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W&P Newsletter – Carbon Pricing Regulation: A Pathway to Carbon Trading in Indonesia

The Minister of Environment and Forestry Affairs (“MOEFA”) has just issued Regulation No. 21 of 2022 on the Guidelines for the Implementation of Carbon Pricing (“MOEFA Regulation 21/2022”) to implement Presidential Regulation No. 98 of 2021 on Carbon Pricing (“PR 98/2021”) and set out the technical aspects of carbon pricing implementation in Indonesia. To see our take on PR 98/2021, please click here.

The key highlights of MOEFA Regulation 21/2022 are as follows:

A. Nationally Determined Contribution (NDC) and Carbon Pricing

NDC is the national commitment set by the Government of Indonesia to reduce Green House Gas (“GHG”) emissions in Indonesia, to be used as the main reference for the relevant sectoral ministries to determine the applicable emission cap and quota reduction target for the implementation of the carbon pricing mechanism. Please click here to access the latest Indonesia’s enhanced NDC.

MOEFA Regulation 21/2022 provides 4 aspects of carbon pricing implementation: (a) carbon trading, (b) result-based payments, (c) carbon levies, and (d) other mechanisms based on the development of science and technology.

This newsletter focuses only on the carbon trading.

B. Carbon Trading

   (1) Emission Trading vs Emission Offset

There are 2 carbon trading schemes recognized under MOEFA Regulation 21/2022: (i) Emission Trading and (ii) Emission Offset:

    1. Emission Trading: The emission trading scheme applies to businesses whose activities are subject to the GHG Emission Cap (i.e., the upper limit of GHG emissions ceiling and/or emission quota determined by the relevant sectoral ministry through (a) the Emission Ceiling Technical Approval (Persetujuan Teknis Batas Atas Emisi – PTBAE) and (b) PTBAE for Businesses (PTBAE-PU)). Businesses that successfully generate GHG emissions less than the prescribed GHG Emission Cap are allowed to sell their unused emission quota to other businesses whose GHG emissions exceed the GHG Emission Cap.
    2. Emission Offset: The emission offset scheme applies to businesses that are not subject to the GHG Emission Cap. If those businesses conduct climate change mitigation actions, they are entitled to certain carbon units, provided the mitigation actions have passed the Measurement, Reporting, and Verification (“MRV”) process by the MOEFA. The carbon units can be sold to other business, to allow the latter to offset their excessive emissions.

A news report indicates that the Indonesian Stock Exchange will be designated as the entity charged with the administration of the carbon exchange.

   (2) Domestic vs International Trading

Carbon trading can be conducted either domestically or internationally (cross-border) and either through a carbon exchange or through direct trading (off-exchange).

MOEFA Regulation 21/2022 prioritizes domestic carbon trading in an effort to achieve Indonesia’s NDC. However, MOEFA Regulation 21/2022 allows international carbon trading (either through the carbon market or by international cooperation arrangement), subject to the fulfillment of certain conditions, including (i) achievement of the targeted NDC of the relevant Sub-sector; and (ii) approval of the proposed international carbon trading by the MOEFA.

   (3) Cross-sector/Sub-sector Trading

Carbon trading is principally designed to be carried out between businesses within the same Sector and Sub-sector as listed in the table below:

Sector Sub-sector
1.        Energy;

2.        Waste;

3.        Industrial processes and product utilization;

4.        agriculture;

5.        forestry; and/or

6.        Other sectors following the development of science and technology.

1.        Power generation;

2.        Transportation;

3.        Building;

4.        Solid waste;

5.        Liquid waste;

6.        Waste (sampah);

7.        Industry;

8.        Agriculture (persawahan);

9.        Livestock (peternakan);

10.    Plantation;

11.    Forestry;

12.    Peat and mangrove management; and/or

13.    Other sub-sectors following the development of science and technology.

The cross-sector/sub-sector trading is permitted subject to the following conditions:

    1. For domestic cross-sector/sub-sector. Domestic cross-sector/sub-sector carbon trading is subject to the cross-sector/sub-sector carbon trading quota limitation set by the MOEFA.. Businesses are still waiting for the MOEFA’s futher guidance on the quota.
    2. For international cross-sector/sub-sector. International cross-sector/sub-sector carbon trading can be carried out subject to the following: (a) achievement of the NDC target of the sub-sector, and (b) approval of the MOEFA.

    (4) SRN-PPI and SPE-GRK

To implement carbon trading, MOEFA Regulation 21/2022 mandates the Government of Indonesia to establish a system called SRN-PPI (Sistem Registrasi Nasional Pengendalian Perubahan Iklim – National Registration System for Climate Change Control). The SRN-PPI provides nationwide integrated public data and information on Indonesia’s NDC status update and carbon pricing implementation, as a reference for domestic and international stakeholders.  Other than as a source of data and information, the SRN-PPI also serves the function of the Carbon Registry, which will be used by the Government of Indonesia to monitor and record the transfer of Indonesian-based carbon units. For this purpose, MOEFA Regulation 22/2021 requires businesses to (i) register themselves in the SRN-PPI and (ii) record and report their carbon pricing implementation in the SRN-PPI.

As evidence that businesses have registered the emission reduction implementation (by way of generating GHG emissions less than the prescribed GHG Emission Cap and/or performing GHG emission reduction action that has passed the MRV process by the MOEFA), the MOEFA will issue an SPE-GRK (Surat Pengurangan Emisi GRK – GHG Emission Reduction Certificate) to such businesses. The SPE-GRK is registered in the SRN PPI in the form of numbers or registry codes. One SPE-GRK is equivalent to 1 ton of carbon dioxide (CO2e).

  (5) Buffer Allocation

In an effort to achieve its NDC target, the Government of Indonesia sets the following  emission buffer allocation from the Emission Offset activities, which will be reviewed periodically by the Government of Indonesia based on the annual NDC fulfillment report:

    1. For domestic Emission Offset: 0-5% (zero to five percent) of the carbon units to be recorded in the relevant GHG Emission Reduction Certificate (SPE-GRK);
    2. For international Emission Offset: a minimum of 10% and a maximum of 20% of the carbon units to be recorded in the relevant GHG Emission Reduction Certificate (SPE-GRK); and
    3. For international Emission Offset outside the scope of the NDC: a minimum of 20% of the carbon units to be recorded in the relevant GHG Emission Reduction Certificate (SPE-GRK).

Any unused balance of the allocated buffer can be returned to the relevant holder of the GHG Emission Reduction Certificate (SPE-GRK) through the SRN-PPI if the targeted NDC of the relevant Sector, Sub-sector, and Sub sub-sector is achieved for 2 consecutive years.

Although MOEFA Regulation 21/2022 has provided further technical details on the carbon pricing implementation mechanism (some of which are discussed above), numerous aspects seem to remain unclear and too broad  and therefore need to be clarified by the MOEFA and the relevant sectoral ministries. There are more than 20 pending implementing regulations that are expected to be issued related to carbon pricing, including specific regulations on the GHG Emission Cap, the SRN-PPI, the SPE-GRK, as well as the Indonesia carbon exchange infrastructure. Our team will continuously and closely monitor and update you on any development or progress.

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