The Development of the Indonesian Carbon Market after Presidential Regulation No. 98 of 2021: What’s Next?

13 Jul

Presidential Regulation No. 98 of 2021 concerning the Implementation of Carbon Economic Value for Achieving Nationally Determined Contribution Targets and Control of Greenhouse Gas Emissions in National Development (“PR 98/2021”) was issued the past year and became one of the critical legal bases for the Government’s effort to reduce greenhouse gasses (“GHG”) and achieve Indonesia’s Nationally Determined Contribution (“NDC”). The regulation also stipulates the implementation of carbon economic value (nilai ekonomi karbon or “NEK”) and introduces specific mechanisms to implement NEK in order to achieve NDC through (i) carbon trading, (ii) result-based payment, (iii) carbon levies, and/or (iv) other mechanisms that is determined by the Minister of Environment and Forestry (“MOEF”).

Previously, we have highlighted the key points of PR 98/2021 in this ARMA Update. However, PR 98/2021 serves as the ground rules for Indonesia's growing carbon market. Further technical provisions for the actual practice of carbon trading and result-based payment have yet to be addressed in the implementing regulation. This ARMA Update will address the aspects that need to be regulated in the MOEF regulation as the implementing regulation of PR 98/2021.

Points of Discussion

Several matters need to be adjusted or further regulated in the MOEF regulation that will serve as the implementing regulation of PR 98/2021, which we have broken down into the following points:

GHG Emission Limit

The GHG Emission Limit is the maximum GHG emission level for a certain period determined by arranging and determining the GHG emission level in the sub-sectors and businesses and/or activities by the relevant minister. To implement carbon trading in the form of an emission trading mechanism, each business actor needs to have a GHG Emission Limit. However, PR 98/2021 does not regulate the mechanism for determining the GHG Emission Limit for each business actor. Thus, a comprehensive arrangement is needed that can allow for the implementation of emission trading.

Indonesia Certified Emission Reduction (“ICER”)

PR 98/2021 stipulates that ICER, which is the certificate of GHG emission reduction issued by the MOEF, cannot be used for international trade without authorization from the MOEF. Thus, the process and requirements for obtaining the authorization need to be regulated to support the use of ICER in international carbon trading.

In addition, it is necessary to clarify the obligations to obtain authorization for the voluntary carbon market to emphasize that the use of voluntary certification can be used without authorization from the MOEF. The MOEF issued a press release on 11 April 2022 (“Press Release 11 April”), that states that all carbon projects, including ones using voluntary certifications, are in line with the PR 98/2021. However, some carbon projects are still in the process and are struggling to achieve compliance. It is crucial to regulate the voluntary carbon market further to ensure and accommodate the conformity of all carbon projects in Indonesia.

Monitoring, Reporting, and Verification (“MRV”) System

PR 98/2021 contains the MRV mechanism to be used to carry out carbon trading and result-based payment activities, including activities that use voluntary certification mechanisms other than ICER. Thus, it is necessary to regulate further the carbon trading reporting obligation procedures that use voluntary certification based on PR 98/2021. Carbon trading reports have previously been regulated in several MOEF regulations but are less effective since carbon trading using voluntary certification is often not reported. The issuance of PR 98/2021 provides the right momentum to integrate the voluntary carbon trading and performance-based payments system in accordance with PR 98/2021.

Corresponding Adjustment

The corresponding adjustment is stipulated in the Paris Agreement in which the parties who choose to carry out voluntary cooperation that includes the use of internationally transferred mitigation results to become NDC achievements must use calculations that guarantee the prevention of double counting. PR 98/2021contains provisions regarding mutual recognition in foreign carbon trading. The MOEF carries out mutual recognition through (i) disclosure of information on the use of MRV standards; (ii) conformity with the use of international standards and/or SNI; (iii) statement of conformity results; (iv) creating and implementing mutual recognition; and (v) registering a certification recognized by both parties in the SRN PPI.

Thus, would this be the basis for a corresponding adjustment in implementing the NEK in Indonesia?

The MOEF, in the Press Release 11 April, aims to reduce any possibility of double-counting to ensure that Indonesia does not miss its NDC target. Thus, the matter of the corresponding adjustment will need to be addressed in the implementing regulations that will further regulate the corresponding adjustment.

NEK Implementation in Agriculture, Forestry, and Other Land Use Lands

Carbon trading and result-based payments are often implemented through Agriculture, Forestry, and Other Land Use (“AFOLU”) projects. Prior to PR 98/2021, carbon sequestration and storage carried out in forests were regulated in various MOEF regulations, one of which was the obligation to have a Utilization of Carbon Storage and/or Sequestration Business Permit. However, this provision is not reflected in the latest regulation, leaving questions regarding the basis and licensing for forest carbon activities.

On the other hand, there are regulatory disparities in carbon activities carried out in agricultural land and other land use areas. The lack of regulation in the agricultural sector can hinder the development of carbon projects involving agricultural activities. PR 98/2021 is an umbrella regulation for the implementation of NEK in various sectors, but policies in agriculture are required as mandated to ensure the synergistic implementation of NEK.

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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