Efforts to reduce greenhouse gas (“GHG”) emissions have rightfully called for the international community’s attention, and Indonesia is not isolated from this multinational endeavor. Indonesia’s latest catalog of GHG reduction efforts is manifested as the newly-established Carbon Exchange (“IDXCarbon”) launched on 26 September 2023. This ambitious project is stipulated within the Financial Services Authority (Otoritias Jasa Keuangan or “OJK”) Regulation Number 14 of 2023 concerning Carbon Trading through Carbon Exchanges (“OJK Regulation No. 14/2023”) and further elaborated in OJK Circular Letter Number 12/SEOJK.04/2023 concerning the Procedures for the Organisation of Carbon Trading through Carbon Exchange (“SEOJK No. 12/2023”), and Director’s Decree of the Indonesia Stock Exchange Number Kep-00296/BEI/09-23 concerning Carbon Unit Trading Rules through Carbon Exchange Organisers (“IDX Decree No. 00296/2023”).

To ingrain a sense of acquaintance with the long-awaited IDXCarbon, this article shall provide an overview of IDXCarbon, Carbon Units, the market segments in IDXCarbon, and the overall implications of such regulations toward the future of carbon trading in Indonesia. Accordingly, this article shall only provide elaboration on critical points within OJK Regulation No. 14/2023, SEOJK No. 12/2023, and IDX Decree No. 00926/2023 and is not intended to be exhaustive.

Introduction to IDXCarbon and Carbon Units

Under OJK Regulation No. 14/2023, the Carbon Exchange constitutes a system that regulates carbon trading and the registration of the ownership of Carbon Units.[1] In turn, the Carbon Unit is meant as proof of ownership of carbon in the form of a certificate or technical approval for every 1 ton of carbon dioxide.[2] These two provisions demonstrate that IDXCarbon constitutes a mechanism that oversees the sales and purchase of certificates or technical approvals that allow business actors or activities to emit a specific volume of carbon. For this purpose, IDXCarbon is assisted by Carbon Exchange Organisers (Penyelenggara Bursa Karbon), which establish and provide carbon exchanges between IDXCarbon participants (Pengguna Jasa Bursa Karbon).[3]

About the above elaboration, IDXCarbon in itself regulates the trading of two types of Carbon Units: Technical Approval for Emissions Threshold for Business Actors (Persetujuan Teknis Batas Atas Emisi bagi Pelaku Usaha or “PTBAE-PU”) and GHG Emissions Reduction Certificate (Sertifikat Pengurangan Emisi Gas Rumah Kaca or “SPE-GRK”)[4] as registered in the National Registry System for Climate Change Control (Sistem Registri Nasional Pengendalian Perubahan Iklim or “SRN PPI”) and by Carbon Exchange Organisers.[5] It must be noted that the clearing of transaction in IDXCarbon is instantaneous and carried out on a trade-by-trade basis,[6] meaning that Carbon Unit transaction in IDXCarbon shall be settled on the same day upon which the transaction occurs, ensuring no delay in the process.

In short, PTBAE-PU is a technical approval that determines the ceiling limit or the maximum quota for GHG emissions for certain business actors and activities [7] and could only be traded through domestic carbon trading and between fellow PTBAE-PU holders.[8] On the other hand, SPE-GRK constitutes a certificate demonstrating that its holder has reduced its GHG emission based on the determined GHG emission ceiling limit.[9] Unlike PTBAE-PU, SPE-GRK could be traded internationally and between different business sectors.[10]

SPE-GRK transacted in IDXCarbon are grouped into several categories to identify the methods and standards of the GHG emissions reduction or mitigation project that the SPE-GRK is predicated upon. As of now, IDXCarbon has established the following means of SPE-GRK:[11]

SPE-GRK Standards

• Indonesia Nature Based Solution (“IDNBS”)

The IDNBS refers to SPE-GRK projects falling into the agriculture, forestry, and land-use sectors, which concern the conservation of the natural environment to reduce GHG emissions as certified by the SRN-PPI.

• Indonesia Nature Based Solution International Standard (“IDNBSI”)

The IDNBS refers to SPE-GRK projects falling into the agriculture, forestry, and land-use sectors, which concern the conservation of the natural environment to reduce GHG emissions as certified by the SRN-PPI and an accredited international agency.

