Indonesia Carbon Exchange (IDXCarbon) launched on September 26, 2023. Indonesia’s efforts to finally step up its game in achieving its Nationally Determined Contributions (NDCs) and Net Zero Emissions (NZE) by 2060 caused the nation to either celebrate or maintain skepticism. Many are even still foreign to the concept. Despite the hype and buzz in Indonesia, carbon trading is a concept that has been introduced previously.
Carbon trading started with the United States cap-and-trade in the 1990s, demanding companies to pay for their carbon emissions. Then, the 1997 Kyoto Protocol suggested the same method to control emissions. Since then, others have followed. According to the World Bank, as of March 2023, the map of those implementing the Emissions Trading System (ETS) is as follows:
Source: Carbon Pricing Dashboard. World Bank.org
The number of countries committed to and attempting to participate in the carbon market has undoubtedly increased. The expected outcome is the decrease in CO2 emissions. However, worldwide carbon dioxide emissions have only increased.
Annual carbon dioxide (CO₂) emissions worldwide from 2013 to 2023
Sourced from: Statista[1]
Considering Carbon Pricing
When IDX launched Indonesia’s trial carbon market in February, its carbon credits were priced at around US$2-18 per ton of CO2. Malaysia also recently launched its voluntary carbon market (VCM) last year, pricing its carbon credits at US$4-15 per ton of CO2. The young Indonesian and Malaysian markets still have a lower price range compared to the EU’s established carbon market, where credits can be priced as high as US$80 per ton of CO2.
Reducing world carbon emissions hinges on the price of carbon credits as the world is moving closer to implementing and utilizing the carbon market to fund programs to achieve its NDCs. When carbon credits are available cheap, companies are bound to purchase credits with the intention of “canceling off” emissions. That is, “since they’re so cheap, we can just buy credits to offset the emissions we create,” instead of the desired mindset: “we have to reduce emissions, so we don’t have to buy more expensive credits.”
Indonesia’s carbon market remains at its incipiency. As there is still dissonance between its carbon taxation and the price of carbon credits. The latter is priced at US$2-18 per ton of CO2 while Law No.7/2021 on Tax Harmonization stipulates that companies are to be taxed Rp30,000 (approx. US$2) per kilogram of CO2 emissions. The math would only make companies opt to pay taxes rather than buy credits.
Ensuring Indonesia’s Carbon Market Takes off—the right way.
Indonesia has just begun its carbon market journey, and its initial prices may reflect something other than its future. There are certain things that Indonesia may need to keep in mind when formulating its carbon market policies:
- Implementing proper Greenhouse Gas (GHG) Verification and Validation Systems
During a recent event by Bloomberg Technoz, experts discussed that the government has yet to appoint an official verification and validation institute to overlook carbon credits that companies report to the Ministry of Environment and Forestry. Many Indonesians can choose from the world-renowned VERRA or the WWF’s Gold Standard; local-based MUTU is also an option. This must be standardized, especially with Indonesia’s desire to expand its carbon market beyond national borders.
- Ensuring that carbon credits provide additional value.
Issuing carbon credits for forest conservation and protection seems tempting and an easy way to add a bank, but it virtually serves no additional value to carbon offsets. It puts weight on forests, or they’ll be cut down otherwise. Incentives must be valued more than stagnant protections.
- Protection and consideration of communities
With Indonesia’s many indigenous communities and ethnicities that live in harmony with forests and biodiversity that may be subject to carbon crediting and pricing, the government needs to play a fair role in ensuring that those people do not get displaced or inconvenienced by projects. Counting carbon and valuation will require proper land ownership certification or contracts between agreeing parties on who the carbon credits would belong to. When the carbon market matures and the price of credits soar, indigenous communities are prone to exploitation by those who want to gain a killing from their forest areas. Conflicts may erupt.
Final thoughts
Indonesia’s potential to develop and utilize its carbon market income is immense, given the amount of forest coverage and fertile biodiverse lands. Moving forward, Indonesia will seek to improve the quality of its market. Thus, the government must keep in mind the three points to stabilize and steadily increase the price of credits. For businesses and enthusiasts of sustainable development, it is imperative that they keep in mind the prospects of carbon credits when planning future CSRs. Proper land tenure arrangements and commercialization contracts for CSR activities can be arranged to ensure that the benefits can be responsibly reaped in the future.
There also needs to be mutual accountability between sellers and buyers in the carbon market to ensure fair trade and practices, as well as standardized and transparent monitoring of projects. Indonesia can only move forward and improve its regulations for carbon credits from here on out, and it’s best to keep your eyes peeled on its growth, lest you miss out and the price of its credits shoot through the roof.
[1] https://www.statista.com/statistics/276629/global-co2-emissions/
Author: Yizhi Riangmi