Indonesia has enacted several regulations to fulfill its commitments as a signatory country to the Paris Agreement in addressing climate change issues. One of which is through the carbon trading implementation mechanism as regulated in Law Number 4 Year 2023 on The Development and Strengthening of the Financial Sector (“Law 4/2023”).

To concretize the implementation of a carbon economic value through carbon trading under Law 4/2023, the Financial Services Authority (“OJK”) has issued OJK Regulation Number 14 Year 2023 on Carbon Trading Through Carbon Exchanges (“POJK 14/2023”).

Under POJK 14/2023, the Indonesian government has established regulations for the carbon trading ecosystem through carbon exchange, including: (i) the operator of the carbon exchange and their requirements; (ii) tradeable Carbon Unit; and (iii) the administration of carbon trading through the carbon exchange.

According to POJK 14/2023, the OJK does not establish or designate a specific entity to act as the administrator of the carbon exchange. The administrator of the carbon exchange is open for implementation by business entities.

In order to conduct carbon trading activities through the carbon exchange, relevant business entities must first obtain a license as a Carbon Exchange Operator, which is submitted to the OJK.

To qualify as a Carbon Exchange Operator, the establishment of the Carbon Exchange Operator must meet the following requirements:

1. Have a paid-up capital of at least IDR 100.000.000.000 (one hundred billion Indonesian Rupiah), not derived from loans;
2. Shareholders must be a sui generis entities, Indonesian citizens, Indonesian legal entities, and/or foreign legal entities that have obtained permission or are under the supervision of the authorized financial services in their home country, with a maximum ownership of 20% of the total shares with voting rights;
3. Shareholders must not be bound by a nominee arrangement scheme; and
4. Special rights may only be owned by the shareholders who are sui generis entities, Indonesian citizens, and/or Indonesian legal entities.

Board of Directors and Board of Commissioners of the Carbon Exchange Operator

In connection with the day-to-day operation management of the Carbon Exchange Operator, POJK 14/2023 stipulates the mandatory requirements to be fulfilled by the Board of Directors and Board of Commissioners of the Carbon Exchange Operator, namely:

1. The Board of Directors must consist of at least 2 (two) individuals, with one person designated as the President Director;
2. At least 1 (one) member of the Board of Directors must possess knowledge or experience in the field of climate change control and carbon market and must not hold concurrent positions in other Carbon Exchange Operator;
3. Members of the Board of Directors are prohibited from holding concurrent positions in other companies; and
4. The Board of Commissioners must consist of at least 2 (two) individuals, with one person designated as the President Commissioner.

Prohibitions for the Board of Directors and Board of Commissioners

POJK 14/2023 also stipulates several prohibitions on the Board of Directors and Board of Commissioners of the Carbon Exchange Operator, including:

1. Having an affiliation with members of the Board of Directors and/or members of the Board of Commissioners in other carbon exchange operators;
2. Owning shares or a controlling shareholder, either directly or indirectly, over clients of the Carbon Exchange Operator;
3. Engaging in transactions involving tradeable carbon units traded on the Carbon Exchange Operator; and
4. Involvement in the unauthorized or unlawful use of narcotics.

Tradeable Carbon Units

According to POJK 14/2023, carbon units are categorized as securities, or financial instruments, or investment contracts, whether in conventional, digital, or other forms in accordance with technological developments that grant rights to the owner to directly or indirectly derive economic benefits from the issuer or from a specific party based on an agreement, and any derivatives of securities that can be transferred and/or traded in the capital market.

Based on this construction, a discourse has been initiated to determine whether carbon units are considered as securities or futures commodities as regulated by the Commodity Futures Trading Regulatory Agency (“Bappebti”)

The tradeable carbon units traded on the carbon exchange consist of:

1. Technical Approval of Emission Upper Limits (“PTBAE”) for Business Entities (“PTBAE-PU”); and
2. Greenhouse Gas Emission Reduction Certificate (“SPE- GRK”).

However, as the above mentioned tradeable carbon units must first be registered in the National Climate Change Control Registry System (“SRN-PPI”) and by the Carbon Exchange Operator. Moreover, the Carbon Exchange Operator may facilitate the trading of tradeable carbon units from abroad that are registered in the SRN-PPI or tradeable carbon units that are not registered in the SRN-PPI, provided it does not contravene the provisions of laws and regulations.

Tradeable carbon units from abroad that are not registered in the SRN-PPI must meet the following requirements, such as:

1. Registered, validated, and verified by an institution accredited by the international registration system organizer;
2. Eligible for trading on foreign carbon exchanges; and
3. Other requirements stipulated by the OJK after coordinating with the Minister of Environment and Forestry.

The Administration of Carbon Trading through Carbon Exchange

As the implementing regulation of POJK 14/2023, the OJK has issued Circular Letter Number 12/SEOJK.04/2023 on the Procedures for the Administration of Carbon Trading through Carbon Exchange (“SEOJK 4/2023”). According to POJK 14/2023 that Carbon Exchange Operators shall use an electronic system to conduct Carbon Unit transactions continuously. However, both POJK 14/2023 and OJK Circular Letter 4/2023 have not been clearly regulated about the specification and configuration of electronic system as mentioned.

However, considering the concept of Carbon Unit is designated as securities, it is possible that the specification and configuration of electronic system used can be similar with existing securities transaction platforms.

Moreover, Carbon Unit Operator could be conducted directly between Parties and/or through intermediary between service users. POJK 14/2023 also requires Carbon Exchange Operator to provide Carbon Unit trading system that includes:

1. Sell offer of Carbon Unit meets the purchase; and
2. Settlement of Carbon Unit transaction, either fund settlement or Carbon Unit settlement, between parties in a similar sector and/or difference sector in accordance with the provisions of statutory regulations.

Regarding the settlement of Carbon Unit transactions, service users can settle the transaction with a clearing mechanism with or without guarantee. In this case, Carbon Exchange Operator can cooperate with a custodian entity, such as PT Kustodian Sentral Efek Indonesia (“KSEI”). KSEI, as transaction practice in the capital market, will act to create and record single investor identification (SID) for parties who will carry out carbon trading.

Carbon Offset

Carbon Offset is reducing greenhouse gas (“GHG”) emission carried out by business and/or activities that used to compensate emissions produced elsewhere. In this matter, Carbon Offset carried out voluntarily or in the event that a particular business sector does not have a GHG emission limit, then the company can purchase the Carbon Credit to support the reduction of GHG emission.

In short, the Offset Carbon scheme as follows: (i) Pembentukan Mitigation Action Plan Document (“MAPD”) carried out by company; (ii) Public consultation towards MAPD with involved NGO or the surrounding government; (iii) Validation by MoEF; (iv) Registration of SRN-PPI; (v) Implementation and verification by MoEF; (vi) Issue SPE-GRK.

Regulatory Framework on Implementing the Carbon Economic Value

As the background, hereby the provision concerning carbon trading:

Should there be any queries related to this regulation or to find out if this affects your business or personal interest, please do not hesitate to contact us.