Background

Indonesia is strengthening its efforts to achieve Indonesia's Net Zero Emission by 2060. In August 2023, the Financial Service Authority (Otoritas Jasa Keuangan or "OJK") issued OJK Regulation No. 14 of 2023 on Carbon Trading Through Carbon Exchange ("OJK Reg 14/2023"). This long-awaited regulation is supplementary to Law No. 4 of 2023 on Development and Reinforcement of the Financial Sector on the significance of Carbon Exchange, and it is deemed a crucial step to achieving Indonesia's sustainability target as well as commitment to the low emission future.

To implement this regulation, the Indonesia Stock Exchange with the Presidential office of the Republic of Indonesia officially launched the Indonesia Carbon Exchange ("IDX Carbon") in September 2023, after obtaining the Carbon Exchange Business License issued by OJK. Business actors may participate in Indonesia's carbon trading by accessing https://www.idxcarbon.co.id/.

Having regard to the position, we hereby provide a general overview on OJK Reg 14/2023, particularly the (i) Definitions and Classifications of Carbon Trading, (ii) Carbon Exchange Operator Requirements, (iii) Carbon Trading Implementation, and (iv) Applicable Sanctions.

Definitions and Classifications

OJK Reg 14/2023 introduces several new definitions regarding carbon trading in Indonesia, which are as follows:

  1. Carbon Unit: Proof of carbon ownership in the form of a certificate or technical approval expressed in one ton of carbon dioxide, recorded in the National Registry System for Climate Change (Sistem Registri Nasional Pengendalian Perubahan Iklim or "SRN PPI"). Carbon Units traded through the carbon exchange are considered as securities, which are similar to securities in the capital market sector.
  2. Greenhouse Gas Emission Reduction Certificate (Sertifikat Pengurangan Emisi Gas Rumah Kaca or "SPE-GRK"): Proof of emission reduction by the business actor or business activity, measured and verified by, reported to, and recorded in SRN PPI in the form of registry number and/or code.
  3. Business Entity Emission Cap Approval (Persetujuan Teknis Batas Atas Emisi Bagi Pelaku Usaha or "PTBAE-PU"): A business actor's maximum threshold of greenhouse gas emission, and/or emission quote for a specific period.

Pursuant to Article 3 of OJK Reg 14/2023, a Carbon Unit shall constitute as securities and must be registered to (i) SRN PPI and (ii) Carbon Exchange Operator (i.e., IDX Carbon), before it can be traded. Please note that Carbon Units traded through a carbon exchange operator can be in the form of:

  1. PTBAE-PU; and
  2. SPE-GRK.

("Carbon Units") (Article 5 of OJK Reg 14/2023)

The Carbon Exchange Operator only facilitates carbon trading for the registered local and foreign Carbon Units. However, a non-registered Carbon Unit can be traded through a Carbon Exchange Operator provided:

  1. The non-recorded/registered Carbon Unit does not contradict the prevailing laws and regulations; and
  2. The foreign non-registered Carbon Unit has conformed with the requirements set out in Article 3 (4) of OJK Reg 14/2023:
    1. it has been registered to, validated, and verified by an agency that has obtained the required accreditation from an international registration system operator;
    2. it has fulfilled the requirements to be traded at the foreign Carbon Exchange; and
    3. it has fulfilled all other requirements determined by OJK after consultation with the Ministry of Environment and Forestry.

(Article 3 (3) and (4) of OJK Reg 14/2023)

Carbon Exchange Operator Requirements

As elaborated above, any carbon trading shall be conducted by the Carbon Exchange Operator. A business actor who intends to become a Carbon Exchange Operator must fulfill all requirements set out by OJK, such as obtaining a business license issued by OJK and having a Limited Liability Company (Perseroan Terbatas or "PT") duly established in Indonesia (Article 11 of OJK Reg 14/2023).

OJK Reg 14/2023 also stipulates other general requirements that need to be satisfied by the prospective Carbon Exchange Operator, which are:

  1. Minimum paid-up capital: A Carbon Exchange Operator must have, at least, IDR100 billion paid-up capital, which is not in any form of loans. (Article 13 of OJK Reg 14/2023)
  2. Minimum composition: OJK Reg 14/2023 also stipulates a mandatory composition of Shareholders, Board of Directors ("BoD"), and Board of Commissioners ("BoC"). For your ease of reference, please refer to the table below.
  3. Shareholders BoD BoC
    1. can be:
      1. sui generalis organizations established under the prevailing regulations i.e., Bank Indonesia, and the Indonesian Investment Authority);
      2. Indonesian individuals;
      3. Indonesian entities; and/or
      4. foreign entities already licensed by the financial regulators in the jurisdictions.
    2. may have the maximum 20% of foreign ownership; and
    3. are prohibited from having any nominee arrangement.

