When Indonesia established a carbon trading mechanism last year, the move was welcomed across the board. However, a lack of strong implementing regulations, regulatory uncertainty, and insufficient business incentives have combined to ensure slow-going for the country's carbon trading market.

 

In September last year, Indonesia's outgoing President, Joko Widodo, launched the country's first carbon exchange, Bursa Karbon Indonesia (BKI), hailing it "Indonesia's real contribution to fight with the world against climate crisis."

As Indonesia is one of the top 10 global carbon emitters, the move to set up a carbon exchange market was almost unanimously welcomed, but IDX Carbon has seen few trades since its inception. According to Indonesia Financial Services Authority (OJK) data, carbon exchange transactions in Indonesia remain low, with only 52 registered users as of Mar. 18. The total accumulated transaction volume is only $1.9 million since its launch in September.

Lawyers in the country say the government needs to do more to mitigate regulatory uncertainties, build infrastructure, and issue comprehensive implementing norms to attract more capital to its carbon exchange.

Karina Sungkono, a partner at Indonesian law firm Santoso, Martinus & Muliawan Advocates, says that in the nascent and still-developing carbon trading market, the country's lawyers play two crucial roles: Advising clients – such as investors, project proponents and buyers – engaged in carbon trading on risk identification and risk mitigation and providing guidance and interpretation on the regulations; and advising the OKJ the carbon exchange operator and other stakeholders for improvement of regulations. 

The role of lawyers is not limited to regulatory concerns, says Alta Mahandara, partner at Indonesian law firm ADCO Law.

"Lawyers are also needed to emphasise the environmental importance of carbon trading activities carried out by business actors in combatting climate change. Additionally, we emphasise the current significance for business actors to enter the carbon trading market early. Businesses may position themselves to 4 benefit from a sustainable business model in the long run and become leaders in sustainability by participating in carbon trading early on," he explains.

REGULATORY UNCERTAINTY

While the implementation of general provisions and the BKI indicates a positive trajectory for Indonesia's commitment to climate change, there remain areas for improvement.

"These include the establishment of clear and robust technical guidelines for climate change mitigation, the enactment of additional sectoral regulations, and the complete implementation of Indonesia's carbon trading through BKI," Mahandara explains.

Indonesia has been involved in the international carbon market for many years. A number of Indonesian renewable projects were successfully registered under the Clean Development Mechanism (CDM), established in accordance with the Kyoto Protocol, as well as in various international voluntary carbon registries.

The journey towards a structured carbon market began with Indonesia's efforts over the past two years to establish a regulatory framework for carbon pricing and trading.

Presidential Regulation 98 of 2021 and Ministry of Environment and Forestry 21 of 2022 laid the groundwork for carbon pricing mechanisms, including cap and trade systems, to reduce greenhouse gas emissions and align with Indonesia's Nationally Determined Contribution (NDC) goals.

In 2022, the Minister of Energy and Mineral Resources issued Regulation No. 16 of 2022 on Procedures of Administration of Carbon Economic Value in the Power Plant Subsector, which was the regulatory framework for emission trading in the power sector in Indonesia, mainly for coal-fired power plants.

Law No. 4 of 2023, enacted in January 2023, further solidified Indonesia's commitment to carbon trading by categorising it as a financial transaction overseen by the OJK. OJK's Regulation No. 14 of 2023 on Carbon Trading through Carbon Exchange provided detailed guidelines for the implementation of Indonesia's domestic carbon market, classifying carbon units as securities and outlining the requirements for trading these units domestically and internationally.

Indonesia's stock exchange has also issued several regulations regarding carbon trading through BKI, covering critical aspects such as fees, registration procedures, trading protocols, and supervision of carbon trading through BKI.

 

"Indonesian corporations are showing a growing interest in purchasing carbon units to reach their net-zero goals. At the same time, many project proponents are exploring diverse projects for carbon trading, such as renewable projects and forest restoration initiatives. This requires Indonesian lawyers to adapt by becoming well-versed in new business models and Indonesian carbon trading scheme while navigating regulatory uncertainties."

- Karina Sungkono, Santoso, Martinus & Muliawan Advocates

 

 

In the last three years, Indonesia has made significant progress in developing its carbon trading regulatory framework, although several regulatory uncertainties remain, explains Sungkono.

