Carbon trading future and implementation challenges for Indonesia
This article has been translated by PwC Indonesia as part of our Indonesia Infrastructure News Service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.
The Jakarta Post - Masa depan perdagangan karbon dan tantangan implementasi untuk Indonesia
29 December 2021
By: Rio Christiawan
Jakarta – The United Nations Climate Change Conference of the Parties (COP26) in November in Glasgow, Scotland, appeared to have brought a new wave of optimism for the future of carbon trading, as shown in the issuance of Presidential Regulation (Perpres) No. 98/2021 on the implementation of carbon pricing for achieving nationally determined contribution target and controlling greenhouse gas emissions in national development (Perpres No.98/2021).
This presidential regulation was issued because of the increasing number of countries that apply carbon pricing (carbon taxes, carbon trading) instruments to reduce carbon emissions. Data from the Chicago Climate Exchange (CCX) from 2020 to November shows that the carbon market has continued to grow despite the economic recession. Currently, 3.76 percent of carbon emission reductions are carried out through carbon trading at a price of US$40 to $80.
Despite the growing demand, the supply of the carbon market is still lower than the expected target to fulfill the first Kyoto Protocol. There are currently two independently operated carbon markets: the compliance market and the voluntary market. The compliance market is mainly driven by the Kyoto Protocol, while the voluntary market is driven by the industrial sector and pressure from investors to meet the net-zero emissions target.
Nowadays, many countries have regulated international carbon trading. However, this scheme may potentially reduce the carbon credits owned by the selling country, which in turn may reduce the nationally-determined contribution (NDC) target. Therefore, Indonesia insists on certain flexibilities in international carbon trading. There is a trend of increasing demand for carbon credits in the voluntary market, while the supply remains small.
Many countries participating in COP want to be quickly involved in international carbon trading under the condition that there are transparency, suitable prices and flexibility to either put it in NDC or sell it. For example, climate impact X provides a platform for carbon trading that fulfills the wishes of the country holding the carbon credits. This certainly shows the future of carbon trading for Indonesia, including the trend of carbon trading in the voluntary scheme.
So far, ecosystem restoration has been regarded as a sustainable forestry business because it restores the forests that are damaged due to exploitation. As there is no written basis for restoration in the forestry laws, this discretion is incorporated into the forest utilization business license (PBPH) in the new Job Creation Law.
There are 14 types of forest utilization in PBPHs that are considered multi business, one of them being non-timber forest product and carbon trading that may be included in the ecosystem restoration scheme. Out of 16 restoration licenses that have existed since 2007, only three to four companies have practiced carbon trading in the voluntary market.
Carbon trading business through forest concession requires various efforts to protect the forests. In addition to keeping the concession away from fires, illegal logging and encroachment, the concession owner also needs to restore the forest into its original ecosystem. Hence, cooperation with the communities around the concession is non-negotiable.
To avoid encroachment -- a technique of setting fire to an area of the forest for community plantations -- the restoration company must encourage them to implement sustainable forest management or provide new sources of income so as not to threaten the ecosystem restoration process in concession areas.
Indonesia is committed to achieving Sustainable Development Goals (SDGs) by 2030. One of the forms of support for sustainable development is the Forest Utilization Business License on Ecosystem Restoration as a form of sustainable forest area management.
There are two main components of an ecosystem restoration management project, namely area management and institutional management. In the first component, area management, there are three pillars: biodiversity, community development and climate change. The three pillars are in accordance with the sustainable forest management principles set out by the government, namely environmental sustainability, social sustainability and economic sustainability. Right now, the harmonization of activities in the forestry sector is still needed to support SGDs.
Ecosystem restoration schemes are located in production forests. Generally, restoration concessions used to be productive forest areas with Forest Management Rights (HPH) that no longer have timber, so the HPH permits are suspended or the HPH permits were revoked as a result of unsustainable management. The key to ecosystem restoration is that the program must be socially acceptable, economically viable and ecologically sustainable.
There are six SDGs related to the environment: clean water and proper sanitation, sustainable cities and settlements, responsible consumption and production, climate change management, marine ecosystems and terrestrial ecosystems. The ecosystem restoration business has become part of the SDG road map and low-carbon development road map.
The SDGs in Indonesia mention the importance of involving the private sector in reporting various forms of support for sustainable development. Currently, the Financial Services Authority (OJK) is designing a green taxonomy for the private sector in hopes that sustainable development will become mainstream. The environmental development pillar consists of six SDG goals, and several targets related to the forestry sector are contained in the 15th goal of the SGDs: life on land. Low-carbon development is the cornerstone in achieving net-zero emissions through collaboration between government and non-government sectors. Currently, the government is also preparing a green fiscal stimulus and other low-carbon fiscal instruments.
The implementation of the new forestry business ecosystem after the Job Creation Law for the achievement of SDGs stated that the incorporation of SDGs in the vision and mission to encourage the achievement of the Environment and Forestry Ministry's 2020-2024 goals are in the form of four pillars, namely environmental, economic, social and good governance.
The reconfiguration of forest management as a single ecosystem (landscape management) consists of environmental management, social management and economic management. Landscape management/sustainable forest management can be achieved through multiple forestry businesses and strengthening the community's legal access. In sustainable forest management, it is necessary to emphasize the components in sustainable forest management, namely area certainty, business guarantee, productivity, product diversity and competitiveness.
In the end, the integration of policies between sectors is important to encourage economic transformation toward a developed and resilient Indonesia led by the Environment and Forestry Ministry.
