POJK Inadequate Carbon Pricing Fails to Combat Climate Crisis

POJK Inadequate Carbon Pricing Fails to Combat Climate Crisis

Press Release

Jakarta, July 21, 2023


Financial Services Authority Regulation (POJK) on carbon exchange is planned to take effect from September. The Head of the Board of Commissioners of the Financial Services Authority (OJK) Mahendra Siregar and the Minister of Environment and Forestry, Siti Nurbaya, have also recently signed a Memorandum of Understanding to collaborate in carbon trading implementation. This draft of POJK is currently under discussion with the XI Commission of the House of Representatives.


Referring to Law of the Republic of Indonesia No. 4 of 2023 on the Development and Strengthening of the Financial Sector, Article 23 Paragraph 1, carbon trading is defined as market-based mechanism to reduce greenhouse gas emissions by buying and selling carbon units. The following Article mentions that the carbon exchange is a system that regulates carbon trading and/or the ownership of carbon units. Carbon trading in Indonesia will start from the coal energy sector and eventually will be more closely related to the energy, forestry, and industrial sectors.


Director General of Electricity at the Ministry of Energy and Mineral Resources (ESDM), Jisman Parada, predicts that the carbon price will be in the range of US$2-18 per ton of CO2, equivalent to Rp30,000-Rp270,000 (assuming an exchange rate of Rp15,000). Pius Ginting, the Coordinator of Action for Ecology and People’s Emancipation (AEER) reveals that this price is relatively low compared to other countries that have implemented such schemes. Singapore, the first country in Southeast Asia to adopt this policy, has set a carbon price of S$5.36 per ton of CO2e or approximately Rp59,000 (assuming an exchange rate of Rp11,000). Moreover, South Korea’s carbon price reaches US$30 per ton of CO2e or around Rp450,000. This means that the estimated carbon price in Indonesia is still too low.


“The low carbon price is contradictory to Indonesia’s target for early retirement from coal. This is because carbon trading may justify continuing the operation of coal-fired power plants (PLTU) by enabling them to purchase carbon quotas if they exceed the specified emission limits,” said Pius.


He also pointed out several challenges if the government’s issued regulations are underdeveloped and a lack of supervision and transparency exists in implementation. Firstly, no regulation obliges companies to disclose the amount of carbon emissions they produce. Currently, carbon emissions data from companies and coal-fired power plants (PLTU) are not accessible to the public. This condition made estimating the amount of carbon that should be paid by the companies difficult. Secondly, companies will be more inclined to purchase carbon rather than invest in green projects such as renewable energy power plants.


The solution to climate change will be more effective if carbon trading in Indonesia is implemented alongside other actions to reduce carbon footprint, such as carbon taxes, increasing green portfolios, and transitioning to renewable energy. Instead of solely promoting carbon trading rules, the government should also focus on expediting the implementation of the carbon tax, as mandated in Law of the Republic of Indonesia No. 7 of 2021 on Tax Regulation Harmonization (HPP). Since its issuance in late 2021, the government has delayed the implementation of this regulation twice until 2025. Nevertheless, carbon taxes can serve as a more ambitious mechanism for emission reduction as they apply across all industrial sectors gradually.


Lesson learned from Singapore’s carbon tax since 2019, the tax has been applied to 80% of the total greenhouse gas (GHG) emissions or 50 facilities in the manufacturing, power generation, waste, and water sectors. The government of Singapore has set the initial carbon price at S$5 per ton of CO2e and plans to gradually raise it to S$25 by 2024-2025, S$45 by 2026-2027, and eventually reach S$50-80 by 2030. During the first five years of Singapore’s carbon tax implementation, the carbon tax will generate S$1 billion, equivalent to Rp14 trillion in revenue. The funds will be allocated to decarbonization and green economic transition programs, one of which includes research and development for sustainable urban solutions using Solar Photovoltaic (PV) systems and low-carbon technologies.


Achieving such success demonstrates the Singaporean government’s effectiveness in implementing carbon tax alongside carbon trading, setting a practical example for Indonesia. Lastly, the government must pay attention to several critical considerations if it intends to implement effective carbon trading as a climate change solution.


“The government must set an appropriate carbon price. This price should not be too low to induce behavioral changes in industries. Additionally, the government should establish clear carbon trading mechanisms to avoid greenwashing practices by the industry,” Pius emphasized.

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