• Indonesia Technology Based Solution (“IDTBS”)

The IDTBS refers to SPE-GRK projects falling into the energy, waste, industrial process, and product use sectors, which concern the use or development of technology to capture or reduce GHG emissions as certified by the SRN-PPI.

• Indonesia Technology Based Solution International Standard (“IDTBSI”)

The IDTBSI refers to SPE-GRK projects falling into the energy, waste, industrial process, and product use sectors, which concern the use or development of technology to capture or reduce GHG emissions as certified by the SRN-PPI and an accredited international agency.

Each of the preceding SPE-GRK standards applies to projects located in Indonesia that have initiated their GHG emissions reduction from 2013 until 2023. Currently, no categories encompass SPE-GRK projects outside the Indonesian territory, nor those that have reduced GHG emissions before 2013 or after 2023.

Currently, the PTBAE-PU and SPE-GRK are the sole objects of sales and purchase within IDXCarbon. However, this does not inhibit the possibility that other Carbon Units could be transacted shortly. As interpreted from OJK Regulation No. 14/2023 and SEOJK No. 12/2023, Carbon Exchange Organisers may enable the sales of Carbon Units from foreign states not registered in SRN PPI.[12] This implies that other Carbon Units actively traded outside Indonesia could still be sold and purchased within IDXCarbon.

OJK Regulation No. 14/2023 also provides that Carbon Exchange Organisers are authorized to develop other Carbon Unit-based products upon OJK’s approval,[13] creating the implication that Carbon Exchange Organisers may be able to produce their type of Carbon Unit aside from PTBAE-PU and SPE-GRK to be traded by IDXCarbon participants. This may increase the appeal of IDXCarbon for business actors, both national and international, to engage in Indonesia’s carbon trading. With the possibility for new, tradeable Carbon Units that could be found both in and out of Indonesia, IDXCarbon could establish a diverse trading ecosystem where different types of Carbon Units are available to accommodate the interests of many stakeholders, whether it be concerning their business sectors, experience, or financial capacity.

Mechanisms of IDXCarbon

As established by IDX Decree No. 00296/2023, IDXCarbon comprises four market segments for carbon trading, which are as follows:[14]

1. Auction Market (Pasar Lelang Penyelenggara Bursa Karbon);
2. Regular Market (Pasar Reguler Penyelenggara Bursa Karbon);
3. Negotiated Market (Pasar Negosiasi Penyelenggara Bursa Karbon); and
4. Non-Regular Market (Pasar Non-Reguler Penyelenggara Bursa Karbon).

Auction Market

The Auction Market is a bidding system with a baseline Carbon Unit price of IDR 1,00.[15] Like a traditional auction, the winner shall be determined based on which bidder has offered the highest price at the earliest opportunity (price and time priority).[16] However, it is worth noting that the trading of PTBAE-PU and SPE-GRK differs within the Auction Market. PTBAE-PU auctions are enacted by the Ministry of Energy and Mineral Resources (“MEMR”),[17] while SPE-GRK auctions must first be requested to Carbon Exchange Organisers by Project Owners.

Regardless, the Auction Market is a reasonably feasible medium for carbon trading, especially for business actors already well-accustomed to the auction and bidding system. However, we must note that the Auction Market is more suitable for larger enterprises, for they can set a higher bidding price to be appointed as the winner of the Carbon Unit that is up for auction.

Regular Market

Second, the Regular Market in IDXCarbon endorses a system whereby sellers and purchasers of Carbon Units can post two types of offers: (i) limit order and (ii) market order. A limit order constitutes an offer whereby sellers and purchasers designate their price and volume for the Carbon Units they intend to sell or purchase. In a market order, only the importance of the Carbon Unit is determined by the sellers and purchasers when making their offer.[18]

As explained above, the limit order in the Regular Market gives participants more liberty to determine their price range about the requested or provided volume of Carbon Units. However, it must be noted that the limit order is bound by price and time priority,[19] so another offer may supersede an offer of purchase if the former falls short of the priority thresholds. Accordingly, the limit order may be more suitable for veteran industry players as they possess more significant resources to mark a higher price range to successfully match their offer for purchase. On the other hand, market orders are less competitive since they are compared solely on the volume of the requested or provided Carbon Units, making this choice more friendly for novice IDXCarbon participants.

