Trading carbon like trading a stock? How's the mechanism exactly?
Indonesia has recently launched a new platform for carbon trading called IDXCarbon, which allows carbon units to be traded like stocks in the carbon market. This innovative platform was inaugurated on September 26th by the Indonesia Stock Exchange and is supervised by the Financial Services Authority (OJK). The purpose of carbon exchange is to increase companies’ actions to reduce their emissions.
IDXCarbon is a highly anticipated innovation that will accelerate emission reduction in Indonesia. It is a positive step towards achieving Indonesia’s decarbonization commitment to achieve net-zero emissions by 2030.
A. Introduction of carbon exchange
1. What is Carbon Exchange
Carbon exchange is a market-based mechanism that allows entities to buy and sell carbon units. A carbon unit represents a reduction or removal of one tonne of carbon dioxide equivalent (CO2e) from the atmosphere. Participants that can join carbon exchange are industries, project developers, corporate, and financial industries and intermediaries. Carbon Exchange can also be conducted by five sectors, which are FOLU, energy, waste, IPPU, and agriculture.
Buying and selling carbon in the carbon market is the last step. Before being eligible to join the carbon market, companies must take actions to reduce emissions through the Climate Change Mitigation Action framework, such as waste management, use of renewable energy, and reduction of fossil fuels.
2. The Law that Regulates Carbon Exchange
The primary legal basis for carbon exchange in Indonesia is Presidential Decree No. 98/2021 about the Economic Value of Carbon (NEK). This regulation stipulates that carbon trading might be conducted directly (business to business) or through carbon exchange.
Another primary legal basis is OJK Regulation No.14/2023 (POJK 14/2023) about Carbon Trading through Carbon Exchange. This regulation regulates the object of trading, the framework of carbon exchange. Following POJK 14/2023, OJK released OJK Circular Letter No.12/2023 about Procedures for Organizing Carbon Trading through the Carbon Exchange.
Other than that, the details of carbon exchange are also regulated through:
Presidential Decree No. 98/2021 about the Economic Value of Carbon (NEK)
Law Number 16 of 2026 about the Ratification of the Paris Agreement
Law Number 7 of 2021 about Harmonization of Tax Regulation
Law Number 4 of 2023 about the Development and Strengthening of the Financial Sector (UUP2SK)
Minister of Environment and Forestry Regulation No.7/2023 about Forestry Sector Carbon Trading Procedure
Minister of Energy and Mineral Resources Regulation No.16/2022 about the Implementation of NEK in the Electric Power Generation Subsector
Minister of Environment and Forestry Regulation No.21/2022 about Procedures for Implementing the Economic Value of Carbon
3. Trading Requirements
The trading requirements in IDXCarbon are regulated by the Decree of The Board of Directors of The Indonesian Exchange Number Kep-00296/BEI/09-2023. To participate in the carbon exchange, entities must first register as a Service User Carbon Exchange and pay the transaction fee determined by the organizer. They can buy and sell carbon units during trading hours, which are from 09.00 until 15.00.
B. Types of Carbon Units
In carbon exchange, carbon units are securities that must be registered to the National Registry System for Climate Change Control (Sistem Registri Nasional Perubahan Iklim - SRN-PPI) to be eligible for carbon trading in IDXCarbon. There are two types of carbon units eligible to be traded in IDXCarbon: SPE-GRK and PTBAE-AU. IDXCarbon also allows the trading of foreign carbon units with terms and conditions.
1. SPE GRK
Sertifikat Pengurangan Emisi Gas Rumah Kaca (Certificate of Greenhouse Gas Emission Reduction), which is a carbon unit generated by an individual or entity that implements a project or activity that reduces or removes greenhouse gas emissions. For example, an institution that plants mangroves or a company that installs solar panels can generate SPE GRK. Entities can use SPE-GRK to comply with their mandatory emission reduction targets set by the government or to offset their emissions voluntarily.
2. PTBAE AU
Stands for Persetujuan Teknis Batas Atas Emisi Pelaku Usaha (Technical Approval of Emission Ceilings of Business Actors). It’s an emission allowance given by the related ministry to the companies. Companies must not produce emissions more than the emission cap determined in the PTBAE PU. PTBAE PU is a cap-and-trade mechanism and is eligible for carbon trading. Therefore, companies that produce emissions below the cap can trade it to companies that want to increase their emission cap.
