continuously submit buy and sell offers at any time, creating a lively trading environment.
  3. Negotiated Trading: This option is available for trades that have been pre-negotiated outside the IDXCarbon system, allowing for more customized agreements.
  4. Marketplace: This is a dedicated space where project owners can list their carbon units at a set price, giving them more control over their sales strategy.

At the launch of IDXCarbon, 16 companies participated, with half of the buyers being banks. By October 12, 2023, IDXCarbon recorded transactions of 459,970 tons of CO2 equivalent, which is significantly higher than Malaysia’s Carbon Exchange, which recorded 166,500 tons of CO2 equivalent from its launch in March 2023 until October 2023. This strong performance shows Indonesia's growing importance in the carbon market.

In its first year of operation, IDXCarbon saw an increase in the number of Greenhouse Gas Emission Reduction Certificates (SPE-GRK) traded, rising from 459,953 tons of CO2 equivalent to 613,894 tons. The total transaction value also grew from Rp29.21 billion to Rp37.06 billion, with 420,029 tons of CO2 equivalent being retired from the total volume.

As of January 17th in 2025, IDXCarbon has recorded a total trading volume of 1,131,000 tons of CO2 equivalent (tCO2e) since its launch. This achievement is accompanied by an increase in the number of users of IDXCarbon services, which reached 100 users by the end of 2024. This number represents more than a twofold increase compared to the number of users in 2023.

Additionally, at the beginning of 2025, IDXCarbon added three new carbon projects or Greenhouse Gas Emission Reduction Certificates (SPE-GRK), further increasing the number of carbon units available. The first project is from PT PLN Indonesia Power, which reported carbon units from a new gas-fired power plant, PLTGU Priok Block 4, totaling 763,653 tCO2e, with the emission reduction year being 2021. The second project, also by PT PLN Indonesia Power, involves converting a single-cycle power plant to a combined cycle at PLTGU Grati Block 2, which recorded 407,390 tCO2e, also with a vintage year of 2021. The third project is the conversion of a single-cycle power plant to a combined cycle at PLN NP UP Muara Tawar, managed by PT PLN Nusantara Power, which recorded 30,000 tCO2e, with a vintage year of 2023. All these projects are classified under IDTBS, which is for technology-based reduction carbon units from Indonesia. With these new projects, IDXCarbon now has six carbon projects available for trading.

Currently, only Indonesian legal entities can participate in the IDXCarbon market. While there may be opportunities for foreign companies in the future, the primary focus is on strengthening the domestic market for now. Indonesia has officially announced its readiness to engage in international carbon trading, with authorized carbon units totaling 1,780,000 tons of CO2 equivalent (CO2e) sourced from the energy sector.

The Global Carbon Market

Carbon finance is crucial for implementing Nationally Determined Contributions (NDCs) under the Paris Agreement, which allows for market mechanisms through Article 6. This has led to a growing interest in carbon markets worldwide, with 83% of NDCs indicating plans to use international market mechanisms to cut greenhouse gas emissions.

The European Union (EU) launched the world's first international Emissions Trading System (ETS) in 2005. The EU Emissions Trading System (EU ETS) is the main tool for reducing greenhouse gas emissions across Europe, covering 45% of the EU's total emissions from energy-intensive sectors. The EU aims to achieve a 55% reduction in emissions compared to 1990 levels by 2030. The current phase of the EU ETS runs from 2021 to 2030 and aims to create a climate-neutral ecosystem by 2050. The system sets a cap on the total amount of greenhouse gases that regulated companies can emit, dividing this limit into European Union Emission Allowances (EUAs). Each allowance permits the holder to emit one metric ton of CO2 equivalent. Companies and airlines must surrender enough allowances each year to cover their emissions.

