CLIENT UPDATE:

CARBON AND ESG

August 2023

The Carbon Exchange: Indonesia's next climate action frontier

Overview
Indonesia has taken a major step towards tackling climate change with the enactment of
Financial Services Authority (OJK) Regulation No.14 of 2023 on Carbon Trading through
Carbon Exchanges (Carbon Exchange Regulation).
The Carbon Exchange Regulation is a follow-up to Law No.4 of 2023 on the Development
and Strengthening of the Financial Sector (P2SK Law), which established the framework
for carbon exchanges in Indonesia (Carbon Exchange). The Carbon Exchange
Regulation provides more detailed rules on the establishment of a Carbon Exchange
operator (CE Operator), including the types of carbon units that can be traded, the
procedures for trading carbon units, and the oversight of the carbon trading market.
The Carbon Exchange Regulation is a significant milestone for Indonesia's climate change
agenda and is expected to help Indonesia to achieve its target of net-zero emissions by
2060. It also has the potential to open up new economic opportunities for businesses and
investors in Indonesia.
Carbon exchanges as contemplated under the P2SK Law and Carbon Exchange
Regulation
Supervisory authority
Before the P2SK Law was issued, there was considerable speculation that the Commodity
Futures Trading Regulatory Agency (known as Bappebti), the Minister of Finance or the
tax authority would be appointed to supervise Indonesian carbon exchanges. However,
contrary to the speculation, OJK was appointed to oversee and regulate carbon exchange
activities in Indonesia.CE Operator
The P2SK Law specifies that any party that fulfills the requirements set out by OJK can
apply to become a CE Operator. The Carbon Exchange Regulation now outlines the
following requirements for CE Operators:
No. Aspect Requirements
1. Business OJK has the authority to issue CE Operator business licences
licence following applications by business players that satisfy OJK’s
requirements
2 Entity and The CE Operator must be a limited company established in
capitalization Indonesia (perseroan terbatas) having a minimum issued and
paid-up capital of Rp100 billion (approximately US$6.5 million)
3 Foreign A CE Operator:
ownership
• can have a maximum 20% direct or indirect foreign
restrictions
ownership;
• is prohibited from having any arrangements that give control
to the minority foreign shareholder, such as a right to
nominate a majority of the Board of Directors (BoD) and/or
Board of Commissioners (BoC), or veto rights at general
meetings of shareholders (that must be retained by the
Indonesian shareholders); and
 No. Aspect Requirements
• must ensure that its shareholders (including any foreign
shareholders) pass OJK’s fit and proper test
4 Management A CE Operator’s BoD and BoC members must:
• pass OJK’s fit and proper test;
• not be affiliated with other BoD or BoC members;
• not own shares in or act as a controller of any user of the
carbon exchange;
• not participate in any carbon unit transactions; and
• be appointed for a four-year term and can only be
reappointed for one additional term.
A CE Operator’s BoD must:
• have a minimum of two members (with one appointed as
President Director);
• ensure that one member has knowledge or experience with
climate change control and carbon markets;
• ensure that its members are all domiciled in Indonesia; and
• not hold concurrent positions in other companies or
concurrent positions of other BoD members in the same CE
Operator.
A CE Operator’s BoC must have a minimum of two
commissioners (with one appointed as President
Commissioner).
5. Articles of Any changes to the CE Operator’s AoA must be approved by
Association OJK
(AoA)

The Carbon Exchange Regulation contemplates that OJK will further regulate the
requirements and procedures for applying to OJK for approval of a CE Operator’s
prospective shareholders and BoD/BoC members. Business players satisfying all of OJK’s
requirements can apply for a CE Operator business licence.
The CE Operator’s supervisory role and regulation-making role under the Carbon
Exchange Regulation are extensive, including obligations to provide systems and/or
means to support Carbon Unit trading, ensure adequate internal control and risk
management, provide access and support to OJK for supervisory purposes, including real
time access to transaction date. The Carbon Exchange Regulation also gives the CE
Operator very broad powers to make regulations regarding service users’ activities,
covering service users, Carbon Units and trading supervision.
What is being traded?
While IDX trades stocks, bonds, and funds, the Carbon Exchange trades "carbon units".
A “Carbon Unit” is defined as proof of carbon ownership in the form of a certificate or
technical approval which is stated in 1 (one) ton of carbon dioxide recorded in the National
Registry System for the Control over Climate Change (Sistem Registri Nasional
Pengendalian Perubahan Iklim/SRN PPI or Carbon Registry).
The P2SK Law and Carbon Exchange Regulation provide that Carbon Units are
“securities” which are categorised as financial instruments with economic benefits that are

