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

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Summary of Case Study

The raise of our earth’s temperature is at its highest rate due to the level of carbon dioxide in our atmosphere. The basic to the concept of carbon trading stems from the idea where communities will be getting paid through carbon credits for their land and services in planting trees that stores carbon dioxide[1]. Nonetheless, this is a concept that has been proven to be complicated in practice and has risen so many questions, many of which are:

  • Do carbon credits really improve the lives of the people living around the areas of carbon sequestration?
  • Is the privately run voluntary carbon market really offsets 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 raises a dilemma every time a new carbon sequestration project is being proposed or a new carbon trading market emerged.

Then comes a news from one of the world’s most biodiverse and also one of the most resourceful countries when it comes to 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 the IDX, hence its name, the IDX Carbon[2]. As a result of continuous annual peatland fires and deforestation cases that were caused by industries 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 for there has been a legal obligation to do so. An academic journal as early as 2021 has elaborated the importance of establishing a carbon trading market, which will assign permits that would allow measurements of greenhouse gases emissions and would also allow extra emitters to purchase additional permits from other emitters that successfully emits less than their assigned cap[3]. 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 asses what other nations have conducted and to determine what lessons shall Indonesia take from both failures and successes of existing schemes.

Keywords

Indonesia, Indonesia Stock Exchange, IDX Carbon, Greenhouse Gases, Carbon Dioxide, CO2, 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 of 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 its Central Branch of the public library at 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 Peoples, including the territories of the Musqueam, Squamish, and Tsleil-Waututh Nations.

I was born in Jakarta, Indonesia to a mother of Javanese and a father of Sundanese descents. Since I was raised up in Jakarta and grew up there as well, experiencing the impact of climate change has been a hands-on experience throughout my life. Heatwaves, floods, air pollution, these are the things that 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 the accountability of my government’s latest step in regards to 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 shall be an essential part of any country’s environmental policy. Canada is at one of its most challenging times and that is addressing its past policies regarding the treatments of Indigenous Canadians and their civil rights. The contemporary needs of reparation were caused by reckless policy making as well as the ignorance towards inclusivity. For Indonesia’s recent introduction to decentralization, obsession towards direct government control and a common misconception of consensus, I really hope that this case study may provide a light to those in the pursuit of transparency, inclusivity and Indigenous involvement in policy making.

Introduction

Although used interchangeably, understanding the basic difference between the term “Carbon Credit” and “Carbon Offset” is important. A Carbon Credit or a Carbon Allowance acts a permit for a party—usually a company—to emit a metric ton of CO2 or CO2 equivalent. With these assets, a cashflow would take place 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 system[4]. A Carbon Offset on the other hand is a contribution of carbon removal from the atmosphere by an institution. For that contribution, other institutions can purchase that carbon offset in case they need to emit more CO2 or CO2 equivalent, more 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 gave birth to the concept of carbon credits in the first decade of the 21st century[5]. The treaty itself extends the 1992 United Nations Framework Convention on Climate Change (UNFCCC), which was effectively being enforced in 2005. Under this framework, signatory states agreed to set up methods of transnational emissions exchanges. These included three mechanisms which are[6]:

  • 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 to the Kyoto Protocol can acquire emission units from other countries in order to mee their emission reduction targets. The security of transactions will be backed by a software-based accounting system, which forms an international transaction log between countries. The principles behind the IET gave birth to the European Union Emissions Trading Scheme in 2005[6].

Clean Development Mechanism

The CDM paved the way for emissions reduction or removal projects to be taken place in less developed countries to earn Certified Emissions Reductions (CER) credits. Equivalent to one tonne of CO2, CER credits are tradeable 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 stimulated at a global scale, providing developed countries the flexibility in meeting their emission reduction limitation targets by purchasing carbon credits from developing countries. Although the market experienced a stagnation by the end of its first commitment period in 2012 and of its second commitments in 2020, the CDM trailblazed what we know today as the Voluntary Carbon Market or the VCM[1].

Joint Implementation

The JI mechanism was created to address countries with a limitation to reduce emissions by allowing them to take part in emissions reduction project in another country with a commitment under the Kyoto Protocol in order to meet its emission reduction targets. Projects under the JI mechanism will receive ERUs or the Emissions Reduction Units, valued the same as CERs of which is one tonne of CO2 per units[6].

