ESG and Climate Change Update: The Long-Awaited Carbon Exchange Regulation
Authors
After much anticipation, the Financial Services Authority (Otoritas Jasa Keuangan or “OJK”) finally issued the OJK Regulation No. 14 of 2023 concerning Carbon Trading Through Carbon Exchange (“OJK Reg 14/2023”) as mandated by Article 26 (1) of the Law No. 4 of 2023 regarding the Development and Strengthening of the Financial Sector (“Law 4/2023”).
The OJK Reg 14/2023 is a landmark regulation that establishes the framework for developing and operating carbon trading markets in Indonesia. The regulation is a positive step towards the development of a robust and credible carbon trading market in Indonesia.
This ARMA update explores the key components intricately detailed within the OJK Reg 14/2023.
Carbon Exchange
In line with Law No. 4 of 2023, the OJK Reg 14/2023 also determines carbon units to be classified as securities (efek). This entails their exchange within the carbon market and their mandatory recording in two distinct registers: the Indonesian National Registry System for Climate Change Control (“SRN PPI”) and the Carbon Exchange Operator. Such carbon units are in the form of Business Actor Emission Upper Limit Technical Approval (Persetujuan Teknis Batas Atas Emisi Pelaku Usaha or PTBAE-PU) and GHG Emission Reduction Certificate (Sertifikat Pengurangan Emisi Gas Rumah Kaca or SPE-GRK).
Another noteworthy aspect highlighted by the OJK Reg 14/2023 is that Carbon Exchange Operators possess the capability to enable transactions involving carbon units from foreign countries that have or have not been recorded in the SRN PPI, as long as it does not contrary to laws and regulations. For foreign-sourced carbon units that have not been recorded in the SRN PPI, they must meet the following conditions:
- Have been registered, validated, and verified by accredited institutions from an international registry;
- Fulfil the international carbon exchange trading requirements; and
- Other requirements may be determined by the OJK (after coordinating with the Ministry of Environment and Forestry or “MOEF”).
The ability to trade foreign-sourced carbon units is a significant development that will help to expand the Indonesian carbon market further. Nonetheless, it is crucial to establish proper collaboration between the MOEF, OJK, and Carbon Exchange Operators before introducing foreign-sourced carbon units to the exchange. Moreover, as the Government is likely working on additional regulations on international carbon trading, it is important that these forthcoming guidelines align with the protocols for transactions within the Carbon Exchange.
Carbon Exchange Operator Requirements
Carbon Exchange Operators are required to obtain a license from the OJK to organize and provide systems and/or means to bring together parties to conduct carbon unit transactions. These transactions must occur using an ongoing electronic system until the carbon unit's utilization for fulfilling emission reduction obligations by business entities. This encompassing system shall include the facilitation of buying and selling offers for carbon units, along with the subsequent settlement of these transactions. This settlement shall involve funds or carbon units, applicable to both sector-specific and cross-sectoral participants.
Other than carbon unit transactions, Carbon Exchange Operators can also conduct other activities and develop other carbon unit-based products such as derivative products with underlying assets in the form of carbon units after obtaining approval from the OJK.
As contained in OJK Reg 14/2023, below are the requirements for a Carbon Exchange Operator:
- Must be in the form of a limited liability company legally domiciled in Indonesian territory;
- Has the minimum paid-up capital of Rp100,000,000,000 (one hundred billion Rupiah);
- Every amendment of its articles of association must be approved by the OJK before being notified or submitted for approval to the Ministry of Law and Human Rights; and
- Cannot become a party to conduct transactions for its own benefit in the system it organizes
Carbon Exchange Operator Obligations
In conducting the carbon exchange, the Carbon Exchange Operator has the following obligations:
- Provide systems and/or means to support trading and supervision of carbon unit trading;
- Provide services fairly, effectively, and efficiently to users without discrimination;
- Have adequate internal control and risk management;
- Own, implement, and develop standard operating procedures needed to support business activities, at least regarding service users, trade, trade supervision, systems, regulations, information confidentiality, and business continuity;
- Administrate, store, and maintain records of all service user activities and carbon unit trading data for at least 5 (five) years;
- Make regulations regarding service users, traded carbon units, trade, and trade control;
- Supervise carbon unit trading activities carried out by service users which will need to be approved by the OJK, along with any of its amendments;
- Take certain actions against any indication or violation of laws and regulations related to carbon unit trading; and
- Provide access and support for OJK’s supervision, including real-time access to transaction data.