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able to be transferred or traded, as regulated. The Carbon Exchange Regulation states
that Carbon Units traded on the Carbon Exchange consist of:
GHG Emissions Reduction Certificates, Technical Approvals for Upper GHG
(Sertifikat Pengurangan Emisi GRK/SPE- Emissions Limits (Persetujuan Teknis
GRK or ERCs) Batas Atas Emisi, PTBAE)
(a) SPE-GRK is a form of proof of (a) PTBAE is the determination of GHG
emissions reduction by businesses emissions limits within entire
and/or activities in the form of registry subsectors. Related to PTBAE for
numbers and/or codes. subsectors is PTBAE for specific
Business Entities (PTBAE-PU), under
(b) SPE-GRKs are issued and registered
which emissions limits and/or
by the Carbon Registry from carbon
emissions quotas within a certain
offset projects following a process of
period are determined for each
measurement, reporting and
business entity under its relevant
verification (MRV) by accredited
subsector.
independent verifiers and validators.
(b) PTBAE and PTBAE-PU are
(c) The MRV process is a similar concept
determined by the ministries in charge
to Verified Carbon Units (VCU), which
of the particular subsectors. The
are carbon credits issued to approved
government regulates a ‘cap and
projects following the principles of the
trade’ system, under which a PTBAE-
Verified Carbon Standard (VCS)
PU business entity that has a balance
(known as Verra), a widely used GHG
of its unused emissions limit or quota
crediting program. To qualify as VCU,
can store or domestically trade such
emissions reductions must be
balance with other PTBAE-PU
genuine, must have occurred before
business entities that have exceeded
VCU issuance, go beyond business-
their emissions limit or quota.
as-usual activities, must be
measurable, permanent, (c) The above cap and trade system is
independently verified and uniquely similar to the emissions trading
numbered to prevent multiple usage. system (ETS) as adopted by many
international players, including the
European Union, that was the first to
adopt such a system.

The CE Operator can facilitate trading on the Carbon Exchange of Carbon Units from
abroad, whether or not they are recorded in the Carbon Registry. However, foreign Carbon
Units must comply with various provisions set out in the Carbon Exchange Regulation
referred to below.
According to the Carbon Exchange Regulation, foreign Carbon Units that are not listed in
the Carbon Registry must meet certain requirements, including that they must:
• be registered, validated and verified by an institution accredited by an international
registration system organizer;
• meet the criteria for trading on a foreign Carbon Exchange; and
• fulfil “other requirements” set by OJK.
Therefore, foreign Carbon Units like, for example, VCU (Verified Carbon Units) issued by
international bodies such as Verra, would have the opportunity to be traded on the Carbon
Exchange if they fulfil the above criteria, including the very open “other requirements” set
by OJK.
Lots of homework, but significant opportunities!
The Carbon Exchange Regulation identifies the following key areas that need to be
further regulated:

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(a) The need for an electronic system to match Carbon Unit transactions. This
system should be able to handle both the purchase and sale of Carbon Units, as
well as the settlement of Carbon Unit transactions. It is important to consider that
several sectors will participate in the Carbon Exchange, including forestry,
plantation, oil and gas, and general industry sectors.
(b) The need for further regulations regarding service users, traded Carbon
Units, trading activities and trading supervision. These further regulations will
ensure the Carbon Exchange’s proper functioning and security. They will need to
be developed in consultation with the relevant stakeholders and within the current
legal framework.
(c) The possible role of intermediary traders in Carbon Unit
transactions. Intermediary traders could provide valuable services by facilitating
the matching of buyers and sellers.
(d) The potential for the development of Carbon Unit derivatives, such as
options, futures and swaps. These products could provide further opportunities
for investors and traders, and could help to increase carbon market liquidity.
Particularly points (b), (c), and (d) above present some interesting business opportunities
that could be explored by additional players within the carbon trading ecosystem. Please
also see below schematic diagram of potential carbon market stakeholders and ecosystem
based on information published by OJK and IDX, and our observations on the current
carbon market practice.

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Conclusion
Based on media reports, the Indonesian Government has estimated that the potential
value of domestic carbon trading in Indonesia is as high as US$565.9 billion. The Carbon
Exchange Regulation is a crucial milestone for the Indonesian government, as it will
significantly boost development of the Indonesian carbon economy ecosystem once the
Carbon Exchange is up and running.
Although many sectors have not yet been regulated for carbon economic value (currently
only electricity generation using coal-fired power plants; and forestry), the potential
economic value of carbon credits from all these sectors is enormous. However, the
government still has a long way to go to regulate all the currently unregulated sectors
before they can actively contribute to Indonesia’s carbon market.
Presidential Regulation 98/20211 and Ministry of Environment and Forestry Regulation
21/20222 indicate that carbon economic value will be regulated in four other sectors (in
addition to forestry): energy (apart from electricity generation using coal-fired power
plants), waste, industry and agriculture; and 12 subsectors. There are also indications that
future sectors could be subject to carbon economic value regulation, depending on
advancements in science and technology.
The Indonesian carbon market is still in its early stages but has the potential to be a major
driver of economic growth and environmental sustainability in Indonesia. We will continue
to monitor developments in the Indonesian carbon market and provide updates as they
become available.

S&T is one of Indonesia’s

leading law firms with a
recognised market leading
Technology, Media &
Telecommunications Law
Robert Reid
practice. Denia Isetianti
Foreign Counsel
Partner
If you would like to discuss Denia_isetianti@soemath.com robert_reid@soemath.com
any aspect of this update, or
your business activities or
plans, please feel free to
contact us.

1
Presidential Regulation No. 98 of 2021 on the Implementation of Carbon Economic Value to Achieve the Nationally Determined Contribution
Targets and the Control of Greenhouse Gas Emissions in National Development.
2
Minister of Environment and Forestry Regulation No. 21 of 2022 on Carbon Economic Value Governance