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 then answered at the Conference of the Parties (COP) 21 in 2015 under the Article 6 of the Paris Agreement [7]. It discussed how countries can cooperate in order to perform climate action, the rules for cooperative approach in climate mitigation as well as how to integrate both the existing carbon markets and non-market approaches (government to government)[4]. 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 form a transparent set of goals to all signatory states[4]. 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 oC above pre-industrial levels [4]. With the COP28 taking place during the writing of this case study, it is hoped that the conference will conceive an internationally negotiated agreement for an official carbon market, a transparent public registry accessible by everyone, lists all carbon offset projects and also allows countries and institutions to trade across borders[1].

Although the launch of the IDX Carbon has been perceived as a national achievement by the general Indonesian public, critical issues such as indigenous involvements has not been officially adressed by the government and this may raise the potential of ethnic tensions and social problems in the long run[8]. 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, therefore putting their forest-dependent livelihoods at risk and might also face force relocation by their state government[9].

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

Speaking about Indonesia, one cannot be so distant from corruption. The Southeast Asian giant is notoriously corrupt, scoring only 34 out of 100 in Transparency International's Corruption Perceptions Index[8]. Carbon credits from the voluntary carbon market in India has been funding unaccountable projects that cannot be proven to be contributing to climate change mitigation as promised[1].  

On the other hand, Tokyo Metropolitan Government have 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 the local communities, industries, municipalities, NGOs and scholars[10]. From a standpoint of Jakarta as the sole central for most affairs in Indonesia from the political, the economic and the industrial center, a city scale ETS might have been the most suitable platform to be made 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)[8] 2023[8] Yes (IDX Carbon)[2]
The European Union Transnational Yes (EU ETS)[7] 2005[7] Yes (EEX)[11]
Malaysia National No Planned Yes (Unregulated)
India National No Planned Yes (Unregulated)
California Regional/State Yes (California Cap-and Trade)[12] 2013[12] Yes (VCMDA)[13]
Greater Tokyo City/Metropolitan Yes (Tokyo ETS)[10] 2010[10] Yes (JPX)[14]

The European Union Emissions Trading Scheme: The Pioneer

The reason why we can call the European Union Emissions Trading Scheme (EU ETS) as the pioneer of all ETSs is of course for its title to be the first. The EU was the first to respond the 1997 Kyoto Protocol by 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 countries must publish their individual National Allocation Plan (NAP) to determine each national caps, which will account to EU-wide cap if all NAPs are accumulated. This measure implies that the amount of cap in the EU is determined through a decentralized method from bottom to up instead of up to bottom from 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 EU-wide price for carbon credits, ranging between EUR 7 to 31 per ton (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 both successes, failures and recoveries. The period during end of Phase 1 was one of its most jawdropping stories when the price of EU Allowance (EUA) went down to zero due to oversupply of credits. Nonetheless, the system kept evolving and went to be known as one of the most comprehensive and reliable scheme in the world. Its principle in being the backbone of European energy transition was strengthened when in 2023, the EU ETS would include the shipping industry as the newest sector in its compliance market.

Malaysia: The Secret Deal

The case of the Malaysian state of Sabah might become the most disgraceful story in the journey of carbon sequestration. At the end of 2021, state officials signed a nature conservation agreement with an Autralian carbon credits verification company, Tierra Australia, to defer logging and other industrial activities from more than 2 million hectares of forest for the next century[9]. 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[15]. 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[9]. Moreover, he added that only village leaders have been consulted regarding this deal, acting on behalf of the rest of their forest-dependent population[9]. Meanwhile, Second Deputy Chief Minister of Sabah, Jefferey Kittingan declared that indigenous and forest-dependent communities must recognize the sovereignty of the state 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[9]. She said that she was very disappointed in discovering that the deal was being taken behind the doors of those who lives around traditional forest and are dependent to NTFPs of those forest 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"[15]. 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 monetisation 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 iIndigenous and forest dependent communities will be happy to welcome investors who would improve their livelihoods, if it is done and informed and consulted properly[16]. Critics from both Malaysia and abroad further condemned this agreement, citing that it has been 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[16]. A year after, there has not been any more development regarding this scandalous agreement. In June 2023 however, Jeffrey Kitingan, today the First Deputy Chief Minister of Sabah and the most outspoken supporter of the agreement stated that the deal is still active and will still be financially backed by its initial partners[17]. 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 in 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 owned entirely by a Singaporean surgeon, Dr. Ho Choon Hou, 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 listed by the European Union in a list of countries that would allow companies to perform tax evasions[17]. This implies that there are possibilities that those funds that have been saved for the Sabah NCA might have come from illicit sources, risking carbon credit verification to be linked with money laundering operations[17]. The case of Sabah is a story that can be translated as an epic in the history of Voluntary Carbon Market development. It provided lessons on how elite capture would have such a spacious room to move, for they were the ones who are setting the policies, while investors market their initiative as virtuous, behind a green smoke.

