Indonesia establishes the legal framework for a domestic emissions trading system
In October 2021, President Joko Widodo of Indonesia signed “Presidential Regulation No. 98/2021 on the Instrument for the Economic Value of Carbon for Achievement of the NDC and Control of Carbon Emissions in Development”, a regulation that will serve as the legal framework for domestic carbon pricing regulations intended to help Indonesia meet the climate targets laid out in its Nationally Determined Contribution.
Indonesia has been considering carbon pricing for several years, with key progress made in 2017 when the “Government Regulation No. 46/2017 on Environmental Economic Instruments” was passed. This provided a first basis for ETS implementation, setting a mandate for an emissions and/or waste permit trading system to be implemented by 2024, within seven years from its passage.
The following year, a study funded by the World Bank’s Partnership for Market Readiness examined four market-based mechanisms that the country might choose to employ: an ETS for the power and industrial sectors, an energy efficiency certificate scheme for industry, a cap-trade-and-tax system, and a carbon offset mechanism. The design and governance framework of an MRV system was also drawn up in 2018 and MRV guidelines for the power sector were published. An online platform for GHG reporting in the electricity sector was also established, and a pilot MRV program was launched for the Java-Madura-Bali electricity grid.
A voluntary and intensity-based pilot ETS for the power sector was implemented between April and August 2021, where participants traded allowances and offset credits stemming from renewable energy generation. 84 coal-fired plants, both public and private, were invited to participate, with 26 eventually taking part. According to government plans, the pilot programme is set to continue with new phases over the coming years before transitioning to a mandatory ETS, which is mandated by 2024.
The much-anticipated Presidential Regulation No. 98 of October 2021 extends the 2017 regulation on environmental economic instruments and lays out the skeleton framework for upcoming ETS. The carbon market is set to operate in conjunction with a carbon tax that was also signed off in October 2021 as part of an updated tax framework Law No. 7/2021 “Concerning Harmonization of Tax Regulations”. This legislation contains for the first time a tax on carbon emissions and is set to be imposed from April 2022 on coal-fired power plants, with a view to gradually expanding to other sectors. Facilities unable to meet their obligations under the ETS will be liable to the tax.
The implementing regulations for this hybrid “cap-trade-and-tax” system are currently being developed and are expected to be released in the coming months.