Carbon trading (carbon trading) is an activity of buying and selling carbon credits, in which the buyer produces carbon emissions that exceed the set limit. Carbon credit is a representation of the 'right' for a company to emit a number of carbon emissions or other greenhouse gases in its industrial processes. One unit of carbon credit is equivalent to reducing the emission of 1 ton of carbon dioxide (CO2).
Carbon credits that are sold generally come from green projects. Verification agencies such as Verra will calculate the ability of forest land to absorb carbon in certain projects and issue carbon credits in the form of certificates. Carbon credits can also come from companies that produce emissions below the threshold set by their industry.
The local government will usually issue these credits up to certain limits. If the company produces less emissions than the credits it has, then the company can sell these credits on the carbon market.
However, if the resulting emissions exceed the credits owned, the company must pay fines or buy credits on the carbon market. Thus, countries in the world can control the amount of carbon emissions produced and reduce the impact of greenhouse gases significantly.
First and foremost, carbon trading is a key tool in addressing the urgent challenge of climate change. This allows us to reduce the impact of greenhouse gas emissions, especially carbon dioxide, which is the main cause of global warming. By understanding carbon trading, individuals and organizations can actively contribute to reducing emissions and fighting climate change. Carbon trading offers significant economic incentives. Through the establishment of a carbon market, emission allowances are assigned a monetary value. This creates a financial framework within which companies can trade these allowances, providing strong incentives for emission reductions. By learning about carbon trading, individuals can identify opportunities to invest in cleaner technologies, increase energy efficiency, and adopt sustainable practices. This not only helps the environment but also benefits businesses by reducing costs and increasing long-term competitiveness.
Carbon trading also offers insight into flexibility and cost efficiency in emission reduction strategies. The carbon market allows entities to choose the most cost-effective method of reducing emissions. This flexibility ensures that emission reductions occur where they have the greatest impact, maximizing the efficiency of mitigation efforts. By understanding carbon trading, individuals can identify opportunities to invest in emission reduction projects, explore renewable energy options, and make informed decisions about sustainable practices.
Finally, learning about carbon trading is critical to fulfilling international commitments. Many countries have pledged to reduce their greenhouse gas emissions under international agreements such as the Paris Agreement. Understanding carbon trading mechanisms allows countries to meet their emission reduction targets and meet their obligations. There are several international agreements, which is:
Stockholm, 1972
The United Nations holds a Conference on the Human Environment. At this conference, representatives from various countries met for the first time and discussed the global environmental situation.
Rio de Janeiro, 1992
The UN held the Earth Conference, where at this conference a working convention was formed called the United Nations Framework Convention on Climate Change (UNFCCC). The main goal of the UNFCCC is to stabilize the concentration of greenhouse gases in the atmosphere to a safe level.
Kyoto, 1997
The UNFCCC regulates the provisions for the stability of greenhouse gas concentrations in the atmosphere in the Kyoto Protocol. This Protocol was ratified on 11 December 1997 and entered into force on 16 February 2005. The first commitment period started in 2008 and ended in 2012, in which 38 industrialized countries and the European community were required to reduce greenhouse gas emissions by an average of 5 % below emission levels in 1990.
In the second commitment period (2013-2020), the emission reduction target was 18% below the 1990 level. Although the Kyoto Protocol was able to reduce emissions in bound countries (27% of global carbon emissions in the first period, and 15% in the second), but global carbon emissions also increased by 2.6% in 2012 or about 58% higher than the 1990 level.
Paris, 2015
Acting from the Kyoto Protocol, 195 governments from various countries agreed to a global climate agreement known as the Paris Agreement on 12 December 2015. The Paris Agreement is completely voluntary. These countries are committed to reducing their greenhouse gas emissions and ensuring that global temperatures do not rise by more than 2˚C (3.6˚F), while keeping global temperature increases below 1.5˚C (2.7˚F).
The Paris Agreement became effective on 4 November 2016. Countries that have agreed to the Paris Agreement are required to submit Nationally Determined Contributions (NDCs) – emission reduction plans and implementation strategies every five years. Each new NDC must be more ambitious than the previous plan, particularly in terms of increasing the reduced emission target.
From a government and regulatory perspective, carbon trading is more feasible and easier to implement than regulations that directly limit and tax carbon emissions. Direct regulation will be more expensive from a budgetary point of view and limit the space for industrial-driven economic growth.
Through carbon trading, the government can also monitor the amount of carbon emissions produced in the country in a more organized manner. This is because the amount of emission and absorption potential is measured against predetermined standards. The number of carbon credits circulating in the carbon market will certainly help control the amount of carbon emissions released into the atmosphere.