India: The Shady Free Market

India has by far one of the most vibrant Voluntary Carbon Market in the world[18]. A 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[4]. By studying case studies from India, we can deepen our understanding about independent carbon credit verifiers, two of which are the most prominent are the US-based Verra and the Swiss-based Gold Standard[12]. Under these two major crediting programs, India have issued about 1,451 projects[1]. A giant in the supply side, that does not mean that all Indian carbon sequestration projects are accountable. From India, lessons can be taken from three case studies, which are:

  • The Distribution of Improved and High-Efficiency Cookstoves[4]
  • Araku Valley Livelihood Project[4]
  • Sustainable Rice Productions[4]

The Distribution of Improved and High-Efficiency Cookstoves

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

Two Indian cookstoves manufacturing companies, Greenway Grameen Infra Pvt Ltd of Mumbai and EKI Energy Services of Indore are involved in Carbon Sequestration projects by distributing the branded “Improved” or “High-Efficient” cookstoves to households dependent on firewood, charcoal, chips or traditional cookstoves[1]. The two companies believed that their environmentally-friendly cookstoves are able to offset 2-4 tonnes of Carbon Dioxide annually. At the same time, a huge number of recipients of these cookstoves have already LPG connections to power their conventional cookstoves[4]. The two companies assumed that by giving their biomass cookstoves for free or at discounted price thought that people’s behaviour would change and would switch to those cookstoves leaving conventional LPG cookstoves entirely[4]. As carbon verifiers of these two projects, Verra and Gold Standard provided the project developers—EKI Energy Services and Greenway Grameen Infra Pvt Ltd respectively—the standard set of parameters and operations criteria in order to help developers calculate their emissions reductions. Moreover, credit customers have also been informed that included within those project design documents are instructions to the cookstoves recipients that they will generate carbon finance if they switch completely to those “Improved” or “High-Efficient” cookstoves[1]. The problem about this project is that there is not enough monitoring to guarantee that they will do so[4]. Secondly, the estimated baseline that the projects were using are based on an assumption that the target population is completely dependent on non-renewable fuels such as LPGs, discovered at the end that many of the recipients of the cookstoves have had LPG connections in their homes[4].

Araku Valley Livelihood Project

The Araku Valley Livelihood Project is interesting because it involved one France's most iconic brand of drinking water, Evian[1]. The story started in 2010 when about 6,000 hectares of plantation spread over 333 villages began earning carbon credits[12]. 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 its project developer, Livelihood Funds, an investment fund organization with an initial investment from Evian's parent company, Danone[4]. In its project design document, it is mentioned that Livelihood Funds is partnering with a local social funding organization, Naandi Foundation based in Hyderabad[4]. 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[1]. 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[4]. 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[4]. Questions raised when Evian declared that they are carbon neutral based on their claim that they have collaborated with Livelihood Funds. The mystery remain whether the project have benefited the smallholding farmers in the first place, followed by if there has been any additionality so that the project might be banked as a carbon sequestration project[1]. In reality, yes, the project have benefited coffee farmers of the Araku Valley, to the point that their coffee bean quality had 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 has been transformed into millionaires by this project, something that investigators found to be untrue after a survey to the plantations[1]. The second question is the additionality issue, which means that the project will not have existed without revenues from the carbon credits. If carbon sequestration does not take place in this initiative, the project might as well be seen as a CSR project. Mystery remains as Livelihood Funds does not sell carbon credits from this project in an open VCM. They are issuing it to private companies, whose names are listed in its websites. Global European companies—mainly French—such as Hermes, Michelin, Credit Agricole and La Post are listed as their associates[4]. Due to its nature of non-transparency, Michelin Group retired its credits from this project in 2020[4].

