Documentation:Open Case Studies/FRST522/2023/The Indonesian Carbon Trading Market (IDX Carbon): What lessons can be learned from existing schemes in other jurisdictions?

Summary of Case Study

The rise in our earth’s temperature is at its highest rate due to the level of carbon dioxide in our atmosphere. The basis of the concept of carbon trading stems from the idea that communities will be paid through carbon credits for their land and services in planting trees that store carbon dioxide. Nonetheless, this is a concept that has proven to be complicated in practice and has raised many questions, many of which are:

• Do carbon credits really improve the lives of the people living around areas of carbon sequestration?
• Does the privately run voluntary carbon market truly offset carbon dioxide?
• Is a carbon credit a license to emit carbon dioxide?

The official launching of the Indonesian national carbon trading market, the IDX Carbon, in September 26th 2023 in Jakarta, Indonesia. Attending the inauguration event were the Minister of Environment and Forestry (Siti Nurbaya Bakar), the Head of the Financial Services Autority (Mahendra Siregar), the President of Indonesia (Joko Widodo) and the Coordinating Minister of Maritime and Investment Affairs (Luhut Binsar Pandjaitan) (left to right)

These are the questions that raise a dilemma every time a new carbon sequestration project is proposed or a new carbon trading market emerges.

Then comes news from one of the world’s most biodiverse and resourceful countries in terms of natural resources. On September 26th, 2023, Indonesia officially launched its national-scale carbon trading market at the main hall of the Indonesia Stock Exchange building in Jakarta. The market will be administered and integrated within the system of the Indonesia Stock Exchange, or IDX, hence its name, the IDX Carbon. As a result of continuous annual peatland fires and deforestation caused by industrial and plantation activities, the government of Indonesia has been pressured by its environmentalists and academics for a long time to take firm actions in climate change mitigation measures, as there has been the legal obligation to do so. An academic journal as early as 2021 elaborated on the importance of establishing a carbon trading market, which would assign permits that allow the measurement of greenhouse gas emissions and enable additional emitters to purchase extra permits from those who successfully emit less than their assigned cap. Exciting news aside, the reality on the ground regarding carbon sequestration might not be as beautiful as one could imagine. One of the aims of this case study is to assess what other nations have conducted and to determine what lessons Indonesia should take from both the failures and successes of existing schemes.

Keywords

Indonesia, Indonesia Stock Exchange, IDX Carbon, Greenhouse Gases, Carbon Dioxide, CO², CO2, CO2 Equivalent, Carbon Offset, Carbon Credits, Carbon Sequestration, Emissions Allowance, Junk Credits, Indigenous Communities, Traditional Communities

Land Acknowledgement & Positionality Statement

Although I am currently enrolled in the Master of International Forestry program at the University of British Columbia at its Point Grey Campus, I often spend my time studying or working on my assignments around downtown Vancouver, as well as at the Central Branch of the Vancouver Public Library on West Georgia Street. For the community that has welcomed me with warmth and great care, I would like to acknowledge that I am studying and learning on the traditional, ancestral, and unceded territory of the Coast Salish People, including the territories of the Musqueam, Squamish, and Tsleil-Waututh Nations.

I was born in Jakarta, Indonesia, to a Javanese mother and a Sundanese father. Since I was raised in Jakarta and grew up there, experiencing the impact of climate change has been a hands-on experience throughout my life. Heatwaves, floods, air pollution—these are the things I experienced regularly as an ordinary local of the Indonesian capital. As a citizen of the world’s third-largest democracy, I believe that I have the right to analyze and inquire into the accountability of my government’s latest steps regarding its climate change mitigation policy, in this case, the establishment of the national carbon trading market.

In grasping valuable lessons from Canada, Indigenous rights and public welfare should be essential components of any country’s environmental policy. Canada is facing one of its most challenging times in addressing its past policies in regards to the treatment of Indigenous Canadians and the revocation of their civil rights. The contemporary need for reparation has arisen from reckless policy-making and ignorance towards inclusivity. For Indonesia’s recent introduction to decentralization, along with an obsession with direct government control and a common misconception of consensus, I genuinely hope that this case study may provide insight to those in pursuit of transparency, inclusivity and effective policy-making.

