Perspectives

Technical Assistance II

In late 2023, ARISE+ Indonesia responded to a request from BKPM and Bappenas to conduct an assessment of Indonesia’s Carbon Market and how it can be optimized in the future. The assignment coincided with the launch of Indonesia’s Carbon Exchange (IDX Carbon), thus offering a timely opportunity for ARISE+ Indonesia to engage international expertise in this area.

Dr. Divaldo Rezende, a leading International Expert on Carbon Markets, was engaged to conduct the assessment, bringing more than 30 years of experience from around the world, including his native Brazil, an important peer market for Indonesia.

Following his mission and the presentation of his report to the Indonesian Government, the ARISE+ Indonesia team caught up with Dr. Rezende to gather his thoughts and recommendations for Indonesia’s Carbon Market.

The following is an excerpt from our interview.

Can you briefly set out the context and purpose of your assignment in Indonesia in relation to Carbon Markets?

In 2021, Indonesia embarked on a pivotal journey in climate action by issuing Presidential Regulation No. 98 (PR 98/2021). This regulation marked a significant shift in the country's approach to carbon management, granting the government effective control over carbon rights and introducing various carbon pricing mechanisms, including a carbon trading system. As the implementation and optimisation of this regulation continue to evolve, it my mission to Jakarta in late 2023 was timely, in order to evaluate and provide recommendations for enhancing Indonesia's Carbon Trading System.

The objectives of the assignment were multifaceted and strategically significant:

1. International Model Assessment: To thoroughly analyse and provide insights on various international models of Carbon Trading Systems, both compliance-based and voluntary. This analysis aims to identify models that are successful, relevant, and adaptable to the Indonesian context.
2. Stakeholder Consultations: Engaging with key Indonesian stakeholders is vital to understanding the discussions and plans underway concerning the nation’s carbon trading system. This step involves consulting with diverse entities to gather a comprehensive view of the current landscape and future aspirations.
3. Actionable Recommendations Development: The ultimate goal was to offer practical, actionable recommendations to the Government of Indonesia. These recommendations focus on establishing and refining national and subnational Carbon Trading Systems, particularly relevant to the policy planning efforts for Indonesia's new capital, Nusantara.

These recommendations are grounded in global best practices and proven procedures from other Carbon Market Schemes. It is hoped that this report will assistthe Government of Indonesia in taking practical, effective steps towards establishing and optimising a robust and efficient Carbon Trading System.

What key challenges lie ahead as Indonesia seeks to optimise its Carbon Market?

In the face of escalating global climate change challenges, carbon trading has emerged as a crucial mechanism in the international effort to mitigate greenhouse gas emissions. For Indonesia, a country endowed with rich natural resources and extraordinary biodiversity, implementing an effective carbon trading system presents significant potential – not only environmentally but also socially and economically. The country’s vast rainforests and peatlands, pivotal in carbon sequestration, position it as a critical player in global climate action initiatives.

However, the current embryonic state of Indonesia's carbon market calls for strategic enhancements to meet global standards and realise its full potential. Our assignment aimed to explore and propose strategies to refine Indonesia's carbon trading framework, examining its existing mechanisms, strengths, and areas needing improvement. By analysing successful global models and tailoring them to Indonesia’s unique socio-economic and environmental context, we have sought to offer comprehensive and robust recommendations.

The importance of these recommendations is profound. Fine-tuning Indonesia’s carbon trading system aligns with global climate change mitigation efforts and opens doors to sustainable economic development. It represents a step towards a more sustainable, green economy, benefiting Indonesia’s environment and people.

What are your key recommendations for addressing these challenges?

Our recommendations underscore the pivotal role of optimising Indonesia's Carbon Trading System in line with Presidential Regulation No. 98/2021. We have pinpointed several critical areas for improvement through detailed analysis, engagement with stakeholders, and benchmarking against international standards. Our multi-faceted recommendations focus on governance enhancement, engaging the private sector, aligning with global standards, leveraging technological advancements, and developing a robust framework for the carbon market.

Implementing these recommendations requires a collaborative approach across various sectors and governmental levels. Emphasising ongoing improvement and feedback is crucial to adapting to changing environmental, economic, and social landscapes. The report highlights the need for a dynamic system that meets international best practices and suits Indonesia's unique circumstances.

