Tomorrow Indonesia : Carbon Pricing by Capped, Traded, and Taxed

By Riyan Al Fajri

Indonesia has experienced remarkable economic growth over the past half-century, emerging as the fourth-fastest growing large economy in the world, following Korea, Singapore, and China. This growth has been significantly bolstered by the export of coal and natural gas, contributing positively to the country’s trade balance. By 2021, Indonesia achieved nearly full electrification of households, and the percentage of the population living below the national poverty line has dramatically decreased from 60% in 1970 to less than 10% today. As the world’s fourth-most populous country, Indonesia ranks as the seventh-largest economy, the twelfth-largest energy consumer, and the largest coal exporter globally.

In light of its economic achievements and the pressing need to address climate change, Indonesia took a significant step forward just before the 26th United Nations Climate Change Conference (COP26) in Glasgow. President Joko Widodo enacted Presidential Regulation No. 98 of 2021 on the Implementation of Carbon Economic Value (CEV) for the Achievement of Nationally Determined Contribution (NDC) Targets and Greenhouse Gas (GHG) Emission Control in National Development, effective October 29, 2021. This regulation replaces two earlier regulations related to GHG emissions, namely Presidential Regulation No. 61 of 2011 and Presidential Regulation No. 71 of 2011. The new regulation mandates that implementing regulations be issued by the same date in the following year.

Under Regulation 98, CEV, also referred to as carbon pricing, represents the economic value assigned to each unit of GHG emissions produced from human and economic activities. The implementation of CEV in Indonesia will occur through various mechanisms, including carbon trading, results-based payments (RBP), carbon levies, and other methods determined by the Minister of Environment and Forestry (MOEF) based on scientific and technological advancements.

Regulation 98 outlines two primary types of carbon trading activities: emissions trading and emissions offset. The emissions trading mechanism applies to businesses and activities that have a predetermined GHG emissions cap set by the relevant ministry. This ministry will establish emissions limits for specific sectors and issue allowances to ensure compliance with these caps, effectively introducing a cap-and-trade scheme. Conversely, emissions offsets are defined as reductions in GHG emissions achieved through mitigation actions from other businesses or activities, compensating for emissions produced elsewhere. Further details regarding the implementation of emissions offsets will be specified in a separate regulation from the MOEF.

Results-Based Payments (RBP) serve as incentives for achieving verified GHG emission reductions or other validated non-carbon benefits. Regulation 98 categorizes RBP into three types: international RBP, where international parties provide payments to the central or provincial government; national RBP, where the central government compensates provincial, regency, or city governments, businesses, or communities; and provincial RBP, where provincial governments provide payments to regency or city governments, businesses, or communities. The MOEF will develop guidelines to govern the implementation of RBP, including monitoring and evaluation processes.

Carbon levies are imposed by either the central or regional government on goods and services with carbon potential or on businesses and activities that generate carbon emissions, which can negatively impact the environment. These levies can take the form of taxes or non-tax state revenues. As previously discussed, carbon taxes will be levied on individuals or entities purchasing carbon-containing goods or engaging in activities that produce carbon emissions. The government plans to implement carbon taxes starting April 1, 2022, initially targeting coal-fired power plants, with plans to extend the tax to other sectors by 2025. Additionally, non-tax state levies will be applied to all transactions involving carbon units, currently set at 10% of the carbon transaction value in the forestry sector.

Businesses participating in CEV through carbon trading and RBP must submit validation and verification results conducted by independent consultants. Further provisions regarding validation, verification, and competency standards for validators and verifiers will be established in a regulation from the MOEF. Relevant authorities, including the minister, governors, regents, mayors, and business actors, are required to measure and report their climate change adaptation actions and CEV implementation at least once a year through the National Registry System for Climate Change Control (Sistem Registri Nasional Pengendalian Perubahan Iklim or "SRN"). The MOEF will validate and verify these reports.

