As a reaction to global climate change, about 196 countries, including Indonesia, have adopted the Paris Agreement to the United Nations Framework Convention on Climate Change (“Paris Agreement”).Indonesia has ratified the Paris Agreement in to Law No. 16/2016. The Paris Agreement requires the government to contribute in reducing greenhouse gas emissions that are mandated domestically in order to limit the global average temperature rise to below 2 to 1,5 degrees Celsius of the industrial temperature levels.
Prior to the Paris Agreement, Indonesia has also ratified the Kyoto Protocol to The United Nations Framework Convention on Climate Change (“Kyoto Protocol”) as stated in Law No. 17/2004. The Kyoto Protocol requires the contracting parties to reduce emissions in accordance with the upper limit as stipulated in the Attachment of Kyoto Protocol.
As an indicator to measure the effort in controlling climate change, the economic value of carbon is one of the instruments in implementing the government policy to reduce the greenhouse gas emissions. As a form of its implementation, at the end of 2021 the government issued PR No. 98/2021 which regulates the implementation of the Economic Value of Carbon (Nilai Ekonomi Karbon) (“NEK”) in terms of achieving the Nationally Determined Contribution (NDC) target and controlling the Greenhouse Gas Emissions (Gas Rumah Kaca) (“GRK”). In particular, Article 2 paragraph (3) of PR No. 98/2021 regulates two targets of NDC, inter alia: (a) stipulating the policies and steps including implementing activities in accordance with the Government’s commitment in the form of GRK reduction of 29% (twenty nine percent) to 41% (forty one percent) in 2030 compared to the baseline of GRK; and (b) building national, regional and community resilience to various risks of climate change or climate resilience. One of the NEK implementation scopes is the mechanism of carbon trading in general and sectorally on carbon exchange.
Carbon Trading Mechanism
The carbon trading can be conducted in two ways: directly (outside of the carbon exchange) by sellers and buyers who require carbon units, or indirectly (via carbon exchange). Trading through carbon exchange will be more trustworthy, because the system will be integrated into the National Registry System of Climate Change Control (Sistem Registri Nasional Pengendalian Perubahan Iklim) (“SRN-PPI”).
Once the carbon units are registered in the SRN-PPI, then the sorting process will be carried out in order to identify the carbon units that will be traded on the carbon exchange and through direct trading. This is conducted as an anticipation/mitigation towards the occurrence of double counting/double selling, i.e. when a carbon unit is traded in both carbon exchange and direct trading.
Regulations of Carbon Trading
There are several regulations for carbon trading, among others:
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- Law Number 17 of 2004 regarding Ratification of Kyoto Protocol to the United Nations Framework Convention on Climate Change (“Law No. 17/2004”);
- Law Number 21 of 2011 regarding Financial Services Authority as lastly amended by Law No. 4 of 2023 regarding Development and Strengthening of the Financial Sector (“FSA Law”);
- Law Number 16 of 2016 regarding Ratification of Paris Agreement to the United Nations Framework Convention on Climate Change (“Law No. 16/2016”);
- Law Number 4 of 2023 regarding Development and Strengthening of the Financial Sector (DSFS Law);
- Presidential Regulation Number 98 of 2021 regarding Implementation of Carbon Economic Value for the Achievement of Nationally Determined Contribution Target and Control of Greenhouse Gas Emissions in National Development (“PR No. 98/2021”);
- Minister of Energy and Mineral Resources Regulation Number 16 of 2022 regarding Implementation Procedures of Carbon Economic Value in Power Plant Subsector (“MEMRR No. 16/2022”);
- Minister of Environment and Forestry Regulation Number 21 of 2022 regarding Implementation of Carbon Economic Value (“MEFR No. 21/2022”);
- Minister of Environment and Forestry Regulation No. 7 of 2023 regarding Carbon Trading Procedures in the Forestry Sector (“MEFR No. 7/2023”); and
- Financial Services Authority Regulation Number 14 of 2023 regarding Carbon Trading Through Carbon Exchange (“FSAR No. 14/2023”).
The formation of carbon exchange has been mandated in Article 6 paragraph (1) letter B of FSA Law, and the FSA will act as regulator and supervisor of the activities of parties in carbon exchange or in this case carbon trading.
The general information that must be considered while performing carbon trading is provided below.
The FSA’s Duties and Responsibilities in the Carbon Exchange
The FSA has been mandated with regulating and supervising the carbon exchange. FSA is in charge of regulating, licensing, supervising, and developing carbon trading through the carbon exchange. Supervising including (1) carbon exchange organizer; (2) carbon trading market infrastructure support; (3) users of carbon exchange services; (4) transactions and settlement of carbon unit transactions; (5) carbon trading governance; (6) risk management; (7) consumer protection; and (8) parties, products and/or activities related to carbon trading through carbon exchange.
