Basic Understanding of Carbon Pricing and Its Main Objectives

Carbon pricing is a fiscal policy to include external costs for greenhouse gas emissions. In other words, each carbon dioxide equivalent (CO₂e) emission is given a price, so that emitters “pay” for the environmental damage caused. According to the World Bank, carbon pricing captures the external costs per unit of CO₂e released into the atmosphere and links it as a price to the source of the emission. In Indonesia, the official term is the Economic Value of Carbon (NEK). Presidential Regulation 98/2021 defines NEK as the value of each unit of GHG emissions resulting from human activities. The main objective of carbon pricing is to internalize these environmental costs, thereby encouraging industry and consumers to switch to low-carbon technologies. In other words, this policy makes emitters responsible for the damage caused and “pay” for the costs of the damage.

Main Components of Carbon Pricing

In general, there are three main carbon pricing instruments: carbon tax, cap-and-trade system (ETS), and results-based payments. In the carbon tax scheme, the government sets a fixed rate per ton of CO₂e. Emission producers are required to pay taxes according to the amount of emissions they produce. This policy is simple and provides price certainty, with the principle of polluter pays. For example, starting in 2022, Indonesia will implement a minimum carbon tax rate of around IDR 30,000 per ton on coal-fired power plants as an initial step (source: HPP Law chapter 13).

The Emission Trading System (ETS) is a cap-and-trade mechanism. The government sets a national or sectoral emission limit (cap), then issues quotas (allowances) to business actors. Companies whose emissions are below the quota can sell excess permits to those that exceed the limit. Thus, domestic and international carbon markets are created. Presidential Regulation 98/2021 states the core mechanism of carbon trading: one party carries out cap and trade (ETS) and the other party carries out offsets (carries out emission reduction activities elsewhere).

Result-Based Payment (RBP) is an incentive in the form of payment for the achievement of validated emission reductions. This means that the government (through a designated institution) pays companies or programs that succeed in reducing emissions by a certain amount. These payments are non-market, as they do not directly increase the carbon price in the market. In Indonesian regulations, RBP is set to encourage mitigation and conservation projects (e.g. REDD+), where the Environmental Fund Management Agency (BPDLH) distributes incentives after verification of emission reductions.

Here is a recap of the main components of carbon pricing:

• Carbon Tax: A fixed rate per ton of carbon. Businesses with high emissions pay a higher tax. Example: carbon tax on power plants.

• Emissions Trading (ETS): A cap-and-trade system, with emission quotas (allowances) that can be traded between companies. The government sets a total emission limit (cap).

• Results-Based Payments (RBP): Financial incentives based on verified emission reductions. Motivates mitigation activities outside of carbon market schemes.

Carbon Pricing Policy and Regulation Structure in Indonesia

Indonesia has regulated the carbon pricing framework through several main regulations:

It can be seen above that Presidential Regulation 98/2021 is the national basis for NEK and carbon pricing instruments. Ministerial Regulation 21/2022 then fills in the implementation details: for example, the formation of a carbon market (domestic and international), the RBP mechanism through BPDLH, and the imposition of fiscal levies on emissions. Meanwhile, POJK 14/2023 regulates the financial infrastructure of the carbon market, including the regulation of the Carbon Exchange, the Carbon Unit trading mechanism, and integration with SRN-PPI.

Implementation of the Carbon Market in Indonesia

Based on the regulations above, the Indonesian carbon market has several important mechanisms:

• Domestic Carbon Trading: Between domestic entities based on the NDC sector. For example, an industry can buy its reduced emissions (SPE-GRK) from other actors who have reduced emissions.

• International Carbon Trading: Indonesia allows carbon credits from abroad to enter the domestic market, with the provision of a permit from the relevant Minister. Conversely, national business entities can sell emission credits abroad (carbon exports).

• Carbon Exchange (Carbon Market): The main carbon transactions are conducted through the official Carbon Exchange (such as the IDX Carbon platform launched in September 2023). However, trading between business actors can also be conducted directly outside the exchange, as long as it is recorded. The Carbon Exchange provides trading infrastructure and liquidity, and is under the supervision of the OJK.

• Carbon Payment (BPDLH): The proceeds from the RBP scheme are distributed by the Environmental Fund Management Agency (BPDLH) to parties that reduce emissions, after being verified by the Ministry of Environment and Forestry. This fund comes from carbon fiscal revenues and other sources.

• National Registry (SRN-PPI): All Carbon Units to be traded must be registered with the SRN-PPI (National Climate Control Registry System). This is to ensure accountability and MRV (Monitoring, Reporting, Verification). For import credits, additional requirements apply (must be registered/validated in the international registry and meet OJK standards).

• Emission Reserve (Buffer): In purchasing SPE-GRK (GHG Emission Reduction Certificate), the government regulates a buffer (reserve) of part of the certificate, namely 0-5% for domestic transactions and 10-20% for cross-border transactions, to anticipate the risk of reversal of emission reductions.

Overall, this implementation aims to create an integrated domestic carbon market, while remaining connected to international mechanisms. Indonesia is also adjusting regulations (for example, the Job Creation Law, articles related to carbon taxes) to suit the NDC target and global market demand.

Comparison of Indonesia with Other Countries

Globally, the implementation of carbon pricing is still diverse. According to the World Bank 2024, around 24% of the worlds GHG emissions are currently covered by carbon pricing instruments (ETS systems or carbon taxes). However, there is a large gap between countries. In Indonesia, the carbon pricing system has only just begun to operate (for example, the ETS pilot for the electricity sector in 2023), so the carbon price in Indonesia is very low, only around $1 per ton of CO₂e in the early stages of the ETS. Compare this with several other countries: Uruguay imposes a carbon tax of around $167 per ton (the highest in the world), and many other developed countries set prices >$50. The average global carbon price is around $10–$40, far above Indonesias initial level.

In addition to price, coverage is also different. European countries and some provinces in the United States already have comprehensive ETS systems (such as EU-ETS, California, RGGI) with high emission coverage. Meanwhile, Indonesia has only implemented a partial ETS (only the PLTU sector). The map below shows countries with ETS policies (blue/purple) and carbon taxes (red).

The map above shows the distribution of carbon pricing policies around the world. The blue/dark colors indicate countries or regions that have implemented an emissions trading system (ETS) and/or carbon tax. It appears that most developed countries (Europe, North America, parts of Asia) have started carbon pricing policies, while in many other regions these policies are still in the planning stage.

The following graph compares carbon pricing levels across regions (as of April 2024). The blue bars represent ETS schemes, the red circles represent carbon taxes. Indonesia (ETS) is on the far left with the lowest price. Countries such as Switzerland, Sweden, and Canada (top right row) have much higher carbon prices, ranging from tens to hundreds of dollars per ton.

This graph shows carbon prices (USD per ton CO₂e) in various countries according to the World Bank 2024. Indonesia (ETS) is listed on the far left (only ~$1), while several other countries have reached tens to hundreds of USD per ton. The color of the bars indicates the coverage of emissions subject to carbon pricing in each jurisdiction. 

In summary, although Indonesia has started carbon pricing, the price level and coverage are still low compared to many other countries. However, with a clear roadmap (Presidential Regulation 98/2021 and its sequels), Indonesia is trying to catch up while supporting the emission reduction target at the national level.