The Indonesian Government, through the Financial Services Authority (“OJK“), issued Regulation No. 14 of 2023 on Carbon Trading through Carbon Exchange (“New Reg“) to reduce the Greenhouse Gas (GHG) effect by way of carbon pricing trading. Previously, the Indonesian Government already issued several umbrella regulations in the same sector, namely:
- Law No. 16 of 2016 on Ratification of the Paris Agreement to the United Nations Framework Convention On Climate Change;
- Law No. 4 of 2023 on Financial Sector Development and Reinforcement (“PPSK Law“);
- Presidential Regulation No. 98 of 2021 on the Implementation of Carbon Economic Value (CEV) for the Achievement of Nationally Determined Contribution (NDC) Target and Greenhouse Gas (GHG) Emission Control in National Development;
- The Minister of Environment and Forestry Regulation No. 21 of 2022 on Procedure for Implementation of Carbon Pricing;
The above regulations mandate the capital market regulator to carry out carbon trading through carbon exchange. As a step closer to implementing the commitment to control the GHG effect, the issuance of New Reg brings more certainty to the undertakings interested in monetizing carbon value through carbon exchange. New Reg regulates several matters, among others, the tradeable carbon unit in carbon exchange (including the foreign carbon unit), carbon trading requirements in carbon exchange, capital and management structure of carbon exchange, reporting obligations of carbon exchange operator, supervisions of carbon exchange, amendment of regulation and articles of association of carbon exchange operators, and sanctions. New Reg took effect from 2 August 2023.
Carbon Trading
Previously, the PPSK Law broadened the definition of securities so it may capture, among others, carbon units to be used in carbon trading. New Reg defines a carbon unit as a certificate/technical approval evidencing carbon ownership, quantified in one ton of carbon dioxide registered in the National Climate Change Control National Registry System (Sistem Registri Nasional Pengendalian Perubahan Iklim / SRN PPI). The trading of it, among others, will use a certificate showing the amount of greenhouse gas emission reduction, quantified in one ton of carbon dioxide named SPE-GRK (see below).
In carbon exchange, tradeable carbon unit consists of the following:
- Undertakings Emission Ceiling Technical Approval (Persetujuan Teknis Batas Atas Emisi Pelaku Usaha / PTBAE-PU)
- GHG Emission Reduction Certificate (Sertifikat Pengurangan Emisi Gas Rumah Kaca / SPE-GRK)
- other carbon unit regulated by the relevant minister, and
- other carbon unit that meets certain criteria regulated by the OJK.
The above carbon unit shall be registered first in the SRN PPI and the carbon exchange operator before the transaction. It is also worth mentioning that New Reg facilitates cross-border carbon trading. Certain additional requirements exist for an offshore-originating carbon unit to be tradeable in the exchange, among others, registered, validated, and verified by accredited international registration systems. OJK may also determine other requirements after coordinating with the Ministry of Environment and Forestry.
Carbon Exchange Operator
New Reg regulates that any party operating as a carbon exchange operator must first obtain a carbon exchange business license from OJK. The carbon exchange operator must be in the form of an Indonesian limited liability company (PT) having a minimum paid-up capital of IDR 100 billion (approx. USD 6.5 million), which cannot be originated from loan. The shares of carbon exchange operators can only be owned (after obtaining OJK’s approval) by sui generis institutions, Indonesian citizens, Indonesian legal entities, and/or foreign legal entities that have obtained licenses or are supervised by the financial service regulator in the country of origin. There is a 20% shares-ownership limitation (direct or indirect) for foreign legal entities to own the voting shares of the carbon exchange operator. Prospective shareholders of a carbon exchange operator must pass fit and proper test carried out by OJK. In addition to the foregoing restriction, New Reg also limits that the right to nominate the majority of members of BoD and/or BoC, as well as veto right to a significant decision, belongs only to sui generis institutions, Indonesian citizens, and/or Indonesian legal entities. Same as the prospective shareholders, the members of BoD and/or BoC of a carbon exchange operator must pass fit and proper test carried out by OJK. Detailed requirements and licensing of carbon exchange business license, the requirements for the prospective shareholders, BoD, and BoC members will be detailed regulated by OJK later in an implementing regulation.
New Reg also authorizes carbon exchange operators to issue sets of regulations for the carbon exchange user, tradeable carbon unit, trading rules and supervisions. As a safeguard, New Reg mandates the amendment of foregoing regulations must obtain prior approval from OJK first.
Furthermore, several reporting obligations must be submitted electronically to OJK and the Ministry of Environment and Forestry (as relevant), among others, a summary of the monthly transactions, annual reports, changes in the organization chart/system, sanctions imposed on users, etc.
Comments
The Indonesian Government initially considered imposing a carbon tax for emissions not offset by carbon credits. Still, authorities delayed the implementation while waiting for the right “economic situation”. The enactment of New Reg may be viewed as a step closer to the aforementioned “economic situation”. Although New Reg manages to address the outline of the establishment of carbon exchange, we view that more detailed regulations must be issued to fully implement the monetization of carbon units through carbon exchange. Despite all the foregoing, there is hope that carbon trading can be implemented soon.
For Further Information, Please Contact:
MetaLAW, Legal Consultant, Jakarta, Indonesia
general@metalaw.id
