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Indonesia’s Carbon Pricing Regulatory Framework in a Nutshell

Author: Maichle Delpiero, Wed, Oct 5th 2022, 18:10

Indonesia’s Carbon Pricing Regulatory Framework in a Nutshell

by: Maichle Delpiero[1]

 

Background

In October 2021, prior to Indonesian President, Joko Widodo, left for the Climate Change Summit in Glasgow, England (“COP 26”), the Indonesian government had issued Presidential Regulation Number 98 of 2021 regarding the Implementation of Carbon Economic Value to Achieve Nationally Determined Contribution Targets and Control Over Greenhouse Gas Emissions in Relation to National Development (“PR 98/2021”). PR 98/2021 was issued to accelerate the achievement of the Nationally Determined Contribution (“NDC”) target[2] and the control of Green House Gases (“GHG”). The NDC target consists of a GHG reduction of 29% or equivalent to 834 million tons of CO2e (through its own efforts) to 41% or equivalent to 1,185 million tons of CO2e (through international framework).

To achieve those targets, it can be fulfilled through the execution of carbon pricing (Indonesian Word: Nilai Ekonomi Khusus “NEK”).[3] NEK is the value of each unit of GHG emissions resulting from human activities and economic activities.[4] This article will provide overview of Indonesian carbon pricing system based on Presidential Regulation 98/2021.

 

Indonesian Carbon Pricing System

Presidential Regulation 98/2021 introduces NEK as mechanism to reduce GHG in Indonesia. The NEK concept is implemented in 3 mechanism as follow.

1. Carbon Trading

Carbon trading is a GHG reduction mechanism through carbon sale and purchasing, both domestically and internationally[5] by (a) adhering to National Registry System for Climate Change Control (Indonesian Word: Sistem Registri Nasional Pengendalian Perubahan Iklim “SRN PPI”); or (b) prioritizing the utilization of GHG emission reduction certificates produced through the national emission reduction certification mechanism.[6] In carbon trading, there are 2 (two) schemes as follows:[7]

  • Emission Trading System

In emissions trading, the government would initially set a tradable Upper GHG Emission Limit (Indonesian Word: Batas Atas Emisi GRK “BAE”). Any business entity having lower emissions than BAE, would be able to sell the leftover emission quotas to companies having exceeded their quotas. This scheme is also often known as cap-and-trade.

In August 2021, this emission trading trial was successfully carried out by PT PLN (Persero) through the Tanjung Jati B (TJB) Unit 4 steam power plant.[8] This power plant sold the emission at a price of Rp. 30,000 per ton of CO2 to Punagaya Power Plant, Pangkalan Susu Power Plant, Sebalang Power Plant, and Teluk Sirih Power Plant. In the trial, the government established the BAE as follows.[9]

No. Category BAE

1.

Power Plant 100-400 MW

1,013 tons CO2 MWh

2.

Power Plant > 400MW

0,918 tons CO2 MWh

3. Mine Mouth Power Plant

1,094 tons CO2 MWh

  •  GHG Emission Offset

The application of this GHG emission offset is applied in the event that a business activity (i) does not have a BAE; or (ii) the results of GHG emission reductions made are below or above the established baseline.[10] GHG emission offset is carried out by business entities by providing compensation through other actors or business activities. The value or price of compensation would be determined on the price set in the carbon market.[11]

In 2021, PT PLN (Persero) successfully conducted a GHG emission offset trial with carbon credit transactions through the Verified Carbon Standard (“VCS”) program.[12] This trial was carried out by PT PJB UP Paiton by purchasing carbon credits produced by the Musi hydropower plant.[13]

By doing carbon offsets, the business actors entities compensate for some of their carbon emissions so that the balance of carbon emissions becomes lower.

Both emission trading and emission offset represent ways to mitigate the effect of global warming. However, it should be noted that both ways use a different approach. In emission trading, the government firstly will set a limit on aggregate emissions from a group of emitters (cap). If the business actor exceeds the predetermined cap, then the business actor can buy the available emission level from other business actors (trade). Meanwhile, in the offset, the business actor will indirectly reduce GHG by compensating their exceeding emission through another business actor performing green business activity, i.e. re-forestation.

