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Indonesia opens carbon trading market to both skepticism and hope

Rainbow over rainforest in Sumatra. Photo credit: Rhett A. Butler

Rainbow over rainforest in Sumatra. Photo credit: Rhett A. Butler

  • Environmentalists have criticized Indonesia’s carbon trading mechanism, which had its first day of trading Sept. 26.
  • The government touts the mechanism as a way to curb emissions and attract climate funding, but critics call carbon trading a false solution to climate change and a greenwashing attempt.
  • Environmentalists say carbon trading could discourage companies from outright reducing emissions, enabling a “business as usual” attitude in which people and companies could buy carbon credits to continue polluting instead of changing their behaviors.
  • A recent analysis by The Guardian and researchers from Corporate Accountability found that most of the top 50 emission offset projects — those that have sold the most carbon credits in the global market — were likely junk or worthless.

JAKARTA — Indonesia has just launched its first carbon emissions trading market in a bid to fight climate change.

The Southeast Asian country is one of the world’s top 10 greenhouse gas emitters, with a bulk of its emissions coming from the burning of coal to generate power.

To fight climate change, Indonesia has pledged to reach net carbon neutrality by 2060.

The government has touted the carbon market as a part of its climate policies.

The market offers companies and financial institutions a mechanism to offset their emissions while providing funding for carbon reduction projects.

Under the mechanism, companies that emit more carbon than their quota can buy carbon credits from companies that emit pollution below a limit set by the government or from renewable power plants.

Over-emitting companies could also buy carbon credit certificates that are issued for activities or projects that remove carbon from the atmosphere, such as forest conservation.

The idea behind the carbon trading market is that companies will be encouraged to cut emissions so they can sell their carbon credits to the market.

On the other hand, emitters will also be motivated to transition from fossil fuels to renewable energy so they don’t have to buy carbon credits.

Carbon trading is now open to coal plants that are generating at least 100 megawatts of power and are linked to the state’s central electricity grid, which accounts for about 86% of the country’s coal capacity.

The opening day of the market on Sept. 26 recorded the trading of 13 carbon credits of nearly 460,000 metric tons of carbon dioxide equivalent (CO2e) from geothermal projects in North Sulawesi operated by state-owned PT Pertamina Geothermal Energy.

Each metric ton of carbon credit is priced at 69,600 rupiah ($4.45), far below the cost of similar products in established carbon markets like the European Union.

While the government touts carbon trading as a way to reduce emissions and solve climate change, some green groups have criticized the mechanism, calling it a false solution and greenwashing.

One of the criticisms against the carbon trading mechanism is that it could actually discourage companies from outright reducing emissions, especially if the carbon is priced too low.

This would enable a “business as usual” attitude, where people and companies could buy cheap carbon credits to continue polluting instead of changing their behaviors.

“Carbon trading is chosen [as a solution] just to allow companies and industrialized nations to keep extracting natural resources, whether by digging up and burning fossil fuels, deforesting or through conservation projects that create conflicts and climate crisis,” said Uli Arta Siagian, the forest campaign manager at the Indonesian Forum for the Environment (Walhi).

Arie Rompas, a forest campaigner from Greenpeace Indonesia, called the carbon trading mechanism “a license to keep polluting,” which will distract the public from efforts that could really reduce emissions.

Not only could companies easily buy cheap carbon credits to offset their emissions, some of these carbon certificates might not even come from actual reduction in emissions, said Torry Kuswardono, the executive director of NGO Yayasan PIKUL.

He said the carbon trading mechanism, particularly one where the offset comes from forest conservation, is having a crisis in credibility.

“There’s a lot of junk carbon credits that are not proven to be reducing emissions,” Torry said. “Indonesia is embarrassing itself by taking pride in choosing an instrument that is being put under global scrutiny.”

A recent analysis by The Guardian and researchers from Corporate Accountability, a nonprofit transnational corporate watchdog, found that most of the top 50 emission offset projects, those that have sold the most carbon credits in the global market, were likely junk or worthless.

These top offset projects, such as forestry schemes, hydroelectric dams and solar and wind farms, can’t guarantee additional, permanent greenhouse gas cuts. In some cases, the project might leak greenhouse gas emissions or shift emissions elsewhere.

“Indonesia needs to choose other instruments that are more credible in terms of mitigation and the protection of the environment, social and human rights, rather than the market instrument,” Torry said.

Uli said the true solution to climate change is reducing emissions drastically by stopping the extraction and burning of fossil fuels and deforestation. One way to protect forests is by recognizing and protecting the rights of Indigenous and local communities to their forests, she said.

Science has demonstrated that forests and other biomes are healthier when these communities are in charge, even though their customary rights aren’t always recognized.

There are potentially 20.8 million hectares (51.4 million acres) of customary forests throughout Indonesia — an area half the size of California — that had been identified by the Ancestral Domain Registration Agency (BRWA), a civil society initiative that maps Indigenous territories across Indonesia.

But the government had only officially recognized 221,648 hectares (547,700 acres) of them as of August 2023.

