Indonesia’s Carbon Market – Navigating New Landscape of Opportunity
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.
- 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.
- Regular Trading: This allows all participants to continuously submit buy and sell offers at any time, creating a lively trading environment.
- Negotiated Trading: This option is available for trades that have been pre-negotiated outside the IDXCarbon system, allowing for more customized agreements.
- 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:
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opportunities, and the road
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