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According to the United States Environmental Protection Agency, the increase in carbon emissions has been caused by human activities over the past 150 years. Despite limited activities during the COVID-19 pandemic, the carbon footprint is constantly increasing due to lenient regulatory measures.
Attempts to control carbon emissions in Indonesia are regulated by Presidential Regulation No. 98 of 2021 on Implementing the Economic Value of Carbon to Achieve Nationally Determined Contribution Targets and Control Greenhouse Gas Emissions greenhouse in national development (“PC 98/2021”). The issue is also addressed in our previous article Tax Harmonization Act.
PR 98/2021 is part of Indonesia’s implementation of the Paris Agreement, previously ratified under Law No. 16 of 2016 on the Ratification of the Paris Agreement to the United Nations Framework Convention on climate changes. PR 98/2021 underpins the hope that Indonesia would be able to manage the adverse effects of climate change and reduce greenhouse gas emissions (“EGG”) to achieve the Nationally Determined Contribution (“CDN”).
To achieve the NDC, PR 98/2021 introduces two general methods, (i) mitigation and (ii) adaptation. Furthermore, PR 98/2021 also conceptualizes the Economic Value of Carbon (“CEV”), where it regulates carbon pricing and carbon trading agreements, including but not limited to economic incentives, carbon levies and taxes. These measures involve the relevant ministries, institutions, local governments, economic actors and the public (“Organizers”). In this article, we focus on the main provisions of PR 98/2021 in relation to the economic actors involved in mitigation/adaptation actions. We also highlight key features that business actors need to pay attention to and how CEV is implemented as a tool to achieve NDC. In short, PR 98/2021 marks Indonesia’s regulatory willingness to adapt to the shift from a voluntary carbon market to a compliance market.
A. Sectors of activity concerned
PR 98/2021 stipulates several business areas that are responsible for achieving the NDC. These sectors are:
- Industrial process and product use;
- Forestry; and or
- Other sectors depending on the evolution of science and technology.
The above business sectors are divided into the following sub-sectors:
- Power stations ;
- Solid waste;
- liquid waste;
- Peat and mangrove management; and or
- Other sectors depending on the evolution of science and technology.
At the national level, the sectors and sub-sectors are supervised by the relevant line ministries. In the provincial framework, they are supervised by the competent governor in coordination with the regional government.
B. Mitigation and adaptation measures
According to PR 98/2021, climate change mitigation and adaptation measures are divided into three stages:
- Planning of mitigation/adaptation actions;
- The implementation of actions to mitigate/adapt to climate change; and
- Supervision and evaluation of climate change mitigation/adaptation actions.
With regard to the planning of mitigation/adaptation actions, economic actors must:
- process the inventory of GGEs;
- formulate and determine the baseline of GGE;
- set mitigation/adaptation targets; and
- plan actions to mitigate/adapt to climate change.
C. Objectives and implementation of the economic value of carbon
The main objectives of NDC in PR 98/2021 are: (i) to reduce GHG emissions by 29% to 40% by 2030; and (ii) strengthen national, regional and public security against the risks of climate change (“Indonesia NDC Objectives”).
To continue the implementation of mitigation and adaptation actions to achieve the NDC, PR 98/2021 introduces the implementation of the CEV (Carbon Economic Value), which consists of the preliminary compliance of commercial actors by the through the measurement, reporting and verification process in the national registry system. for the control of climate change (System Registri Nasional Pengendalian Perubahan Iklim Where “SRNPPI”).
Business actors in the above-mentioned sectors/sub-sectors must record and report their mitigation and adaptation performance, as well as their CEV implementation to SRNPPI on an annual basis. The related reports will be verified by an independent auditor on the recommendation of the Minister of Environment and Forests (“Minister”) for the issuance of the greenhouse gas emissions reduction certificate (“GGE Certificate”). If they do not register and submit reports, traders may be subject to administrative penalties, such as:
- Warning letter;
- Forced measures by the Indonesian government;
- Administrative fines;
- Suspension of the GGE certificate; and
- Revocation of the GGE certificate.
D. Benefits of Obtaining GGE Certificate
The GGE certificate is used as a basis for compliance by economic actors of their performance to participate in NDC objectives. In addition, the GGE certificate can be used to obtain several advantages:
- Carbon trading: Traders can use the GGE certificate as additional documentation to conduct domestic or foreign carbon trading. Currently, there are no implementing regulations regarding the carbon trading system. However, PR 98/2021 allows international carbon trading as long as it does not contravene Indonesia’s NDC targets.
- Payments based on results: commercial actors can benefit from certain incentives obtained through GGE certification. Prior to the implementation of PR 98/2021, the Minister of Environment and Forestry regulated results-based payments in accordance with Regulation No. P.70/MELHK/SETJEN/KUM.1/12/2017 on lines Implementing Guidelines on Reducing Emissions from Deforestation and Forest Degradation, Role of Conservation, Sustainable Management of Forests and Enhancement of Forest Carbon Stocks (“MEF 70/2017”), which hosts the results-based payment mechanism for commercial actors in the forest industry. During the implementation of PR 98/2021, the publication of regulations on results-based payments by the respective ministries will be possible.
- Carbon tax and levies: based on Law No. 7 of 2021 on the harmonization of tax regulations (“HPP law“), the Indonesian government introduced the “carbon tax”, a tax imposed on business actors who produce carbon emissions with massive and harmful impacts on the environment. By obtaining the GGE certificate, a business actor can have an estimate less carbon taxes and levies.
Commercial actors already implementing carbon trading and results-based payments prior to the implementation of PR 98/2021 are subject to recording and reporting on climate change mitigation and carbon units via the SRNPPI no later than one year after the promulgation of PR 98/2021.
Failure to comply with this requirement may prohibit these commercial actors from trading their remaining carbon credits, while their registered and reported credits can only be traded domestically.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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