Introduction

Although used interchangeably, understanding the basic difference between the terms “Carbon Credit” and “Carbon Offset” is important. A Carbon Credit, or Carbon Allowance, acts as a permit for a party—usually a company—to emit a metric ton of CO2 or CO2 equivalent. With these assets, cash flow occurs from companies to regulators and from regulators to climate change mitigation projects. This concept gave birth to compliance carbon markets (CCM) and cap-and-trade systems. A Carbon Offset, on the other hand, is a contribution to carbon removal from the atmosphere by an institution. In return for that contribution, other institutions can purchase the carbon offset if they need to emit more CO2 or CO2 equivalent than their allowance cap in order to continue their operations. This concept gave birth to voluntary carbon markets (VCM). However, institutions within a state with a cap-and-trade system can also benefit from VCM. The Kyoto Protocol of 1997 laid the groundwork for the concept of carbon credits in the first decade of the 21st century. The treaty itself extends the 1992 United Nations Framework Convention on Climate Change (UNFCCC), which was effectively enforced in 2005. Under this framework, signatory states agreed to establish methods of transnational emissions exchanges. These included three mechanisms, which are:

• International Emissions Trading (IET) Kyoto Protocol Article 17
• Clean Development Mechanism (CDM) Kyoto Protocol Article 12
• Joint Implementation (JI) Kyoto Protocol Article 6

The front page of a newspaper from December 1997 celebrates the adoption of the Kyoto Protocol

International Emissions Trading

The IET ruled that countries with binding targets under the Kyoto Protocol can acquire emission units from other countries in order to meet their emission reduction targets. The security of transactions will be backed by a software-based accounting system, which establishes an international transaction log between countries. The principles behind the IET gave rise to the European Union Emissions Trading Scheme in 2005.

Clean Development Mechanism

The CDM paved the way for emissions reduction or removal projects to take place in less developed countries, allowing them to earn Certified Emissions Reductions (CER) credits. Equivalent to one tonne of CO2, CER credits are tradable between countries and can be purchased by more developed or industrialized countries to meet their emissions reduction targets under the Kyoto Protocol (United Nations, 2007). Through this mechanism, sustainable development and emissions reductions are stimulated on a global scale, providing developed countries with the flexibility to meet their emission reduction limits by purchasing carbon credits from developing countries. Although the market experienced stagnation by the end of its first commitment period in 2012 and its second commitment period in 2020, the CDM trailblazed what we know today as the Voluntary Carbon Market (VCM).

Joint Implementation

The JI mechanism was created to assist countries with limitations on reducing emissions by allowing them to participate in emissions reduction projects in another country with a commitment under the Kyoto Protocol, enabling them to meet their emission reduction targets. Projects under the JI mechanism will receive Emission Reduction Units (ERUs), valued the same as Certified Emissions Reductions (CERs), which is one tonne of CO2 per unit.

Despite the fact that the conception of the Voluntary Carbon Market was a historic feat, the problem is that it lacks standardization due to the absence of an international regulating body. This shortcoming was addressed at the Conference of the Parties (COP) 21 in 2015 under Article 6 of the Paris Agreement. It discussed how countries can cooperate to undertake climate action, the rules for cooperative approaches in climate mitigation, as well as how to integrate both existing carbon markets and non-market approaches (government to government). Part of the agreement was also the commitment of each country to set its own Nationally Determined Contributions (NDC) to illustrate each country’s framework and to form a transparent set of goals for all signatory states. In a nutshell, the 195 signatory states of the 2015 Paris Agreement agreed to cooperatively combat climate change and to keep the rise in mean global temperature to well below 2 °C above pre-industrial levels. With COP28 taking place in Dubai during the writing of this case study, it is hoped that the conference will result in an internationally negotiated agreement for an official carbon market, a transparent public registry accessible to everyone that lists all carbon offset projects, and allows countries and institutions to trade across borders.

Although the launch of the IDX Carbon has been perceived as a national achievement by the general Indonesian public, critical issues such as Indigenous involvement have not been officially addressed by the government, which may raise the potential for ethnic tensions and social problems in the long run. In Malaysia, for example, an Indigenous community was not involved in a multinational carbon sequestration deal that will affect their rights and access to their traditional forests, thereby putting their forest-dependent livelihoods at risk and potentially facing forced relocation by their state government.

