Climate change poses a serious threat to the global environment and economy. Its impact is not only felt in the environmental sector, but also affects peoples welfare, food security, and the economic stability of a country. With this in mind, the European Union became one of the first—and largest—regions to implement carbon pricing through the EU ETS, which it launched in 2005. By 2023, the EU ETS had helped reduce emissions from European power plants and industries by around 47%, compared to 2005 levels. Carbon pricing schemes in the form of Carbon Tax are also implemented by other countries. For example, Finland implemented a carbon tax in 1990, making it the first country to do so. Since 2000 until the end of 2018, Finlands carbon emissions have decreased significantly by 19.49% (Nurhayati et al., 2024).
World Bank Group (2025) defines carbon pricing as an instrument that captures the external costs of greenhouse gas (GHG) emissions—the costs of emissions that society must bear, such as crop damage, health care costs from heat waves and droughts, and property loss from flooding and sea level rise-and links them to the sources of those emissions through a price, usually in the form of the price of carbon dioxide (CO2) emitted. Carbon pricing is imposed on GHG emissions, covering seven GHGs directly under the Paris Agreement, including Carbon Dioxide (CO2), Methane (CH4), Nitrous oxide (N2O), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), Sulphur hexafluoride (SF6), and Nitrogen trifluoride (NF3) (National Atmospheric Emissions Inventory, 2024). The results of this application itself can be said to be quite significant in controlling Greenhouse Gas (GHG) emissions. Seeing the significant results of the implementation of carbon pricing in reducing GHG emissions, Indonesia then took a similar step through the establishment of the carbon pricing (Nilai Ekonomi Karbon/NEK).
The Indonesian government then issued Presidential Regulation No. 98 of 2021 on the Implementation of carbon pricing for Achieving the Nationally Determined Contribution Target and Controlling Greenhouse Gas Emissions in National Development (Penyelenggaraan Nilai Ekonomi Karbon untuk Pencapaian Target Kontribusi yang Ditetapkan secara Nasional dan Pengendalian Emisi Gas Rumah Kaca dalam Pembangunan Nasional). This regulation aims to integrate economic mechanisms in GHG emission control to achieve the Nationally Determined Contribution (NDC) target and support sustainable national development. The NDC is a result of the Paris Agreement that requires countries to set GHG emission reduction commitments. Indonesia—in this case—is committed to achieving GHG emission reductions by 2030 of 29% or 834 million tons CO2e if done by its own efforts, or up to 41% or 1,185 million tons CO2e if done with international cooperation. Chapter IV of Presidential Regulation 98 of 2021 further elaborates on the “Implementation of carbon pricing” (“Tata Laksana Penyelenggaraan Nilai Ekonomi Karbon”) which includes carbon trading, performance-based payments, and carbon levies. Here are the details of the mechanisms regulated in this regulation.
Nationally Determined Contribution (NDC)
Indonesia is committed to achieving GHG emission reductions by 2030 of 29% or 834 million tons CO2e through its own efforts, up to 41% or 1,185 million tons CO2e through international cooperation. Indonesia is currently preparing its Second NDC to update the previous NDC. The NDC document that has been prepared is then determined by the Minister and submitted to the United Nations Framework Convention on Climate Change. Indonesia sets NDC targets that apply to six sectors and each subsector. These sectors are: energy and fugitive (12.5%–15.5%), waste (1.4%–1.5%), industrial process and product use (0.2%–0.3%), agriculture (0.3%–0.4%), forestry and other land use (17.4%–25.4%), and/or other sectors in accordance with the development of science and technology. While the sub sectors included are power plants, transportation, buildings, solid waste, liquid waste, industrial waste, rice fields, plantations, forestry, peat and mangrove management, and other sub-sectors in accordance with the development of science and technology.
(Source: PwC)
To achieve this NDC, Indonesia established the implementation of the carbon pricing based on Presidential Regulation 98 of 2021. In this regulation, the carbon pricing implementation mechanism is carried out through three main approaches, namely:
Carbon Trading (Perdagangan Karbon), a system of buying and selling emission rights between businesses that produce higher emissions and those that reduce emissions more.
Result-Based Payment (Pembayaran Berbasis Kinerja), an incentive scheme for parties that successfully reduce GHG emissions in accordance with applicable regulations.
Carbon Tax (Pungutan Atas Karbon), which is a tax or surcharge imposed on activities or goods that produce high carbon emissions to encourage energy efficiency and transition to green technologies.
Carbon Trading: Market-Based Mechanisms
One of the main instruments in implementing carbon pricing is carbon trading, which allows economic entities to adjust their emissions through a market-based mechanism. Carbon trading comes in compliance or voluntary forms. First, compliance Emissions Trading, for example, is like the Emission Trading System/ETS in the European Union, where each sector or industry is given an upper limit of emissions (cap). If emissions exceed the cap, the company must buy carbon units from other parties or be subject to a carbon tax, while if emissions are lower than the cap, the company can sell its excess carbon units. This would form a cap-and-trade (and tax) system. Second, Voluntary is where companies have no obligation to comply with regulations to reduce emissions, but voluntarily purchase carbon credits from green projects, such as reforestation or renewable energy to offset emissions.
