Carbon Pricing Regulation in Indonesia: a Legal Analysis

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

On 29 October 2021, Indonesia enacted a Presidential Regulation No. 98/2021 on Economic Value of Carbon to Reach Nationally Determined Contribution’s Target and Control GHG Emission in National Development (Government of Indonesia, 2021) (or carbon pricing regulation, hereafter referred to as the ‘Regulation’). The economic value of carbon in this Regulation is defined as the value of each greenhouse gas (GHG) emission unit produced from human and economic activities (Article 1 paragraph 2). The Government of Indonesia (GoI) stated that the main reasons for this regulation is to provide an adequate living quality as mandated in the 1945 Constitution, and to meet the Paris Agreement (2015)’s goal of limiting global temperature rise to less than 2Celsius. The Regulation identifies a few trading mechanisms, including a ‘cap and trade’ scheme between two business entities, a carbon offset scheme, and result-based payments. Carbon trading will be conducted via an Indonesian bourse, and levies will be charged on transactions.

There are several important points to note about this Regulation:

First, Indonesia is among the 61 countries in the world that have established carbon pricing regulations (World Bank, 2020). Other countries include China, which has a pilot project in her transportation sector’s carbon taxing since 2020 and is planning their monitoring, reporting, and verification (MRV) activities in their Emission Trading Scheme (ETS); and India, which owns 7% of the world’s carbon trading market. The European Union (EU) has EU Emission Trading Systems (EU ETS), which is the world’s major carbon market. These countries are all striving not only for the betterment of their environment but also for economic benefit. This goes to show that green recovery and green development are popular concepts not just because of their touted environmental benefits, but (arguably more so) because they are profitable.

Second, Article 1 paragraph 22 of the Regulation states that ‘carbon right is the control of carbon by the State’. We understand that the state would have this mandated to her as stipulated by Article 33 paragraph 3 of the 1945 Constitution. However, the word ‘penguasaan’ or ‘control’ should be interpreted as ‘managing’ instead of ‘domination’ or ‘ownership’. Therefore, according to this Regulation, the carbon right is managed by the state, and any benefit from the carbon incentives and fiscal instruments in reducing GHG emission should be used for the people of Indonesia.

As stated in Article 59 of Regulation, it is most likely that the Indonesian Environment Fund (Badan Pengelola Dana Lingkungan Hidup/BPLDH) will be the appointed institution managing the carbon fund, profit-sharing from the carbon market, result-based payments (RBP), and the carbon levy. The Regulation also stated that this type of carbon levy will be collected as a form of non-tax state income (Penerimaan Negara Bukan Pajak/PNBP), meaning that it is possible for this fund to be ‘earmarked’ as a carbon or climate fund to be used only for carbon- or climate-related activities for relevant communities. Since this Regulation has not detailed whether the fund is earmarked, it is important to ensure that subsequent implementation regulations do indeed stipulate this.

This Regulation is complimentary to the ‘carbon tax’ instrument which was previously enacted by Law No. 7/2021 on the Harmonization of Tax Regulation. The carbon tax rate is set with a minimum rate of Rp. 30 (US$ 0.002) per kilogram of CO2 equivalent (CO2e), or US$ 2.13 per ton of CO2e emission above the stipulated cap (cap and tax) (Ministry of Finance Indonesia, 2021). The tax rate set by the GoI is one of the lowest carbon tax rates in the world (devtechsys.com). This rate is acutely lower than the estimated carbon tax rate for Indonesia by the World Bank and IMF at US$ 30-100 per ton of CO2e. Experts have opined that this current tax rate will not encourage behavioral change – business sectors would rather pay the carbon tax than invest in new technologies or use renewable alternatives to reduce carbon emissions. There are also possibilities of this low carbon tax becoming an invitation for extractive industries to invest in their activities in Indonesia, which would cause environmental degradation in Indonesia. GoI needs to make a clear assessment of the current carbon tax, and since the regulation is pointing as a ‘minimum rate’, the implementing regulation should hike the tax rate higher than this minimum rate.

Third, this Regulation demands many implementation regulations. These are ministerial regulations on the management of climate mitigation and adaptation activities; guidelines on validation, verification, independent validator, and verifications standards of competence; sectoral guidelines on the carbon market; guidelines on RBP; guidelines on MRV for climate mitigation, adaptation, and carbon pricing; guidelines for the national carbon registry system; guidelines on sanctions; a certification for GHG emission reduction; policies for national and international carbon trading; and policies for carbon levy management. All these regulations and policies must be enacted within one year after the enactment of a quo Regulation. Thus, Indonesia is on a tight timeline to have all these implementing regulations and policies in place by October 2022.

The implementing regulations and policies must clearly elucidate the steps for implementation and clarify the roles of all stakeholders involved. For example, the Regulation stipulates that the GoI is the developer, executor, and regulator of climate mitigation and adaptation action plans, and the baseline of GHG emissions. Apart from this superficial identification, the roles have not been explained in detail. The Regulation also stated that carbon pricing activities will have a steering committee to give guidance on the economic value of carbon in Indonesia, led by the Coordinating Minister of Marine Affairs and Fisheries. The Coordinating Minister of Economic Affairs will be the deputy chair and its members are the line ministries related to carbon pricing issues. This steering committee will oversee and manage carbon pricing issues internally within ministries as well.

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

Fourth, this Regulation focuses on land-based 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 be under the purview of the Ministry of Marine Affairs and Fisheries. Because of the regional autonomy, land-based and marine-based management and profit-sharing also differ. The Regulation stipulates that the economic value of carbon regulation’s activities on planning; implementation; monitoring and evaluation; and guidance and support are determined by administrative authorities. Blue carbon would need a different arrangement in terms of planning, implementation, and reporting. Article 14 paragraph 6 of the Regional Government Law imbues local governments with authority for up to four miles of their coastal areas, but this authority is limited to marine resources profit sharing and not marine area management. Provincial governments are authorized to manage marine resources in their areas, up to 12 miles from its coastal line to the high seas or territorial seas.

The roadmap for carbon pricing in Indonesia is still long and winding. It will take a couple more years from today for Indonesia to really get her feet down and start running in the carbon market arena. The most important things are: Indonesia needs to prioritize the benefit of carbon pricing for the needs of the people directly affected by carbon and climate impacts, such as indigenous communities, local communities, and the poorest of the poor; and Indonesia needs to safeguard her environment under the sustainable development principle. These are top priorities and need to be reflected as such in the upcoming implementation of carbon pricing regulations.

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