The EU has also assisted China in developing its own ETS, which began trading in 2021 and is now the largest in the world, covering about one-seventh of global carbon emissions from fossil fuel combustion. Both the EU and China are working to connect their carbon markets with neighboring regions— the EU with Switzerland and China with Southeast Asian countries— to enhance market efficiency and reduce fragmentation.

European countries should also collaborate with African nations on carbon markets. Some progress is being made, such as Rwanda and Sweden negotiating government-to-government climate financing agreements. However, more investment is needed from large European emitters, based on a premium carbon price, to support a climate fund for Africa. Although Africa contributes the least to global greenhouse gas emissions, its rapidly growing economies and population will lead to increased energy use in the coming decades. Aligning Africa's development with a fair energy transition is essential for meeting global climate goals. This transition will be costly; in Sub-Saharan Africa alone, the net-zero transition is estimated to cost around $1.7 trillion by 2030.

In South Asia, India, the third-largest CO2 emitter in 2021 after China and the United States, faces unique challenges due to its large population. Despite having lower per capita emissions, India's overall emissions are significant. To address these challenges, India launched a pilot Emission Trading System (ETS) in Surat, Gujarat, in 2019, which was the world's first cap-and-trade market aimed at reducing particulate pollution by 29% from business-as-usual levels. India's climate change efforts also include market-based instruments like the Perform, Achieve, and Trade (PAT) scheme, which sets energy-saving targets for industries and allows for trading energy-saving certificates. Additionally, the Renewable Energy Certificates (RECs) trading scheme helps states meet their Renewable Purchase Obligations (RPOs). The government plans to transition from the PAT scheme to a comprehensive ETS in three phases, aligning with India's NDCs for greenhouse gas emissions reduction and demonstrating its commitment to energy efficiency, renewable energy, and carbon market development.

In the United Kingdom and Australia, the Carbon Trade Exchange (CTX) was established in 2009 as a global digital marketplace for trading carbon credits. The CTX serves as a platform for buyers and sellers from various sectors, including companies, NGOs, brokers, banks, and intermediaries, facilitating the exchange of high-quality carbon credits. The CTX recognizes a wide range of global carbon credits, including United Nations Clean Development Mechanism (CDM) credits, Gold Standard, Verified Carbon Standard, and other mechanisms like Verified Emission Reductions (VERs) and Certified Emission Reductions (CERs). In addition to being a trading platform, the CTX offers carbon services such as carbon offsetting, carbon neutral certification, project development, and carbon footprinting. The CTX aims to fund renewable energy projects, forest conservation, and community initiatives.

Many more national and subnational ETS are now operating or under development.

Potential and Challenge

As of 2023, the global carbon trading market is valued at over $900 billion, with the European Union Emissions Trading System (EU ETS) making up a large part of this market. Reports indicate that the EU ETS accounts for between 75% (according to Bloomberg) and 87% (according to Statista) of the total value of the global carbon market. This shows how important the EU is in emissions trading and how it affects carbon pricing around the world.

Voluntary carbon markets have also grown rapidly, surpassing $1 billion in trades last year, according to Ecosystem Marketplace. Some experts believe this is just the start, suggesting that carbon markets need to grow 15 times by 2030 to help limit global warming to 1.5°C. Companies are especially interested in high-quality carbon credits, often called “charismatic” credits, which come from projects that also provide social or environmental benefits, making them more appealing to the public.

Despite these opportunities, many nature organizations face challenges. While the demand for carbon credits is increasing, most projects are not yet ready to sell these credits. This gap highlights the need for better preparation and support for organizations working in this area.

Indonesia has significant potential in the carbon market due to its vast natural resources. It has the third-largest tropical rainforest in the world, covering 125.9 million hectares and capable of absorbing about 25.18 billion tonnes of CO2. Its mangrove forests, which span 3.31 million hectares, can absorb around 950 tonnes of carbon per hectare, totaling about 33 billion tonnes. Additionally, Indonesia has the largest peatland area globally, covering 7.5 million hectares with a carbon absorption capacity of around 55 billion tonnes. In total, Indonesia can absorb 113.18 gigatons of CO2, showing its important role in global carbon capture efforts.

