The Application of Carbon Pricing Towards a Sustainable Economy to Envision Indonesia 2045
The Application of Carbon Pricing Towards a Sustainable Economy to Envision Indonesia 2045

The Application of Carbon Pricing Towards a Sustainable Economy to Envision Indonesia 2045

Authors: Eulis Ardiyanti Sari, Hamdan Rosadi, Nadia Lutfiana Mawarni, Rosaninda FS

Reviewers: Ahmad Awaludin Mufid, Yustina, Dwi Martutiningrum, Nadia Faradiba, Farid Al-Firdaus, Dinda Ganisawati Javada

Indonesia’s vision point 5 (net zero emission) in 2045 is sustainable economic development and environmental harmony. One is implementing environmental and low-carbon development, and Indonesia has been ratifying the Paris Agreement with other countries. Furthermore, taking lessons from other developing countries implementing carbon pricing will help reach the desired goal. 

The Paris Agreement in 2015, as a climate change mitigation, envisions keeping the Earth’s surface temperature rise below 2°C (preferably 1.5°C) (UNFCCC, 2015). To achieve this, Indonesia, among 196 nations, committed to reducing GHG emissions (Green House Gas). However, Indonesia has not aligned to keep the temperature increase below 1.5°C (Climate Transparency, 2020). This condition occurs because Indonesia has not yet implemented all carbon pricing regulations.

Carbon Pricing

Thus, one of the national efforts is the implementation of the Carbon Economic Value (CEV) for each unit of greenhouse gas emissions. The implementation of CEV is further regulated in the Presidential Regulation of the Republic of Indonesia Number 98 of 2021 concerning the Implementation of Carbon Economic Value.

Economists highlight carbon pricing as the most effective mitigation method (International Actuarial Association, 2019). Besides accelerating the technology transition, effective carbon pricing fiscal policies can boost national revenue and benefit low-income communities (Zachmann et al., 2018). Carbon pricing revenue can fund public services, protect vulnerable communities from climate change impacts, and invest in sustainable infrastructure.

The World Bank mentions a range of US$ 50-100 per ton of CO2 as the price level needed to keep global temperature increases below 2 degrees. In 2021, less than 4% of global emissions will be covered by a carbon price that is the same or higher than the baseline. Figure 1 below shows carbon prices set in some countries. 

Figure 1. Carbon price as of April 2023

The Implementation in Indonesia

The Financial Services Authority (OJK) subsequently issued OJK Regulation Number 14 of 2023 concerning Carbon Trading through the Carbon Exchange (OJK Carbon Exchange Regulation), which serves as a guideline for carbon trading policies. 

Based on OJK regulation, Carbon Units traded through the Carbon Exchange are Securities and must be registered in the National Climate Change Control Registry System (SRN-PPI) and the Carbon Exchange Organizer. Entities that also can conduct business activities as Carbon Exchanges are market organizers that have obtained a business license as Carbon Exchange Organizers from the OJK.

Furthermore, Carbon Exchange Organizers must have a minimum paid-up capital of Rp100,000,000,000.00 (one hundred billion rupiah), which must not be derived from loans. Then, shareholders, members of the Board of Directors, and members of the Board of Commissioners of Carbon Exchange Organizers must meet the requirements set by the OJK and undergo an assessment of competence and suitability.

On the other hand, there are shortages of carbon pricing in Indonesia. As an economic inequality, there is a potential for carbon pricing to burden more vulnerable economic sectors, such as small and micro industries, without providing adequate support. The imposition of additional costs on emissions can affect consumers with higher prices for goods and services, especially in the energy sector. This can impact the cost of living for the community. Then, uncertainties in Indonesia’s political and legal policies can hinder the implementation of carbon pricing. Investors may be reluctant to commit to carbon pricing initiatives if they perceive a risk of significant policy changes in the future. Indonesia can learn from China to implement the carbon pricing policy to resolve this problem. 

Forms of mitigation action in reducing GHG emissions through carbon absorption and storage, as regulated in Minister of Environment and Forestry Regulation Number 7 of 2023, are carried out through 22 (twenty-two) mitigation actions.

The Ministry of Environment and Forestry has fulfilled all carbon trading policies by establishing a Road Map for Carbon Trading in the Forestry Sector, as stated in the Decree of the Minister of Environment and Forestry Number: SK.1027/MENLHK/PHL/KUM.1/9/2023 dated September 22, 2023, where this Road Map contains general criteria related to the disaggregation of emission baselines and emission reduction targets and specific criteria related to implementation plans, targets, and strategies for achieving targets.