Other than the above, Carbon Exchange Operators will need to submit a work plan and a yearly budget to the OJK, at least at the end of November each reporting year. The first submission of such work plan and yearly budget will be done at the Carbon Exchange Operators license submission to the OJK.
The Carbon Exchange Operators also have reporting obligations to the OJK, as follows:
- Service user monthly transaction recapitulation report, which is submitted no later than the 5th (fifth) trading day of the following month. This is also reported to the MOEF;
- Annual activity report including annual financial statements that have been audited by accountants registered with OJK, submitted no later than the end of the 3rd (third) month after the date of the annual financial statements. This is also reported to the MOEF;
- Approval and/or rejection of service users and/or change of service user, submitted no later than the next trading day;
- Changes to the organizational structure and/or system, submitted no later than the next trading day;
- Violations and sanctions imposed on the service user, submitted no later than the next trading day;
- Special events related to disruptions to the trading system and supervision, submitted no later than the end of the same trading day;
- BOD and/or BOC resignations, submitted no later than 2 (two) working days since the event is known; and/or
- General meeting of shareholders (“GMS”) results submitted no later than 2 (two) working days from the GMS date, provided that the notarial deed of the GMS must be submitted to OJK no later than 2 (two) working days after the deed’s received.
Carbon Exchange Operator’s Organs
The OJK Reg 14/2023 also regulates the Carbon Exchange Operator’s shareholders, Board of Directors (“BOD”), and Board of Commissioners (“BOC”) which is elaborated below.
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Shareholders
The shares of a Carbon Exchange Operator can only be owned by sui generis institutions, Indonesian citizens, Indonesian legal entities, and/or foreign legal entities that have obtained licensing or are under the supervision of a financial services regulator in their home country. Nominee arrangements are not permitted to be carried out in this matter. Specifically for such foreign legal entities, there are restrictions on the maximum amount of direct or indirect shares ownership as much as 20% (twenty percent) and cannot possess any special rights to nominate a majority of members of the BOD and/or BOC or veto rights on a GMS resolution for significant matters.Shareholders of a Carbon Exchange Operator will need to be approved by the OJK through an assessment of ability and appropriateness and the shareholders need to fulfil the financial integrity and feasibility requirements.
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BOD and BOC
A Carbon Exchange Operator is required to have a minimum of 2 (two) BOD members, with 1 (one) member required to have knowledge or experience in the field of climate change control and carbon markets and cannot concurrently hold the position of another member of the BOD in the same Carbon Exchange Organizer. Further, all of the BOD members are not permitted to concurrently hold positions in other companies. The BOD members must be domiciled in Indonesia.On the other hand, there is a similar minimum number of BOC members of a Carbon Exchange Operator, which is 2 (two) BOC members.
A Carbon Exchange Operator’s BOD and BOC members will need to fulfil the integrity, competency, and expertise requirements, as all potential BOD and BOC members will have to be pre-approved by OJK before their appointment by the Carbon Exchange Operator’s GMS. Both BOD and BOC members are permitted to have a term of office of 4 (four) years and can only be reappointed for 1 (one) more term of office.
Several prohibitions are imposed on a Carbon Exchange Operator’s BOD and BOC members, such as:
- Cannot possess an affiliate relationship with other BOD and/or BOC members;
- Cannot own or owns shares or be a direct or indirect controller to the Carbon Exchange Operator’s service users;
- Cannot conduct caron unit transactions traded in the Carbon Exchange Operator; and
- Engaging in the use of narcotics unrightfully or against the law.
Administrative Sanctions
Failure to comply with the requirements and obligations contained in the OJK Reg 14/2023 shall be met with administrative sanctions imposed by the OJK, to parties directly conducting the violation or parties who caused such violation to occur. These administrative sanctions may be in the form of the following:
- Written warnings;
- Payment of fines;
- Restriction of business activities;
- Suspension of business activities;
- Revocation of business license;
- Revocation of approvals; and/or
- Revocation of registrations.
The imposition of the above-mentioned sanctions can be publicized by the OJK to the public.
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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