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Emerging carbon markets: Indonesia’s new emission trading system for power plants

In climate change terms, Indonesia is mostly known for being one of the “lungs of the earth” as home to a huge portion of the world’s rainforest as well as peat bogs that store vast amounts of carbon. However, the electricity its 276 million inhabitants use comes almost entirely from coal, and the country is a major coal producer and exporter. Its emissions from power and industry (40% of which come from coal plants) amount to well over half a billion tonnes of CO2 equivalent per year and are on the rise. Coal plants account for 90% of the country’s power sector emissions.

The Indonesian government has therefore implemented carbon pricing in an effort towards fulfilling its Nationally Determined Contribution (NDC) under the Paris Agreement, which includes being “climate neutral” by 2060. In 2021, Presidential Regulation No. 98/2021 created a mandatory national emission trading system (ETS) with a carbon tax (the so-called “cap-trade-and-tax” system). The ETS, which so far applies only to the power sector (specifically 99 coal-fired electricity generating facilities of various capacities, see Table 2), entered into force at the beginning of 2023, but the carbon tax component has not been enacted.

The program came onto the radar screen of carbon market stakeholders in late September, when Indonesian President Joko Widodo unveiled the Indonesia Carbon Exchange (IDXCarbon) - the platform on which the ETS’s compliance instruments and various carbon contracts are to be traded. The inaugural trades on IDX involved banks buying domestic offset credits from geothermal energy projects at about USD 4.50/t.

Following the previous analysis on Indonesia, we explain the high-emitting nation’s intensity-based emission trading system for the power sector.

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