Legal Insights

Supporting the Path to Net Zero: Indonesia’s Carbon Market and Regulatory Frameworks

As part of its commitments under the Paris Agreement, Indonesia has set ambitious climate targets. Through Law No. 16 of 2016, the country pledged to reduce greenhouse gas emissions by up to 41% with international support by 2030, and to achieve net zero emissions by 2060. To reach these goals, the government has introduced two main policy instruments: the carbon market mechanism and carbon taxation. 

Carbon Market Mechanism 

Indonesia has established a comprehensive legal framework to support decarbonization: namely Government Regulation No. 98 of 2021 on the Implementation of Carbon Economic Value. A key component of this regulation is the carbon market mechanism, which assigns a financial value to emissions, thereby integrating environmental costs into business decisions. 

The framework includes three main mechanisms: 

• Carbon trading (Perdagangan Karbon): Companies can buy and sell carbon credits. 

• Carbon levies (Pungutan atas Karbon): Charges applied to companies based on their emissions. 

• Result-based payments (Pembayaran Berbasis Kinerja): Financial rewards for verified emission reductions. 

The carbon market mechanism allows the trading of emission reductions or allowances, either through a carbon exchange (bursa karbon) or via direct transactions. Under Regulation No. 21 of 2022 on Procedures for the Implementation of Carbon Pricing, the process is as follows: 

1. Emission reduction activities are registered in the National Registry System for Climate Change Control (SRN PPI). 

2. Results are measured, reported, and independently verified. 

3. Verified reductions generate carbon credits (SPE-GRK). 

4. Companies may sell their credits or purchase credits to meet their own targets. 

In practice, this means reduced emissions are given a financial value, while excess emissions carry a cost. 

Participation in the carbon market mechanism is mandatory for companies in regulated sectors such as forestry and land use, marine and fisheries, energy, waste, agriculture, and industrial processes, as well as for those with assigned emission limits. For other companies, participation is voluntary, but it may provide both financial advantages and reputational benefits. 

Carbon Taxation 

Another policy tool is carbon taxation, introduced under Law No. 7 of 2021 on the Harmonization of Tax Regulations and implemented through Government Regulation No. 98 of 2021. The tax applies to companies that exceed their emission limits, with rates linked to prevailing market prices. This structure is intended to encourage investment in cleaner technologies or the purchase of carbon credits. 

Companies that actively participate in carbon markets may see their tax burden reduced in proportion to the verified emission reductions they achieve or acquire. Additional incentives, such as tax deferrals or exemptions, may be granted subject to further regulations issued by the Ministry of Finance. 

While the carbon market is already in operation, carbon taxation is not yet universally enforced. Nevertheless, the regulatory framework has been established, and businesses are encouraged to prepare for tighter requirements. Early participation allows companies to mitigate risks, tap into new revenue streams, and enhance their environmental, social, and governance (ESG) credentials. 

Indonesia’s climate policies align with international expertise in sustainability and innovation, offering opportunities for strategic partnerships. Such collaborations can contribute to Indonesia’s decarbonization efforts while supporting the global sustainable agenda in Southeast Asia’s largest energy market.