Coal barges coming down the Mahakam river in Samarinda, East Kalimantan, Indonesian Borneo

Speaking about Indonesia, one cannot be distant from corruption. The Southeast Asian giant is notoriously corrupt, scoring only 34 out of 100 on Transparency International's Corruption Perceptions Index. Carbon credits from the voluntary carbon market in India have been funding unaccountable projects that cannot be proven to contribute to climate change mitigation as promised.  

On the other hand, the Tokyo Metropolitan Government has a much more rational and comprehensive example through the establishment of the Tokyo Emissions Trading Scheme in 2010, the world’s first city-scale emissions trading scheme. The system involves a diverse array of stakeholders, including local communities, industries, municipalities, NGOs, and scholars. From the standpoint of Jakarta as the sole center for most affairs in Indonesia—political, economic, and industrial—a city-scale ETS might have been a more suitable and feasible platform to serve as a model that can be further developed into a national-scale ETS.

Table 1. Scopes of Existing Carbon Trading Schemes

Jurisdiction(s)	Scale	Compliance Market	CCM Starting Year	Voluntary Market
Indonesia	National	Yes (IDX Carbon)	2023	Yes (IDX Carbon)
The European Union	Transnational	Yes (EU ETS)	2005	Yes (EEX)
Malaysia	National	No	Planned	Yes (Unregulated)
India	National	No	Planned	Yes (Unregulated)
California	Regional/State	Yes (California Cap-and Trade)	2013	Yes (VCMDA)
Greater Tokyo	City/Metropolitan	Yes (Tokyo ETS)	2010	Yes (JPX)

The European Union Emissions Trading Scheme: The Pioneer

The reason why we can call the European Union Emissions Trading Scheme (EU ETS) the pioneer of all ETSs is, of course, because of its title as the first. The EU was the first to respond to the 1997 Kyoto Protocol with the publication of its Green Paper in March 2000, followed by the adoption of the EU ETS Directive in 2003. The system was officially launched in 2005, and with it, each member country must publish its individual National Allocation Plan (NAP) to determine each national cap, which will contribute to the EU-wide cap when all NAPs are accumulated. This measure implies that the amount of cap in the EU is determined through a decentralized method from the bottom up, rather than from the top down by the European Commission.

Throughout its existence, the EU ETS have had three phases:

Phase 1 (2005-2007)

• Covers Carbon Dioxide emissions from power generators and energy-intensive industries
• Successfully established an EU-wide price for carbon credits, ranging between EUR 7 and EUR 31 per ton (which collapsed to EUR 0 in 2007)

Phase 2 (2008-2012)

• Joined by three non-EU Member states (Iceland, Liechtenstein and Norway)
• Included Nitrous Oxide emissions
• Increased penalty fine for non-compliance
• Allows businesses to buy international credits from outside the EU
• Established Union Registry (replaced National Registries)

Phase 3 (2013-2020)

• Included emissions of gases from the aviation industry
• Introduced EU-wide cap to replace the sum of all national caps system
• Shift to auction method for allowance allocations

As a pioneering scheme, the EU ETS went through successes, failures, and recoveries. One of its most jaw-dropping stories occurred at the end of Phase 1 when the price of EU Allowance (EUA) dropped to zero due to an oversupply of credits. Nonetheless, the system continued to evolve and has become known as one of the most comprehensive and reliable schemes in the world. Perceived as the backbone of the European energy transition strategy, its principles were strengthened in 2023 when the EU ETS was said to include the shipping industry as its newest sector in its compliance market.

