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To further implement carbon trading in Indonesia, the Financial Services Authority (“OJK”), as the authorized body to supervise the establishment and implementation of Indonesia’s Carbon Exchange (“Carbon Exchange”), recently issued Regulation No. 14 of 2023 on Carbon Trading through Carbon Exchange and OJK Circular Letter No. 12/SEOJK.04/2023 (“OJKR on Carbon Exchanges”). These new regulations are expected to help boost the implementation of carbon pricing in Indonesia.

(Click here to see our take on carbon pricing policies under Presidential Regulation No. 98 of 2021 and here for the relevant policies under Ministry of Environment and Forestry Affairs (“MOEFA”) Regulation No. 21 of 2022).

OJKR on Carbon Exchanges essentially regulate (i) the institutional aspects of the Carbon Exchange and (ii) the general rules for trading carbon units on the Carbon Exchange, as summarized below:

  1. Institutional Aspects of Carbon Exchange
    By Law No. 4 of 2023 and OJKR on Carbon Exchanges, OJK is given the authority to issue the business license for a company to become a Carbon Exchange operator (“Carbon Exchange License”).
    The general requirements to become a Carbon Exchange operator are as follows:

    1. Capitalization: The Carbon Exchange operator must be in the form of a limited liability company (Perseroan Terbatas) with a minimum issued and paid-up capital of IDR100 billion (approximately USD 6.5 million), which must not be funded from loans. Note that OJK may require a Carbon Exchange operator to increase its capitalization from time to time by taking into account the operational needs of the Carbon Exchange operator.
    2. Foreign Shareholding and Control Limitation.
      • The maximum foreign shareholding is 20% of the total issued voting shares.
      • Under OJKR on Carbon Exchanges, foreigners can become direct or indirect shareholders in the Carbon Exchange operator if they (i) have obtained licenses issued by or (ii) are under the supervision of the financial services regulator in their originating countries. Note that nominee arrangements are strictly prohibited under this regulation.
      • OJKR on Carbon Exchanges specifically strengthen the position of the local shareholders by reserving the following rights for local shareholders: (i) the right to nominate the majority of the Carbon Exchange’s Board of Directors (“BOD”) or Board of Commissioners (“BOC”) members and (ii) the veto rights that have a material impact on the Carbon Exchange operator itself. This means the parties may not contractually agree to deviate from the above minimum requirement of local shareholders’ right.
      • The shareholders of the Carbon Exchanges operator consist of a controlling shareholder(s) and non-controlling shareholders. The determination of the controlling shareholder is carried out based on a statement letter indicating which party that act as the controlling shareholder. Note that, this does not waive the right of OJK to determine otherwise based on its assessment.
    3. Licensing. OJK is vested with the authority to issue the Carbon Exchange License. A Carbon Exchange operator is also permitted to engage in the development of carbon-based products, provided it is approved by OJK.
    4. Fit and Proper Test. Any potential shareholder (regardless of their ownership percentage) of a Carbon Exchange operator must undergo and pass a ‘fit and proper test’ administered by OJK. The same requirements apply to members of the BOD and the BOC.
    5. Other notable requirements.
      • A Carbon Exchange operator is prohibited from engaging in carbon trading for its own benefit.
      • Any amendment of Article of Association of the Carbon Exchange operator must also be approved by OJK.
      • A Carbon Exchange operator is required to issue regulation for its user which must be approved by OJK (including any of its amendment).
      • There must be at least 2 Directors, one of whom must have the knowledge and expertise in the carbon trading sector and all of whom must reside in Indonesia.
      • All BOD and BOC members are prohibited from becoming a shareholder or a controller (either directly or indirectly) in the users (pengguna jasa) of the Carbon Exchange.
  2. General Trading Rules
    OJKR on Carbon Exchanges clearly recognizes Carbon Units as ‘securities’, and therefore they are tradeable on the Carbon Exchange.
    Through OJKR on Carbon Exchanges, OJK allows the Carbon Exchange to facilitate both domestic and international trading of Carbon Units, subject to certain criteria as elaborated below.

    1. Mandatory Registration of Carbon Units
      To be eligible for trading on the Carbon Exchange, Carbon Units must be registered with (i) the National Registration System for Climate Change Control (Sistem Registrasi Nasional Pengendalian Perubahan Iklim or “SRN-PPI”) and (ii) the Carbon Exchange.OJKR on Carbon Exchanges requires tradeable Carbon Units to be in the form of:

      1. Emission Ceiling Technical Approval for Businesses (Persetujuan Teknis Batas Atas Emisi bagi Pelaku Usaha or “PTBAE-PU”):
        The PTBAE-PU sets the emission quota or the maximum Greenhouse Gas (“GHG”) emissions that businesses can release to the environment.
        Businesses that are able to effectively reduce their GHG emissions below the mandated GHG emission cap are allowed to sell their remaining emission allowance to other businesses whose GHG emissions exceed the GHG emission cap.
      2. Greenhouse Gas Emission Reduction Certificate (Sertifikat Pengurangan Emisi Gas Rumah Kaca or “SPE-GRK”):
        The MOEFA will issue an SPE-GRK to businesses that have registered their emission reduction. The certificate is given after the businesses have successfully completed the Measurement, Reporting, and Verification (MRV) process conducted by the MOEFA.
        The SPE-GRK must be registered with the SRN-PPI in the form of numbers or registry codes.
    2. Exemption from Registration with SRN-PPI and Carbon Exchange
      International Carbon Units can be traded on the Carbon Exchange without the need for registration with the SRN-PPI, provided that they:

      1. have been registered, validated, and verified by an accredited institution; and
      2. meet the requirements for trading on offshore or international carbon exchanges.
    3. Trading Mechanism
      Prior to the issuance of OJKR on Carbon Exchanges, the stakeholders expected that the trading mechanism on the Carbon Exchange would replicate the trading mechanism in the capital markets sector.
      However, contrary to the expectation, OJKR on Carbon Exchanges merely sets general guidelines. Therefore, while the issuance of OJKR on Carbon Exchanges can be seen as a step forward, significant aspects, such as the mechanisms for ‘direct trading’ or ‘intermediary services’, remain unclear. OJK seems to still have some homework to do: addressing these issues in future implementing regulations.

According to publicly available news, the Carbon Exchange is expected to launch in third or fourth quarter of 2023, and several companies have reportedly expressed strong interest in becoming the official Carbon Exchange, including the Indonesia Stock Exchange, the Indonesia Climate Exchange, and the Indonesia Commodity and Derivatives Exchange.

Our team will continuously and closely monitor and update you on any developments or progress.

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