Indonesia’s Challenge to Reduce Carbon Emissions

Carbon pricing in Indonesia has great potential, especially in the land and energy sectors. However, its implementation has a number of challenges:

  1. Deforestation due to forest and land fires and the conversion of forest areas

Figure 2: Gross forestry and land-based carbon emissions (in million tonnes CO2e)

Sources: KLHK, 2023 

  1. The government encourages various instruments, including green sukuk and several uses of green sukuk refinancing, by developing renewable energy facilities and infrastructure such as solar, micro-hydro, and mini-hydropower plants. It is estimated that Indonesia will need investment up to 2060 amounting to 77,000 trillion rupiah to achieve various targets of achieving net-zero emissions by 2060.
  2. Postponement of the implementation of the carbon tax in Indonesia until 2025. The initial proposal was IDR 75. With a tariff of IDR 30, Indonesia is one of the countries with the lowest tariff in the world for carbon tax.

Learning From China

The initial phase of China’s emissions trading scheme (ETS) only covers the power sector, excluding intensive sectors other than carbon, such as cement, steel, and aviation. China’s ETS has no total emissions limits; quotas for each power plant are allocated free of charge according to emission intensity benchmarks (amount of emissions released per unit of energy produced). 

The plan is considered to provide minimal incentives for companies to reduce their carbon emissions. Additionally, it functionally subsidizes some coal and gas power plants with allocated emission amounts freely. With weak and little to no compliance scheme policies, there are penalties for companies that fail to comply with China’s national ETS carbon price to be low. Although there is uncertainty about the effectiveness of ETS in the short term, many experts believe ETS has the potential to reform the electricity sector and encourage the reduction of emissions in the medium to long term. China’s ETS has the advantage of being more flexible and easy to adapt to changes in design. If emissions intensity benchmarks are tightened and the reformed power sector accelerates, carbon pricing will increase inefficient power generation costs, thus providing incentives to low-emission generators.

Alignment with more comprehensive policies is needed to ensure the successful design and implementation of carbon pricing. Stakeholder engagement with a solid communications strategy is necessary to build trust and assist in implementation and data collection. Policy flexibility allows decision-makers to adapt overall targets and policy design features in response to changing conditions. There are specifically agreed international financial reporting standards regarding calculating carbon quotas.

Figure 3. Countries that produce global carbon emissions 

In November 2021, carbon trading volume in China successfully exceeded the milestone of 1 billion yuan, or around IDR 2.2 trillion, since it was launched in mid-July 2021, or only about four months. Carbon trading in Panda Country uses the carbon emission trading scheme (ETS).

By 2030, China will reduce its carbon emissions by 65% from 2005 levels. Apart from the carbon trading mechanism, it will also increase the installed capacity of new renewable energy (Energi Baru Terbarukan/EBT) power plants, especially wind and solar, to more than 1,200 gigawatts (GW). Then, the share of non-fossil fuels in primary energy consumption will reach 25% in 2030. However, this figure increases from the previous commitment of only 20% (Aulia, 2023).

Based on Figure 2, China is a developing country ambitious in reducing carbon emissions because it produces the most carbon emissions globally. Indeed, efforts to control carbon emissions have yet to become a priority. However, if it is not managed correctly, it can worsen economic problems, including poverty, which is a priority problem. 

Conclusion

Indonesia can adopt what China has been doing by creating a carbon price that reduces carbon emissions and provides economic benefits to society (from carbon trading). This approach is the right choice for developing countries.

Previously, Indonesia has implemented carbon pricing through various regulations that have been stipulated, such as Presidential Decree No. 98 of 2021 concerning the Implementation of Carbon Economic Value, OJK Regulation No. 14 of 2023, Minister of Environment and Forestry Regulation No. 7 of 2023 concerning Procedures for Carbon Trading in the Forestry Sector, and so the government needs to maintain forest functions and reduce deforestation rates.

Indonesia has also set a carbon price of IDR 30 per kilogram of carbon dioxide equivalent according to Law Number 7 of 2021. To maximize the implementation of carbon pricing, Indonesia also needs to pay attention to the carbon price suggested by the World Bank. 

While China does not impose quota restrictions on carbon trading, commitments to reduce carbon, such as changing electricity technology from fossil fuels to renewable energy, are implemented. Indonesia can adopt China’s policy for implementing carbon trading without putting forward sanctions. 

References

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Zhao, Yibing dkk. (2022). Carbon pricing policy, revenue recycling schemes, and income inequality: A multi-regional dynamic CGE assessment for China. Resource. Science Diret

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