May 5, 2023
JAKARTA – The government has decided to allow foreign entities to purchase credits in the Indonesian carbon market, paving the way for multinational companies and institutions to tap into the country’s large carbon trading potential.
Businesses involved in carbon-trading schemes lauded the decision, adding that it was aligned with the 2016 Paris Agreement on climate change. However, environmental analysts fear that the trade will not result in any real environmental improvement.
The announcement came after Investment Minister Bahlil Lahadalia said on Wednesday that the Indonesian carbon market would be “open”, following a meeting with President Joko “Jokowi” Widodo in the State Palace prior to the press conference.
Edo Mahendra, an expert staffer on the green economy at the Office of Coordinating Minister for Maritime and Investment Affairs told The Jakarta Post on Thursday that by being an open market the Indonesian carbon market would allow foreign buyers to purchase credits to offset their emissions.
The alternative “closed” concept would mean Indonesia would only use its carbon market to pursue its own emission-reduction plan in its nationally determined contribution (NDC).
“Indonesia has great potential in the carbon market. That’s why we need to lead [with an open market],” Edo said.
Investment Minister Bahlil stressed that all entities participating in carbon-trading activities in the country should be registered with the national registry system (SRN) and the transaction process ought to be done in Indonesia through the country’s carbon exchange.
The Financial Services Authority (OJK) will oversee the carbon exchange in the country, while the registration process will be supervised by the Environment and Forestry Ministry, which operates the SRN database.
“The registration is only once. After [an entity] is registered by the environment ministry, it can conduct transactions in the carbon exchange, similar to activities in the stock exchange,” Bahlil said.
The minister added that carbon credits from Indonesia could not be sold in any other country’s carbon exchange.
Coordinating Minister for Economic Affairs Airlangga Hartarto pointed out the importance of traceability, which the government will address through the use of certificates and electronic systems. Thus, even after being traded multiple times, the original source of the carbon credit is still traceable, he said.
The meeting in the State Palace also raised the issue of market makers for the exchange to prevent big institutions or foreign companies becoming hoarders, he said, adding that the government would establish a body to function as market maker.
“We feel the form [of the institution] will be similar to the Indonesia Investment Authority [INA] or a state-owned enterprise,” he said.
Ahmad Zuhdi Dwi Kusuma, an industry analyst at Bank Mandiri’s Office of Chief Economist, said the decision would increase the number of potential buyers of the country’s carbon certificates and make the price more competitive.
An influx of capital from the carbon market then could also strengthen the rupiah exchange rate and become an incentive for investors who want to enter the energy-transition sector.
“However, the negative aspect is the carbon exchange could leave our economy vulnerable to global economic volatility,” Ahmad told the Post on Thursday.
Indroyono Soesilo, who chairs the Association of Indonesian Forest Concessionaires (APHI), lauded the move.
Previously, there had been talk of Indonesia focusing on achieving its NDC first before deciding on an open carbon exchange, but later the government made arrangements for the NDC target to be calculated each year, he said.
“The previous plan was not interesting, while the current one is more interesting,” Indoroyono told the Post on Thursday.
He gave as an example a concession that could absorb a baseline of 10 million tonnes, but later it could absorb 12 million tonnes after implementing mitigation efforts, such as less deforestation and more reforestation, which would result in an excess of 2 million tonnes.
If the concession was obliged to contribute 1.5 million tonnes to the NDC, then it could sell the other half million tonnes through the carbon exchange, he said.
“If there is an excess, it will be prioritized for the NDC target, and the rest for the voluntary carbon market,” he said.
The voluntary market is meant for companies or institutions seeking to voluntarily offset their emissions by purchasing carbon credits from various sources elsewhere.
The new arrangement would not hinder the government’s NDC target of reducing domestic carbon emissions, he insisted.
Zakki Amali, a research manager at Jakarta-based environment watchdog Trend Asia, doubted claims that involving foreign entities would help the country to meet its NDC targets, adding that it needed to be examined carefully.
For instance, the Energy and Mineral Resources Ministry only targets 500,000 tonnes of carbon dioxide reduction from carbon trading in the power plant subsector this year, which is the country’s second-largest source of emissions after forest and land use.
However, the reduction is regarded by many as too slight, being only equivalent to 0.2 percent of total carbon dioxide emissions from coal power plants, which can amount to 250 million tonnes.
“Carbon trading may be a fake solution to the government’s claim of reducing emissions. The negative environmental impact is likely to remain,” Zakki told the Post on Thursday.
Furthermore, he said the government lacked transparency in verifying and calculating emissions, which may undermine the carbon-trading scheme.
“Without transparency, Indonesia’s carbon trading will only benefit carbon emitters, while the environmental objectives will never be met,” he said.
Carbon trading in Indonesia kicked off this year but is only applied to the power sector so far, while the carbon exchange is still under development. The government plans to expand it to other sectors only after 2025, according to the 2021 Tax Harmonization Law.