On 29 October 2021, the President of the Republic of Indonesia finally issued the much-anticipated carbon pricing regulation through the issuance of Presidential Regulation No. 98 of 2021 on the Implementation of Carbon Pricing for Achieving the Nationally Determined Contribution (“NDC”) Target and Controlling Greenhouse Gas (“GHG”) Emissions in National Development (“PR 98/2021”).
To regulate carbon pricing (i.e., the economic value of GHG emissions) from human and economic activities, PR 98/2021 introduces the following mechanisms:
- carbon trading;
- performance-based payments; and
- carbon levies.
In addition to the above, PR 98/2021 also authorizes the Minister of Environment to determine other mechanisms from time to time.
The carbon pricing mechanisms will be implemented in numbers of sectors as set out in PR 98/2021, including the (a) energy, (b) waste, (c) processing industry and product utilization, (d) agriculture, and (e) forestry sectors.
The key points of each mechanism are discussed below.
- Carbon Trading
Carbon trading is a market-based mechanism to reduce GHG emissions through the sale and purchase of carbon units either domestically or internationally. The carbon trading is done through either (i) domestic carbon markets via the Carbon Exchange or (ii) direct trading in accordance with the National Registry System for Climate Change Control (Sistem Registri Nasional Pengendalian Perubahan Iklim) or using the GHG Emission Certificates.
In terms of methods, carbon trading can be done through the following two schemes.
- Emissions Trading Scheme
The emissions trading scheme is also commonly known as “cap and trade”, where the Government sets the upper limit (cap) on tradable GHG emissions. Entities with emissions lower than the cap can sell (trade) their unused emission quotas to entities that have surpassed theirs.
In 2021, the Directorate General of Electricity launched a pilot project on voluntary emissions trading in the coal-fired power plant sector. The trial was conducted to introduce the concept of emissions trading to relevant stakeholders in preparation for the mandatory emissions trading, which is scheduled to be nationally implemented in 2024. There were 32 coal-fired power plants joining the pilot run, with 14 power plants acting as buyers and 18 power plants acting as sellers. From March 2021 until August 2021, the State Electricity Company (PLN) also initiated a voluntary emissions trading trial involving around 80 coal-fired power plants, including Paiton, Tanjung Awar-Awar, and TJB Unit 4.
- GHG Emissions Offsetting Scheme
To compensate for the emissions they generated, business entities are now allowed to “offset” (rather than actively reduce) their own emissions by using/buying emission reductions from other businesses and/or activities.
The GHG emissions offset applies to businesses and/or activities without any GHG emissions cap.
For example, in 2019, a leading Indonesian paint company successfully obtained “carbon neutral certification” from a private party for its carbon offset measures, including through switching to environmentally friendly machinery and modes of transportation procured from other entities.
- Emissions Trading Scheme
- Performance-Based Payments
This refers to the payments or incentives for businesses that successfully reduce their GHG emissions on the basis of their verified results of GHG emissions reduction and/or conservation or increment of carbon reserves. This mechanism includes payments from international party(ies) to the Government. It is worth noting that the performance-based payments do not transfer the carbon ownership.
- Carbon Levies
PR 98/2021 provides for the imposition of carbon levies by way of taxation, customs and excise, or other government charges. Previously, the Government has also enacted Law No. 7 of 2021 on Harmonization of Tax Regulations, which introduces tax imposition when an individual or an entity purchases carbon-containing goods and/or performs activities that generate carbon emissions (“Carbon Tax”).
The imposition of the Carbon Tax will take effect in stages as of 1 April 2022. In the first stage, the Carbon Tax will be imposed on the coal-fired power plant sector at a rate of IDR30,000 or equivalent to USD2.1 per ton of CO2. The Government has set a target for full Carbon Tax implementation by 2025 (subject to carbon market development, achievement of NDC targets, sector readiness, and economic conditions). Taxpayers participating in carbon pricing activities would be eligible for a carbon tax cut and/or other incentives.
While many people and businesses positively respond to the issuance of PR 98/2021, concrete measures to realize the carbon pricing activities are conditional upon the issuance of the implementing regulations for PR 98/2021, which are expected to be issued by 29 October 2022 at the latest. Our team will continuously and closely monitor and update you on any development or progress.
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