The SRN, established in 2016, is a web-based system designed to manage data and information related to mitigation, adaptation, and implementation means such as finance, capacity building, and technology transfer. The SRN serves several functions, including the registration of mitigation and adaptation actions, providing information to government entities about the contributions of various actors, offering public access to data and information, managing a database to support policy analysis, and crucially, preventing double counting of carbon mitigation actions. Under Indonesia's updated NDC for 2021, the SRN aims to be fully operational by 2030, with an interim target of providing most necessary data and information for national communication (Natcom)

Carbon Trading Implementation

Indonesia operates two distinct types of carbon markets: the compliance market and the voluntary market. A significant area of uncertainty within these markets involves the mechanisms of Corresponding Adjustment (CA) and Non-Corresponding Adjustment (NCA). Under the CA mechanism, emission reductions achieved through international carbon trading cannot be counted towards Indonesia’s Nationally Determined Contributions (NDCs). In contrast, emissions traded without CA still count towards Indonesia’s NDCs. This distinction is important because it creates uncertainty that may deter foreign investment in the country’s carbon market, potentially undermining the effectiveness of Indonesia's climate strategies.

Indonesia is still in the early stage of developing such a market, yet it has made significant progress in recent months. The overview of the carbon market schemes are provided by PwC:

Key Items	Emissions Trading	Emissions Offsetting
System	Emission Trading System (ETS)	Carbon crediting/offsetting
Market	Compliance Market	Voluntary Credit Market (VCM)
Method	Cap, trade and tax	Baseline and crediting
Mechanism	Carbon unit buyers whose business activities exceed the emission allotment/quota (emission quota deficit) purchase quota/capacity to emit more emissions from carbon unit sellers who have a surplus of carbon emission quota/ capacity	Carbon credit buyers who wish to emit carbon emissions from their business activities purchase carbon credits to offset(-ting) GHG emissions released as a result of their activities from the carbon credit sellers.
Carbon unit	Carbon Allowance Approval (Persetujuan Teknis Batas Atas Emisi “PTBAE”)	Emissions Reduction Certificate (Sertifikat Pengurangan Emisi Gas Rumah Kaca” SPE-GRK”)
Sector and Sub-sector	• Energy (Power Plant) • Forestry (Peat and Mangrove Management)*	• Energy (Carbon Capture and Storage (CCS) and Carbon Capture, Utilisation and Storage (CCUS)) • Forestry (Forestry)

 

In early 2023, the power generation sector was chosen as the first subsector to implement mandatory carbon trading. This decision was made because the sector has relatively straightforward emissions calculations, which are supported by the Ministry of Energy and Mineral Resources Regulation 16/2022 on Procedures for Implementing Carbon Economic Value in the Power Generation Subsector. The initiative began with a pilot program in 2021 and was officially launched in February 2023, marking a significant step in Indonesia's commitment to reducing greenhouse gas emissions.

During the first compliance phase of carbon trading, 99 Coal-Fired Power Plants (CFPPs), which account for about 86% of coal power generation in Indonesia, participated in the cap-and-trade scheme. On the opening day of the market, September 26, 2023, 13 carbon credits were traded, representing nearly 460,000 metric tons of carbon dioxide equivalent (CO2e) from geothermal projects in North Sulawesi, operated by state-owned PT Pertamina Geothermal Energy. Each metric ton of carbon credit was priced at 69,600 rupiah (approximately $4.45), which is significantly lower than prices in established carbon markets like the European Union, where prices can exceed $30 per ton. This price difference highlights the need for Indonesia to make its carbon market more attractive to both domestic and international investors.

Each CFPP is assigned a maximum allowance or emission quota based on its previous performance and specific criteria. Plants that emit less than their allocated quota can trade their surplus allowances to other companies that exceed their limits. Conversely, if a CFPP's emissions exceed its quota, it must either reduce its emissions by purchasing allowances from other CFPPs or buy carbon credits from the market. This cap-and-trade system not only encourages emission reductions but also promotes collaboration among power plants to manage their carbon footprints effectively.

