Abstract
Indonesia, an archipelagic economy with a continuously-growing US$1.3 trillion GDP, is influenced by unique biodiversity and recognized as world’s major exporter of natural resources. It also holds 75-80% of the world’s carbon sinks. For instance its mangrove forests and peatlands store 20 and 37% of global carbon credits respectively, while rainforests store 25 Gt carbon. On one hand, these made Indonesia a potential hotspot for carbon market, that if valued at US$ 5 per tonCO2, could lead to US$ 150 billion economy in revenue. On the other hand, Indonesia’s emissions also increased during the COVID-19 recovery from 1.1 to 1.2 GtCO2eq in 2022, making it the world’s 6th biggest emitter. Though so, Indonesia has been strengthening its ambitions, committing to reduce GHG by 31.89% unconditionally or 43.2% with international support by 2030, and implementing carbon pricing and market is imperative to achieve this, among other methods such as result-based payments.
Carbon trading in Indonesia has so far been implemented in private manner and/or between coal-fired power companies, with the latter focused on compliance rather than voluntary that should be reinforcing each other. This is perhaps due to clear cost benefit, showed by mathematical model that offsetting in the carbon market is much more cost-efficient than installing, for instance, carbon capture technology, at US$ 6.5/tonCO2e vis-à-vis US$ 92.5/tonCO2e (assuming carbon price remains below $100/ton CO2e for the next couple of years).
It is also important to note the social value of carbon market such as newly-generated carbon sequestration projects by local communities, environmental justice principles and ethical standards. In September 2023, Financial Services Authority (OJK) launched IDXCarbon at the Indonesian Stock Exchange with 16 companies recording 459.970 tonCO2eq transactions, all to help address net zero targets while creating economic benefits and putting the first leaps in positioning Indonesia as a leader in this field.
To accelerate this progress, Government of Indonesia has been making strategic efforts in setting up grants and funding incentives through Badan Pengelola Dana Lingkungan Hidup (BPDLH) of the Ministry of Finance and national emission data management (SRN-PPI) at the Ministry of Environment & Forestry (KLHK). Though so, at infrastructure level, challenges exist in closing the innovation gaps and carbon market knowledge management, determining entity level emission caps, integrating centralized carbon registry system, and ultimately incentivizing industries beyond recognizing efforts through green taxonomy and sustainable financing. At system level, further challenges remain in continuing developing the long-term carbon trading roadmap and implementation acceleration champions, ensuring industrial viewpoints are accommodated and improving collaboration among ministries, institutions and private sectors.
Further, identified gaps in the regulatory scheme encompass carbon tax incentives, sectoral regulations, and the absence of frameworks for waste, agriculture, industry, and transportation sectors. Challenges within the current regulatory schemes involve multiple approval processes, mandatory national recognition, and administrative burdens for businesses engaged in Carbon Trading. To address this includes the enactment of comprehensive regulations by Ministries relevant to these sectors.
Now as Indonesia develops its outlook of the upcoming political cycle in 2024, its progressive private sector contribution should be further recognized and optimized, especially with the governance-level support. The country is in “crisis”, where turning points will mean breaking through on many fronts if it truly wants to emerge as a winner in carbon market.