Slow start to Indonesia’s booming carbon market

Slow start to Indonesia’s booming carbon market

Since President Widodo launched the Indonesian stock exchange two months ago, there has been barely any trading in carbon credits.

In September, Indonesian President Joko Widodo opened the country’s first carbon exchange IDX Carbon, declaring that “this is Indonesia’s real contribution to the fight with the world against the climate crisis.”

In the launch video, a soothing female voice calls out on the guitar. “Join us to accelerate net zero with greater transparency, liquidity and efficiency,” she says, as a headless businessman caresses a 3D globe.

Two months later, this call has been largely ignored. Climate Home’s analysis of trading data indicates that most days see no trading at all.

Carbon credit traders and experts blamed a lack of purchasing incentives, administrative errors, and confused government priorities.

A controversial solution

Carbon trading allows the trading of carbon credits. One company removes carbon dioxide from the atmosphere and another company pays to take the credit for it.

Supporters of carbon credits say they are a way to finance climate action that could not be done otherwise, while critics say their real-world benefits are overstated and that they provide polluters with an excuse to continue emitting.

Exchanges between the EU and China are among the largest in the world. President Widodo predicted in September that Indonesia could soon compete with them.

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But the stock market got off to a very slow start. Of the 19 trading days for which Climate Home was able to obtain data, there was no trading for 17 days.

This data was obtained from IDX data and from some of its daily reports, which regularly disappear from its website. IDX did not respond to repeated requests for complete data.

The price of carbon has remained unchanged since launch, indicating that it is an inactive market.

Low demand

Demand for loans is low. This is reflected in the carbon price – just Rs 69,600 ($4.50) per ton of carbon dioxide.

Demand could be boosted if Indonesia implements a plan to limit company emissions and tax them on any excess.

The idea is to allow them to avoid taxes by purchasing another company’s unused emissions allowance or by purchasing carbon credits.

The government initially proposed a tax in 2022, but now says it will be imposed next year or the year after, saying carbon markets must be created first.

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The voluntary market has been launched, and the compliance market will start next year, when the cap and tax on coal-fired power stations is trialled.

The government has sent mixed messages about the extent to which businesses can buy voluntary credits to cover their tax liabilities and the cap. The Department of Energy wants a limited role, while the Department of the Environment wants a more expansive role.

Suppliers kept out

All of this has reduced domestic demand, and regulations allowing foreign companies to purchase credit have not yet been put in place.

Desi Juliana is the director of CarbonX, a company that buys and sells credits. She told Climate Home that this is due to pending international trade regulations and divided priorities in government.

Iliana said that while some groups in government are keen to attract foreign investment, the administration’s main priority is to ensure carbon credits issued count towards national carbon reduction commitments.

Until now, the stock exchange lacks sellers as well as buyers. The government allowed only three companies to sell credit.

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This is because with more carbon trading regulations coming soon, many companies are still in a “wait and see” mode, said Vivek Mulyana of PWC Legal Indonesia.

One Indonesian carbon credit seller, who did not want to be named, complained that regulations are often vague and inflexibly implemented.

They added that the lack of expertise and experience needed to quickly assess the credibility of projects was a particular problem, as only four verification and validation bodies had signed up.

With carbon credit projects plagued by accusations of over-accounting and human rights abuses, the role of verifiers will be crucial.

“A lot of investors use carbon credits primarily as a form of green virtue signaling,” says Bill Sullivan, a mining and energy attorney with Christian Teo & Associates.

“Accordingly, any scandals in this sector could undermine the full meaning of carbon credits for them, and therefore make purchasing carbon credits less attractive for them,” he added.

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