The establishment of a carbon market provides an opportunity for companies to raise funds through carbon trading. However, it is essential to carefully examine the requirements for companies entering the market. These requirements include taking proactive measures to reduce emissions, maintaining detailed emissions records, and developing strategies for future emissions reductions. It is crucial to avoid the misconception that the carbon market is simply a way to offset emissions by purchasing carbon credits without making real efforts to reduce emissions. This understanding is vital for ensuring the integrity and effectiveness of the carbon trading system.

The Ministry of Energy and Mineral Resources (ESDM) regulates the quotas and allowances in the electricity sector, setting limits on the emissions allowed for each power plant operator. With a planned maximum quota reduction to 85% by 2024, the government aims to encourage operators to develop effective emission reduction strategies. Currently, quotas are based on emission intensity and the average emissions of the previous year, which can lead to higher allocations in subsequent years. Therefore, regular monitoring is necessary to ensure that emission quotas are appropriately adjusted for each power plant, promoting continuous improvement in emissions management.

Although Indonesia's carbon market is still relatively new, its effective implementation is expected to drive significant changes in industrial behavior, particularly within the power generation sector and the broader energy industry. To attract more buyers and traders to participate in carbon exchanges beyond the energy sector, it is vital to share information widely. In this early stage, government incentives are essential, as meeting the 'green' criteria often requires additional processes that can increase costs and create burdens, potentially making the carbon market less appealing to participants.

In comparison, China’s carbon market has made significant progress in establishing a comprehensive regulatory framework to manage carbon emissions trading. According to a report by PwC, different countries have adopted various mechanisms for their carbon markets:

Carbon Market	Mechanisms	Regulatory drivers for demand	CA/NCA mechanisms
Indonesia	ETS and offset	Carbon tax (draft in progress); Emission caps for limited sector	CA required in all international trade
China	ETS and offset	Emission caps and government policies	CA not required, allows for NCA
US	Voluntary carbon markets and regional cap-andtrade systems (e.g., California, RGGI)	Emission caps and government incentives in some states	CA not required for voluntary credits
EU	ETS	Emission caps and expensive penalties,carbon tax, and policies such as the European Green Deal	Requires CA in all international trade
South Korea	ETS and offset	Emission caps, market stability provisions, government incentives	CA not required, allows for NCA

For instance, while Indonesia relies on emission trading systems (ETS) and offsets, China has implemented stringent emission caps and government policies without requiring CA for its voluntary credits. This difference allows China to have a more mature and effective carbon market, demonstrated by successful compliance cycles and the launch of the National Voluntary Market to supplement its compliance market.

Countries with established carbon markets, such as China and those in Europe, can serve as valuable references for Indonesia as it develops its carbon pricing strategy. These countries have successfully covered multiple sectors and facilitated international trading, providing benchmarks for Indonesia to create a more effective carbon pricing strategy that aligns with global standards. By learning from these examples, Indonesia can enhance its carbon market and better contribute to global efforts to combat climate change.

Result Based Payment (RBP) Indonesia – Received

Results-Based Payments (RBP) play a vital role in Indonesia's efforts to reduce greenhouse gas emissions by providing funding based on verified emission reductions. For example, Indonesia has received payments for reducing emissions by approximately 1.5 million tons of CO2 equivalent in recent years, demonstrating the effectiveness of RBP in achieving climate goals. RBP is a key component of the REDD+ mechanism, which is facilitated by the United Nations Framework Convention on Climate Change (UNFCCC). REDD+ aims to reduce emissions from land use changes, support forest protection and rehabilitation, and enhance carbon sequestration. By ensuring that REDD+ performance is properly incentivized and rewarded, RBP provides a revenue stream for countries to continue implementing programs and activities that reduce deforestation. This connection between RBP and REDD+ highlights the importance of financial incentives in promoting sustainable land management practices.