The renewable energy sector in Indonesia also has great potential, with an estimated capacity of 3,687 GW from sources like ocean waves, geothermal, bioenergy, wind, hydro, and solar. This potential is equivalent to 112 times Indonesia’s total electricity consumption for 2023, which is 288.4 TWh. Given the current emissions from electricity generation, Indonesia’s renewable energy potential could lead to a reduction of about 27.5 GtCO2e each year. Furthermore, Indonesia's geology supports a high potential for carbon capture and storage (CCS), with an estimated capacity of 577 GtCO2e in saline aquifers and depleted oil and gas reserves. While it may be difficult to fully utilize these resources, these figures show the significant opportunities for generating carbon credits through various projects in Indonesia.

According to PwC, global demand for carbon credits is expected to reach 1.6 gigatons of CO2e annually by 2030, as reported by the Taskforce on Scaling Voluntary Carbon Markets. The International Energy Agency (IEA) also predicts that the carbon credit market could grow significantly due to increasing climate commitments and the urgent need for emission reductions. This growing demand opens up opportunities for Indonesia to play a major role in the global carbon market.

Foreign investors have historically shown interest in funding carbon projects in Indonesia because of the country’s vast carbon capture potential. Larger projects often involve partnerships with international organizations, such as the REDD+ agreement with Norway and the Katingan Mentaya Project managed by Permian Global. BP’s Tangguh project, which can store 1.8 gigatons of CO2, is another example of international investment in Indonesia's carbon initiatives. Recently, foreign investors, including Abu Dhabi’s Offset8 Capital, have also invested in biochar projects in Indonesia. These investments not only help the environment but also provide financial returns, making this market more attractive.

However, challenges remain. According to PwC, the current price of carbon credits in Indonesia is too low to make projects financially viable. As of September 2024, the market price of carbon credits is IDR 58,800 per tonne (about USD 3.8). In comparison, the estimated costs for reducing emissions from afforestation projects range from USD 35 to USD 65 per tonne of CO2. This difference highlights a significant problem: the low demand for these credits keeps prices down, making it hard for project developers to cover their costs, including opportunity, implementation, transaction, and institutional costs. As a result, the financial feasibility of carbon projects remains uncertain, which could slow progress toward emission reduction goals.

One way to boost market demand is through effective carbon tax and emission capping mechanisms. Indonesia plans to expand its carbon tax implementation in three phases until 2030, aiming to include more types of power plants. However, the success of these plans depends on the expansion of cap-and-trade systems and having enough carbon credits available to make them a viable option in the carbon market.

Although Indonesia plans to implement a carbon tax in 2025, the proposed base price of IDR 30,000 (about USD 2 per ton) is considered too low compared to the global average. For context, the global average carbon tax price is around USD 6 per ton, with some regions, like the European Union, pricing carbon as high as USD 90 per ton. Therefore, the carbon tax price should ideally be higher than the market price of carbon credits to effectively encourage reductions in emissions and stimulate market demand.

Singapore’s carbon tax, introduced in 2019, has been a notable success and serves as a model for other countries. Singapore started its carbon tax at SGD 5 per ton of CO2e from 2019 to 2023, covering about 80% of its greenhouse gas emissions. To support its net-zero targets, Singapore has increased the carbon tax to SGD 25 per ton for 2024 and 2025, with plans to further raise it to SGD 45 per ton in 2026 and 2027. By 2030, the tax is expected to reach between SGD 50 and SGD 80 per ton, demonstrating a clear commitment to reducing emissions and enhancing the effectiveness of its carbon market.