To reach a successful transaction and settlement of Carbon Units in the Regular Market, IDXCarbon participants must pay close attention to the auto-rejection mechanism, whereby a particular offer shall be unconditionally rejected if certain circumstances apply. In that regard, IDXCarbon shall impose Auto Rejection on the following recommendations in the Regular Market:[20]

1. If the price offer for the sales and purchase of Carbon Units is below the minimal price threshold of 200,00 IDR per Unit of Carbon,
2. If the price offer for the sales and purchase of Carbon Units is below or above 20% of its price reference or
3. If the volume offered for the sales and purchase of Carbon Units exceeds the importance provided by IDXCarbon.

Though not expressly stated within IDX Decree No. 00296/2023, we interpret that the intention behind the Auto Rejection is threefold:

1. First, it may help with preliminarily filtering market offers that do not fulfill the baseline price or volume for Carbon Units in the Regular Market, thereby circumventing the potential for an overabundance of noncompliant price or volume offers;
2. Second, by barring price offers to 20% of the Carbon Unit reference price, it may prevent specific submissions from having a limitless price range, thereby maintaining a normal fluctuation of Carbon Unit prices and
3. Third, it may be utilized to prevent one or several prominent IDXCarbon participants from dominating the carbon market by limiting the range of the price and volume offers that they could make, thereby allowing novice participants to partake in the trades without being barricaded by high price offers from more prominent industries.

IDXCarbon’s inclusion of the Auto Rejection system is a positive precaution, establishing the Regular Market as a versatile segment for various IDXCarbon partakers to participate in while maintaining a concrete oversight over the transactions.

Negotiated Market

The Negotiated Market refers to a sales or purchase offer of Carbon Units, which shall be negotiated with their counterparty.[21] Before this, the negotiating parties must have an agreement that enumerates, among others, (i) the Carbon Unit series, (ii) the Carbon Unit price, and (iii) the Carbon Unit volume.[22]

After that, the negotiation results constitute a transaction arranged by the Carbon Exchange Organiser once the counterpart has confirmed the development.[23] It is worth noting that the minimum price for Carbon Units in the Negotiated Market amounts to IDR 1,00.[24] Aside from this, however, participants in the Negotiated Market are free to agree upon the price and volume of the transacted Carbon Unit, making this segment arguably the most versatile method of exchange in IDXCarbon. However, since the Carbon Unit price and volume are predicated on negotiations and are not matched by Carbon Exchange Organisers, participants in the Negotiated Market must exert additional time and costs to consult and reach a compromise with their counterparts before settlement.

Non-Regular Market

The final segment in IDXCarbon is the Non-Regular Market. The most apparent difference between this segment and the preceding ones is that the object of the transaction is purely SPE-GRK [25] with a floor price of IDR 1,00.[26] Herein, Project Owners may post a sales offer for SPE-GRK, and prospective purchasers may either file a request for purchase with the price settled by the Project Owner or request for sale with a different price range.[27] Upon a request of purchase, sellers in the Non-Regular Market shall provide their confirmation concerning whether or not they approve of the purchase offer; the Carbon Exchange Organisers shall annul such requests not confirmed by the sellers.[28]

Furthermore, sellers in the Non-Regular Market are entitled to remove their SPE-GRK sales offer from the Non-Regular Market and allocate it in the Regular Market upon notice to the Carbon Exchange Organisers.[29] However, we must note that prospective sellers who intend to carry out this option shall be bound by the rules of the Regular Market – including a different floor price for the SPE-GRK and the Auto Rejection system – which may not be as desirable as the somewhat less demanding system found in the Non-Regular Market.

Key Takeaways

As of the writing of this article, IDXCarbon has traded more than 459.000 tonnes of carbon with a closing price of 69.600 IDR since its inauguration on 26 September 2023. This is a promising start to the awaited development of IDXCarbon in the coming times. However, building a mature carbon market with intentions of making it international is not a tiny milestone to reach. Indeed, even though IDXCarbon is now still exclusively open to domestic business actors, Carbon Exchange Organisers must always ensure that the available market segments, registration process, and accreditation standards are sufficient to accommodate foreign Carbon Units once the market is open for foreign actors. Not only that but mindful attention must also be made to circumvent the possibility of foreign Carbon Units outcompeting their domestic counterparts or vice versa.

Regardless, it would be a mistake not to acknowledge that IDXCarbon has hit the ground running. IDXCarbon may become one of, if not the world’s most significant carbon trading market with this course.