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[4]. 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[1]. 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[4]. 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.[4]. The issue here is that farmers have complained that revenue shares of carbon credit sales can sometimes be insufficient to cover the cost of their operation using the new methods. “Because of alternate wetting and drying method, we now use more herbicides to control weeds and our input costs go up,” said a rice farmer[4]. Meanwhile, Value and Network Ventures Advisory Services (VNV for short) grouped farmers into groups of between 60 to 65 farmers. The financial support from carbon credit revenues would be distributed per those groups, counting only USD 606 annually, which would be less than USD 10 per farmer per year to cover operational expenses using the new method[1]. 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[1]. What they recall was that management companies assured them of monetary incentives if they follow the alternate wetting and drying method of rice cultivation. The problem with these type of projects is whether the incentives would benefit the farmer and improve their quality of life[4]. Subsistence farming is very sensitive because, for many people in rural areas, their lives are very dependent to their staple crops, which if a change in cultivation system affected farmer's productivity, it might lead to crop failure and sometimes famine[4]. Moreover, the project management companies have failed in answering the question of whether their methodology really reduces greenhouse gases emissions[4].

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[12]. 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[12]. 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[19]. Moreover, the state also has additional goals to reach 100% carbon-free electricity as well as economy-wide carbon neutrality by 2045. At launching, the cap-and-trade regulations applied first towards electric powerplants 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 was seen as a success for its achievement of 1990 greenhouse gas emissions levels as early as 2016[13]. 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[19]. This further standarized and stabilized the value of the allowance and opens new markets with the addition of those two Canadian jurisdictions. Nonetheless, the California cap-and-trade program is not free of flaws. A study from 2018 stated that there has been limited investigation regarding the dimension of environmental justice within the state-wide program[20]. It suggested that companies within the compliance program run GHG emitting plants disproportionately distributed in economically disadvantaged communities[21]. The paper focused on Californian oil refineries and stated that between 2016 to 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 had given birth to pockets of sacrificed communities where the air quality experienced a steady decline for the past decade[20]. The case of California created a dilemma, for the cap-and-trade system meant to fulfil America's commitment to SDG 13 (Climate Action). In practice however, the scheme has distanced the state of California 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[10]. It is the first ETS that was built solely for greenhouse gases mitigation. During its development, the Tokyo Metropolitan Government (TMG) consulted a diverse array of stakeholders from communities, industries, municipalities, NGOs, to scholars[10]. Launched in 2010, the Tokyo ETS survey involved an online survey to ensure a widespread participation of the entire metropolitan area[22]. The system includes mandatory annual reporting of GHG emissions by every building, which results in an archive of a very accurate and reliable data. The ETS was also appreciated 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, the reporting is simplified by using existing data from electricity and fuel bills of buildings and facilities that emits 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 the meeting is held[10]. In September 22nd 2023, Tokyo Stock Exchange, Inc. officially announced that their nation-wide carbon trading market would be officially launched on October 11th 2023[23]. The system was launched after a successful 13 years of Tokyo ETS implementation within the Tokyo Metropolitan Area and the system was also launched to include participations from all Japanese prefectures. The national scale carbon trading market will be operated by and within the system of the JPX Group, parent company to Tokyo Stock Exchange, Inc.

Critical Issues

Additionality

The immensely critical aspect about carbon credits that many project developers often misunderstood is additionality. As a matter of fact, carbon credits are not rewards for greenhouse gases reductions, rather than a mean to compensate for what is not easy to offset elsewhere[4]. In order for carbon credits to be traded, reductions must be additional. In other words, reductions would not be successful without carbon trading mechanism. A good example can be taken from powerplants of renewable energies such as wind turbines, solar panels or hydroelectric. These projects would have been profitable in the first place, which implies that these types of projects cannot be considered as a suitable candidate for a carbon sequestration project. Another common example is to take credits from trees that have already existed or would have been planted even without a the label of 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 does not take place[4]. This means that a Baseline Estimation shall represent an alternate scenario. An example can be demonstrated by the potential deforestation based on a forest concession's AAC (Annual Allowable Cut). If the forest concession company would be 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[4]. 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 took place when a carbon sequestration project is undertaken to reduce emissions but at the same time, the company involved is engaged in another emissions to occur someplace else[4]. This issue have taken places in several cases where carbon credits or emissions allowance becomes a licence to emit more.

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[4]. The same term can also be used when the party that is responsible for emissions reduction and the party who buys the carbon credit claims the same reduction. This problem have existed ever since the digitization and tokenization of assets such as the emergence of cryptocurrencies. Those double countings were solved by the innovation of blockchain, a distributed ledger technology that can ensure the accountability and traceability of transactions[24].