Malaysia: The Secret Deal

The case of the Malaysian state of Sabah might become one of the most disgraceful stories in the journey of carbon sequestration. At the end of 2021, state officials signed a nature conservation agreement with an Australian carbon credits verification company, Tierra Australia, to defer logging and other industrial activities on more than 2 million hectares of forest for the next century. The deal would allow the state of Sabah to sell carbon credits to companies looking to fulfill its sustainability goals, with Tierra Australia and its funder, Hoch Standard Pte. Ltd.—a Singaporean private-equity firm— to be granted 30% of the profits and the rest 70% of the profits to be allocated by the state of Sabah to fund economic development for its Indigenous communities. However, the problem about the deal was that the Indigenous—the term Adat is more widely used in Malay speaking countries, literally means Traditional—communities living in the forests of Sabah knew nothing about the deal. Peter Burgess, CEO of Tierra Australia, defended the deal, emphasizing that the company will employ community members in restoring the rainforests. Moreover, he added that only village leaders had been consulted regarding this deal, acting on behalf of the rest of their forest-dependent population. Meanwhile, the Second Deputy Chief Minister of Sabah, Jefferey Kittingan, declared that indigenous and forest-dependent communities must recognize the sovereignty of the state and that the government has the right to sequester carbon from its protected forests. The minister also asserted that consolidations solely with village chiefs are more than sufficient to conclude the consensus of the indigenous communities. Anne Lasimbang, a member of the Indigenous Kadazan-Dusun ethnic group, said that learning about the nature conservation agreement was as if something exploded in her face. She said that she was very disappointed to discover that the deal was being made behind the doors of those who live around traditional forests and depend on non-timber forest products (NTFPs) from those forests for their daily livelihoods, like herself. She added, “I live in the village. I have a forest—a very small forest, but still very important to me.". The Attorney General of the state of Sabah later confirmed that the agreement is null and void, stating, "The State Government will not permit any land to be leased, transferred, or otherwise ‘handed over’ as part of any carbon trading or carbon monetization program." Generally, the issue here is not the agreement or the initiative itself, but the way it came about. Lasimbang then replied that she is very sure that the Indigenous and forest-dependent communities will be happy to welcome investors who would improve their livelihoods if it is done with proper notice, transparency, and consultation. Critics from both Malaysia and abroad further condemned this agreement, citing that it is a major violation of the principle of Free, Prior, and Informed Consent (FPIC) ingrained in the United Nations Declaration on the Rights of Indigenous Peoples . A year later, there has not been any further development regarding this scandalous agreement. In June 2023, however, Jeffrey Kitingan, now the First Deputy Chief Minister of Sabah and the most outspoken supporter of the agreement, stated that the deal is still active and will continue to be financially backed by its initial partners. For a long time, information regarding what or who is behind Hoch Standard Pte. Ltd. has been shrouded in mystery, until recently. Kitingan, in a YouTube interview held on August 11, 2023, mentioned that Hoch Standard Pte. Ltd. is directly controlled and funded by Lionsgate Ltd., a shell company based in the British Virgin Islands. Lionsgate Ltd. is wholly owned by a Singaporean surgeon, Dr. Ho Choon Hou, who is listed in the nature conservation agreement as the Project Director and a Strategic Funder. This information raised more eyebrows, as the British Virgin Islands is included by the European Union on a list of countries that allow companies to engage in tax evasion. This implies that there is a possibility that the funds allocated for the Sabah NCA might have come from illicit sources, risking carbon credit verification being linked to money laundering operations. The case of Sabah is a story that can be seen as an epic in the history of Voluntary Carbon Market development. It provides lessons on how elite capture can have such ample room to operate, as they are the ones setting the policies while investors market their initiatives as virtuous behind a facade of green smoke.

India: The Shady Free Market

India has by far one of the most vibrant Voluntary Carbon Market in the world. Data from 2015 indicated that about thirteen percent of the one and a half billion Certified Emission Reductions (CERs) issued under the Clean Development Mechanism (CDM) of the Kyoto Protocol were issued by India. By studying case studies from India, we can deepen our understanding of independent carbon credit verifiers, two of the most prominent being the US-based Verra and the Swiss-based Gold Standard. Under these two major crediting programs, India have issued about 1,451 projects. A giant in the supply side, this does not mean that all Indian carbon sequestration projects are accountable. From India, lessons can be learned from three case studies, which are:

• The Distribution of Improved and High-Efficiency Cookstoves
• Araku Valley Livelihood Project
• Sustainable Rice Productions

The Distribution of Improved and High-Efficiency Cookstoves

Recipient of an Improved of Highly-Efficient cookctove in Bhor, Maharashtra, India

