Aligning Indonesia’s Carbon Market Regulations with COP29 Outcomes and Article 6 Compliance
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Overview
On 11-22 November 2024, representatives from nearly 200 member countries of the United Nations Framework Convention on Climate Change (“UNFCCC”) attended the 29th Conference of the Parties (“COP29”) in Baku, the capital city of Azerbaijan. Among its notable outcomes, COP29 achieved a significant milestone: a consensus on the operationalisation of Articles 6.2 and 6.4 of the Paris Agreement. The following is a summary of both areas and the implications for Indonesia’s carbon market.
Key Outcomes
Key implementation rules for Articles 6.2 and 6.4, which focus on market-based mechanisms, were clarified and finalised at COP29.
- Article 6.2 of the Paris Agreement
Article 6.2 enables countries to trade Internationally Transferred Mitigation Outcomes (“ITMOs”), allowing one country to support emissions reductions in another and count these reductions toward its own targets.
The discussions on Article 6.2 in COP29 centred on the technical details of authorising bilateral agreements between countries and the conditions for reversing or revoking such authorisations. Notably, the decision adopted at COP29 provides clarity on the three components of authorisation under Article 6.2 of the Paris Agreement, namely the authorisation of:
- the cooperative approach which establishes the framework for countries to collaborate on emissions reductions, ensuring alignment with the Paris Agreement’s goals;
- ITMOs which validate the emissions reductions traded between countries, ensuring they meet environmental and accounting standards; and
- participating entities which accredit entities responsible for implementing or benefiting from these cooperative approaches, ensuring they meet necessary standards.
Further, the finalized text outlines the procedural steps required for approving bilateral agreements for ITMO trading and specifies that revocation of authorisation is only permitted if the conditions outlined in the text are fulfilled.Additionally, a new transparency framework was introduced, requiring all authorisation requests to be submitted through a unified accounting and reporting platform. Countries must publicly disclose approval details for ITMOs. The UNFCCC Secretariat is tasked with verifying annual data submissions for compliance, though no penalties for non-compliance are outlined beyond public disclosure.
Further, it was decided that mitigation outcomes can only be initially transferred if authorized by the first transferring party. The timing of the first transfer is defined as either the first international transfer or as specified by the transferring party. For mitigation outcomes authorized for other international purposes, the transferring Party must establish robust mechanisms to track issuance, use, or cancellation to ensure corresponding adjustments. The first transfer must be recorded by December 31 of the year prior to the relevant biennial transparency report.
Another highlight are decisions to address inconsistencies; regarding the requirement to resolve identified inconsistencies promptly and the request to avoid using ITMOs flagged as inconsistent for achieving their NDCs to prevent double counting. Significant or persistent inconsistencies will be identified by the Article 6 technical expert review team, highlighted in official reports, and brought to the attention of the Paris Agreement bodies. These inconsistencies will also be publicly disclosed to ensure transparency.
The guidance on cooperative approaches under Article 6.2 document also includes decisions to enhance the interoperability of registries under Article 6.4, enabling the connection between national, international, and mechanism registries to ensure seamless data sharing, tracking, and transfer of emission reductions as ITMOs. The secretariat was tasked with providing optional registry services for Parties to issue and manage mitigation outcomes, ensuring these services align with international registry standards but without endorsing the quality or environmental integrity of the outcomes.
- Article 6.4 of the Paris Agreement
Article 6.4 establishes a global carbon market through the Paris Agreement Crediting Mechanism (“PACM”), overseen by a UN supervisory body. This system will issue and track credits (known as A6.4ERs), with the first expected by early 2025.
During the first week of COP29, new methodological standards for the PACM under Article 6.4 were adopted by the UN Supervisory Body. These standards require project developers to conduct risk assessments and demonstrate how their projects support sustainable development, such as poverty reduction, health improvement, and sustainable job creation.
Further negotiations clarified key issues, resulting in an agreed text that: defines the process for authorizing emission reductions, establishes the use of the Article 6.4 registry alongside national registries for tracking carbon credits, and details how legacy Clean Development Mechanism (“CDM”) projects from the Kyoto Protocol can transition to the Article 6.4 mechanism.
Regarding authorisations under the PACM, Article 6.4 credits not requiring corresponding adjustments can now be authorized even after issuance, provided they have not been transferred in or out of the PACM registry. This change allows host countries greater flexibility and control in authorizing mitigation outcomes within their borders. The Article 6.4 Supervisory Body will establish guidelines for setting limits on the post-issuance authorisation process, preventing potential delays that could disrupt market stability.
On Article 6.4 and national registries, it was decided that participating party registries can voluntarily connect to the Article 6.4 mechanism registry, allowing the transfer of authorized A6.4ERs, while ensuring no double counting and enabling access to data on holdings and transaction history.
Further, reforestation and afforestation projects under the CDM can be transferred to the new mechanism if requests are submitted by 31 December 2025, and if they comply with the rules, methodologies, and procedures established by the Article 6.4 Supervisory Body. In relation to Indonesia, there are currently 10 (ten) registered Programmes of Activities hosted by Indonesia under the CDM.
