Indonesia introduces carbon trading policy

Out-Law News | 18 Nov 2021 | 12:30 am | 1 min. read

Indonesia has introduced new rules on carbon trading, according to a Reuters report.

Reuters reported that Indonesian president Joko Widodo signed the regulation before the recent COP26 climate change conference. The text of the regulation has not been made public.

Yeap John

John Yeap

Consultant

An issue for Indonesia to consider is the implication of pricing carbon in an electricity supply sector that is highly subsidised. 

The regulation provides for a cap-and-trade trading mechanism between businesses, a carbon offset scheme and results-based payments, according to Reuters. The regulation requires an exchange to be set up to facilitate the trading.

Renewables and climate change expert John Yeap of Pinsent Masons, the law firm behind Out-Law, said: “With the focus on carbon trading at COP26, we are likely to see wider adoption of such mechanisms across the region. However, as we have seen with similar markets elsewhere, including most recently the adoption of a trading mechanism in China, implementation will not be easy. Issues ranging from a fair allocation of caps across sectors through to pricing and ensuring sensible outcomes from the trading, will need to be considered.”

“Furthermore, an issue for Indonesia to consider is the implication of pricing carbon in an electricity supply sector that is highly subsidised. Where consumers do not pay a cost reflective price for power, the implication of a price for carbon will likely be greater tariff subsidy, which may not influence consumer behaviour. The ability of a carbon pricing mechanism to deliver the desired outcomes will therefore need to be considered,” he said.

The Indonesian government has already asked the Indonesian stock exchange (IDX) to work on the implementation of the carbon trading system, according to an Indonesian local news agency. The country expects to launch the carbon trading scheme during its presidency of the ‘Group of 20’ (G20) large global economies, which runs from 1 December to 30 November 2022.

Meanwhile, it says Indonesia is losing out in the carbon trading business. Currently, some Indonesian companies are active on foreign markets, especially in Singapore, “where they trade on a voluntary basis”, a Jakarta Post journalist said.

Earlier the month, during the COP26 conference, Indonesia joined a pilot programme to support its transition from coal to clean energy, which was set up by global climate finance body the Climate Investment Funds (CIF).

Meanwhile, the country’s finance minister Sri Mulyani Indrawati said that Indonesia could retire coal-fired power generation by 2040 if it gets enough financial assistance from the international community.