Two Indian cookstove manufacturing companies, Greenway Grameen Infra Pvt Ltd of Mumbai and EKI Energy Services of Indore, are involved in carbon sequestration projects by distributing branded “Improved” or “High-Efficient” cookstoves to households dependent on firewood, charcoal, chips, or traditional cookstoves. The two companies believe that their environmentally friendly cookstoves can offset 2 to 4 tonnes of carbon dioxide annually. At the same time, a significant number of recipients of these cookstoves already have LPG connections to power their conventional cookstoves. The two companies assumed that by providing their biomass cookstoves for free or at a discounted price, people’s behavior would change and they would switch to these cookstoves, leaving conventional LPG cookstoves entirely. As carbon verifiers for these two projects, Verra and Gold Standard provided the project developers—EKI Energy Services and Greenway Grameen Infra Pvt Ltd, respectively—with a standard set of parameters and operational criteria to help the developers calculate their emissions reductions. Moreover, credit customers have also been informed that included within the project design documents are instructions for the cookstove recipients that they will generate carbon finance if they switch completely to these “Improved” or “High-Efficient” cookstoves. The problem about these projects is that there is not enough monitoring to guarantee that recipients will do so. Secondly, the estimated baseline that the projects were using is based on the assumption that the target population is completely dependent on non-renewable fuels such as LPG. It was later discovered that many of the recipients of the cookstoves already had LPG connections in their homes.

Araku Valley Livelihood Project

The Araku Valley Livelihood Project is interesting because it involves one of France's most iconic brands of drinking water, Evian. The story started in 2010 when about 6,000 hectares of plantation spread over 333 villages began earning carbon credits. These communities are situated in the Araku Valley of the state of Andhra Pradesh in eastern India. However, the carbon credits are owned entirely by the project developer, Livelihood Funds, an investment fund organization with an initial investment from Evian's parent company, Danone. In its project design document, it is mentioned that Livelihood Funds is partnering with a local social funding organization, Naandi Foundation, based in Hyderabad. A core part of this project is the planting of a variety species of trees in over 6,000 hectares of plantation owned by 9,700 of smallholding tribal farmers. Out of those trees, half of them will provide shade around coffee plantations. Based on the project document, the farmers have agreed that although they will have the rights to the farm's produces, they will not claim any of the carbon credits generated by the project. It also mentioned that they also agreed that they will never assert any property rights over the carbon credits for the period of 20 years. The problem about this agreement is that the farmers knew nothing about what they are signing, nor the concept of carbon credits either. Questions were raised when Evian declared that they are carbon neutral based on their claim that they have collaborated with Livelihood Funds. The mystery remains whether the project has benefited the smallholder farmers in the first place, followed by whether there has been any additionality so that the project might be recognized as a carbon sequestration project. In reality, yes, the project has benefited coffee farmers of the Araku Valley to the point that their coffee bean quality has risen and Araku has evolved into a brand of a popular fair trade coffee chain. However, the Naandi Foundation reported that tribal smallholding farmers in the Araku Valley have been transformed into millionaires by this project, something that investigators found to be untrue after conducting a survey of the plantations. The second question is the issue of additionality, which means that the project would not have existed without revenues from the carbon credits. If carbon sequestration does not take place in this initiative, the project might also be seen as a CSR project. The mystery remains as Livelihood Funds does not sell carbon credits from this project in an open VCM. Instead, they are issuing them to private companies whose names are listed on their website. Global European companies—mainly French—such as Hermès, Michelin, Crédit Agricole, and La Poste are listed as their associates. Due to its nature of non-transparency, Michelin Group retired its credits from this project in 2020.

