By: Nadia Hadad, the Executive Director of MADANI

Indonesia marked a milestone on September 26, 2023, with the official launch of the Indonesian Carbon Exchange (IDXCarbon). President Joko Widodo emphasized that this is Indonesia's concrete contribution to combat the climate crisis. The revenue generated will be reinvested in environmental preservation efforts, with a specific focus on reducing carbon emissions.

The President also underscored the importance of implementing regulations and voluntary carbon market facilitation in alignment with international best practices, while ensuring they do not impede Indonesia's Nationally Determined Contributions (NDCs) targets.

However, the climate crisis is a multifaceted challenge that demands more than just global emission reductions; it requires an equitable approach that can ensure climate justice. The most severe impacts of the climate crisis are disproportionately felt by marginalized and vulnerable communities.

Based on the ‘polluter pays’ concept, parties responsible for the largest Greenhouse Gas (GHG) emissions must take responsibility for addressing climate change. Not only the mitigation efforts but also adaptation and compensation for those experiencing losses and adverse impacts (loss and damage).

In recent years, major economies and businesses have sought to cancel out their polluting activities by paying for emissions to be reduced elsewhere. Those practices have become a cornerstone for businesses seeking to offset their carbon footprint. This leads to a critical question: does this count as a ‘polluters pay’ concept and whether carbon trading genuinely leads to a reduction in emissions?

Moreover, can the system be implemented in a way that is equitable and guarantees justice, ensuring that vulnerable communities and Indigenous Peoples and Local Communities (IPLCs) can genuinely reap the benefits from this system?

In Indonesia, carbon trading can be conducted either directly or through the carbon exchange. Presidential Regulation 98/2021 outlines two types of carbon trading: emissions trading and GHG offset trading. Domestic offsetting can occur within the same sector or across sectors outlined in the NDC. International offsetting is also permissible, often achieved through schemes like forest protection or avoided deforestation projects, per Ministerial Regulation No. 7 of 2023. Alas, the dominant mechanism in the forestry sector's trading is offsetting.

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This scheme has yet to demonstrate a tangible reduction in emissions and has adverse effects on IPLCs. Recent studies and investigations have shown that these projects overstate their ability to reduce emissions, and may even have detrimental effects on IPLCs.

Notably, reports by The Guardian earlier this year scrutinized projects under Verra, the world's leading carbon standard, and found that more than 90% of rainforest carbon offsets by the biggest certifier are worthless. Furthermore, More than 70% of the reports examined by Carbon Brief found evidence of carbon-offset projects causing harm to Indigenous people and local communities.

Therefore, a more robust standard and a strong regulatory framework should be in place.

As such, certain prerequisites must be met before carbon trading is implemented. Firstly, all countries, including Indonesia, must enhance their NDCs to align with the path towards limiting global warming to 1.5 degrees Celsius and harmonize domestic development policies across all sectors with these climate commitments.

Secondly, strict and transparent caps on GHG emissions must be established for each sector. Currently, only power plants are subject to emission caps. Obligations for GHG emission reduction in the forestry sector need to be reinforced, given the significant land and forest permits by industry players.

Thirdly, offsets should be limited to residual emissions, those that remain after polluters have optimally reduced their GHG emissions. Without this limitation, offset schemes may inadvertently become misaligned incentives.

Fourth, carbon trading regulations must ensure social and environmental integrity, including concepts such as additionality, reliability, and permanence. Compensating energy sector emissions with offset credits from the forest and land sectors should be avoided due to unresolved integrity issues. The framework for social and environmental safeguards entrusted to various existing national and international standards should also be clarified.

The forest carbon trading framework should also promote policies to reduce the disparity in land and forest ownership, a major barrier to community participation. This can be achieved by expediting the recognition of community rights, including those of IPLCs, accelerating the realization of genuine social forestry and agrarian reforms, prioritizing forests for landless communities in cases of claims conflict with corporations, and developing public standards for scientifically valid and freely accessible carbon assets for forest guardians.

Furthermore, the government must ensure transparency and accountability throughout the carbon trading chain.

Finally, considering that forests and ecosystems are highly vulnerable to climate change impacts, building resilience in ecosystems and communities becomes crucial. Therefore, the Economic Value of Carbon must ensure adequate funding for effective and equitable climate change adaptation.

However, the design of the carbon market seems more likely to serve the interests of project developers, auditors and others who make a profit out of this lucrative business. The carbon market as it exists today is not designed to mitigate emissions – in fact, according to many, it might actually be increasing emissions across the world.

Hence, the question is whether carbon trading will be the priority action when the obligation to reduce GHG emissions has not been fairly distributed among those causing the emissions, including business entities. Without meeting the various prerequisites and conditions outlined above, it will be challenging for carbon trading to play a role in achieving climate justice.

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