Mitigating the risk of climate change necessitates the control of greenhouse gases, whereby Indonesia’s mechanism of control is through carbon trading via a Carbon Exchange (targeted to launch this September). Carbon trading uses a cap-and-trade scheme; the Ministry of Environment and Forestry (Kementerian Lingkungan Hidup dan Kehutanan Republik Indonesia/“MOEF”) sets a limit on carbon emissions and entities are permitted to trade their quota of carbon emissions.
Thus, as promised by Article 26 (1) of Law No. 4 of 2023 on Development and Strengthening of the Financial Sector (“Law 4/2023”), the Financial Services Authority (Otoritas Jasa Keuangan/”OJK”) released OJK Regulation No. 14 of 2023 on Carbon Trading Through Carbon Exchange (POJK 14/2023”) to accelerate the establishment of the cross-border carbon exchange. Pivotal provisions of POJK14/2023 are elaborated further below.
Establishment and Operation of the Carbon Exchange
- Purpose of Carbon Exchange
Since Indonesia ratified the Paris Agreement to the United Nations Framework Convention on Climate Change through Law No. 16 of 2016, it has done little to develop its commitment to reaching its National Determined Contribution (“NDC”). As proven by the Climate Action Tracker,[1] Indonesia is deemed ‘highly insufficient’ in completing their NDC target of reducing emissions to 31.89% (thirty-one point eight-nine percent) (unconditional) and to 43.20% (forty-three point twenty percent) (conditional – subject to availability of international support for finance, technology transfer and development and capacity building).
Hence, as a progressive step forward, Indonesia’s introduction to POJK 14/2023 paves an economic incentive for businesses to proactively regulate their outtake of greenhouse gases by simplifying carbon trading domestically and internationally by utilizing a Carbon Exchange. This incentive is evident with POJK 14/2023’s introduction to the international platform during the ASEAN Business and Investment Summit (ABIS) 2023, whereby the Minister of Coordinating Economic Affairs urged collaborations between the ASEAN countries for carbon trading.[2]
- Carbon Exchange Organizer (“CEO”)
The requirements for entities to be a CEO are set out below inter alia:
a. A limited-liability company domiciled in Indonesia;[3]
b. Have a paid-up capital of at least IDR100,000,000,000.00 (one hundred billion Rupiah) that is not in the form of loans;[4]
c. OJK must approve shareholders of a CEO [5] and constitute (i) sui generis institutions (i.e., Bank Indonesia, the Investment Management Agency, and the Indonesian Export Financing Agency); (ii) Indonesian citizens; (iii) Indonesian legal entities; and/or (iv) foreign legal entities that have obtained licenses or are under the supervision of the financial services regulators in their country of origin (capped at 20% of shares directly or indirectly owned of all shares with voting rights);[6]
d. All shareholders, directors (must also be domiciled in Indonesia), and commissioners of a CEO must pass the fit-and-proper test from OJK;[7]
e. At least have 2 (two) directors and 2 (two) commissioners whereby at least one director has knowledge or experience in the field of climate change control and carbon market;[8]
f. A market organizer that (i) organizes and provides systems and/or facilities to allow for parties to engage in transactions of securities or financial instruments in the capital market or financial market; and (ii) already has a business license as a CEO issued by OJK;[9]
g. Use electronic systems to match ongoing carbon unit transactions;[10]
h. Provide a carbon unit trading system that can (i) match offers of sale and purchase of carbon units (either directly and/or using an intermediary i.e., depository and settlement agency such as the Indonesia Central Securities Depository/PT Kustodian Sentral Efek Indonesia in the context of the capital market within the Indonesian Stock Exchange); and (ii) settle carbon unit transactions. It should be noted that trading may be conducted within and/or outside the same sector;[11]
i. Must have adequate internal control and risk management and administer, store, and maintain records of all service user activities and carbon unit trading data for a minimum period of 5 (five) years;[12]
j. Formulate regulations on service users, carbon units traded, trading, and trading supervision subject to the approval of OJK;[13]
k. Provide access and support to OJK for supervision of the CEO and its service users, including real-time access to transaction data;[14]
l. OJK must approve of any amendments to a CEO’s articles of association prior to submission to the Ministry of Law and Human Rights;[15]
m. Must submit and apply for approval on annual work plans and budgets to OJK by the end of November every year;[16]
n. Must submit reports to OJK via an electronic reporting system that include inter alia: (i) monthly transaction recapitulation of service users; (ii) annual activity report, including a financial statement that has been audited; (iii) approval and/or rejection of the parties applying as service users and/or changes in service users; (iv) changes in the organizational structure and/or system; and (v) violations and sanctions imposed upon service users;[17] and
o. Must submit report to MOEF via an electronic reporting system on (i) monthly transaction recapitulation of service users; and (ii) annual activity report, including a financial statement that has been audited.[18]
The authorities and prohibitions for CEOs include:
a. May develop carbon unit-based products after obtaining approval from OJK (i.e., derivative products with underlying assets in the form of carbon units);[19]
b. May engage with other third parties to conduct customer due diligence and/or establish a single service user identity number;[20]
c. Prohibited to conduct a transaction in its system for its interests;[21] and
d. Directors and/or commissioners of a CEO are prohibited from (i) having affiliation with other directors and/or commissioners of a CEO; (ii) owning shares or becoming controllers directly and/or indirectly of users of their service; (iii) conduct carbon trading transactions; and (iv) engage in illegal or unlawful use of narcotics.[22]
OJK may publicize any administrative sanctions resulting from non-compliance,[23] which includes the following:[24]
a. Written warning;
b. Fines, namely the obligation to pay a certain amount of money;
c. Restriction of business activities;
d. Suspension of business activities;
e. Revocation of business licenses;
f. Cancellation of approvals; and/or
g. Cancellation of registration.
