As part of its commitment to supporting the achievement of net-zero emissions and reducing greenhouse gas emissions, the Ministry of Energy and Mineral Resources (ESDM) has officially started carbon trading, which is not an easy task.

Through this initiative, Indonesia expects to reduce emissions by more than 36 million tons of CO2e by 2030 and achieve carbon neutrality by 2060, as outlined in the roadmap for carbon trading in the power generation subsector. The target is outlined in Presidential Regulation number 98 of 2021 on the Implementation of Carbon Economic Value for Achieving Nationally Determined Contribution Targets and Controlling Greenhouse Gas Emissions in National Development.

"We hope that carbon trading can be supported by business players in the power generation subsector," said Arifin Tasrif, Minister of Energy and Mineral Resources (ESDM), at the launch of carbon trading in the power generation subsector, on Wednesday, 22 February.

Carbon trading entails the purchase and sale of credits for carbon dioxide or greenhouse gas emissions in an effort to reduce emissions and mitigate climate change.

For Indonesia, carbon trading is a crucial step in reaching its goals, and the government believes that carbon trading could stimulate promising business potential.

Through this scheme, companies that are able to cut emissions can sell carbon credits to companies that exceed emission limits. As a result, companies that successfully reduce emissions will see an increase in their revenue source.

The government has divided carbon trading into several phases, with phase 1 involving 99 steam power plants (PLTUs) with a capacity of 33,569 MW. This year, carbon trading is also mandatory only for power plants connected to the PT PLN (Persero) electricity network with a capacity greater than or equal to 100 MW.

According to data from the Ministry of Energy and Mineral Resources, the achievement of CO2 emission reduction is 40.6 million tons in 2018, 54.8 million tons in 2019, 64.4 million tons in 2020, 70 million tons in 2021, 91.5 million tons in 2022, and in 2023 it is projected to be 116 million tons.

New Regulations

The new regulations, which aim to create an economic value for carbon, will function based on market mechanisms and give incentives for companies that can reduce greenhouse gas emissions.

The increased revenue generated by carbon pricing can be utilized to support sustainable development and fiscal reform. However, the adoption of carbon pricing is likely to confront challenges, particularly amid rising inflation and energy prices.

In Indonesia, the value of carbon trading transactions in phase 1 is estimated to reach US$9 million per year, assuming a potential amount of carbon to be traded directly between companies of 500,000 tons of CO2e, and a projected carbon credit price of US$2 to US$18 per ton of CO2e.

The Technical and Environmental Director of Electricity at the Ministry of Energy and Mineral Resources (ESDM) Priharto Dwinugroho explained that the ministry does not set the carbon price. "The figures are from our study that the price range is between US$2 and US$18 per ton, depending on the specifications of each power plant," he said.

When the carbon market is established, in the future, prices will refer to market mechanisms. The establishment of a carbon market remains one of the important agendas of the Financial Services Authority (OJK).

Carbon trading is one of the most promising business prospects as a result of the trend of energy transition carried out by many countries. The World Bank noted that global revenue from carbon pricing in 2022 reached US$84 billion, an increase of nearly 60 percent from the previous year.

This year, PT PLN Nusantara Power, a subsidiary of PLN, plans to issue carbon credit emission reduction certificates (SPE) totaling 1.57 million tons of CO2e. The plan to issue a substantial amount of SPE carbon credits indicates a huge business opportunity for trading emission reduction factors in Indonesia.

This is because the SPE carbon credits can later be sold to power plants that exceed the specified carbon emission limit. "We have the potential of 1.57 million tons of CO2e of SPE that can be traded," said the CEO of PLN Nusantara Power Rully Firmansyah.

The potential SPE carbon credits of PLN Nusantara Power come from three power plant projects, including a gas and steam power plant in Block 3 Muara Karang with a potential SPE carbon credit of up to 1.2 million tons of CO2e.

Then, the Sipansihaporas and Renun hydroelectric power plants, which are projected to have a potential SPE carbon credit of 363,957 tons of CO2e. In addition to PLN, private electricity businesses also see promising business opportunities in the recent introduction of phase 1 carbon trading.

The Chairman of the Indonesian Independent Power Producer Associations (APLSI) Arthur Simatupang said that the commitment of power plant companies to cut emissions could become a new source of income due to the presence of carbon trading. Business players now have a more concrete understanding of the emission limits that must be considered to determine future carbon credit trading.

Meanwhile, the United Nations Development Program (UNDP) Resident Representative Norimasa Shimomura expressed support for the implementation of carbon trading in the power generation subsector. According to him, Indonesia has taken the initial step in adopting carbon trading as an instrument in the energy sector to reduce greenhouse gas emissions from coal-fired power plants, as well as delivering carbon incentives for renewable energy investment and energy efficiency.

"It is an honor for UNDP to participate in Indonesia's Energy Transition with funding from the Government of Japan," said Norimasa.

Writer: Firman Hidranto
Editors: Ratna Nuraini/Elvira Inda Sari/Siti Chodijah
Translator: Irvina Falah