Committing to a greener future: Indonesia embraces implementing the economic value of carbon

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On October 29, 2021, shortly before the United Nations Climate Change Conference (COP 26), Indonesia released Presidential Regulation No. 98 of 2021 on implementing the economic value of carbon to achieve the contribution objectives determined at the national level and the control of greenhouse gas emissions in relation to National Development (“Regulation“). The settlement builds on Indonesia’s ratification of the Paris Agreement (via Law No. 16 of 2016), under which Indonesia expressed hope to better manage the impact of climate change and declared its commitment to reduce greenhouse gas emissions and achieve the nationally determined contribution. (“NDC “).

The regulation prescribes mitigation and adaptation actions as the two main methods to tackle climate change and achieve the NDC. It also introduces the concept of “economic value of carbon” (nilai ekonomi karbon) – it develops a regulatory framework on carbon pricing and carbon emissions trading agreements (including registration and assessment, economic incentives and carbon levies and taxes) and reports that Indonesia is ready to move from a voluntary carbon market to a compliant carbon market. As would be expected with such a large and extensive piece of legislation, the details of implementation will need to be spelled out in future ministerial-level regulations. Government agencies will be headed by the coordinating minister for maritime affairs and investment and will involve other ministers such as the finance minister, the environment and forestry minister, the national development planning minister, the Minister of Energy and Mineral Resources, the Minister of Industry, Minister of Transport, Minister of Agriculture, Minister of Maritime Affairs and Fisheries and Minister of Trade. We discuss the main concepts below.

Climate change mitigation actions

The regulation provides that government agencies, relevant ministries, governors, regents and mayors (depending on their respective authorities) are to take (and possibly involve the private sector in taking) the following measures in terms of climate mitigation. climate change :

  1. establish an inventory of greenhouse gas emissions;
  2. determine the benchmark greenhouse gas emissions;
  3. set targets for climate change mitigation; and
  4. form a climate change mitigation plan.

Separately, private sector participants engaged in sectors such as energy, waste, industrial processes and product use, agriculture and forestry, need to take certain mitigation measures in their ongoing activities as well. that in all the projects they undertake. This could include activities such as increasing the carbon efficiency of electricity generation and transmission, management of solid and liquid waste, and management of plantations, farms, peatlands and mangroves. We expect more sectors to be included over time as the concept is proven and the market develops and matures.

In the meantime, the regulation instructed the relevant ministries to establish greenhouse gas emission ceilings for the above-mentioned sectors, and to monitor and evaluate their implementation.

Climate change adaptation actions

As with climate change mitigation, the government requires specific private sectors to take action to adapt to climate change. For now, these sectors include food, water, energy, health and the ecosystem.[1], and we expect more sectors to be added.

At this point, the regulation prescribes a process similar to that for climate change mitigation (see points (1) to (4) in the section above). However, noting that the adaptation and mitigation activities and outcomes are quite different, we expect the implementing regulations to provide a clearer picture of the state’s expectations.

Greenhouse gas emission limit

The regulation provides for the concept of setting emission ceilings for certain participants within the sectors described in the sections above. These limits and their exact scope will be determined by the relevant ministries in future regulations.

Economic value of carbon

Under the regulations, the government will use the economic value of carbon (“VC“) as a tool to promote mitigation and adaptation to climate change. CAV can be implemented through the following mechanisms:

  1. carbon trading;
  2. economic incentives;
  3. carbon royalties; and
  4. any other mechanism based on scientific and technological developments.

Before carbon can be traded, incentive payments or taxes imposed, carbon must be accurately tracked and assessed through the scoring system described below.

Carbon valuation system and certification

The regulation establishes the national registry system for combating climate change (Sistem Registri Nasional Pengendalian Perubahan Iklim, commonly called “SRN IPP“). The SRN PPI is the body responsible for monitoring carbon emissions in the context of Indonesia’s NDC target.

The measurement, reporting and verification system determines the amount of greenhouse gas emissions and the data will be used to calculate the CAV and the performance of various companies with respect to mitigation and adaptation measures. to climate change.

The regulation obliges companies to register and report to the SRN PPI their performance in terms of climate change mitigation actions, climate change adaptation actions, CAV implementation and climate change related resources. . These reports (which must be filed at least once a year) will be verified by the Ministry of Environment and Forests and can serve as a basis for companies to access green or sustainable finance or to participate in carbon trading. Companies that do not register and do not declare may be subject to sanctions which will be detailed in the subsidiary legislation.

Concerning the CAV, companies must (after having transmitted the required information to the SRN PPI and having received a verification from an independent validator) be verified by the competent minister before being able to acquire certificates of reduction of greenhouse gas emissions. Greenhouse (“Certificates“). Certificates can be used as evidence of reduced greenhouse gas emissions, to participate in carbon trading, to distinguish themselves with stakeholders as being environmentally friendly, to receive payments or compensation in connection with climate change mitigation (see below), as well as to serve as a basis for accessing green or sustainable finance.

At this point, these certificates cannot be marketed internationally unless authorized by the Ministry of Environment and Forestry, but there is a plan to develop the framework to market these certificates internationally. foreigner.

Carbon exchange system

The implementing regulation will make a distinction between entities that have a greenhouse gas emission limit and those that do not. At this stage, it appears that entities with a limit on greenhouse gas emissions will fall under an emissions trading system (which can be conducted via a carbon exchange or directly), while entities with no greenhouse gas emission limit will be subject to a compensation mechanism. It is not clear at this point if or how these systems will interface with each other. We expect more clarity in future regulations at the ministry level.

In either case, the SRN PPI will play an important role in managing the data collected from government surveillance and company reports (including their CAVs and Certificates). Carbon trading can be domestic or foreign. However, in the case of international trade, the regulation establishes two key rules for business: (i) international trade must not reduce the Indonesian NDC target[2] and (ii) the prior approval of the competent minister will be required. Further details will be specified in the implementing regulations.

Economic incentives and carbon taxes

In addition to the carbon emissions trading mechanism, companies can benefit from certain economic incentives.

The regulation provides for the concept of performance-based payments if the activities lead to a verified reduction in greenhouse gas emissions or generate other benefits, such as ecological conservation.

The regulation also provides that certain companies or activities may be subject to carbon levies in the form of fiscal, customs, customs or other levies.

Further details will be reflected in regulations to be issued by the relevant ministries.

Legacy provisions

Regarding legacy agreements, the regulation provides that parties that had implemented carbon trading or performance-based payments before the regulation entered into force must register and report their agreements through SRN PPI at the latest. one year after the entry into force of the regulation. If this obligation is not fulfilled, the sale of the remaining carbon credits associated with these agreements is prohibited. Old carbon credits that have been registered and reported can only be sold within the country.

Key to take away

The regulation enshrines in law the imperative to take measures to mitigate and adapt to climate change. In particular, it focuses on the notion of the economic value of carbon and establishes pricing, trading and other related economic concepts to incentivize market players to reduce their carbon emissions.

The settlement means Indonesia is the second country in Southeast Asia (after Singapore) to regulate its carbon market. Although the details of how the regulation will be implemented will need to be spelled out in regulations at the ministerial level, it is clear that the regulation is a big step forward in Indonesia and South Asia’s transition. -Is towards a greener economy.


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