News / opinion / analysis by Mathew Carr

April 3, 2022 (London): Indonesia, president of the G20 this year, has a climate strategy that’s coming together.

Fingers crossed it spreads to the rest of the G20, and quickly.

According to its Presidential Regulation No. 98/2021 on Economic Value of Carbon, the right to emit heat-trapping gas is managed by the state, “and any benefit from the carbon incentives and fiscal instruments in reducing GHG emission should be used for the people of Indonesia,” said Linda Yanti Sulistiawati | APCEL Senior Research Fellow, NUS Law, Singapore, and UGM Assoc. Prof of Law, Indonesia, in this analysis.

Countries deploying carbon pricing, which generates government revenue, “are all striving not only for the betterment of their environment but also for economic benefit,” Yanti Sulistiawati said.

“This goes to show that green recovery and green development are popular concepts not just because of their touted environmental benefits, but (arguably more so) because they are profitable.” So, greed in the green sector means corruption is potentially a big problem (see note below).

The importance of the financial incentive, the possibility of profit, is what a lot of environmentalists don’t get. But business people do, increasingly. A few days ago, CarbonX, an Indonesian carbon asset developer joined with the world’s first fully digital carbon exchange AirCarbon Exchange (ACX) to develop a carbon marketplace in Indonesia (see full announcement below and additional lawyer take).

Indonesia is now among more than 60 countries in the world that have established carbon pricing regulations. That’s now about one third of the world, yet they cover only about 22% of global emissions.

Other countries include China, which has been implementing its emission trading system (ETS) on a scaled-back timeline. The European Union’s ETS is the world’s biggest.

(Adds another lawfirm’s take, below; more to come)

NOTES

Note One

See this for some of the potential problems for taxpayers, corruption (unedited):

TEMPO.CO, Jakarta – Head of the Financial Transaction Reports and Analysis Center (PPATK) Ivan Yustivandana said the massive implementation of the carbon tax in Indonesia potentially leads to “leakage” of state revenues.

“This can lead to potential leakage of state revenues … committed by individuals and business actors,” Ivan said in a YouTube broadcast on Thursday, March 30.

According to him, there are a number of violations that may occur in the implementation of the carbon tax, including tax evasion, tax fraud, corruption, and money laundering.

This is considered a global phenomenon. In accordance with the study conducted by the Anticorruption Resource Center in 2021, corruption in carbon taxes could reduce the imposition of carbon taxes from business actors.

Note 2

Analysis from PPATK source doc here.

Preventing Money Laundering Money Related to Carbon Taxes

JAKARTA, March 31, 2022 – The Center for Financial Transaction Reports and Analysis (PPATK) together with all anti-money laundering and terrorism financing prevention (APU-PPT) stakeholders are committed to preventing and eradicating money laundering crimes (TPPU) related to carbon taxes . taxes ). This is done to support the government’s efforts to reduce carbon emissions or net zero emissions by 2030 while optimizing state revenues from taxation, especially carbon taxes.

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Note 3

CarbonX announcement (unedited)

CarbonX Signs MOU with AirCarbon Exchange, Building Indonesia’s Carbon Marketplace

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MARCH 28, 2022, Abu Dhabi, London, Singapore & Indonesia –

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CarbonX, an Indonesian high impact Carbon asset developer, has signed a Memorandum of Understanding (MoU) with the world’s first fully digital carbon exchange, AirCarbon Exchange (ACX) to jointly develop a carbon marketplace in Indonesia.

Director of CarbonX, Dessi Yuliana stated that the partnership will provide Indonesian carbon project developers with a domestic carbon market linked to ACX’s international client order book. Also, the carbon marketplace will allow the growing Indonesian carbon market to rapidly scale up.

“The joint venture delivers all aspects of a comprehensive carbon infrastructure where buyers and sellers worldwide and domestically can transact in a transparent and efficient manner,” Dessi said in an official statement, Monday (28/3/2022).

