I. A carbon market in motion: how Indonesia is shaping its legal framework
Indonesia has established a comprehensive legal framework to regulate carbon trading, particularly within the forestry sector, to achieve its Nationally Determined Contribution (NDC) targets under the Paris Agreement.
A pivotal component of this framework is the Ministry of Environment and Forestry Regulation No. 7 of 2023 (MoEF 7/2023), which outlines specific procedures for carbon trading in the forestry sector.
Scope and objectives of MoEF 7/2023:
Enacted on June 15, 2023, MoEF 7/2023 serves as an implementation measure for:
Presidential Regulation No. 98 of 2021, concerning the implementation of carbon pricing to achieve NDC targets and control greenhouse gas (GHG) emissions.
MoEF Regulation No. 21 of 2022, regarding procedures for implementing carbon economic value.
The primary aim of MoEF 7/2023 is to regulate carbon trading procedures in the forestry sector, focusing on:
GHG Emissions Offset (Voluntary Carbon Market – VCM): action of GHG emissions reductions carried out by businesses and/or activities to compensate for emissions made elsewhere. Emission Reduction Certificates (ERC), also called Sertifikat Pengurangan Emisi Gas Rumah Kaca (SPE GRK), are the tradeable commodity in this mechanism.
Transactions are recorded in the National Registry System for Climate Change Control (SRN-PPI). This platform is managed by the Indonesian government to record and monitor climate change mitigation actions, adaptation efforts, and carbon economic value activities. It serves as a centralized database for registering carbon units, including emission allowances and reduction certificates, ensuring transparency and accountability in the carbon trading process. All carbon units must be registered in the SRN-PPI to be eligible for trading on platforms like the Indonesia Stock Exchange’s carbon market, IDXCarbon.
Emissions Trading (Cap and Trade System): transaction mechanism between businesses who have GHG emissions exceeding their designated allowance, also referred to as “cap and trade”. The emission allowance, as the tradeable object, is issued in the form of Technical Approval for Emission Allowance for Business Entity (Persetujuan Teknis Batas Atas Emisi Pelaku Usaha / PTBAE PU). As at 4 November 2023, PTBAE is applied respectively to (1) power plant sub-sector in energy sector; and (2) mangrove and peat land located within or outside forest area in forestry sector.
Technical approval for business entity emission cap (PTBAE-PU): The PTBAE-PU represents the maximum allowable GHG emissions for a business entity within a specified period. This cap is determined based on factors such as the entity's industry sector, historical emissions data, and national emission reduction targets. Entities emitting below their assigned cap may have excess allowances, which can be traded in the carbon market. Conversely, those exceeding their cap must purchase additional allowances or offset their excess emissions through certified reduction projects. In a nutshell, this works like the ETS mechanism but it is specific to Indonesia.
The regulation addresses climate change mitigation efforts, including:
Reducing deforestation
Restoring peatlands
Rehabilitating mangroves
Reforesting former mining areas
Establishing permanent nurseries
Implementing eco-riparian projects
Other relevant actions in the forestry sector
By setting these procedures, MoEF 7/2023 aims to enhance previous regulations and encourage businesses to contribute to Indonesia's NDC targets.
The two mechanisms of GHG Emissions offset and Emissions Trading imply specific authorizations as follows, depending on the various types of forests. Without such authorizations, the projects cannot be implemented.
Areas for carbon projects and corresponding authorizations
AREA | REQUIREMENTS |
GHG Emissions Offset | |
Permanent production forest area, forest area convertible production and utilization blocks of protected forest areas that have Forest Utilization License (Perizinan Berusaha Pemanfaatan Hutan / “PBPH”), social forestry management agreement, or management rights | Implemented by holders of PBPH, social forestry management agreement, or management rights |
Permanent production forest areas, convertible production forest areas, and protected forest area utilization blocks that do not have PBPH, social forestry management agreement, or management rights; | Implemented after obtaining PBPH, social forestry management agreement, or management rights. |
Blocks of other protected forest areas. | Implemented after obtaining Minister’s approval. |
Conservation forest area. | Implemented after having approvals of:
|
Customary forest (Hutan Adat). | Implemented by indigenous people who carry out GHG Emissions Offset activities. |
Private forest (Hutan Hak). | |
State-owned forest that is not recorded by the government. | Implemented after obtaining location determination and/or approval from the governor or minister with their respective authorities under the prevailing laws and regulations. |
GHG Emissions Offset and / or Emissions Trading | |
Peatlands and mangrove areas that are inside a government-recorded forest.
| Implemented after obtaining PBPH, approval for social forestry management, or management rights. |
Peatlands and mangrove areas that are outside government-recorded forest. | Implemented after obtaining approval from governor, regent or mayor, or minister or head institutions with their applicable authority. |
Customary law communities, holders of Social Forestry Management Agreements, and private forest owners who carry out GHG Emissions Offset businesses and/or activities must receive assistance or partners who have experience or expertise related to carbon measurement, project planning and implementation or accessing carbon markets.