Lessons to Learn and Discussion

From the EU ETS

The European Union has provided a great example of feasibilities of transnational or regional carbon trading schemes. Southeast Asian countries such as Singapore and Malaysia have suffered airborne air pollution that were caused by forest fires in Indonesia. This implies that an ASEAN ETS must be the next step. With Singapore's early entry to the Voluntary Carbon Market through its Climate Impact X trading platform, which has been operating since 2019, a multi-national collaborative scheme between the two countries will stimulate an ASEAN ETS[25].

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, situated in the same geographical area and have faced the same issues. There is approximately 20.8 million hectares of customary forests scattered throughout the Indonesian Archipelago[8]. A source mentioned that the more realist solution to climate change it to drastically reduce emissions by cutting the use of fossil fuels and to terminate industrial extractions from forests[26]. To achieve that, the only way would be to protect Indonesian forests by recognizing the rights of the Indigenous and local communities to their forests, which they depend on in the first place[8].

From India

An important aspect to be learned from India'a cases is the possibility of Voluntary Carbon Markets to be a wildfire. Since late 2010s, environmental startups such as Jejakin and LindungiHutan have surfaced in Indonesia's environmental conservation space[27]. 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[28]. An example can be taken from a carbon credit project in the province of Jambi where the project is expecting an annual carbon credits by sequestering of up to 13,832 tonnes of Carbon Dioxide Equivalent by supporting the livelihoods of five forest-dependent communities[29]. The problem about 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 huge problem, given the offset of greenhouse gases is based on an 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[30]. This is outrageous, since many of Indonesia's coal powerplants are located in areas of poverty and poor infrastructures, far away from the cities of comfortable lives. 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 ignores the vulnerable population of its citizens[30].

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[10]. City-scale can be started in Jakarta first, which will introduce the public of the capital regarding the system first. This can also serve emissions trading between provinces. Part of the web-based system implemented by the National Registry System is the registration of mitigation and adaptation actions, achievement and resources to support actions[28]. This function can be completed easier if done on provincial level first rather than national.

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[31]. 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?[32] 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[33]. The global Voluntary Carbon Market is on record high with about 500 million transactions in 2021, a market worth more than USD 2 billion[31]. 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.