Commissioner of CarbonX, Pandu Sjahrir added, Indonesia currently has committed to making a transition to a green economy through the Net Zero Emission (NZE) target in 2060 which is embodied in Presidential Regulation Number 98/2021 on the Implementation of Carbon Economic Value.

To achieve the target, all actors need to collaborate and are supported by enabling policies. Considering Bappenas data, Indonesia will require massive investments of around 3.4 to 3.5 percent of GDP per year to achieve the NZE.

“The carbon marketplace platform scheme created by CarbonX can contribute to assisting investment funding to achieve NZE targets. If all of this takes place optimally, Indonesia can produce a massive supply of carbon offsets and contribute to the NDC commitment, while also providing social and economic co-benefits,” Pandu said.

AirCarbon Exchange Managing Director and Co-Founder, William Pazos stated the collaboration with CarbonX will provide more opportunities for carbon asset producers in Indonesia.

“Today’s announcement marks another milestone in ACX’s rapid ascent as one of the world’s premier carbon marketplaces. By leveraging ACX’s technology, the CarbonX partnership will launch with immediate scale. Indonesian buyers and sellers will immediately gain access to an international marketplace with participants from 30 countries,” said Pazos.

ACX has been recognized as the Best Carbon Exchange in Environmental Finance’s prestigious Voluntary Carbon Market Rankings 2021 – the largest and most closely watched survey of the world’s Voluntary Carbon Market. With the first trade completed on the platform at the start of 2021, the Exchange has grown significantly and has been bringing transparency, efficiency, and liquidity to the voluntary carbon markets.

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Note 4

ANOTHER lawyer’s take (unedited from January): Shearman & Sterling

COMMITTING TO A GREENER FUTURE: INDONESIA EMBRACES THE USE OF CARBON ECONOMIC VALUE

On October 29, 2021, shortly before the 2021 United Nations Climate Change Conference (COP 26), Indonesia issued Presidential Regulation No. 98 of 2021 on the Implementation of Carbon Economic Value to Achieve Nationally Determined Contribution Targets and Control over Greenhouse Gas Emissions in Relation to National Development (“Regulation”). The Regulation builds on Indonesia’s ratification of the Paris Agreement (via Law No. 16 of 2016), under which Indonesia expressed its hope to better manage the impact of climate change and stated its commitment to reduce greenhouse gas emissions and to achieve the nationally determined contribution (NDC).

The Regulation prescribes mitigation and adaptation actions as the two main methods to tackle climate change and to achieve the NDC. It also introduces the concept of “carbon economic value” (nilai ekonomi karbon )—it develops a regulatory framework on carbon pricing and carbon trading arrangements (including registration and valuation, economic incentives and carbon levies and taxes) and signals Indonesia’s readiness to graduate from a voluntary carbon market into a compliance carbon market. As one would expect with such a substantial and wide-ranging piece of legislation, details on implementation will need to be fleshed out in future ministerial level regulations. The government agencies will be led by the Coordinating Minister for Maritime Affairs and Investment and will involve other Ministers such as the Minister of Finance, Minister of Environment and Forestry, Minister of National Development Planning, Minister of Energy and Mineral Resources, Minister of Industry, Minister of Transportation, Minister of Agriculture, Minister of Marine 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) must take (and possibly involve the private sector in taking) the following steps in respect of climate change mitigation:

• Establish a greenhouse gas emissions inventory;
• Determine baseline greenhouse gas emissions;
• Set targets for climate change mitigation; and
• Form a climate change mitigation plan.

Separately, private sector participants engaged in sectors such as energy, waste, industrial process and product use, agriculture and forestry, must take certain mitigation actions in their ongoing businesses as well as in any projects they undertake. This could include activities such as increasing the carbon efficiency of power generation and transportation, solid and liquid waste management, and plantation, farm, peatland and mangrove management. We expect that more sectors will be included over time as the concept is proven and the market develops and matures.

Meanwhile, the Regulation has tasked the relevant ministries with establishing caps on greenhouse gas emissions for the foregoing sectors, and to monitor and evaluate their implementation.