Carbon Exchange Organizer
Carbon trading through the carbon exchange shall be conducted by a carbon exchange organizer who has secured a business license from the FSA.
The FSA has granted carbon exchange organizer business license to PT Bursa Efek Indonesia through Decree of Members of the Board of Commissioners No. KEP-77/D.04/2023 dated 18 September 2023, which valid from the date of issuance of the decree.
Organizing Carbon Trading Through the Carbon Exchange
The carbon exchange must arrange carbon units trading in orderly, fair and efficient way. The organizing of carbon trading through the carbon exchange shall be done by using an electronic system and conducted continually.
The respective system includes:
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- meeting of carbon unit sale and purchase bidding; and
- settlement of carbon unit transactions, either fund or carbon unit settlement,
among parties in the same sector and/or in different sectors in accordance with the rules of laws and regulations.
For the settlement of carbon unit transactions, either settlement of fund or carbon unit, the carbon exchange organizer must ensure the risk management, including the adequacy of fund and carbon unit of the party who will conduct the carbon unit transaction.
The Tradable Carbon Units
- Technical Approval on the Emissions Limitation of Business Actor (Persetujuan Teknis Batas Atas Emisi Pelaku Usaha) (“PTBAE-PU”)
PTBAE-PU is a GRK threshold for business actors and/or determination of emissions quotas within a certain arrangement period for each business actor.
The stipulation of PTBAE-PU is carried out on the basis of a suggestion from a business actor which is carried out by submitting an application to the relevant minister or directly stipulated by such respective minister. The minister who specifies the relevant PTBAE-PU is the sectoral minister in charge of each business actor’s business line.
PTBAE-PU stipulated by the respective minister may be traded at the start of the compliance period via domestic emissions trading and/or other PTBAE-PU owners. Compliance Period is a period as stipulated by the minister to measure the compliance of business actors in decreasing GRK in line with the GRK limit or duly stipulated target. At the end of the compliance period, business actor will conduct the measurement of actual emissions and draft the report on implementation of PTBAE-PU which contains at least:
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- the measurement of actual emissions at the end of the Compliance Period; and
- the measurement of remaining upper limit of GRK during the Compliance Period by reducing the value of upper limit of GRK and/or emission quota with actual emissions.
The respective implementation report will be verified by an independent verifier to determine the position (above or below PTBAE-PU) of the business actor’s actual emissions. If the actual emissions are less than PTBAE-PU, the remaining GRK limit and/or emissions quota that are not used can be traded in domestic emissions trading and/or among of PTBAE-PU owners or stored for a maximum of two years after the compliance year. Meanwhile, if the actual emissions exceed PTBAE-PU, the business actor must conduct offset which can be done by purchasing carbon units from other business actors.
Furthermore, in terms of actual emissions less than PTBAE-PU, business actors can apply for the issuance of SPE-GRK (as defined below).
- The Certificate of Greenhouse Gas Emissions Reduction (Sertifikat Pengurangan Emisi GRK) (“SPE-GRK”)
SPE-GRK is a letter of evidence of emissions reduction. To acquire SPE-GRK, business actor must record the Draft Document of Climate Change Mitigation Action (DDCCMA) in the SRN-PPI and report on the results of implementing climate change mitigation activities.
Trading of carbon unit in the form of PTBAE-PU is known as the cap-and-trade emission trading system – ETS (emissions trading), whereas trading carbon units in the form of SPE-GRK is known as the GRK offset.
After gaining FSA approval, the carbon exchange organizer can develop the activities or products based on carbon units. As a result, it is feasible that in the future carbon units other than PTBAE-PU and SPE-GRK will be traded in the carbon exchange.
The carbon exchange’ transactable carbon units are listed in the SRN-PPI and the Carbon Exchange Organizer. The carbon units which are not listed in the SRN-PPI cannot be traded. Therefore, in order to become tradable, every business actor who intends to engage in carbon trading must first register the owned carbon units in the SRN-PPI and the carbon exchange organizer.
Overseas Carbon Trading
Overseas carbon trading can also be carried out through the carbon exchange or direct trading. In conjunction with the overseas carbon trading, the Minister of Environment and Forestry (“MOEF”) oversees the mutual recognition cooperation arrangement, which is supported by escalation of capacity on verification implementation, publishing, and cooperation promotion.
Furthermore, the carbon exchange organizer can essentially facilitate the trading of carbon units derived from overseas, whether listed in the SRN-PPI or not listed in the SRN-PPI, provided that those are not against the provisions of laws and regulations. Carbon units that are not listed in the respective SRN-PPI must be (1) registered, validated and confirmed by an institution that has been accredited by an international registration organization; (2) fulfill the requirements to be traded in the overseas carbon exchange; and (3) other requirements as stipulated by the FSA.