Sustainable Rice Productions

One of the newest sector in carbon sequestration method is alternative wetting and drying in the method of rice farming. This method is backed by the argument that conventional method of rice farming accounts for roughly about two percent of the global greenhouse gas emissions. This practice caused the culmination of methane producing bacteria during the continuous flooding of ricefields. The basic idea of alternative wetting is to let the soil dry out until fissures appear on the soil surfaces before re-flooding it with water. This alternate water avoids the growth of those methane producing bacteria. Two project developers, namely Core CarbonX Solutions Pvt. Ltd. based in Hyderabad and Value and Network Ventures Advisory Services based in Bengaluru have been involved in these projects. With projects of this kind across the state of Telangana, Core CarbonX Solutions Pvt. Ltd. pledges to share the farmers about USD 23 per hectare/year, which is equivalent to 35 to 45 percent of the revenue from carbon credit sales. Interestingly, 30 percent of it would go to their investors, Carbon Streaming and Vida, two Canadian companies that invest in carbon credit projects and the rest of the revenue would go back to Core CarbonX Solutions Pvt. Ltd.. The issue here is that farmers have complained that revenue shares from carbon credit sales can sometimes be insufficient to cover the costs of their operations using the new methods. “Because of the alternate wetting and drying method, we now use more herbicides to control weeds, and our input costs go up,” said a rice farmer. Meanwhile, Value and Network Ventures Advisory Services (VNV for short) grouped farmers into groups of between 60 and 65 farmers. The financial support from carbon credit revenues would be distributed among those groups, amounting to only USD 606 annually, which would be less than USD 10 per farmer per year to cover operational expenses using the new method. Moreover, both companies have signed agreements with farmers, which states that farmers has agreed to transfer the rights of their carbon credits to the project management companies. Many of these farmers are unaware about carbon credits, its systems and concept of carbon sequestration. What they recall is that management companies assured them of monetary incentives if they followed the alternate wetting and drying method of rice cultivation. The problem with these types of projects is whether the incentives will benefit the farmers and improve their quality of life. Subsistence farming is very sensitive because, for many people in rural areas, their lives depend heavily on their staple crops. If a change in the cultivation system affects farmers' productivity, it might lead to crop failure and sometimes famine. Moreover, the project management companies have failed to answer the question of whether their methodology truly reduces greenhouse gas emissions.

California Cap-and-Trade

The neighborhood of Wilmington in southern Los Angeles, California, where an active oil rig is emiting Carbon Dioxide and other greenhouse gases near suburban areas

The California cap-and-trade scheme was a compliance carbon market launched in 2013. It is by far the fourth largest cap-and-trade carbon trading market scheme in the world, just behind China, the European Union and South Korea. The program is implemented and administered by the California Air Resources Board (CARB) and it is core to the State of California's strategy to reduce greenhouse gas emissions to 1990 levels by 2020, 40% below 1990 levels by 2030, and 80% below 1990 levels by 2050. The state also has additional goals to reach 100% carbon-free electricity as well as economy-wide carbon neutrality by 2045. At its launch, the cap-and-trade regulations initially applied to electric power plants and industrial facilities that emit at least 25,000 tons of carbon dioxide equivalent annually. In 2015, the program expanded to include fuel distributors. So far, the system has been seen as a success for achieving 1990 greenhouse gas emissions levels as early as 2016. Revenues from the program are deposited into the state's GHG Reduction Fund, which distributes it to state agencies that would enforce new programs to further reduce GHG emissions. However, what is unique about the California cap-and-trade scheme is the story of how it links with Québec and Ontario cap-and-trade programs in 2014 and 2018 respectively. This further standardized and stabilized the value of the allowance and opened new markets with the addition of those two Canadian jurisdictions. Nonetheless, the California cap-and-trade program is not without flaws. A study from 2018 stated that there has been limited investigation regarding the dimension of environmental justice within the statewide program. It suggested that companies within the compliance program operate greenhouse gas-emitting plants that are disproportionately located in economically disadvantaged communities. The paper focused on the activities of California's oil refineries and stated that between 2016 and 2017, six refineries increased their emissions after purchasing credits from the system. This created sacrifice zones called Air Toxic Hotspots, which implies that the California cap-and-trade scheme has given rise to pockets of sacrificed communities where air quality has experienced a steady decline over the past decade. The case of California created a dilemma, as the cap-and-trade system was meant to fulfill America's commitment to SDG 13 (Climate Action). In practice, however, the scheme has further distanced the state from another SDG, which is the 11th (Sustainable Cities and Communities).