Climate Change Adaptation Actions

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

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

Greenhouse Gas Emission Limit

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

Carbon Economic Value

Under the Regulation, the government will use carbon economic value (“CEV”) as a tool to further climate change mitigation and adaptation. CEV can be implemented through the following mechanisms:

• Carbon trading;
• Economic incentives;
• Carbon levies; and
• Any other mechanism based on scientific and technological developments.

Before carbon can be traded, incentive payments or levies imposed, the carbon must be accurately tracked and valued via the valuation system described below.

Carbon Valuation System and Certification

The Regulation establishes the National Registry System for Climate Change Control (Sistem Registri Nasional Pengendalian Perubahan Iklim, commonly referred to as “SRN PPI”). The SRN PPI is the body that is responsible for monitoring carbon emissions within 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 CEV and the performance of various businesses with respect to climate change mitigation and adaptation actions.

The Regulation requires businesses to register and report their performance of climate change mitigation actions, climate change adaptation actions, CEV implementation and climate change resources, to the SRN PPI. These reports (which must be filed at least annually) will be verified by the Ministry of Environment and Forestry and can be used as the basis for businesses to access green or sustainable financing or to participate in carbon trading. Businesses that fail to register and report may be subject to sanctions that will be detailed in subsidiary legislation.

In relation to CEV, businesses must (after submitting the required information to SRN PPI and receiving a verification from an independent validator) be verified by the relevant minister before they can acquire greenhouse gas emissions reduction certificates (“Certificates”). The Certificates can be used as evidence for greenhouse gas emissions reductions, to participate in carbon trading, to distinguish oneself to stakeholders as being environmentally responsible and to receive payments or compensation in relation to climate change mitigation (see below), as well as to serve as a basis for access to green or sustainable financing.

At this stage, these Certificates cannot be traded internationally unless authorized by the Ministry of Environment and Forestry, but there is a plan to develop the framework for allowing these Certificates to be traded abroad.

Carbon Trading System

The implementing regulations will distinguish between entities on which a greenhouse gas emission limit is imposed and those that do not have such a limit. At this stage, it appears that entities with a greenhouse gas emissions limit will fall under an emissions trading system (which can be conducted through a carbon exchange or directly), whereas entities without a greenhouse gas emissions limit will fall under an offset mechanism. It is not clear at this stage whether or how these systems will interface with each other. We expect further clarity in future ministry level regulations.

In both cases, the SRN PPI will play a significant role in managing the data gathered from the government’s monitoring and businesses’ reporting (including their CEV and Certificates). Carbon trading can be either domestic or foreign. However, in the case of international trading, the Regulation establishes two key rules for businesses: (i) international trading shall not reduce the Indonesian NDC target^[2] and (ii) prior approval from the relevant minister will be required. Further details will be set out in implementing regulations.

Economic Incentives and Carbon Levies

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

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

The Regulation also provides that certain businesses or activities may be subject to carbon levies in the form of tax, duty, customs or other levies.

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

Legacy Arrangements

In respect of legacy arrangements, the Regulation provides that parties that had carbon trading or performance-based payments in place prior the Regulation coming into effect must register and report their arrangements through SRN PPI no later than one year after the Regulation came into force. If this obligation is not fulfilled, the sale of any remaining carbon credits associated with those arrangements is prohibited. Legacy carbon credits that have been recorded and reported can be sold only domestically.

Key Takeaway

The Regulation spells into law the imperative to take climate change mitigation and adaptation action. In particular, it focuses on the notion of carbon economic value and establishes related pricing, trading and other economic concepts to incentivize market participants to reduce their carbon emissions.

The Regulation means that Indonesia is the second country in Southeast Asia (after Singapore) to regulate its carbon market. Although details of how the Regulation will be implemented will need to be ironed out in ministry-level regulations, it is clear that the Regulation is a huge step forward in Indonesia’s and Southeast Asia’s transition towards a greener economy.

This article is co-authored by Assegaf Hamzah and Partners.

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