"Indonesian corporations are showing a growing interest in purchasing carbon units to reach their net-zero goals. At the same time, many project proponents are exploring diverse projects for carbon trading, such as renewable projects and forest restoration initiatives. This requires Indonesian lawyers to adapt by becoming well-versed in new business models and Indonesian carbon trading scheme while navigating regulatory uncertainties," she says.

These regulatory uncertainties can be chalked down to the infancy of the carbon trading market in the country along with the lack of detailed implementing regulations, Sungkono says.

"BKI was only established less than a year ago, and there are only a few projects that have been successfully registered and which carbon units have been traded on the BKI. In addition, there are still a few uncertainties that will need to be addressed in more comprehensive and detailed implementing regulations, she says.

"To navigate these challenges, Indonesian lawyers need to continuously monitor any updates on regulations and market trends/development. It is also crucial for lawyers to have in-depth understanding of the regulations to guide clients effectively and ensure compliance with legal requirements," Sungkono adds.

Another key hurdle that lawyers encounter when practicing within Indonesia's carbon trading landscape revolves around what are commonly known as 'procedural challenges,' adds Mahandara.

Given that BKI and the Indonesian carbon markets are still in their infancy, the regulatory landscape lacks sectoral and technical laws and regulations related to carbon trading, as well as inadequate infrastructure readiness for conducting carbon trading activities, Mahandara explains.

To address this challenge, Mahandara says that law firms must prioritise establishing comprehensive communication with policymakers and work to bridge the gap between them and business actors.

"This includes providing direct guidance to our clients in navigating the intricate and lengthy process of implementing carbon trading activities and fulfilling reporting obligations," he adds.

INCREASING TRADING

Besides regulatory uncertainty and inadequate infrastructure, the BKI has failed to bring in more takers from a lack of incentivisation. Setting and strictly implementing emission caps on future projects in the country can bring more businesses to the carbon trading markets as companies look to offset their energy consumption.

Indonesia's Ministry of Environment and Forestry has announced in March its intention to implement the Technical Approval for Emission Limits set by the Minister of Energy and Mineral Resources, and it strongly believes that this regulation can enhance the carbon market in Indonesia.

Experts say this will enable companies to assess whether they need to engage in carbon credit trading through carbon trading platforms according to emission limit standards.

The second big move will be the internationalisation of the carbon trading market, allowing foreign companies to trade on the BKI. Climate Home reports that that has not happened yet because of pending international trading regulations and divided priorities within the government.

While some groups in government are keen to attract foreign investment the main administration priority is ensuring that carbon credits issued are counted towards national carbon reduction commitments, Climate Home reported.

Checking for actual carbon benefits in projects versus allowing the much more lucrative free carbon trade is one of the key ethical considerations for lawyers as well, says Sungkono.

"One of the key ethical considerations is on the environmental and social impact of projects that generate carbon units, especially if the project is developed in or around the forest area. Questions that will need to be addressed are whether the project will genuinely lead to meaningful emission reduction and whether there is any potential for greenwashing," she explains.

There is also the issue of power imbalance between stakeholders in an emission reduction project, especially between investors and the local community that will be most affected by the project.

"The government and other stakeholders such as financiers/lenders can play crucial roles in fostering a more balanced power dynamic. For example, project financiers may impose stricter environmental and social standards to provide more protection and support to the local community," Sungkono adds.

Mahandara agrees, saying he believes effective communication with clients looking to enter the carbon trading market is the key to ensuring a strong connect between carbon trades and environmental benefit.

"Although carbon trading has emerged as a tool of substantial economic value, we have to recognise that there are real tangible implications of carbon trading, especially carbon offsetting, on the environment and communities residing near climate mitigation activities," he says.

Businesses must comprehend that carbon trading projects entail long-term commitments and must provide lasting and sustainable impacts on the community, Mahandara explains.

"We encourage business actors to not only comply with the prevailing laws and regulations in Indonesia related to the involvement of local and indigenous (adat) communities, but also go beyond compliance and refer to internationally accepted transparency, accounting, and reporting standards. This will help maintain the integrity of their carbon trading projects and limit potential risks to the environment and local communities through their projects," he adds.