Indonesia's carbon market is still new, but it has great potential to make a real difference in the fight against climate change. With its rich natural resources, including large forests and renewable energy sources, the country can become an important player in creating carbon credits. However, this market needs time to grow and face challenges like low carbon credit prices, complicated rules, and the need for better infrastructure. By building a clear and trustworthy system, involving local communities, and putting effective policies in place, Indonesia can create a strong carbon market that helps reduce emissions and supports sustainable development. As the country moves forward, it has the chance to lead by example, showing that with patience, dedication, and smart planning, a successful carbon market can develop, leading to a greener and more sustainable future for everyone.

 

Reference:

  1. Center for Strategic and International Studies (CSIS). (2023). Navigating Indonesia’s carbon market: Challenges, opportunities, and the road ahead. https://s3-csis-web.s3.ap-southeast-1.amazonaws.com/doc/CSIS_Commentaries_CSISCOM00423_final1-Copy.pdf?download=1
  2. Direktorat Jenderal Kekayaan Negara. (2023, October 2). Understanding the Indonesia Carbon Exchange and its future challenges. https://www.djkn.kemenkeu.go.id/kpknl-lampung/baca-artikel/17264/Mengenal-Bursa-Karbon-Indonesia-Indonesia-Carbon-Exchange-dan-Tantangannya-di-Masa-Depan.html
  3. IDXCarbon. (n.d.). IDXCarbon: The carbon exchange platform. https://idxcarbon.co.id/
  4. IESR. (2023). Navigating Indonesia's carbon market: Challenges, opportunities, and the road ahead. https://iesr.or.id/en/navigating-indonesias-carbon-market-challenges-opportunities-and-the-road-ahead/
  5. Indonesia Business Council for Sustainable Development (IBCSD). (n.d.). Indonesia carbon market: IBCS carbon research. https://business-council.id/indonesia-carbon-market/ibcs-carbon-research/
  6. Indonesia Stock Exchange. (2023, October 2). IDXCarbon begins global carbon trading. https://www.idx.co.id/id/berita/siaran-pers/2296
  7. Indonesia Stock Exchange. (2023, September 26). IDXCarbon: Indonesia's carbon exchange. https://www.idx.co.id/id/berita/siaran-pers/2228
  8. Institute for Essential Services Reform (IESR). (n.d.). Navigating Indonesia’s carbon market: Challenges, opportunities, and the road ahead. https://iesr.or.id/en/navigating-indonesias-carbon-market-challenges-opportunities-and-the-road-ahead/
  9. Investing.com. (2023, October 2). IDXCarbon starts global carbon trading. https://id.investing.com/news/stock-market-news/idxcarbon-mulai-transaksikan-karbon-skala-global-2702440
  10. Parjiono, A. (2023). Workshop on carbon pricing and taxation. https://www.financeministersforclimate.org/sites/cape/files/inline-files/1.1%20Parjiono_Workshop%20Carbon%20Pricing%20and%20Taxation_03102023_Final.pdf
  11. PwC. (2023). Indonesia carbon market white paper. https://www.pwc.com/id/en/publications/esg/indonesia-carbon-market-white-paper.pdf
  12. Reuters. (2023, September 26). Indonesia begins trading carbon dioxide emissions credits. https://www.reuters.com/sustainability/sustainable-finance-reporting/indonesia-begins-trading-carbon-dioxide-emissions-credits-2023-09-26/
  13. United Nations Development Programme. (n.d.). What are carbon markets and why are they important? Climate Promise. https://climatepromise.undp.org/news-and-stories/what-are-carbon-markets-and-why-are-they-important
  14. United Nations Development Programme. (n.d.). Africa needs carbon markets. Climate Promise. https://climatepromise.undp.org/news-and-stories/africa-needs-carbon-markets
  15. Warta Ekonomi. (2023, October 2). IDXCarbon records trading of 1.131 million tons of CO2e, targets 200 users by 2025. https://wartaekonomi.co.id/read555494/idxcarbon-catat-perdagangan-1131-juta-ton-co2e-target-200-pengguna-di-2025

Komentar

Postingan Populer