3. Foreign Carbon Unit
Other than domestic carbon units, IDXCarbon also allows the transaction of foreign carbon units. The foreign carbon units tradable in IDXCarbon do not have to be registered to SRN PPI. They can be traded even if they are from carbon projects verified outside Indonesia. Other conditions to trade foreign carbon units are:
Have been verified by an institution that has obtained accreditation from an international registration system
Must meet the requirements to be traded on a foreign carbon exchange
Must meet other requirements determined by OJK.
C. Market Segments in Carbon Exchange
There are four types of market segments. Each type has a different transaction mechanism.
1. Auction
Buyers can submit their offers to buy PTBAE-PU or SPE-GRK during an auction session.
How the auction is conducted:
The relevant ministry (for PTBAE-PU) or project owner (for SPE GRK) will submit a request to IDXCarbon about the auction plan
The relevant ministry or the project owner will determine the final price of the certificates based on the supply and demand
The winner of the auction is decided based on the price, time priority, and final price.
2. Regular Trading
SPE GRK and PTBAE-PU are traded in the regular market. However, only Emission Trading Business Actors can submit a bid to sell and/or a request to buy PTBAE-PU. Meanwhile, SPE-GRK can be traded by Emission Trading Business Actors and Non-Emission Trading Business Actors. The minimum carbon unit price in the regular market is Rp200,00 with reference to the previous day’s closing price.
3. Negotiated trading
In contrast to other market segments, in negotiated trading, buyers and sellers can agree on the series, price, and quantity of carbon units outside IDXCarbon. Then, the transaction becomes binding and official when confirmed by both parties in IDXCarbon. Negotiated trading provides a secure transaction between two parties because even if the negotiation is conducted outside IDXCarbon, but the transaction is officially conducted in IDXCarbon.
4. Marketplace
Marketplace only allows transactions for SPE-GRK. In this transaction, project owners can appoint another user to sell their SPE-GRK. Then, the appointed user will act as the project owner and get ownership of SPE-GRK. Buyers can submit requests to buy carbon units, and sellers can accept or reject offers.
D. Requirements and Procedures to Be a Carbon Exchange User
To become a carbon exchange user, institutions must fulfill several requirements. These include:
Must have officers responsible for the use of facilities provided by the organizer
Participate in official carbon exchange training conducted by the carbon exchange organizer. At least two representatives that attended the training
Register using the company’s email address with the company’s domain name
Have a bank account connected to BI-FAST and BI-RTGS systems
Pay the registration fee
Have annual financial report for the last financial year
Submit Articles of Association, NPWP, and Business Identification Number (NIB)
It is important to remember that carbon exchange is the last step in the efforts to reduce carbon emissions. Institutions must reduce and eliminate emissions first. This can be done through carbon projects such as planting mangroves and empowering local communities for CSR programs. CarbonEthics offers impactful carbon projects for the environment, biodiversity, and socio-economic development. Explore more about CSR projects with CarbonEthics.
References:
Carbon Exchange User Obligations Introduced: Non-Compliance to Be Subject to the Imposition of Sanctions, 16 October, https://kadin.id/en/analisa/kewajiban-pengguna-bursa-karbon-diperkenalkan-ketidakpatuhan-akan-dikenakan-sanksi/
Mengurai Perdagangan Karbon Melalui Bursa Karbon di Indonesia, 16 October. https://www.hukumonline.com/berita/a/mengurai-perdagangan-karbon-melalui-bursa-karbon-di-indonesia-lt64eeb0c8eea35/?page=3
OJK Regulation No.14/2023 (POJK 14/2023) about Carbon Trading through Carbon Exchange
OJK Circular Letter No.12/2023 about Procedures for Organizing Carbon Trading through the Carbon Exchange
Indonesia is Presidential Decree No. 98/2021 about the Economic Value of Carbon (NEK)
Ambong, Alya; Nawadinta, Azzahra; Wongkar, Chenny; Ginting, Robi, 2023, Mechanism of Carbon Trading through Carbon Exchange Established: Following Financial Services Authority Regulation Issuance on Carbon Trading through Carbon Exchange, Legal Update
Mitigasi dan Adaptasi Iklim, Upaya Kunci Menghadapi Perubahan Iklim, 20 October, https://nationalgeographic.grid.id/read/133458199/mitigasi-dan-adaptasi-iklim-upaya-kunci-menghadapi-perubahan-iklim