Carbon footprint comes from various emission sources. It encompasses direct emissions (Scope 1) and indirect emissions (Scope 2 and Scope 3). An entity must be able to count its Scope 1 and Scope 2 emissions, meanwhile Scope 3 emissions is considered optional and only be reported if the data collected is reliable. The carbon footprint in various industries can vary depending on the nature of their operations, energy sources used, and the extent of emissions-intensive activities involved.
Below are examples of carbon footprints in different industries:
Industry Sector | Scope 1 Emissions | Scope 2 Emissions | Scope 3 Emissions |
Energy and Power Generation | Combustion of fossil fuels in power plants; coal transportation | Purchased electricity, steam, or heat | Extraction, production, and transportation of fossil fuels; consumption of electricity or heat by end-users |
Manufacturing and Industrial | On-site combustion of fossil fuels for boilers, furnaces, engines | Use of purchased electricity, heat, or steam in manufacturing | Emissions across the entire value chain; disposal of the final product; production and transport of feedstock |
Transportation | Combustion of fossil fuels in vehicles, aircraft engines, ships | Purchased electricity for electric rail systems | Vehicle manufacturing; fuel production; business travel; employee commuting; transportation of goods |
Agriculture and Food Production | Enteric fermentation in livestock; manure management; on-farm energy use | Generation of purchased electricity, heat, or steam for the operation | Production and transport of agricultural inputs; land use changes; distribution of agricultural products and food waste |
Building and Construction | On-site combustion of fossil fuels during construction | Energy consumed by buildings and construction sites | Production and transport of building materials; disposal of construction waste |
Retail and Consumer Goods | On-site combustion of fossil fuels for facility operations | Energy consumption of retail stores and facilities | Production and distribution of goods; business travel; waste management; end-of-life disposal |
Financial and Service Sectors | Emissions from construction vehicles and equipment; operations | Energy consumption of office buildings, data centers | Employee commuting; business travel; procurement of goods and services; investment and lending emissions |
Based on GHG Protocol, below are the outline of the process for calculating an entity carbon footprint:
In this step, an entity must be able to identify its activities that produce carbon emissions. Typically, this occurs from stationary combustion, mobile combustion, process emissions, and fugitive emissions.
In this step, the entity then decides the calculation approach. Whether it be direct measurement, stoichiometric measurement, or estimating emissions.
In this step, an entity must collect its data based on the identified emission sources and apply the emission factors correctly.
GHG Protocol provides two categories of calculation tools: cross-sector tools and sector-specific tools. Cross-sector tools can be applied to different industries, meanwhile sector-specific tools can only be used in specified sectors.
For internal reporting, the data is then compiled to its corporate level from all sides of an entity’s activity
After calculating the carbon footprint, the company must verify and validate its calculation by engaging with a third-party auditor, prepare a comprehensive report, and then analyze its carbon footprint data.
While this process may seem straightforward, it is worth noting that calculating carbon footprint may become more complex the larger the company and the more complex its operations. Consulting with sustainability professional can navigate its complexities and ensure accurate reporting
Calculating is only the first step in reducing your carbon footprint. After analyzing your carbon footprint calculation, an entity can now identified each hotspot emissions. Carbon management is understanding these hotspots and taking steps to mitigate or reduce them as much as possible.
There are four tiers in carbon management, which is:
Carbon offsetting is a method for individuals, companies, or governments to neutralize their carbon footprints by investing in environmental projects that reduce carbon dioxide or other greenhouse gases from the atmosphere. These projects are quantified in terms of tonnes of CO2-equivalent (CO2e) reductions. Offsetting provides a pathway to carbon neutrality, where the total emissions are balanced by equivalent carbon savings elsewhere.
Types of Carbon Offset Projects:
Meanwhile, carbon exchange is a market where carbon credits or allowances can be bought and sold. There are two types of carbon markets, compliance and voluntary.
For countries like Indonesia, the IDX Carbon represents an emerging carbon market regulated by the Financial Authority Services (Otoritas Jasa Keuangan/OJK), allowing for the trade of carbon credits and promoting sustainable investment within the region.
The complexity of carbon markets and the quality assurance of offset projects highlight the importance of consulting with knowledgeable professionals in the field. Experts can provide valuable insight into project selection, ensuring that offsets represent real, additional, verifiable, and permanent emission reductions, contributing effectively to climate action goals.
Carbon Tax in the World
Carbon tax is a form of carbon pricing, which is a policy tool used by governments to address greenhouse gas emissions and combat climate change. They are designed to place a price on carbon dioxide (CO2) emissions and incentivize industries and individuals to reduce their carbon footprint. The implementation of carbon taxes varies across countries and regions.
Several countries in the world have adopted carbon tax. At least 27 jurisdictions in the world have implemented carbon taxes, either carbon taxes, carbon prices, or fuel charges with various rates.