Funding for RBP can come from various sources, including government budgets, multilateral climate finance facilities, carbon markets, and the private sector. RBP schemes can be executed through bilateral or multilateral cooperation or carbon trading agreements. The specific terms and conditions for accessing RBP vary based on the agreements made between the participating parties. This diversity in funding sources and mechanisms allows Indonesia to leverage multiple avenues for financial support, enhancing the overall effectiveness of its climate initiatives.

In Indonesia, the Ministry of Environment and Forestry (MoEF) issued Regulation No. 70/2017, which outlines the implementation of REDD+, the role of conservation, sustainable forest management, enhancement of forest carbon stocks, and the framework for RBP. This regulation emphasizes that RBP is associated with positive incentives or payments for verified emission reductions, as well as other benefits beyond carbon credits. By establishing a clear regulatory framework, the MoEF ensures that stakeholders understand their roles and responsibilities in achieving emission reduction targets.

To support these initiatives, the Government of Indonesia established the Environmental Fund Management Agency (Badan Pengelola Dana Lingkungan Hidup - BPDLH) through Ministry of Finance Regulation No. 137/2019. The MoEF has assigned the General Service Agency for Forestry Development Financing and Funding (Badan Layanan Umum Pusat Pembiayaan Pembangunan Hutan – BLU Pusat P2H) to manage revolving funds in the forestry sector, including those related to REDD+. Following the Ministry of Finance's regulation, BPDLH is now responsible for managing funds across various sectors, including energy, mineral resources, carbon trading, agriculture, coastal and fisheries, and other environmentally related sectors. This comprehensive approach to fund management ensures that resources are allocated effectively to support Indonesia's climate goals.

Under the RBP scheme, Indonesia has received positive incentives from the Green Climate Fund (GCF) amounting to USD 103.8 million for greenhouse gas (GHG) emission reductions in the Forestry and Other Land Use (FOLU) sector for the period of 2014-2016, totaling 20.25 million tons of CO2 equivalent. This is referred to as Performance-Based Payment (PBP). The significant funding from the GCF underscores the international community's support for Indonesia's climate initiatives and highlights the importance of measurable results in securing financial assistance.

Additionally, through the Indonesia-Norway Partnership, Indonesia has also received Result-Based Contributions (RBC), which are identical to RBP, totaling USD 56 million for emission reductions in 2016/2017, followed by USD 100 million for emission reductions in 2017/2018 and 2018/2019. Discussions are currently underway for the RBC related to emission reductions for the year 2019/2020. This partnership exemplifies how international collaboration can enhance Indonesia's capacity to achieve its climate objectives.

Similarly, through the FCPF Carbon Fund in East Kalimantan, Indonesia is set to receive a total of USD 110 million in RBP for emission reductions of 22 million tons of CO2 equivalent for the years 2019-2020, although only USD 20.9 million has been paid so far. The province of Jambi is also being prepared to receive RBP amounting to USD 70 million.

Carbon Tax in Indonesia

A carbon tax, also known as a carbon levy, is a tax on greenhouse gas emissions designed to encourage businesses and individuals to reduce their carbon output. The COVID-19 pandemic has put a lot of pressure on Indonesia's state budget, leading to lower public spending and reduced government income. This financial strain, which existed even before the pandemic, highlights the need for changes in the State Budget, especially in taxation. Implementing a carbon tax could be a key way to increase government revenue, helping to create more financial space for important projects.

Indonesia relies heavily on fossil fuels, with over 60% of its electricity coming from coal. This means that the country has a big opportunity to benefit from a carbon tax. On October 7, 2021, the Government of Indonesia (GOI) passed Law Number 7 of 2021, which introduced the country’s first carbon tax. This move aligns Indonesia with 26 other countries that have already adopted similar taxes to combat climate change.