References

  1. ↑ 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 Narain, Sunita (1–15 October 2023). "Men In Black" (PDF). Down To Earth Vol. 32 Issue 10.CS1 maint: date format (link)
  2. ↑ 2.0 2.1 Indonesia Stock Exchange (26 September 2023). "Indonesia Carbon Exchange (IDXCarbon) was Offcially Launched". PRESS RELEASE, PR No: 086/BEI.SPR/09-2023.
  3. ↑ Rachmaniar, A., Supriyadi, A.P., Pradana, H., Mustriadhi (2021). "Carbon trading system as a climate mitigation scheme: why Indonesia should adopt it?". Earth and Environmental Science. 739 – via IOPscience. line feed character in |title= at position 58 (help)CS1 maint: multiple names: authors list (link)
  4. ↑ 4.00 4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 4.25 4.26 4.27 4.28 4.29 Dev & Krishnamurthy (2023). "Discredited: The Voluntary Carbon Market in India". Centre for Science and Environment – via Centre for Science and Environment.
  5. ↑ United Nations (1998). Kyoto Protocol to the United Nations Framework Convention on Climate Change. United Nations. p. 15.
  6. ↑ 6.0 6.1 6.2 United Nations (2007). The Kyoto Protocol Mechanisms: International Emissions Trading Clean Development Mechanism Joint Implementation. United Nations.
  7. ↑ 7.0 7.1 7.2 Borghesi, Montini, Barreca (2016). The European Emission Trading System and Its Followers: Comparative Analysis and Linking Perspectives. Switzerland: Springer. ISBN 978-3-319-31186-9.CS1 maint: multiple names: authors list (link)
  8. ↑ 8.0 8.1 8.2 8.3 8.4 8.5 Jong, Hans Nicholas. "Indonesia opens carbon trading market to both skepticism and hope". 12 October 2023.
  9. ↑ 9.0 9.1 9.2 9.3 9.4 Cannon, John (9 November 2021). "Bornean communities locked into 2-million-hectare carbon deal they don't know about". Mongabay. Archived from the original on |archive-url= requires |archive-date= (help).
  10. ↑ 10.0 10.1 10.2 10.3 10.4 10.5 10.6 The World Bank (June 2010). "Tokyo's Emissions Trading System: A Case Study". Directions in Urban Development – via The World Bank.
  11. ↑ Giacovelli, Sebastian (2011). "Legitimacy Building for the European Energy Exchange" (PDF). Historical Social Research / Historische Sozialforschung. Vol. 36, No. 3 (137): 202 – via JSTOR.
  12. ↑ 12.0 12.1 12.2 12.3 12.4 12.5 Center for Climate and Energy Solutions. "California Cap and Trade". Center for Climate and Energy Solutions. Archived from the original on |archive-url= requires |archive-date= (help).
  13. ↑ 13.0 13.1 Littenberg & Rotter (7 December 2023). "The California Voluntary Carbon Market Disclosures Act – first disclosures not required until 2025?". Ropes & Gray. Archived from the original on |archive-url= requires |archive-date= (help).
  14. ↑ Japan Exchange Group (22 September 2023). "The Opening Date of the Carbon Credit Market". Japan Exchange Group. Archived from the original on |archive-url= requires |archive-date= (help).
  15. ↑ 15.0 15.1 Cannon, John (24 November 2021). "Details emerge around closed-door carbon deal in Malaysian Borneo". Mongabay.
  16. ↑ 16.0 16.1 Cannon, John (10 February 2022). "Malaysian officials dampen prospects for giant, secret carbon deal in Sabah". Mongabay.
  17. ↑ 17.0 17.1 17.2 Cannon, John (1 November 2023). "Critical questions remain as carbon credit deal in Sabah presses forward". Mongabay.
  18. ↑ Lakhani, Nina (19 September 2023). "Revealed: top carbon offset projects may not cut planet-heating emissions". The Guardian.
  19. ↑ 19.0 19.1 California Air Resources Board (n.d.). "Program Linkages". California Air Resources Board.
  20. ↑ 20.0 20.1 Lejano, Kan & Chau (10 November 2020). "The Hidden Disequities of Carbon Trading: Carbon Emissions, Air Toxics, and Environmental Justice". Frontiers in Environmental Science: 3 – via Frontiers. line feed character in |title= at position 33 (help)
  21. ↑ Richard, Chris (10 May 2017). "HOW CALIFORNIA'S GREENHOUSE GAS LAWS CAN BETTER SERVE DISADVANTAGED COMMUNITIES". Ensia.
  22. ↑ International Carbon Action Partnership (n.d.). "Japan - Tokyo Cap-and-Trade Program". International Carbon Action Partnership. Archived from the original on |archive-url= requires |archive-date= (help).
  23. ↑ JPX Group (22 September 2023). "The Opening Date of the Carbon Credit Market". JPX Group.
  24. ↑ Zhao & Chan (16 April 2020). "When Is BlockchainWorth It? A Case Study of Carbon Trading". Energies: 2–4 – via MDPI.
  25. ↑ Climate Impact X. "Who Are We?". Climate Impact X. Archived from the original on |archive-url= requires |archive-date= (help).
  26. ↑ Greenfield, Patrick (13 November 2023). "Let forests grow old to store huge volume of carbon – study". The Guardian.
  27. ↑ Shibata, Nana (25 September 2023). "Indonesia startup to supply carbon credits as nation begins trading". Nikkei Asia.
  28. ↑ 28.0 28.1 ENHANCED NATIONALLY DETERMINED CONTRIBUTION - REPUBLIC OF INDONESIA. Government of Indonesia. 2022. p. 17. |first= missing |last= (help)
  29. ↑ Nofyanza, Dwisatrio, Atmadja, Moeliono & Pham (May 2023). "Towards Indonesian carbon market: Input from REDD+ projects". CIFOR Info Brief. No. 385: 2–6 – via CIFOR.CS1 maint: multiple names: authors list (link)
  30. ↑ 30.0 30.1 Jong, Hans Nicholas (5 December 2023). "Indonesia pushes carbon-intensive 'false solutions' in its energy transition". Mongabay.
  31. ↑ 31.0 31.1 Morse, Ian (4 November 2022). "Carbon offsets: A key tool for climate action, or a license to emit?". Mongabay.
  32. ↑ Greenfield, Patrick (15 September 2023). "Rainforest carbon credit schemes misleading and ineffective, finds report". The Guardian.
  33. ↑ Ramadhani & Koo (2022). "Comparative analysis of carbon border tax adjustment and domestic carbon tax under general equilibrium model: Focusing on the Indonesian economy". Journal of Cleaner Production. 377: 2 – via Science Direct. line feed character in |title= at position 73 (help)
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