Sweden, one of the countries that first implemented a carbon tax, namely in 1991 with gradual implementation of tariffs, is now a country with high carbon tax rates. Uruguay, on the other hand, chose to immediately implement a high carbon tax from the start of implementation in 2022.
The main purpose of the Carbon Tax policy is not for budgeting, but one of the fiscal instruments used by the government to reduce emission disposal as well as to develop renewable energy. How the government introduces and develops renewable energy is a step that must be prioritized over carbon pricing policies.
Carbon Tax in Indonesia
The Carbon Tax Policy was implemented to support the world's mission to maintain an increase in the average global temperature while mitigating the adverse effects of climate change. The carbon tax will set a price on the sources of emission emitters or high emission products purchased.
In Indonesia, the legal basis for imposing a carbon tax has been regulated in the Tax Harmonization Law which was planned to be implemented in April 2022 but has been delayed until the tax subject and government mechanisms are deemed sufficiently prepared to implement carbon tax.
The carbon tax in Indonesia can be broken down as follows:
Charged for carbon emissions that have a negative impact on the environment:
The carbon tax subject is an individual or an entity that:
Carbon tax payable on:
The total purchase value of goods that contain carbon or activities that produce carbon emissions with certain considerations.
When carbon tax due is determined:
The Carbon Tax Rate is higher or equal to the price of carbon in the Domestic Carbon Market. The lowest carbon tax rate is IDR 30.00 per kg CO2e (IDR 30,000 per tCO2e).
According to tax provisions, is Carbon Tax deductible in the tax profit/loss report or non-deductible expense?
Based on HPP Law 7/2021 Tax Cluster Article 6
'The amount of taxable income for domestic taxpayers and permanent establishments is determined on the basis of gross income minus costs for obtaining, collecting and maintaining income, including taxes except income tax'
Generating capacity | : | 800MW |
Upper emission limit | : | 0.913 tCO2/MWh |
Gross electricity production | : | 6,100,000 MWh |
Total GHG Emissions | : | 5,800,000 tCO2 |
Upper emission limit of PT A | : |
0.913 x 6,100,000 = 5,569,300 tCO2 |
Tax Base = Total GHG Emissions – Emission Ceiling
Tax base = 5,800,000 tCO2 – 5,569,300 tCO2
= 230,700 tCO2
Tax payable = Tax Base x Tax Rate
= 230,700 tCO2 x IDR 30,000/tCO2 = IDR 6,921,000,000
Reduction (Purchasing carbon certificates) = 0
Pay Carbon Tax = Tax Owed – Deduction
= IDR 6,921,000,000 - IDR 0 = IDR 6,921,000,000
Generating capacity | : | 800MW |
Upper emission limit | : | 0.913 tCO2/MWh |
Gross electricity production | : | 6,100,000 MWh |
Total GHG Emissions | : | 5,800,000 tCO2 |
Upper emission limit of PT A | : |
0.913 x 6,100,000 = 5,569,300 tCO2 |
Tax Base = Total GHG Emissions – Emission Ceiling
Tax Base = 5,800,000 tCO2 – 5,569,300 tCO2
= 230,700 tCO2 x IDR 30,000/tCO2 = IDR 6,921,000,000
Tax Payable = DPP x Tax Rate
= 230,700 tCO2 x IDR 30,000/tCO2 = IDR 6,921,000,000
Reduction (Purchasing carbon certificates) = 0
= IDR 6,921,000,000 - IDR 0 = IDR 6,921,000,000
Pay carbon tax = Tax owed – deduction
= IDR 6,921,000,000 - IDR 0 = IDR 6,921,000,000
Generating capacity | : | 800MW |
Upper emission limit | : | 0.913 tCO2/MWh |
Gross electricity production | : | 6,100,000 MWh |
Total GHG Emissions | : | 5,800,000 tCO2 |
Upper emission limit of PT A | : |
0.913 x 6,100,000 = 5,569,300 tCO2 |
Tax Base = Total GHG Emissions – emission ceiling
Tax base = 5,800,000 tCO2 – 5,569,300 tCO2
= 230,700 tCO2
Tax payable = Tax Base x Tax Rate
= 230,700 tCO2 x IDR 30,000/tCO2 = IDR 6,921,000,000
Reduction (Buying carbon certificates)
= @IDR 30,000/ ton CO2
130,700 tCO2 x IDR 30,000 = IDR 3,921,000,000
Pay carbon tax = Tax owed – deduction
= IDR 6,921,000,000 - IDR 3,921,000,000
= IDR 3,000,000,000
CARBON REGULATION
ESG REGULATION
OJK Regulation Number 51/POJK.03/2017