The GOI plans to start the carbon tax in the coal-fired power generation sector in April 2022. As part of its goal to reduce CO2 emissions by 29% by 2030, the government also aims to create a carbon trading market and expand the carbon tax to other sectors by 2025. This shows Indonesia's commitment to fighting climate change and improving its environmental policies.

The carbon tax will target emissions that harm the environment. It will apply to people and businesses that buy carbon-heavy goods or engage in activities that produce carbon emissions. The tax will be based on two things: 1) the purchase of goods that contain carbon and 2) activities that result in carbon emissions. Taxpayers who participate in carbon trading or other approved programs may receive reductions in their carbon tax obligations.

The roadmap for implementing the carbon tax in Indonesia includes several key stages. In 2021, the focus was on finalizing regulations and technical details necessary for the tax's implementation. The following year, in 2022, the government began the carbon tax on coal-fired power plants (PLTU). Looking ahead to 2025, the plan is to fully implement carbon trading, which will further enhance the effectiveness of the carbon tax system in reducing emissions and promoting sustainable practices.

According to the law, the carbon tax rate will be competitive with market prices, starting at a minimum of Indonesian Rupiah (IDR) 30 (about USD 0.002) per kilogram of CO2 equivalent (CO2e), which is around USD 2.13 per ton of CO2e emissions above a set limit. CO2e includes various greenhouse gases, such as carbon dioxide (CO2), nitrous oxide (N2O), and methane (CH4). This rate is one of the lowest in the world and much lower than the recommended rates by the World Bank and IMF, which suggest USD 30 to 100 per ton of CO2e for developing countries. The Ministry of Energy and Mineral Resources will pilot a carbon market in the electricity generation sector at this price. Some carbon tax tariff in other countries:

Instrumen Name	Started Dated	Region	Country Income Group	Main Price Rate
Chile carbon tax	2017	Latin America & Caribbean	High income	US$5 (US$5)
Denmark carbon tax	1992	Europe & Central Asia	High income	US$28.21 (DKR195.70)
Finland carbon tax	1990	Europe & Central Asia	High income	US$99.99 (€93.02)
France carbon tax	2014	Europe & Central Asia	High income	US$47.94 (€44.60)
Japan carbon tax	2012	East Asia & Pacific	High income	US$1.91 (JPY289)
Mexico carbon tax	2014	Latin America & Caribbean	Upper middle income	US$4.31 (MXN71.33)
Netherlands carbon tax	2021	Europe & Central Asia	High income	US$71.48 (€66.50)
Norway carbon tax	1991	Europe & Central Asia	High income	US$107.78 (NOK1,174)
Singapore carbon tax	2019	East Asia & Pacific	High income	US$18.48 (S$25)
South Africa carbon tax	2019	Sub-Saharan Africa	Upper middle income	US$10.09 (R190)
Spain carbon tax	2014	Europe & Central Asia	High income	US$16.12 (€15)
Sweden carbon tax	1991	Europe & Central Asia	High income	US$127.26 (SEK1,368.30)
Switzerland carbon tax	2008	Europe & Central Asia	High income	US$132.12 (Sfr120)
UK Carbon Price Support	2013	Europe & Central Asia	High income	US$22.62 (£18)
Ukraine carbon tax	2011	Europe & Central Asia	Lower middle income	US$0.77 (UAH30)
Uruguay CO2 tax	2022	Latin America & Caribbean	High income	US$167.17 (YUY6,373)

 

Indonesia's commitment to implementing a carbon tax and creating a strong carbon trading market is a crucial step in tackling the important issues of economic growth and climate change. By introducing various strategies like carbon pricing, results-based payments, and emissions trading, the government is taking a proactive stance to cut down greenhouse gas emissions and promote a healthier environment.

As Indonesia moves forward in this complex journey, it is vital to encourage cooperation among all stakeholders, including businesses, government agencies, and local communities. Ensuring transparency in carbon markets will help build trust and encourage participation. Additionally, learning from successful practices used in other countries can guide Indonesia in refining its approach.

