Indonesia sets carbon pricing policy to spur carbon trading

Indonesia has passed a much-anticipated regulation that sets a price on carbon emissions and creates a mechanism to trade carbon, as the world’s eighth largest greenhouse gas emitter steps up efforts to achieve its climate goals.

President Joko Widodo announced the new regulation at the United Nations Climate Change Conference (COP26) in Glasgow, where he also highlighted the importance of the carbon market and carbon pricing in fighting climate change.

Carbon trading is a system where a government sets a limit on the amount of carbon which can be emitted and then divides this amount into units which are allocated to different groups. These units can then be traded like any commodity.

Details of Indonesia’s regulation are not immediately available, but based on its earlier draft, companies will be allowed to sell their carbon units if they comply with the reporting and recording procedures for inclusion under the Environment and Forestry Ministry’s national registry, The Jakarta Post reported.

Carbon trading will be done through a bourse in Indonesia, and levies will be charged on transactions.

The regulation outlines a few trading mechanisms, including the trade between two business entities through the so-called cap and trade schemes, carbon offset scheme, and result-based payment, according to a statement from the ministry.

In July, Indonesia brought forward its target for net zero emission (NZE) from 2070 to 2060 or sooner. It is also working towards reducing emissions by 29 per cent by 2030 or by 41 per cent with international financial support. These will be achieved through three major sectors – forestry, energy and transportation – that make up 97 per cent of its nationally determined contribution (NDC).

“The presidential circular on the economic value of carbon is a key milestone in orienting Indonesia’s policies toward the achievement of its NDC 2030 and NZE 2060 targets,” Finance Ministry’s fiscal policy agency chief Febrio Nathan Kacaribu said in a statement. He added that Indonesia might become “the first mover in the market-based climate change mitigation” at the global level.

Even before the regulation on carbon trading was passed, some local communities and business entities had already financially benefited from protecting forests.

Privately-run Rimba Raya and Katingan Mentaya projects in Central Kalimantan prevent about 11 million tonnes of carbon dioxide (CO2) from being emitted each year, with auto mobile, insurance, gas and tech companies buying their carbon offsets to fulfil their own emission reduction targets.

Villagers surrounding the Bukit Panjang Rantau Bayur conservation forest in Jambi also found foreign individuals and organisations to pay for their efforts to preserve the area marginalised by oil plantations, mines and other industrial sites.

Since 2018, the community had obtained compensation ranging from 350 million rupiah (S$32,960) to 1 billion rupiah after their carbon offsets were verified by Edinburgh-based Plan Vivo Foundation.

“Parts of the money was returned to the forest (management) and given back to the whole community to enhance their sense of ownership,” Ms Emmy Primadona Than, project coordinator of green group Indonesian Conservation Community Warsi, told The Straits Times. “We see its big impact on the community. They feel they are supported and their initiative is internationally-recognised.”

The carbon pricing policy will complement another recent measure, carbon tax.

The tax will be applied at a minimum rate of 30 rupiah per kilogram of CO2 equivalent. It will be levied on coal-fired power plants from April next year while a carbon trade mechanism is set up. A carbon market is expected to be operational by 2025.

To generate power, Indonesia, the world’s top exporter of thermal coal, relies largely on the primary fossil fuel, which contributes about 65 per cent to its overall energy mix.

While the country, home to the world’s third largest area of tropical rainforests after Brazil and the Congo Basin, has made internationally-acknowledged attempts to decrease deforestation – its largest source of emissions – it is still struggling to wean itself off coal to supply electricity to its 270 million people.

Finance Minister Sri Mulyani Indrawati told Reuters that Indonesia could phase out coal-fired power plants by 2040 if it could obtain sufficient financial aid from the international community. This is faster than the earlier target of phasing out coal for electricity by 2056.

“For Indonesia, retiring coal early will cost us, then it will also cost the people, it will cost the industry,” Dr Sri Mulyani was quoted as saying by Reuters. “If this is all supposed to be financed from my taxpayers’ money, that won’t work. The world is asking us, so now the question is what the world could do to help Indonesia.”

Agencies