The Carbon Exchange Regulation: Crucial Step to Kickstart Indonesia’s Carbon Trading
The Financial Services Authority Regulation No. 14 of 2023 concerning Carbon Trading through Carbon Exchanges (CE Regulation) recently has been enacted to follow up on Indonesia's ratification of the 2015 Paris Agreement on Climate Change, Law No.4 of 2023 on the Development and Strengthening of the Financial Sector (P2SK Law), as well as Government Regulation No. 98 of 2021 regarding the Implementation of Carbon Economic Value (CEV) for Achieving Nationally Determined Contributions (NDC) and GHG and the Ministry of Environment and Forestry Regulation No. 21 of 2022 concerning the Implementation of CEV. The CE Regulation marks a crucial step for Indonesia's climate change agenda and is anticipated to contribute towards Indonesia's attainment of its NDC goal of achieving net-zero emissions by 2060.
P2SK Law states that the licensing of Carbon Exchange operators (CE Operator) and the oversight and development of Indonesia's carbon exchange (CE) fall under the authority of the Financial Services Authority ("OJK"), which is regulated in more specific ways by the CE Regulation. The CE Regulation provides a comprehensive framework for carbon trading via CE, including the establishment of CE operators, the scope of carbon units included in CE transactions, the process of carbon unit transactions, and the supervision of CE.
Responsibilities of the CE Operator is to facilitate the carbon unit trading system, encompassing two key aspects, namely: meetings for the buying and selling of carbon units; and settlement of carbon unit transactions involving both fund settlement and the carbon units themselves, traded among parties within the same or different sectors.
Establishment of CE operators to be licensed by OJK
The CE Operator must be a limited liability company established under Indonesian law.
Minimum capital of IDR 100 billion
→ all capital not permitted to originate from debt or loans
Maximum capacity owned for foreign shareholders is 20% of shares. Arrangements that grant control to the minority foreign shareholders are not allowed, including the ability to nominate a majority of the BoD and/or BoC. The veto rights during general shareholder meetings must remain with the Indonesian shareholders.
- Have a minimum of two members, with one member having capabilities in climate change control and carbon markets.
- All members’ domiciles are in Indonesia.
- Do not hold simultaneous positions in other companies or filling for other BoD members within the same CE Operator.
- Undergo OJK's fit and proper test.
- Have no affiliations with other BoC or BoD members.
- Hold no ownership stakes in, or control over any users of the CE.
- Abstain from participating in any carbon unit transactions.
- Serve a four-year term, with a maximum of one reappointment.
Articles of Associations
Approval from OJK is required for any alterations to the CE Operator's Articles of Association.
CE operators must establish internal regulations pertaining to the activities of CE users and the oversight of carbon trading.
Tradable carbon units on the CE
The CE Regulation stipulates that carbon units to be traded on the CE must first be recorded in the National Carbon Registry (SRN PPI) and by the CE operator. Tradable carbon units refer to Indonesian Carbon Ownership Certificates as securities and their derivatives, consisting of namely (a) Technical Emission Cap Approval for Business/ Persetujuan Teknis Batas Atas Emisi - Pelaku Usaha (PTBAE-PU) and (b) GHG Emission Reduction Certificate/ Sertifikat Pengurangan Emisi GRK (SPE-GRK).
For carbon units to be classified as securities, "securities" under the capital market also encompass derivatives thereof. CE Operators may undertake additional activities and develop products based on carbon units after securing approval from OJK. Thus, there is potential for the development of derivative products related to carbon units that can be traded in the CE, analogous to existing practices of derivative products related to Indonesia stock exchange such as stocks, bonds, index, and other financial instruments.
International Carbon Unit Trading
The CE Regulation grants authority to CE Operators to facilitate the trading of carbon units originated from foreign countries, regardless of whether these carbon units are listed on the National Carbon Registry (SRN PPI) or not. However, this is subject to conditions including: (i) having been registered, validated, and verified by an institution accredited by international registration system organizers; (ii) meeting the requirements for trading on foreign CE, and (iii) complying with other requirements established by OJK in coordination with the Ministry of Environment and Forestry (KLHK).
What’s next for Carbon Trading in Indonesia
The future of Carbon Trading in Indonesia holds significant promise. While still in its early stages, the Indonesian carbon market has the potential to drive economic growth and environmental sustainability. To ensure its proper functioning and security, further regulations are needed regarding service users, traded carbon units, trading activities, and supervision. These regulations should be developed in consultation with relevant stakeholders, presenting opportunities for investors and traders while boosting carbon market liquidity.
Carbon trading in Indonesia offers intriguing business prospects for additional participants within the carbon trading ecosystem. With potential economic value across various sectors, including energy, waste, industrial processes, product use, agriculture, forestry, and/or other sectors in accordance with advancements in science and technology, carbon credits can play a significant role. However, the only sector that already has implementing regulations is the energy sector, and there is a need for comprehensive regulation in other unregulated sectors to fully harness their potential contributions to Indonesia's carbon market.