Key recommendations include:

1. Establishing a dedicated agency for overseeing the carbon trading system.
2. Ongoing stakeholder engagement.
3. Capacity building and education.
4. Updating the policy and legal framework.
5. Investing in technology and infrastructure.
6. Aligning with international carbon standards and partnerships.
7. Encouraging Public-Private Partnerships (PPP).
8. Developing financial mechanisms and incentives.
9. Integrating blue carbon projects into the national strategy.
10. Establishing robust monitoring and evaluation mechanisms.

Looking globally for inspiration, Indonesia can learn from several established national and multinational carbon trading systems:

1. European Union Emissions Trading System (EU ETS): The world's first primary carbon market and its most significant, focusing on capping and trading emissions from major industrial sectors. Key lessons include robust cap-setting, sectoral coverage, and market stability mechanisms.
2. California Cap-and-Trade Program: This program is part of the Western Climate Initiative and includes emissions trading, offset credits, and stringent monitoring mechanisms. California's system shows how sub-national jurisdictions can effectively manage a carbon market.
3. Regional Greenhouse Gas Initiative (RGGI) in the Northeastern US: This market-based collaborative effort among states aims to reduce greenhouse gas emissions from the power sector. It offers insights into regional collaboration and reinvestment of auction proceeds into energy efficiency and renewable energy projects.
4. China's National Emissions Trading Scheme: As the world's largest carbon market, it provides valuable insights into managing a carbon trading system in a developing country, especially in scale and sectoral inclusion.
5. New Zealand Emissions Trading Scheme (NZ ETS): It's unique for including forestry as a significant sector and offers lessons in integrating land-use changes and forestry into carbon trading.
6. The Brazilian Emission Trading Scheme: initial implementation in terms of the scheme but very similar in terms of potential projects and the size of the economy. Strong connection in terms of forestry and biodiversity approach with Indonesia.

These systems illustrate diverse approaches to carbon trading, offering valuable lessons in governance, market design, compliance mechanisms, and stakeholder engagement. Considering its unique environmental, economic, and social landscapes, Indonesia can adapt these lessons to its context. Adopting best practices from these systems can significantly aid Indonesia in developing a robust, efficient, and effective carbon trading system, contributing to its sustainable development goals and global climate change mitigation efforts.

You recently attended COP28 in Dubai. What are your key takeaways from the global conference regarding how global carbon markets are set to be developed and supported in the coming years?

The COP28 conference in Dubai provided significant insights into the future development and support of global carbon markets, especially in light of the urgent need to reduce greenhouse gas emissions. Here are the key takeaways from the conference:

1. Disparity Between Goals and Commitments: There needs to be a more significant gap between the current national climate plans and the IPCC's recommended 43% reduction in emissions by 2030. Current plans would increase emissions by 9% by 2030 compared to 2010, highlighting a critical need for more ambitious action.
2. Article 6 of the Paris Agreement: This is a pivotal element in addressing the challenges developing and least-developed countries face in transitioning to a low-emissions future. Article 6 facilitates international cooperation and financial support with three essential tools:

• Article 6.2: Allows bilateral exchange of mitigation outcomes, which can be used towards nationally determined contributions (NDCs).
• Article 6.4: Establishes a mechanism for validating and issuing high-quality carbon credits.
• Article 6.8: Encourages cooperation towards achieving NDCs without relying on carbon markets.

3. High-Integrity Carbon Crediting Mechanism: Central to the efforts under Article 6.4, this mechanism aims to identify emission reduction opportunities, attract funding, and foster cooperation among countries. It's also seen as a potential source of climate finance for developing nations.
4. Discussions at COP28:

• Under Article 6.2, key focus areas were technical elements like the authorisation of Internationally Transferred Mitigation Outcomes (ITMOs), international registry interactions, and transparency in reporting carbon trading transactions.
• Regarding Article 6.4, there were deliberations on guidance for carbon crediting methodologies and greenhouse gas removals, focusing on operationalising the new crediting mechanism in the coming year.
• Regarding Article 6.8, discussions centred around non-market-based cooperation, including mitigation, adaptation, and sustainable development. This article emphasises integrated approaches to implementing NDCs.

5. Future Outlook: The groundwork laid at COP26 in Glasgow is being refined at COP28. With ongoing negotiations and implementation plans stretching to the Bonn meetings in 2024, there is an expectation of strengthened support for carbon markets as tools for emission reductions and sustainable development globally.

Overall, COP28 in Dubai marks a critical juncture in refining and implementing strategies to utilise carbon markets effectively, with a strong focus on international cooperation, transparency, and support for developing countries in their climate action efforts.