These efforts will not only help Indonesia meet its climate goals but also position the country as a leader in the global shift toward a low-carbon economy. This transition is not just about reducing emissions; it is about creating a sustainable future that benefits everyone—improving air quality, protecting natural resources, and ultimately enhancing the quality of life for all Indonesians. By taking these steps, Indonesia can pave the way for a greener, more prosperous future for its people and the planet.

 

References:

1. Baker McKenzie. (2022). Indonesia’s carbon market: A new era for carbon trading. https://insightplus.bakermckenzie.com/bm/attachment_dw.action?attkey=FRbANEucS95NMLRN47z%2BeeOgEFCt8EGQJsWJiCH2WAUTleh6%2BAJHrhnZSs12R7qM&nav=FRbANEucS95NMLRN47z%2BeeOgEFCt8EGQbuwypnpZjc4%3D&attdocparam=pB7HEsg%2FZ312Bk8OIuOIH1c%2BY4beLEAeThKA6zsnjb8%3D&fromContentView=1
2. Climate Action Tracker. (n.d.). Indonesia: Policies & action. https://climateactiontracker.org/countries/indonesia/policies-action/
3. DevTech Systems. (2021). On Indonesia's new carbon tax and its effectiveness at reducing greenhouse gas emissions. https://devtechsys.com/insights/2021/11/24/on-indonesias-new-carbon-tax-and-its-effectiveness-at-reducing-greenhouse-gas-emissions
4. Global Climate Finance Task Force. (2020). Results-based payments: A guide for practitioners. https://www.gcftf.org/wp-content/uploads/2020/12/RBP_Booklet_20200512_ENG.pdf
5. Halimah, A. (2021). Carbon pricing in Indonesia: A review of the current status and future prospects. TERC. https://terc.lpem.org/wp-content/uploads/2021/10/Alin_Halimah.pdf
6. International Carbon Action Partnership. (n.d.). Indonesian economic value carbon (Nilai Ekonomi Karbon) trading scheme. https://icapcarbonaction.com/en/ets/indonesian-economic-value-carbon-nilai-ekonomi-karbon-trading-scheme
7. International Monetary Fund. (2022). Indonesia: 2022 Article IV consultation—Press release; staff report; and statement by the executive director for Indonesia. IMF eLibrary. https://www.elibrary.imf.org/view/journals/002/2022/085/article-A004-en.xml
8. International Monetary Fund. (2021). Indonesia: 2021 Article IV consultation—Press release; staff report; and statement by the executive director for Indonesia. IMF eLibrary. https://www.elibrary.imf.org/view/journals/002/2021/047/article-A007-en.xml
9. Kementerian Lingkungan Hidup dan Kehutanan. (2024). Menlhk Indonesia menjadi contoh internasional dalam REDD dan RBP emisi karbon. Retrieved from https://id.scribd.com/document/738811946/PPID-Kementrian-Lingkungan-Hidup-dan-Kehutanan-MenLHK-Indonesia-Menjadi-Contoh-Internasional-dalam-REDD-dan-RBP-Emisi-Karbon
10. Mongabay. (2023, October 10). Indonesia opens carbon trading market to both skepticism and hope. https://news.mongabay.com/2023/10/indonesia-opens-carbon-trading-market-to-both-skepticism-and-hope/
11. PwC Indonesia. (2023). Indonesia carbon market white paper. https://www.pwc.com/id/en/publications/esg/indonesia-carbon-market-white-paper.pdf
12. World Bank. (n.d.). Carbon pricing dashboard: Compliance instruments. https://carbonpricingdashboard.worldbank.org/compliance/instrument-detail
13. Yoga, H. (n.d.). Indonesia's carbon tax: An update. Finance Ministers for Climate. https://www.financeministersforclimate.org/sites/cape/files/inline-files/2.1%20Hestu%20Yoga_Revisi_Update_Indonesia%27s%20Carbon%20Tax.pdf