Tokyo: Starting Small Yet Strong

Tokyo becomes the first city in the world to launch an emissions trading system (ETS) on a metropolitan or city level. It is the first ETS built solely for greenhouse gas mitigation. During its development, the Tokyo Metropolitan Government (TMG) consulted a diverse array of stakeholders, including communities, industries, municipalities, NGOs, and scholars. Launched in 2010, the Tokyo ETS survey involved an online survey to ensure widespread participation from the entire metropolitan area. The system includes mandatory annual reporting of GHG emissions by every building, resulting in an archive of very accurate and reliable data. The ETS was also praised for its simplicity in counting emissions. In many jurisdictions, parties often used the difficulty of counting emissions as an excuse. In Tokyo, on the other hand, reporting is simplified by using existing data from electricity and fuel bills of buildings and facilities that emit GHG. Moreover, the Tokyo ETS has a very positive record of stakeholder consultation, which enables the system to identify areas for improvement in the design of the ETS every time a meeting is held. On September 22nd, 2023, the Tokyo Stock Exchange, Inc. officially announced that their nationwide carbon trading market would be launched on October 11th, 2023. The system was launched after a successful 13 years of Tokyo ETS implementation within the Tokyo Metropolitan Area, and it was also launched to include participation from all Japanese prefectures. The national-scale carbon trading market will be operated by and within the system of the JPX Group, the parent company of Tokyo Stock Exchange, Inc.

Critical Issues

Additionality

The immensely critical aspect of carbon credits that many project developers often misunderstand is additionality. As a matter of fact, carbon credits are not rewards for greenhouse gas reductions; rather, they are a means to compensate for what is not easy to offset elsewhere. In order for carbon credits to be traded, reductions must be additional. In other words, reductions would not be successful without the carbon trading mechanism. A good example can be taken from power plants using renewable energies, such as wind turbines, solar panels, or hydroelectric systems. These projects would have been profitable in the first place, which implies that these types of projects cannot be considered suitable candidates for a carbon sequestration project. Another common example is taking credits from trees that have already existed or would have been planted even without the label of a carbon sequestration project.

Baseline Estimation

Baseline Estimation can be seen as the other side of the coin to Additionality. Baseline Estimation implies the measurement of carbon emissions had a carbon sequestration project not taken place. This implies that a Baseline Estimation should represent an alternative scenario. An example can be demonstrated by potential deforestation based on a forest concession's AAC (Annual Allowable Cut). If the forest concession company is willing to defer logging, it can be said that its AAC is a measurable Baseline Estimation.

Permanence

Permanence in this context implies the failure to maintain the security that constitutes as carbon sequestration assets, therefore reversing the effect. For example, an afforestation project can be damaged or destroyed by both intentional or unintentional forest fire. If taken place, credits must be retired.

Leakage

Leakage occurs when a carbon sequestration project is undertaken to reduce emissions while, at the same time, the project developer or a credit buyer is engaged in activities that lead to emissions occurring elsewhere. This issue has occurred in several cases where carbon credits or emissions allowances become a license to increase emissions.

Double Counting

Double Counting can be described simply when the exact same credit is claimed by two or more parties due to the practice of multiple selling or miscounting. The same term can also be used when the party responsible for emissions reduction and the party that buys the carbon credit claim the same reduction. This problem has existed ever since the digitization and tokenization of assets, such as the emergence of cryptocurrencies. These instances of double counting were addressed by the innovation of blockchain, a distributed ledger technology that can ensure the accountability and traceability of transactions.

Lessons to Learn and Discussion

From the EU ETS

The European Union has provided a great example of the feasibility of transnational or regional carbon trading schemes. Southeast Asian countries such as Singapore and Malaysia have suffered from airborne air pollution caused by forest fires in Indonesia. This implies that an ASEAN ETS must be the next step. With Singapore's early entry into the Voluntary Carbon Market through its Climate Impact X trading platform, which has been operating since 2019, a multinational collaborative scheme between the two countries will stimulate an ASEAN ETS.

