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Towards carbon market in Indonesia: Progress and lessons

  1. Towards carbon market in Indonesia Progress and lessons Sandy Nofyanza December 2022 – Hanoi, Viet Nam
  2. 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
  3. 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
  4. 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%
  5. 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
  6. 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
  7. 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
  8. 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
  9. 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)
  10. 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
  11. 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
  12. 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
  13. 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. 14 Commodity/service Sellers Buyers Institutions (marketplace, rules, etc) Creating a market for REDD+/carbon
  15. 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. 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. 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
  18. 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
  19. 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
  20. 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
  21. 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!
  22. | | | The Center for International Forestry Research (CIFOR) and World Agroforestry (ICRAF) envision a more equitable world where forestry and landscapes enhance the environment and well-being for all. CIFOR–ICRAF are CGIAR Research Centers. Thank you