State Revenue
Until now, the state revenue from each levy on the sale and purchase transactions of carbon units in carbon trading has been classified as non-tax state revenue from levy on the sale and purchase transactions of carbon units. Regulations on the utilization of state revenue from carbon trading are implemented in accordance with the government legislation.
Sectoral Carbon Trading Arrangement
NEK implementation is carried out in sectors (energy, waste, industrial processes and product use, agriculture, forestry, and/or other sectors according to developments in science and technology) and sub-sectors (power generation, transportation, building, solid waste, liquid waste, waste, industry, farming, livestock, plantations, forestry, peat and mangrove management, and/or other sub-sectors depending on developments in science and technology).
Until now, the implementing regulations in relation to carbon trading mechanisms which have been issued namely in the power generation and forestry sub-sectors.
The procedures of carbon trading in the power generation sub-sector duly regulated in MEMRR No. 16/2022. According to PR No. 98/2021 and MEFR No. 21/2022, the mechanism of carbon trading in the power generation sub-sector is carried out through emissions trading and offset of GRK under particular regulations such as:
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- Trading emissions cannot be conducted between the power plant units that are located in the same unit of power plant;
- The offset of GRK is conducted in business and/or activity which has obtained SPE-GRK (which can derive from the reduction of GRK activity in the energy sector, such as generation activity that uses the new energy and renewable energy sources, transportation, building and industrial sub-sector activities including implementation of energy efficiency, and other activities in the energy sector).
Business actor has the obligation to submit the implementation result of carbon trading thereof, which in the form of recording and reporting of carbon trading recapitulation through the Application of Electricity Emissions Calculation and Reporting (Aplikasi Penghitungan dan Pelaporan Emisi Ketenagalistrikan) (APPLE-GATRIK) no later than 31 January of the following year.
In addition, business actors must carried out several other obligations, such as (1) uploading statement documents on the approval of carbon units transfer between power plant units and proofs of financial transactions on the transfer of carbon units for business actors who conduct emissions trading, and/or (2) uploading proof documents on the implementation of GRK offsets for business actors who conduct the GRK offsets; (3) must submit the GRK reports of power plants for each power plant unit which contains data on the activity of power plant unit and data on the exploitation of the power plant unit which submitted through APPLE-GATRIK, no later than 31 January of the following year.
Meanwhile, in the forestry sector, the MOEF has issued MEFR No. 7/2023; whereas the carbon trading takes place in the forestry subsector and subsector of peat and mangrove management. The carbon trading occurs in several areas, including (1) Permanent Production Forest Area, Convertible Production Forest Area and Protected Forest Area Utilization Block that have been duly granted with Forest Utilization Business Licensing (Perizinan Berusaha Pemanfaatan Hutan) (PBPH), Social Forestry Management Approval, or Management Rights; (2) Permanent Production Forest Area, Convertible Production Forest Area and Protected Forest Area Utilization Block which not Duly Granted with PBPH, Social Forestry Management Approval, or Management Rights; (3) Other Protected Forest Area Block; (4) Peat and Mangrove Areas Within Forest Areas; (5) Peat and Mangrove Areas Outside Forest Areas; (6) Conservation Forest Area; (7) Customary Forest; (8) Right-Titled Forest; and (9) State Forest which Excluded from Forest Area.
The carbon trading organizer must also comply with the provisions on:
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- the holder of PBPH, management rights, and right-titled forest must possess the certificate of sustainable forest management, certificate of forest product legality, or declaration of forest product in accordance with provisions of laws and regulations;
- the holder of the lowest social forestry management approval obtains a silver classification in the implementation of social forestry in accordance with the provisions of laws and regulations; or
- the communities of customary law, holders of social forestry management agreements, and communities of right-titled forest owner that conduct GRK offset businesses and/or activities must receive assistances or partners with experience or skills in relation to carbon measurement, project planning and implementation or accessing the carbon market.
Carbon trading is also used in the forestry industry through emissions trading and GRK offset. Its specific provisions, can be referred to MEFR No. 7/2023.
Closing
The development of the carbon exchange is planned to be conducted in three stages—with the first stage taking place in 2023-2024; the second stage in 2025-2026, and the third stage in 2027-2030.
Finally, it is hoped that the carbon exchange would be one of the initiatives that may be taken to achieve the NDC target. To that end, let us support the Government’s effort by raising awareness, expressing concern and assisting in the reduction of greenhouse gas emissions.
Authors: Almaida Askandar, S.H. (MBA candidate), Mohammad Reihansyah, S.H., and Thareq Arraisy, S.H. (IABF Law Firm – Indonesia)