Towards carbon market in Indonesia
Progress and lessons
Sandy Nofyanza
December 2022 – Hanoi, Viet Nam

In this presentation
1. A bit on Indonesia’s vulnerability to climate change
2. A glimpse of the future of carbon economy in Indonesia
1. Regulatory development
2. Putting the price on carbon
3. Carbon trading and tax: The concept
4. Use of carbon revenue
5. The status of national carbon market pilot

Key vulnerabilities
• Extreme weather: floods in major urban centers,
compromised food security
• Sea level rise threatens ~42mio Indonesian living
<10m above sea level
• El Niño-induced drought and forest fires
Notable impacts
• Nat res: e.g., clean water scarcity (despite having
>21% of Asia’s freshwater reserves), biodiversity loss
• Hampering poverty and inequality reduction efforts
INDONESIA

Modelled change in extreme poverty rate based on food price rises of 10%, 50%, and 100% (World Bank 2021)
Indonesia in Mar 2022
Poverty rate: 9.54%
Extreme poverty rate: 2.04%

How much to mitigate climate change in Indonesia?
~ USD 285 billion to meet the conditional NDC target (3rd BUR)
Majority of the money is needed in transforming energy and
transportation system (95%)
FOLU only requires ~2% of the money

Caveat: Indonesia is not yet implementing a carbon market
But the progress in building it so far might provide some
lessons for other forest-rich countries

Future carbon economy
NZE
NDC
REDD+
Policy mix
• 2021-2030 Updated National REDD+ strategy
• Ministerial regulations on technical
implementation of REDD+ is in place
• RBPs from Norway, GCF, JREDD+
• 2030 FoLU Net Sink target
• Planned deforestation: up to 6.8 Mha by
2030
• 2021 Enhanced NDC
• 31.89% & 43.20% ER by 2030
• FoLU sectors accounted for 17.4%-25.4%
ER
• NZE in 2060 or sooner
• Some regulations for carbon trading is in
place – pending roadmap on carbon
market

Slow, but emerging regulation
• PP (Government Regulation) No. 46/2017 on
Environmental Economic Instrument
• Law on Tax Harmonization No. 7/2021
• PerPres (Presidential Regulation) No. 98/2021 on
Carbon Economic Value
• PermenLHK (Ministerial Regulation) No. 21/2022
on Protocol to Implement Carbon Economic Value
from the Forestry Sector

Slow, but emerging regulation (2/3)
Trading instrument
• ETS: cap-trade-tax system
• Offset: private REDD+/ERC or next maybe JREDD+
Non-trading instrument
• Carbon tax
• Carbon levy: imposed in accordance with carbon
content/potential of the good/services
• RBP: JREDD+ (govt led)

Slow, but emerging regulation (3/3)
Upcoming regulation
1. GR on sectoral carbon trading roadmap
2. GR on subject and allocation of carbon tax
3. Finance MR on Procedures and Mechanisms for
Imposing Carbon Tax
4. Finance MR on carbon tariff and justification of
carbon tax

Putting a price on carbon (per tCO2e)
• Indo’s carbon price/tax rate: minimum USD 2
• Based on limited pilot implementation on coal powerplants in 2021
• Fairness, affordability, business climate and circumstances around households’ economy
• E Kalimantan and Jambi’s JREDD+ carbon price rate: USD 5
• Jambi might renegotiate the price to USD 10
• NZ ETS: USD 51.91 (Dec 7); EU ETS: USD 91.3 (Dec 6)
• Business to buy allowances through auctions
• Social cost of carbon: USD 51 (US Gov estimate); USD 185 (Rennert et al 2022)
• Global average: USD 3 (IMF)
• Only 1/5 global carbon emissions are covered by pricing programs

Carbon trading scheme: Indonesia (1/2)
Emission
surplus
Emission
deficit
Carbon tax
SIE: tradable emission permit
SPE: emission reduction certificate/offset
Can also work as a (carbon) tax
reduction scheme
Caveat: Cap-and-tax allows carbon emission above the cap

Carbon trading scheme: Indonesia (2/2)
2021
• Regulatory framework
establishment
• Carbon price set at minimum
USD 2 per tCO2e
• Pilot at select power plants
2022
• First national trial in power
sector (coal plant) – delayed
• MRV and NRS preparation
• Technical regulation at MoEF
• Regular evaluation of carbon
price
2025
• First national trial (probable)
• Start of economy-wide
implementation (phase-in of
all economic sector – but most
likely further delayed)
Timeline
The cap is set by MEMR
The carbon market is set by MoEF

14
Commodity/service
Sellers
Buyers
Institutions
(marketplace, rules, etc)
Creating a market for REDD+/carbon

15
Commodity/service
Sellers
Buyers
Institutions
(marketplace, rules, etc)
Creating a market for REDD+/carbon
1. Public funding (incl aid)
2. Anyone who wants to
become one
“Big, cheap, and quick” (Stern
report 2006)?

16
Commodity/service
Sellers
Buyers
Institutions
(marketplace, rules, etc)
Creating a market for REDD+/carbon
Folding REDD+ into the picture
1. Private REDD+ project
2. Ecosystem restoration
concession
3. “Multi-forestry business
license”

17
Commodity/service
Sellers
Buyers
Institutions
(marketplace, rules, etc)
Creating a market for REDD+/carbon
Certified Emission Reduction?
stocks? Securities?
A carbon exchange?
Separated or integrated
with the stock exchange?
Who’s setting up the institution:
Financial Services Authority (OJK)
Bank Indonesia (BI)
MoFin
BPDLH (Indo Environmental Fund)
MEMR
MoEF
Private sector

Institutions to manage and channel money
(and information on ER)
• Paradox: funding gap & disbursement
problem
• Local level contract design and
enforcement
• How to reduce potential biases in
reporting
• Ensuring transparency in the
verification process
18
SP Dialogue IV participant:
“We have the money (from FCPF-CF), but we are still
figuring things out on disbursement”
For JREDD+: BPDLH manages the money at the top,
and selecting 9 local organizations to help with
disbursement

Use of revenue
No specific earmark yet, only general so far:
1. Development budget
2. Funding climate adaptation and mitigation
3. Low-carbon investment
4. Social assistance

Maybe still a long way to go (hopefully soon enough)
• National carbon tax pilot delayed until 2025, citing the upcoming
global and national macroeconomic uncertainty
• International carbon trading/offset is allowed only after sectoral NDC
target is achieved and upon ministerial authorization
• Potentially discouraging private investment in REDD+ projects

Concluding remarks
• The regulations are emerging at a slow pace, still it’s a welcoming development
• Multiple ways to determine the price of carbon
• National carbon tax pilot has not taken off – politically difficult to start implementation
• The design – cap-trade-tax – is promising, but trade-off remains
• Based on JREDD+ experience: distributing RBPs is not easy
• Involving all economic sectors (eventually) – challenging to accommodate all interests and
align the regulations and resources
• Phase-in is key, but which sector to be phased-in earlier than the other remains
unknown
• Different ministries in charge of different planning – more collaboration and alignment
needed!

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