“There are forests that remain standing to this day, thanks to the protection from Indigenous and local communities,” Uli said. “The state has to acknowledge its failure in protecting the forests and areas managed by the people.”

President Joko Widodo inaugurates the opening of the carbon market in Jakarta on September 26, 2023. Image courtesy of the Indonesian Cabinet Secretariat.

Risks to Indigenous and local communities

The Indigenous and local communities whose rights haven’t been officially recognized by the government are prone to be displaced by carbon offset projects, Uli said.

She said it’s likely that carbon offset projects are managed by companies, rather than communities, under Indonesia’s carbon trading mechanism.

The Ministry of Environment and Forestry granted 16 ecosystem restoration concessions in Indonesia, spanning 621,646 hectares (1.54 million acres), from 2007 to 2021.

Uli said these ecosystem restoration concessions, where businesses restore degraded production forests to maintain biodiversity and ecosystem balance, have displaced Indigenous and local communities from their lands.

It’s now also easier for companies to enter the carbon trading market through a new mechanism introduced by the government called multi business-based forest management.

In the past, a single forestry permit only allowed a company to carry out one business activity.

So for a company to sell its forest carbon credit to the market, it had to apply for a specific business license.

But now, under the new scheme, a forest business license is good for multiple business activities, ranging from planting industrial trees for pulp and paper to selective logging, non-timber forest products and environmental service utilization, such as selling carbon credits.

This simplification of permits will put Indigenous and local communities at greater risk of being displaced from their lands, Uli said.

Muhammad Arman from Indonesia’s main Indigenous alliance, AMAN, said trading carbon without first recognizing, protecting and fulfilling the rights of Indigenous peoples on their natural resources is “a practice of colonialism towards Indigenous peoples.”

Indigenous Dayak Culture Parade in to commemorate Youth Pledge Day in Anjungan village, West Kalimantan, Borneo.


While some activists believe that the carbon trading mechanism has no place in climate change policy, as its concept — which treats carbon merely as a commodity that can be traded — is flawed from the beginning, others say the mechanism could still work, with some caveats.

Nadia Hadad, executive director of the NGO Madani, said there needs to be a systemic change to the carbon trading mechanism to prevent the carbon market from becoming a venue for companies to seek profits, rather than contributing to the fight against climate change.

For one, the government needs to impose emission caps strictly in a transparent manner.

So far, the government has only put a cap on emission levels for coal-fired power plants, with a plan to set quotas for four other sectors —forestry, industrial processes and product use, agriculture and waste management.

“Emission cap in the forestry business sector also needs to be emphasized because businesses control vast lands and forests [in Indonesia],” Madani deputy director Giorgio Budi Indrarto said.

The government also needs to limit the amount of carbon credits that could be sold by an entity at the market by stipulating that only residual emissions are allowed to be traded, he said.

Residual emissions are those that remain after efforts to eliminate such emissions have been implemented.

Limiting carbon trading to residual emissions is important to prevent companies from selling carbon credits even when they haven’t put maximum efforts in reducing their emissions.

The next action that could be taken is recognizing the rights of Indigenous and local communities to lessen the gap in land ownerships between communities and companies, Giorgio said.

Data from the Consortium for Agrarian Reform (KPA) show that the richest 1% own 68% of the land in Indonesia. This huge gap in land ownership has resulted in agrarian conflicts across Indonesia, with 35 cases recorded just in 2021.

Recognizing the rights alone is not enough, said Hariadi Kartodihardjo, a lecturer in forestry policy at the Bogor Institute of Agriculture.

The government also needs to ensure that Indigenous and local communities are benefitting from carbon trading by educating them about the subject and encouraging them to participate in the market, he said.

Hariadi pointed out that carbon trading is a much more complex concept to grasp than forestry businesses like selling timber.

“If the learning curve is steep, then it’s likely that only smart people who are able [to benefit from carbon trading],” he said. “If that’s the case, then the carbon market is no use [for impoverished communities]. These communities should have the opportunities [to benefit from the carbon market], not just smart people.”

Transparency and accountability are the next thing the government needs to work on.

Both things are especially important in the forestry sector, which is plagued with corruption and mismanagement, Hariadi said.

“Who can guarantee there won’t be manipulation of the size of forests guaranteed [to be conserved and restored so that their carbon can be traded]?” he told Mongabay. “Who can guarantee that people who monitor [the forest conservation and restoration] won’t ask for bribe money?”

Indonesia is notoriously corrupt, with the country’s Corruption Perceptions Index (CPI) in 2022 dropping by four points to 34 on a scale of zero (very corrupt) to 100 (very clean). This is the most drastic decline since Transparency International began publishing the annual CPI in 1995, and it puts Indonesia in 110th place out of the 180 countries surveyed.

Without addressing corruption in the forestry sector, the trading of carbon from forest conservation and restoration could be rife with manipulation and bribery, Hariadi said.

“The government should work hard in not only building the carbon market, but also in ensuring the improvement of forest management related to carbon as a commodity,” he said.


Banner image: Rainbow over rainforest in Sumatra. Image by Rhett A. Butler/Mongabay.


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