    (Article 14 of OJK Reg 14/2023)
    1. must be domiciled in Indonesia;
    2. has, at least, two members;
    3. a BoD member cannot concurrently hold the position of member of another BoD in the same Carbon Exchange;
    4. must pass OJK's fit-and-proper test;
    5. has the knowledge or experience in the field of climate control and carbon exchange; and
    6. is appointed for a four-year tenure, and may be reappointed for one additional period.

    (Articles 16 to 22 of OJK Reg. 14/2023)
    1. has, at least, two members; and
    2. is appointed for a four-year tenure, and can be reappointed for one additional period.

    (Articles 20 and 22 of OJK Reg. 14/2023)

In addition to these requirements, a member of the BoD and BoC of Carbon Exchange Operator is prohibited from:

  1. having an affiliate relationship with any other members of the BoD and/or BoC;
  2. owning shares or acting as a controller of the Carbon Exchange users;
  3. trading the units of the Carbon Exchange Operator; and
  4. engaging in the illegal use of narcotics.

(Article 21 of OJK Reg 14/2023)

Implementation of Carbon Trading via Carbon Exchange Operator

Since carbon trading is considered a new aspect of business and trading in Indonesia, OJK Reg 14/2023 provides various steps for Carbon Exchange Operators to be eligible for Carbon Unit trading.

According to Article 7 of OJK Reg 14/2023, a Carbon Exchange Operator has the obligations, such as (i) conducting the carbon trading based on regular, fair, and efficient principles, and (ii) utilizing an electronic system to facilitate continuous transactions of the Carbon Units.

A mandatory customer due diligence shall also apply to the Carbon Exchange Operator when facilitating the trading, or creating a single-service user-identity number. Please note that OJK Reg 14/2023 allows the Carbon Exchange Operator to cooperate with a third party during the commencement of a customer due diligence.

The main obligation of a Carbon Exchange Operator when carrying out carbon trading activity is providing a thorough mechanism in its system to (i) facilitate buyers and sellers to trade the Carbon Units, and (ii) provide the settlement process of the carbon unit transactions.

(Article 7 of OJK Reg 14/2023)

Government's Role

Not only providing various mechanisms and provisions applicable to the Carbon Exchange Operator, OJK Reg. 14/2023 also regulates the government (i.e., OJK) supervision during the carbon exchange process, which includes overseeing the:

  1. Carbon Exchange Operators;
  2. Supporting infrastructure for the carbon trading market;
  3. Users;
  4. Transactions and settlements of Carbon Unit trade;
  5. Governance of carbon trading;
  6. Risk management;
  7. Consumer protection; and
  8. Parties, products, and/or activities related to the carbon trading.

(Article 26 of OJK Reg 14/20243)

Administrative Sanctions

Please note that incompliances with OJK Reg 14/2023 including (i) unregistered Carbon Units, and (ii) non-eligible Shareholders, and members of the BoD, and/or BoC are subject to administrative sanctions in the form of:

  1. Written warnings;
  2. Fines;
  3. Business limitation;
  4. Business suspension;
  5. Business license revocation;
  6. Approvals revocation; and/or
  7. Registration revocation.

The above sanctions are imposed by OJK on to the violators or parties who caused such violation to occur.

(Article 33 of OJK Reg 14/2023)

Concluding Remarks

As Indonesia is planning to move forward to a greener economic approach, the issuance of OJK Reg 14/2023 has provided a significant improvement to Indonesia's carbon trading landscape. This regulation thoroughly addresses the requirements and various aspects that need to be considered when becoming a carbon exchange operator.

The implementing regulations are still being formulated by the sectoral agencies. In the meantime, the Indonesian government is committed to have public discussions to increase the effective carbon trading practice in Indonesia. As such, OJK's more comprehensive regulatory scheme, addressing an in-depth view of carbon trading in Indonesia and benefitting Indonesia to become a more sustainable country for investment, is ultimately worth waiting for.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.