2. Performance-Based Payments

Performance-Based Payments are incentives or payments that are obtained from the achievement results of GRK Emissions reduction that has been verified and/or certified and benefits other than carbon that have been validated.[14] Performance-based payments are made to GHG emission reduction performance through verification of achievements that have been made by ministries/agencies, local governments, and business entities.[15] These performance-based payments cover international, national, and provincial scopes.[16] It should be noted that the implementation of this performance-based payment does not transfer any carbon ownership.[17]

 

3. Carbon Levies

The implementation of levies on carbon is carried out in the form of central and regional taxation, customs and excise, as well as other state levies, based on the content/potential/amount/performance of reducing carbon emissions.[18] On October 29, 2021, Indonesian Government has issued Law Number 7 of 2021 concerning Harmonization of Tax Regulations (“Tax Harmonization Law”) which also regulates the taxes on carbon emission. Below are the general provisions regarding the carbon tax in the Tax Harmonization Law.

No. Aspects Provision
1. Application

Carbon taxes are imposed on carbon emission which have a negative impact on the environment by taking into account (a) the carbon tax roadmap; and/or (b) the carbon market roadmap.[19]

2. Subject

Private persons or entities purchasing carbon-containing goods and/or carrying out activities producing carbon emission.[20]

3. Rate

The carbon tax rate is set to be higher or equal to the carbon price in the carbon market per kilogram of carbon dioxide equivalent (CO2e) or equivalent units.[21]

However, in the event that the price of carbon in the carbon market is lower than IDR 30.00 kilograms of carbon dioxide equivalent (CO2e) or equivalent units, the carbon tax rate is set at a minimum of IDR 30.00 per kilogram of carbon dioxide equivalent (CO2e) or equivalent units.[22]

4. Form and Condition of Incentives

Taxpayers participating in emissions trading carbon, offsetting carbon emissions, and/or other mechanisms according to the laws and regulations in the environmental field can be given following incentives: [23]

  • Carbon tax reductions
  • Special treatment for carbon tax compliance

Condition:[24]

Taxpayers must participate in carbon emission trading, offsetting carbon emissions.

Despite the realization of carbon emission reduction effort by the enactment GR 98/2021, however this the implementation of this carbon legislation has not been allowed to be fully in effect due to the requirement of definitive and implementing rules. Indonesian Government is reported would release the implementing regulation as early as October 2022.

 

C. Key Takeaways

  1. In achieving the NDC target, precisely on reducing GHG emissions, Indonesian Government issued PR 98/2021 containing the set of rules and guidelines on the carbon pricing system (NEK).
  2. PR 98/2021 introduces 3 types of NEK mechanism: (a) trading (emissions trading and GHG emission offsets); (b) performance-based payments; and (c) carbon levies.
  3. The carbon trading would still require the derivative and implementing regulations of PR 98/2021, which is predicted to be issued on October 2022.

 

References:

[1] Paralegal in Armila & Rako.

[2] Article 3 paragraph (3), PR 98/2021.

[3] Article 45, PR 98/2021.

[4] Article 1 paragraph (2), PR 98/2021.

[5] Article 48 paragraph (1), PR 98/2021.  

[6] Article 48 paragraph (3), PR 98/2021.

[7] Article 49 paragraph (2), PR 98/2021.

[8] CNN Indonesia, “PLTU PLN Sukses Uji Coba Perdagangan Emisi Karbon”, https://www.cnnindonesia.com/ekonomi/20210814105701-90-680307/pltu-pln-sukses-uji-coba-perdagangan-emisi-karbon, accessed on 27th July 2022.

[9] Ibid.

[10] Article 52 paragraph (2), PR 98/2021.

[11] Article 54 paragraph (1), PR 98/2021.

[12] CNN Indonesia, “PLTU PLN Sukses Uji Coba Perdagangan Emisi Karbon”, https://www.cnnindonesia.com/ekonomi/20210814105701-90-680307/pltu-pln-sukses-uji-coba-perdagangan-emisi-karbon, accessed on 27th July 2022.

[13] Ibid.

[14] Article 1 number 20 PR 98/2021.

[15] Article 55 paragraph (1), PR 98/2021.

[16] Article 55 paragraph (3), PR 98/2021.

[17] Article 55 paragraph (4), PR 98/2021.

[18] Article 58 paragraph (1), PR 98/2021.

[19] Article 13 paragraph (1) and (2), Tax Harmonization Law.

[20] Article 13 paragraph (5), Tax Harmonization Law.

[21] Article 13 paragraph (8), Tax Harmonization Law.

[22] Article 13 paragraph (9), Tax Harmonization Law.

[23] Article 13 paragraph (13), Tax Harmonization Law.

[24] Article 13 paragraph (13), Tax Harmonization Law.