To ensure transparency and accountability, carbon trading should be conducted through a Carbon Exchange, which serves as a platform for recording and managing carbon transactions. The carbon exchange in Indonesia is called IDX Carbon. IDX Carbon was inaugurated by Joko Widodo as President of the Republic of Indonesia on Tuesday, November 26, 2023 at the Main Hall of the Indonesia Stock Exchange (Bursa Efek Indonesia) after obtaining official permission as a Carbon Exchange Operator from the Financial Services Authority (Otoritas Jasa Keuangan/OJK) through Decree Number KEP-77/D.04/2023 issued on September 18, 2023.
(Source: Adam Akbar/Fairatmos)
IDXCarbon operates under OJK Regulation (POJK) No. 14 of 2023 on Carbon Trading through Carbon Exchange, which aims to create a transparent, regular, fair and efficient trading system. The platform provides more transparent price certainty and offers ease of transactions for businesses that wish to engage in carbon trading. Currently, there are four trading mechanisms in IDXCarbon: Auction, Regular Trading, Negotiated Trading, and Marketplace, which are designed to meet the various needs of carbon trading in Indonesia. With these mechanisms, businesses can choose the trading system that best suits their strategy to reduce carbon emissions.
As part of an integrated system, IDXCarbon is directly linked to the National Registry System for Climate Change Control (Sistem Registri Nasional Pengendalian Perubahan Iklim/SRN-PPI) managed by the Ministry of Environment and Forestry (MoEF). This integration allows for more accurate carbon unit data management and prevents double counting in carbon emission calculations. Companies in the form of corporations that have obligations or commitments to reduce greenhouse gas emissions can become users of IDXCarbon services by registering through the form available on the official website www.idxcarbon.co.id. In addition, project owners who already have Carbon Units listed on SRN-PPI can also sell their carbon units through IDXCarbon, thus supporting a more inclusive and sustainable carbon trading ecosystem.
(Source: BEI)
Sectoral trading is a compliance carbon trading mechanism carried out within a particular sub-sector with the aim of ensuring companies comply with the emission reduction targets set by the government. The first scheme is PTBAE-PU, commonly known as allowances, where the government, through relevant ministries, allocates emission quotas to companies in certain sub-sectors. If the company produces emissions lower than the allocated quota, this excess quota can be sold to other companies in the same sector. If the company produces higher emissions than the allocated quota, then they need additional emission quota to comply with the emission reduction target by purchasing from companies with excess emission quota.
Companies can also offset GHG emissions by purchasing carbon credits. Carbon credits are obtained through emissions mitigation projects such as reforestation, energy efficiency, or renewable energy installation. These carbon credits are known as Greenhouse Gas Emission Reduction Certificates (Sertifikat Pengurangan Emisi Gas Rumah Kaca/SPE-GRK). In Indonesia, carbon credits are only valid when generated from activities that have been validated and verified through SRN-PPI.
Next is Cross-sectoral trading, which is a voluntary cross-sectoral carbon trading mechanism. It occurs after a particular sub-sector has met its NDC target. This trading comes from carbon credits generated by project developers or companies in a particular sub-sector, after the sub-sector emission reduction target has been achieved (excess carbon credits). These carbon credits are also only valid when generated from activities that have been validated and verified through SRN-PPI. Demand in cross-sectoral trading comes from companies or entities that wish to support voluntary emission reduction targets. This includes both domestic and international companies seeking carbon credits to meet additional emission reduction needs.
Performance-Based Payments: Incentives for Emission Reducers
In addition to carbon trading, carbon pricing also regulates result-based payments (RBP). This mechanism is designed to provide financial incentives for sectors that successfully reduce GHG emissions. Based on the Minister of Environment and Forestry Regulation (Permen LHK) No. 21 of 2022 on the Carbon Pricing Implementation Procedure (Tata Laksana Penerapan NEK), this incentive itself will be paid by the Environmental Fund Management Agency (Badan Pengelola Dana Lingkungan Hidup/BPDLH). To get this incentive, a project must fulfill several main requirements, namely:
Demonstrate tangible evidence of GHG emission reductions that have been verified by an independent institution.
Comply with environmental and social standards set by the government.
Report emission reduction results to the SRN-PPI.
These result-based payments are aimed at local governments, businesses, and communities that are active in climate change mitigation activities. The source of funds for this scheme comes from the state budget, international funding, and private investment.