From Malaysia

A banner sign shown by the Indigenous community of Dayak Tomun of the village of Kinipan, Lamandau, Central Kalimantan Indonesia. The sign reads "Rainforest will be better managed by the Indigenous Communities"

Lessons from Malaysia's case might be the most important, as Indonesia and Malaysia share a common ancestral culture, are situated in the same geographical area, and have faced similar issues. There are approximately 20.8 million hectares of customary forests scattered throughout the Indonesian Archipelago. The most feasible solutions to slow down climate change for both countries are to drastically reduce emissions by cutting down the use of fossil fuels and to terminate the industrial extraction of resources from forests. To achieve that, the only way for Indonesia would be to protect its forests through the recognition of the rights of Indigenous and local communities to their customary and ancestral forests, on which they depend in the first place.

From India

An important aspect to be learned from India's cases is the possibility of Voluntary Carbon Markets becoming a wildfire. Since the late 2010s, environmental startups such as Jejakin and LindungiHutan have emerged in Indonesia's environmental conservation space. With IDX Carbon being monitored by the Indonesian National Registry System, it is important to remember that, besides carbon pricing, the accountability of a project's baseline estimation must be measured correctly. An example can be taken from a carbon credit project in the province of Jambi, where the project expects to generate annual carbon credits by sequestering up to 13,832 tonnes of carbon dioxide equivalent while supporting the livelihoods of five forest-dependent communities. The problem with this project is that the livelihoods of those forest-dependent communities are their human rights, and the argument of protecting them from oil palm expansion cannot be regarded as a carbon offset contribution. Baseline estimation in India is also a significant issue, given that the offset of greenhouse gases is based on overtly optimistic assumptions.

From the California Cap-and-Trade

The Suralaya coal-fired power plant in Cilegon, Banten, Indonesia, is one of 13 coal plants where the Ministry of Energy and Mineral Resources of Indonesia says that it has successfully implemented a low percentage of co-firing

Leakage issues like those taking place in California can also be a lesson to be taken, given Indonesia's big reliance on coal powered electric generators. Within Indonesia's Comprehensive Investment and Policy Plan (CIPP), the plan categorizes co-firing of coal powerplants with biomasses as carbon offsetting. This is outrageous, since countless of Indonesia's coal powerplants are located in areas of poverty and poor infrastructures, far away from the cities of comfortable livelihoods. The plan also focuses on large-scale renewable energy rather than smaller ones that can directly support local communities. This implies that the energy transition of Indonesia still ignores the most vulnerable groups of its population.

From the Tokyo ETS

The evolution of Japan's ETS from a city-scale into a national-scale can be seen as a safer step in ensuring the reliability and security of the system as well as its bureaucracy before stepping up big. A city-scale ETS can be started in Jakarta as a first step, which will introduce the public of regarding the system before levelling up into a national scale VCM and CCM. This can also serve as a platform for other provinces and might stimulate emissions trading between provinces in the future. Part of the web-based system implemented by the National Registry System is the registration of actions of mitigation and adaptation, achievements and the resources to support actions. This function can be fulfilled in a more efficient manner if it would be conducted simultaneously on provincial level first, involving several capable provinces instead of forcefully conducting it on national level straightaway.

Recommendations and Conclusion

Although carbon offset markets has existed for the past 26 years, there are still fundamental limitations and problems within its structure. The Indonesian Government with its newly launched IDX Carbon must ask itself: "What is really our sustainability goals and are the institutions and concepts we established really working as a tool for climate action?" In this digital age, transparency is everything while carbon trading markets abroad themselves are still a wild rainforest full of profiting intermediaries such as registries, verifiers and brokers. Moreover, with millions of its Indigenous and under-privileged citizens still fighting their way out of poverty and land disputes, can the Indonesian Government act as a servant to its people? Corporate interests such as oil palm and coal mining enterprises are playing a big role in Indonesian policy making and a tool for climate action shall not be misused as a greenwashing tool. Aside of the IDX Carbon, the Indonesian Government must also consider the viability of carbon taxing, for only a carbon trading market is not sufficient in fulfilling its climate action aspirations. The global Voluntary Carbon Market is on record high with about 500 million transactions in 2021, a market worth more than USD 2 billion. With many from the Indonesian investors community scrambling for profit in the new national-scale carbon market, it is important for the Indonesian Government to reassure their public that the perception towards IDX Carbon cannot be solely based on capital gains.

This conservation resource was created by Course:FRST522.