Carbon Pricing Regulation in Indonesia: A Legal Analysis

By: Linda Yanti Sulistiawati | APCEL Senior Research Fellow, NUS Law, Singapore, and UGM Assoc. Professor of Law, Indonesia.

On October 29, 2021, Indonesia enacted Presidential Regulation No. 98/2021 on the Economic Value of Carbon to Achieve the Nationally Determined Contribution Target and Control GHG Emissions in National Development (Government of Indonesia, 2021 ) (or Carbon Pricing Regulations, hereinafter referred to as the Regulations’). The economic value of carbon in this Regulation is defined as the value of each unit of greenhouse gas (GHG) emissions produced by human and economic activities (Article 1(2)). The Government of Indonesia (GoI) has stated that the main reasons for this regulation are to provide an adequate quality of life, as provided for in the 1945 Constitution, and to achieve the goal of the Paris Agreement (2015) to limit the global temperature increase to less than 2 degrees Celsius. . The regulation identifies a few trading mechanisms, including a “cap and trade” system between two commercial entities, a carbon offset system, and results-based payments. Carbon trading will be done through an Indonesian exchange and levies will be charged on transactions.

There are several important points to note about this settlement:

First, Indonesia is among 61 countries in the world that have established carbon pricing regulations (World Bank, 2020). Other countries include China, which has piloted carbon taxation in its transport sector since 2020 and is planning monitoring, reporting and verification (MRV) activities in its emissions trading system. (ETS); and India, which holds 7% of the global carbon trading market. The European Union (EU) has EU Emissions Trading Schemes (EU ETS), which is the world’s largest carbon market. These countries are all striving not only to improve their environment, but also to derive economic benefits from it. This shows that green recovery and green development are popular concepts not just because of their touted environmental benefits, but (arguably more so) because they are cost-effective.

Second, Article 1(22) of the regulation states that “the right to carbon is the state’s control of carbon”. We understand that the State would have entrusted him with this mandate, as stipulated in Article 33, paragraph 3, of the 1945 Constitution. However, the word ‘penguasaan’ or ‘control’ must be interpreted as ‘management’ instead of ‘dominion’ or ‘ownership’. Therefore, according to this regulation, the right to carbon is managed by the state, and any benefit from carbon incentives and fiscal instruments to reduce GHG emissions should be used for the people of Indonesia.

As stated in Article 59 of the Regulations, it is very likely that the Indonesian Environment Fund (Badan Pengelola Dana Lingkungan Hidup/BPLDH) will be the designated institution to manage the carbon fund, carbon market profit sharing , results-based payments (RBP ) and carbon tax. The regulation also stipulated that this type of carbon tax would be perceived as a form of non-tax revenue of the state (Penerimaan Negara Bukan Pajak/PNBP), which means that it is possible that this fund will be “earmarked” in as a carbon or climate fund. to be used only for carbon or climate-related activities for the communities concerned. Since this regulation did not specify whether the fund is restricted, it is important to ensure that subsequent implementing regulations do so.

This regulation is complementary to the “carbon tax” instrument which was previously enacted by Law No. 7/2021 on the harmonization of tax regulations. The carbon tax rate is set with a minimum rate of Rp. 30 (USD 0.002) per kilogram of CO2 equivalent (CO2e), or USD 2.13 per tonne of CO2e emission above the stipulated cap (ceiling and tax) (Ministry of Finance of Indonesia, 2021). The tax rate set by the Indian government is one of the lowest carbon tax rates in the world (devtechsys.com). This rate is significantly lower than the carbon tax rate estimated for Indonesia by the World Bank and IMF at USD 30-100 per tonne of CO2 equivalent. Experts have argued that this current tax rate will not encourage behavior change – industries would rather pay the carbon tax than invest in new technologies or use renewable alternatives to reduce emissions of carbon. It is also possible that this low-carbon tax will become an invitation for extractive industries to invest in their activities in Indonesia, which would lead to environmental degradation in Indonesia. The Indian government must make a clear assessment of the current carbon tax, and since the regulation indicates a “minimum rate”, the implementing regulation should increase the tax rate above this minimum rate.

Third, this regulation requires many implementing regulations. These are ministerial decrees on the management of climate change mitigation and adaptation activities; guidelines on validation, verification, independent validator and verification competence standards; sectoral orientations on the carbon market; guidelines on BPR; guidelines on MRV for climate change mitigation, adaptation and carbon pricing; guidelines for the national carbon registration system; Sanctions Guidelines; certification for the reduction of GHG emissions; policies for domestic and international carbon trading; and carbon tax management policies. All such regulations and policies must be promulgated within one year of the promulgation of a by-law a quo. So, Indonesia has a tight schedule to have all these implementing regulations and policies in place by October 2022.

Implementing regulations and policies should clearly elucidate the implementation steps and clarify the roles of all stakeholders involved. For example, the regulations state that the GoI is the developer, executor and regulator of climate mitigation and adaptation action plans, and the benchmark for GHG emissions. Apart from this superficial identification, the roles have not been explained in detail. The regulations also stipulate that carbon pricing activities will have a steering committee to provide guidance on the economic value of carbon in Indonesia, headed by the coordinating minister of maritime affairs and fisheries. The minister in charge of coordinating economic affairs will be the vice-president and its members are the ministries concerned with carbon pricing issues. This steering committee will also oversee and manage carbon pricing issues internally within departments.

However, the ministries in charge of the relevant regulations and/or policies must coordinate with all the institutions and stakeholders involved to organize the technical aspects of the implementation. What remains to be seen is how the Indian government engages the business sectors, academia, non-governmental organizations (NGOs) and especially the public, to convey full and correct information on the technical aspects of carbon pricing.

Fourth, this regulation focuses on terrestrial carbon and excludes “blue carbon”. Blue carbon is the carbon stored in coastal and marine ecosystems (thebluecarboninitiative.org), and in this regulation, blue carbon is said to fall under the jurisdiction of the Ministry of Maritime Affairs and Fisheries. Due to regional autonomy, terrestrial and marine management and benefit sharing also differ. The Regulation states that the economic value of carbon regulation activities on planning; Implementation; monitoring and evaluation; and guidance and support is determined by administrative authorities. Blue carbon would require a different arrangement in terms of planning, implementation and reporting. Section 14(6) of the Regional Government Act gives local governments authority over up to four miles of their coastal areas, but this authority is limited to sharing the benefits of marine resources and not to managing marine resources. marine areas. Provincial governments are authorized to manage marine resources in their areas, up to 12 miles from its coastline to the high seas or territorial seas.

The roadmap for carbon pricing in Indonesia is still long and winding. It will take a few more years from now for Indonesia to really get down to business and start racing in the carbon market arena. The most important things are: Indonesia must prioritize the benefits of carbon pricing for the needs of those directly affected by carbon and climate impacts, such as indigenous communities, local communities and poorest of the poor; and Indonesia must protect its environment according to the principle of sustainable development. These are top priorities and should be reflected as such in the upcoming implementation of carbon pricing regulations.

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