(Source: Kelly/Pexels)
Based on the Minister of Finance Regulation (PMK) Number 137/PMK.01/2019 BPDLH is tasked with managing environmental funds in various sectors, including forestry, energy, carbon trading, industry, transportation, agriculture, marine, and other fields related to the environment. In carrying out its duties, BPDLH prepares strategic plans and budgets, collects and develops funds, distributes and oversees the use of funds, manages cooperation with various parties, conducts legal studies and risk management, and carries out internal audits to ensure transparency and accountability in the management of environmental funds in accordance with government policies and laws and regulations. For example, one of the projects run by BPDLH is called “Result-Based Payment (RBP) REDD+ for Results Period 2014–2016 Green Climate Fund Output 2”. This program can run because of Indonesias success in reducing its emissions by 20.25 million tons of CO2e for the 2014–2016 period. BPDLH together with the Ministry of Environment and Forestry and UNDP as accredited entities of the Green Climate Fund (GCF) then compiled a Funding Proposal (FP) which ultimately received funding from the GCF with a value of USD 103.8 million, and made Indonesia the first country in the Asia-Pacific region to obtain this performance-based funding.
BPDLH then allocated the funding into three outputs. One of them is Output 2, which focuses on supporting the strengthening of sustainable forest governance on the ground by expanding and improving the implementation of Social Forestry, Forest Management Unit development, Forest and Land Rehabilitation, fire control, and strengthening sustainable livelihoods. The amount allocated to address this is USD 93.4 million.
Through this Output 2, Indonesia has achieved other achievements to address climate change. These achievements include the addition of a Social Forestry area of 1,863,642.52 ha, technical verification of 31 Indigenous Forest candidate locations, preparation of 112 RKPS, and improvement of 42 KUPS. In addition, Integrated Area Development (IAD) action plan documents and local role development guidelines were also successfully prepared. In forest and land fire control, the project facilitated technical guidance, community empowerment, and strengthening of Fire Awareness Communities (Masyarakat Peduli Api/MPA). For climate change adaptation, 2,709 active ProKlim locations were recorded, with adaptation actions integrated in regional planning. Support for the waste sectors NDC was realized through capacity building of Indonesian delegates, international dissemination, and calculation of emission reductions. The project also strengthened REDD+ architecture, NFMS, climate change resource governance, and GHG inventory reporting. Various dissemination efforts, publications, and workshops, including the printing of The States of Indonesias Forest (SOIFO) 2024 book, add to Indonesias strategic contribution to climate change mitigation and environmental sustainability.
Carbon Tax: A Tax Instrument to Drive the Energy Transition
In addition to providing incentives for sectors that successfully reduce emissions, the government also implemented a carbon tax to impose costs on sectors that still rely on fossil energy and produce high emissions. Carbon taxes are imposed on high-emitting industrial sectors and products and services with significant carbon content, such as fossil fuels and coal-based energy.
The purpose of the tax is to increase the costs for sectors that still use fossil-based energy, thereby encouraging the transition to renewable energy. In addition, revenues from the carbon tax will be used to support green technology research and development, environmental rehabilitation, and climate change adaptation programs in vulnerable sectors.
(Source: Shutterstock)
At the end of 2021, the Government of Indonesia and the House of Representatives officially passed Law Number 7 of 2021 on Harmonization of Tax Regulations (Undang-Undang Harmonisasi Peraturan Perpajakan/UU HPP) which regulates policies related to carbon tax. This policy aims to encourage businesses to shift to a green economy by reducing the carbon emissions generated from their activities. In addition, the carbon tax is also expected to accelerate the transition towards the use of new-renewable energy (Energi Baru Terbarukan/EBT) as the main energy source. With this regulation, the government seeks to create a more sustainable system for managing carbon emissions to reduce negative impacts on the environment.
Carbon tax is imposed on taxpayers, both individuals and business entities, who purchase carbon-containing goods or conduct activities that produce carbon emissions. The carbon tax rate is regulated in Article 13 paragraphs (8) and (9) of the UU HPP, which stipulates that the rate must be higher or at least equal to the carbon price in the carbon market per kilogram of carbon dioxide equivalent (CO2e). If the carbon market price of carbon is lower than IDR 30 per kilogram of CO2e, the carbon tax rate is set at the lower of that figure or an equivalent unit. With this system, the government hopes to control carbon emission levels more effectively and create incentives for industries to reduce dependence on fossil fuels.
Until now, discussions on the Draft Government Regulation related to the carbon tax roadmap are still ongoing. In 2021, the government has started developing a carbon trading mechanism as the first step in implementing this policy. Furthermore, from 2022 to 2024, the carbon tax mechanism is implemented with a cap and tax system that limits emissions for the coal-based power generation sector, especially Steam Power Plants (PLTU). By 2024, a total of 146 Steam Power Plants have joined the carbon trading scheme for the power generation subsector.
From 2025 onwards, the implementation of the carbon tax will be gradually expanded to cover more industry sectors. The government plans to implement this policy across the board to improve the effectiveness of carbon emission control in various economic sectors. With this policy expansion, it is expected that businesses will be more encouraged to adopt environmentally friendly technologies and reduce the adverse impact of carbon emissions on climate change. Carbon tax not only serves as an instrument of environmental control, but also as a strategy to accelerate Indonesias transformation to a sustainable green economy.