Indonesia Joins the Realm of Climate Markets

During 2021, Indonesia turned a corner in national climate policy. In March 2021, the Indonesian government introduced its first voluntary emissions trading system (ETS)—a pilot for a future non-voluntary program. Eighty coal-burning power plants, which were responsible for approximately three-quarters of Indonesia’s emissions, participated. 

Before the November 2021 United Nations Climate Change Conference in Glasgow (COP26), Indonesia strived to fully develop carbon emissions policies. The Indonesian government announced a carbon tax of 30,000 rupiah ($2.09) per tonne of CO2e for coal-fired power plants that will be implemented in April 2022, and the ETS will be fully developed and functioning in 2025.

Indonesia’s Carbon Emissions Background

Along with being the fourth most populous country in the world, Indonesia is one of the 10 highest greenhouse gas emitters globally. Additionally, Indonesia will take over the G20 presidency in 2022 and host the G20 Summit in Bali. One of the three priority issues is a sustainable energy transition. The combination of Indonesia's high emissions and taking on a global leadership role has increased pressure on the country to create comprehensive national policy around climate change. 

President Joko Widodo’s government began preparing an ETS in 2017 when the Indonesian government passed a regulation mandating that an ETS take effect by 2024. Despite suffering severe COVID-19 public health and economic impacts, the Indonesian government continued developing carbon emissions policies to implement the pilot ETS in 2021 and prepare the carbon tax policy for 2022.

Potential Limitations of Indonesia’s ETS and Carbon Tax

Indonesia’s ETS and carbon tax face potential challenges:

• Carbon Tax Level: The carbon tax of $2 per tonne will likely not be high enough to significantly lower carbon emissions. The World Bank suggests setting carbon taxes at $40-$80 to be effective in keeping global temperatures within 2°C. 
• Implementation Transparency: Indonesia ranks 102nd out of 180 countries in terms of corruption, with a transparency score of 37 out of 100. The country has taken steps backward in terms of handling corruption in recent years, limiting the power of its corruption eradication commission in 2019. Corruption could limit the effectiveness of an ETS and a carbon tax if certain enterprises or industries are able to lobby the government for exemption.
• Energy Transition Assistance: Indonesia has focused more on policies that limit carbon output in the electricity sector and less on how to assist power plants in transitioning to cleaner energy. This shortcoming could challenge a long-term goal of ETSs and carbon taxes—phasing out coal. The Asian Development Bank established the Association of Southeast Asian Nations (ASEAN) Catalytic Green Finance Facility to help ASEAN countries make the shift. This type of program can support an overwhelmed government implementing new energy transition plans while combating a public health crisis. It provides access to more than $1.4 billion in loans and technical assistance. 

Despite the potential limitations of Indonesia’s new ETS and carbon tax policies, these implementations are a major step for the heavily populated and high carbon-emitting country. These policies could potentially have a resounding impact on mitigating climate change, and they set an example for the Southeast Asia region—Indonesia is the only ASEAN country with a carbon tax scheduled or implemented besides Singapore. This development is worth watching to see if it becomes a policy in name alone or if it significantly decreases carbon emissions. 

As one of the few Southeast Asian countries with a carbon tax or proposed ETS, Indonesia should consider engaging with its regional trading partners to establish carbon emissions policies that do not lead to carbon leakages across borders. In addition, the Indonesian government should pursue assistance programs for transitioning to green energy to protect the effectiveness of its programs.