It must be emphasized that despite the target of the Carbon Exchange to launch this September, the registration of CEOs is yet to be opened due to the delay of the Circular Letter.[25] However, existing exchanges such as the Indonesian Stock Exchange (PT Bursa Efek Indonesia), and the Indonesia Commodity and Derivatives Exchange Group (ICDX) through the Indonesian Climate Exchange (ICX), have previously determined their interest and readiness to be CEOs.
Carbon Trading Mechanism
The general overview of the procedure for trading carbon units within the Carbon Exchange so far constitutes the following stages:
a. The MOEF establishes carbon emission limits and sets the quota while considering Indonesia’s NDC. Entities capable of reducing their carbon emissions below the stipulated PTBAE-PU threshold trade their surplus quota.
b. Carbon units constitute securities within the Carbon Exchange and must fulfill the following obligations to be ready for trade:
i. Listed on the National Registry System for Climate Change Control (Sistem Registri Nasional Pengendalian Perubahan Iklim/”SRN PPI“) and the CEO;[26] and
ii. In the form of Technical Approval of Upper Emission Limits for Business Players (“PTBAE-PU“) and Greenhouse Gas Emission Reduction Certificates (“SPE-GRK“).[27]
c. Foreign carbon units may be traded in the Carbon Exchange[28] as long as they fulfill the following conditions:
i. Must be listed on SRN PPI; and
ii. If the carbon units are not listed in SRN PPI, the carbon units must be (i) registered, validated, and verified by an institution that has obtained accreditation from an international registration system organizer; (ii) meet the requirements to be traded on a foreign Carbon Exchange; and (iii) other requirements determined by the Financial Services Authority.[29] It should be noted that this provision is still ambiguous and requires consultation with the minister of MOEF.[30]
The mechanism as well as the requirements to conduct trading within the Carbon Exchange is still inadequately guided which will hopefully be elaborated within the Circular Letter that will be issued by OJK in the near future.[31]
Closing Remarks
Indonesia’s target to launch the Carbon Exchange soon after the landmark issuance of POJK 14/2023 is in the right direction. However, seeing as the Circular Resolution from OJK and the regulations of CEOs on implementing carbon trading have yet to be published leaves room for doubt that the Carbon Exchange will be open soon. Thus, is OJK ambitious or just overly ambitious? This will ultimately unfold within the next few weeks as the public speculates whether or not the Carbon Exchange launch will be postponed.
[1] An independent scientific project that tracks government climate action and measures it against the globally agreed Paris Agreement aim of “holding warming well below 2°C, and pursuing efforts to limit warming to 1.5°C.” A collaboration of two organisations, Climate Analytics and NewClimate Institute, the CAT has been providing this independent analysis to policymakers since 2009.
[2] https://en.antaranews.com/news/292737/minister-seeks-asean-cooperation-in-carbon-trading-at-abis-2023.
[3] Article 11 of POJK 14/2023.
[4] Article 13 of POJK 14/2023.
[5] Article 15 of POJK 14/2023.
[6] Article 14 Paragraph (1) of POJK 14/2023.
[7] Article 14 and Article 16 of POJK 14/2023.
[8] Article 19 and Article 20 of POJK 14/2023.
[9] Elucidation of Article 4 of POJK 14/2023.
[10] Article 7 Paragraph (2) of POJK 14/2023.
[11] Article 7 Paragraph (5) of POJK 14/2023.
[12] Article 24 Letter (c) and Letter (e) of POJK 14/2023.
[13] Article 24 Letter (f) and Article 28 Paragraph (1) of POJK 14/2023.
[14] Article 24 Letter (i) of POJK 14/2023.
[15] Article 29 of POJK 14/2023.
[16] Article 30 of POJK 14/2023.
[17] Article 31 Paragraph (1) and Article 32 Paragraph (1) of POJK 14/2023.
[18] Article31 Paragraph (2) and Article 32 Paragraph (1) of POJK 14/2023.
[19] Elucidation of Article 6 Paragraph (2) of POJK 14/2023.
[20] Article 7 Paragraph (4) of POJK 14/2023.
[21] Article 9 of POJK 14/2023.
[22] Article 21 of POJK 14/2023.
[23] Article 35 of POJK 14/2023.
[24] Article 33 Paragraph (4) of POJK 14/2023.
[25] https://investasi.kontan.co.id/news/mepet-target-pendaftaran-penyelenggara-bursa-karbon-belum-dibuka.
[26] Article 3 Paragraph (2) of POJK 14/2023.
[27] Article 5 of POJK 14/2023.
[28] Article 3 Paragraph (3) of POJK 14/2023.
[29] Article 3 Pargraph (4) of POJK 14/2023.
[30] Article 3 Paragraph (5) of POJK 14/2023.
[31] Daftar Tanya Jawab Lazim/Frequently Asked Questions (FAQ) Peraturan Otoritas Jasa Keuangan Nomor 14 Tahun 2023 Tentang Perdagangan Karbon Melalui Bursa Karbon.