II. Understanding non-tax state revenue (PNBP) in Indonesia's carbon trading framework
Under MoEF 7/2023, the Indonesian government has introduced a Non-Tax State Revenue (PNBP - Penerimaan Negara Bukan Pajak) mechanism applicable to business actors involved in carbon trading. This revenue stream is collected by the government from businesses that engage in carbon sequestration and carbon storage activities.
Non-tax state revenue in the carbon sector applies to transactions involving:
Emissions trading – When businesses buy or sell emission allowances, a portion of the transaction value is subject to PNBP.
GHG Emissions Offset Mechanisms – When companies offset their emissions by investing in carbon sequestration projects (e.g., afforestation, mangrove restoration, or peatland rehabilitation), the revenue generated from selling carbon credits is partially allocated as PNBP.
To ensure transparency and traceability, businesses engaged in carbon trading must process their payments through the non-tax state revenue information system (Sistem Informasi Penerimaan Negara Bukan Pajak - SIPNBP). This system centralizes revenue collection, ensuring that state levies are properly recorded and allocated.
The exact rate of PNBP applicable to carbon transactions has not been fully detailed in MoEF 7/2023 but is expected to be determined based on the type of project, scale, and carbon price. This PNBP is likely to Corresponding Adjustment fees in the context of the Article 6 of the Paris Agreement.
III. From local project to certified carbon credits: navigating Indonesia’s registration process
How to obtain the certificate of GHG emission reduction (SPE-GRK)?
The SPE-GRK is an official document certifying that a specific amount of GHG emissions has been reduced or sequestered through approved mitigation activities.
To obtain an SPE-GRK, project developers must:
Prepare a Climate Change Mitigation Action Plan (DRAM) (equivalent to the Project Design Documents (PDD)) outlining methodologies and expected outcomes. Indonesia has developed the Indonesian National Carbon Accounting System (INCAS) to provide a comprehensive and credible account of land-based greenhouse gas (GHG) emissions and removals. INCAS compiles data from various sources, including remotely sensed land cover change data, land use and management information, climate records, soil data, and biomass measurements. While INCAS is tailored to Indonesia's unique circumstances, it aligns with international frameworks such as the Intergovernmental Panel on Climate Change (IPCC) Guidelines for National Greenhouse Gas Inventories.
Undergo validation & verification by accredited third-party verifiers (National Accreditation Committee – Komite Akreditasi Nasional).
Register the validated plan with the SRN-PPI.
Once verified, the SPE-GRK is issued by the Directorate General of Climate Change Control under the Ministry of Environment and Forestry, allowing the credits to be traded in Indonesia’s carbon market. This certificate serves as proof of the GHG emission reductions achieved by the project.
MOEF 716/2023 imposes a limitation on the duration of long-term carbon sales contracts, restricting them to a maximum of five years. This restriction serves to promote transparency and predictability in carbon trading activities. Parties involved in carbon credit transactions must renegotiate and renew their agreements every five years.
IV. Integrating with global markets: is Indonesia ready to recognize international carbon standards?
Indonesia’s acknowledgment of international carbon standards
Indonesia recognizes the importance of international carbon standards and registries, such as the Verified Carbon Standard (VCS) administered by Verra. To harmonize national and international carbon trading practices, the Indonesian Carbon Trading Association (IDCTA) and Verra have established a joint task force.
This collaboration aims to ensure that Indonesia’s emission reduction projects comply with both national regulations and VCS program requirements.
The objective is to facilitate the recognition of Verra’s methodologies and enable the trading of Indonesian carbon credits as Verified Carbon Units (VCUs) in international markets.
Is a Mutual Recognition Agreement (MRA) possible?
The mutual recognition of carbon credits that are not registered under SRN-PPI is possible, but any international carbon registry must first enter into a Mutual Recognition Agreement (MRA) with the Ministry of Environment and Forestry (MoEF).
As of today, no MRA has been signed between the MoEF and any international certification body, such as Verra or Gold Standard.
Currently, any project seeking registration with an international registry like Verra (VCS) must also be registered with SRN-PPI and comply with Indonesian regulations before being recognized on foreign markets.
A dynamic framework moving towards international openness
Indonesia is actively working to establish MRAs with various entities to strengthen its carbon trading framework.
In October 2024, Indonesia and Japan signed a Mutual Recognition Agreement to facilitate bilateral carbon trading under Article 6.2 of the Paris Agreement. This agreement recognizes Indonesian carbon credits as equivalent to Japanese credits, fostering increased cooperation in climate change mitigation efforts.
Indonesia has also signed an agreement with South Korea to explore bilateral cooperation under Article 6 of the Paris Agreement, further demonstrating its commitment to integrating with international carbon markets.
A positive signal for the international carbon market
Recent developments suggest that Indonesia is ready to consider recognizing foreign standards, following nearly three years of a moratorium on new carbon projects.
Additionally, the country has exceeded its climate commitments under the Paris Agreement, resulting in a significant "emission surplus." This positions Indonesia as an attractive destination for hosting international carbon market projects.
⚠️Note: This publication is intended for informational purposes only and does not constitute legal advice.
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