The Implications for the Current Regulations
The outcomes of COP29, specifically the operationalization of Art 6.2 and 6.4 will have direct implications for the global market. These outcomes will provide a clear signal to the parties to participate in Art 6.2 with enhanced environmental integrity and transparency. Indonesia as one of the parties also needs to revisit the current legal framework on the carbon trading regulation particularly Presidential Regulation No. 98 of 2021 regarding Carbon Emission Economic Value (“PR 98/2021”) and the Minister of Environment and Forestry (“MOEF”) Regulation No. 21 of 2022 regarding the Guidelines of Carbon Economic Value Implementation (“MOEF Reg 21/2022”). These regulations form the basis of Indonesia’s carbon pricing mechanism and national registry system, which will result in the legal implications below:
- Alignment with ITMOs and Article 6.4 mechanism
PR 98/2021 already covered the possibility of international carbon trading under the Paris Agreement framework. However, with COP29 outcomes, there are certain matters that need to be refined:
- The necessity to integrate the dual-layer registry system outlined in Art 6.2 for ITMO transactions. The dual-layer system refers to a specific framework with two distinct but interconnected components, each serving a specific purpose, namely (i) an accounting layer for tracking and recording ITMOS; and (ii) a service layer for functional support and holding of ITMOs.
- Explicit provisions for the corresponding adjustment may need to be detailed to avoid double counting and ensure compatibility with Art 6.2 rules.
- MOEF Reg 21/2022 which operationalises the domestic carbon market shall also specify how project credit needs comply with Art 6.4 for baselines, additionality and Monitoring Reporting Verification (“MRV”).
- Enhanced SRN-PPI
One of the major implications of these outcomes is the interconnectivity between national registries, the international registry and the PACM registry. To align with these outcomes, Indonesia’s SRN-PPI needs to align seamlessly with global registry systems to ensure accurate tracking of carbon credits and prevent double counting. This integration should comply with the protocols set out in MOEF Reg No. 12 of 2024 regarding the Implementation of Nationally Determined Contributions in Climate Change Mitigation (“MOEF Reg 12/2024”), which mandates the adoption of compatible data formats and reporting standards to facilitate smooth data exchange between domestic and international systems. Robust cybersecurity measures are essential to protect data integrity, and capacity-building initiatives should be implemented to equip stakeholders with the skills needed for effective management.
- Corresponding Adjustment for ITMOs
To align with the Paris Agreement’s Article 6.2 and the outcomes of COP29, Indonesia needs to establish a well-defined process for Corresponding Adjustment (“CA”) for ITMOs. This process should explicitly address how ITMOs are deducted from Indonesia’s NDC. and ensure transparent tracking to avoid double counting. It is crucial to outline how ITMOs will be accounted for, both domestically and internationally, to prevent the overlap of carbon credits used for compliance purposes.
In this context, the issue of non-ITMO carbon credits must also be clearly defined. These credits should remain available in the domestic compliance market or be sold in the Voluntary Carbon Market (“VCM”) without undergoing CA. To facilitate this, Indonesia shall ensure that regulations distinguish between credits that undergo CA and those that do not, specifying how each category of credits can be used across both markets. This approach will help safeguard the integrity of the carbon market by preventing double counting while ensuring that credits can still contribute to domestic sustainability goals.
MOEF Reg No. 21/2022, alongside other relevant regulations, may need to be amended to clarify the relationship between the VCM and the regulated market. Specifically, amendments should specify whether and how projects in the VCM can opt into the regulated market, setting clear procedures for such transitions. Additionally, regulations should address how non-ITMO credits are treated within the VCM, ensuring their compatibility with domestic regulations and continued trade viability within both domestic and international markets. This will help Indonesia ensure that its carbon market operates in line with global frameworks, contributes effectively to its NDC targets, and supports the broader climate goals under the Paris Agreement.
- Implication on Cooperative Approach
From Indonesia’s regulatory perspective, MOEF Reg 21/2022 contains provisions regarding cooperation and the transfer of emissions outcomes. These provisions must align with the COP29 outcomes. Article 19 and 22 of MOEF Reg 21/2022 state that international carbon trading through cooperation must comply with the Paris Agreement’s regulations, and the transfer of emission reduction outcomes must adhere to the requirements under the Paris Agreement's decisions. Additionally, Article 20 outlines that carbon trade cooperations with foreign business entities require approval, with foreign partners using the cooperation results to fulfil their NDCs once authorized by the Minister of Environment.
While COP29 outcomes set clear technical and procedural requirements, they maintain flexibility by allowing countries to tailor cooperative approaches, provided they adhere to overarching rules, such as avoiding double counting and resolving inconsistencies transparently. Additionally, it was further clarified that the secretariat's provision of registry services or assistance will not involve the establishment of guidance or supervision over national registries by the Conference of the Parties. Instead, the secretariat will focus on providing technical support and ensuring interoperability between national and international registries without regulating or overseeing the management of national systems.
- MRV Requirements
To align with the Paris Agreement and comply with Article 6.4, Indonesia needs to adopt stricter MRV standards within its domestic carbon market. The enhanced MRV protocols from COP29 introduce more rigorous documentation and verification processes, which should be mirrored in Indonesia’s existing legal framework.
The following enhancements should be considered for Indonesia’s MRV system to better align with Article 6.4:
- Ensure clear evidence that emission reductions are real, measurable, additional, and aligned with international standards by demonstrating contributions to sustainable development goals.
- Enhance independent third-party verification to meet PACM standards, ensuring environmental integrity and preventing double counting.
- Indonesia’s domestic registry, SRN PPI, should integrate with international systems to accurately track carbon credits and prevent duplication in compliance markets and international transactions.
- Regulations must ensure continuous monitoring of issued credits, particularly those without corresponding adjustments, to uphold sustainability criteria and maintain global market credibility, aligning with COP29.
Disclaimer:
This client update is the property of ARMA Law and intended for providing general information and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. ARMA Law has no intention to provide a specific legal advice with regard to this client update.
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