Carbon Trading Implementation Needs to be Followed by Tighter Emission Limits

press release

Jakarta, March 1, 2023 – The Ministry of Energy and Mineral Resources (ESDM) began implementing a carbon trading mechanism in the coal-fired power plant (CFPP) sector on Wednesday, February 22, 2023. The Institute for Essential Services Reform (IESR) stated the implementation of carbon trading as a step forward, noting the need for tightening emission caps in the future. In addition, the results of carbon trading can be a source of Non-Tax State Revenue (PNBP), which, if appropriately allocated, can encourage investment in renewable energy and increase energy efficiency.

Carbon trading is finally implemented after being tested in several coal-fired power plants in 2021. The government has also established Technical Approval for Emission Limits (PTBAE) starting from the non-mine mouth (MM)/MM CFPPs with a capacity of 25 MW to 100 MW of 1,297 tons CO2e/MWh, up to Non-MM CFPP with a significant degree of 400 MW is 0.911 tons CO2e/MWh.

“Even though the carbon trading scheme has been implemented appropriately in Indonesia, the ceiling for carbon emissions set by the government is currently still relatively high, and no effort is required for CFPP owners to fulfill it. As an illustration, the intensity of carbon emissions in power plants in neighboring countries is 20% -40% lower than in Indonesia. This opens up opportunities to tighten emission limits for CFPP in the future,” said Executive Director of IESR, Fabby Tumiwa.

IESR believes that determining quota restrictions for CFPP will increase business actors’ awareness of the emissions produced and regulate CFP operations more efficiently.

Furthermore, this carbon trade regulates the replacement or carbon offsets if the generating unit produces emissions exceeding the Technical Agreement for the Upper Emission Limit of Business Actors (PTBAE-PU). This plant must purchase emissions from the PLTU unit that has emissions under PTBAE-PU and or purchase an Emission Reduction Certificate (SPE GRK).

“To increase the integrity of the offset mechanism and the real impact of reducing emissions by using the SPE instrument, the government must ensure normal emission reduction activities that can be traded on the carbon market. It is recommended that SPEs be prioritized from renewable energy generation to align this instrument with energy transition efforts to reach NZE 2060 or earlier. This SPE instrument can be an incentive for businesses and the public to build renewable energy generators,” explained Fabby.

IESR proposes that SPE be carried out to accelerate the installation of rooftop solar PV by consumers. The electricity generated by the rooftop solar PV and exported to the grid can become SPE and be used for carbon offsets. Revenue from SPE sales can increase consumer interest in installing rooftop solar power plants.

The Minister of Energy and Mineral Resources will give a written warning, and the allocation of PTBAE-PU for the subsequent carbon trading is around 75%. This applies to business actors who should refrain from participating in carbon trading by not submitting a plan for monitoring greenhouse gas emissions and revisions to reporting on greenhouse gas emissions.

“The existence of quota restrictions imposed by the government on business actors who violate the rules is a clear form that the government is committed to trading carbon as an instrument to reduce emissions. However, in practice, it requires strict monitoring,” mentioned Farah Vianda, Coordinator of the Sustainable Financing Project, IESR Green Economy.

The government has set the value of PTBAE-PU to 99 units of coal-fired power plants from 42 companies that will become carbon trading participants, with a total installed capacity of 33,569 MW. The price of carbon traded between CFP units in the country is estimated to be from US$ 2 to US$ 18 per ton.

“Ministry of Finance regulations governing carbon prices can be issued immediately to provide certainty for carbon trading activities. It is hoped that the carbon price applied will not be too far from the global average price,” Farah added.

Public oversight of the implementation of carbon trading also needs to be developed. Efforts to include a carbon trading mechanism in stock trading, which the Indonesia Stock Exchange is currently reviewing, will make carbon prices more competitive and promote transparency to attract investors and mainstream sustainable financing principles.***