Carbon credit issuances from Indonesia on hold, developers await clarity

Lack of clarity on the Indonesian government's guidelines on trading in the voluntary carbon market has led to some uncertainty on the issuances of credits of new vintages.

The issuances of 2021 vintage credits from South Pole, a large developer that creates carbon credits worldwide, are currently on hold, while Verra, the international certifier of credits, clarifies the current Indonesian government regulations.

According to South Pole, the credits on hold are associated with a hydropower power plant project in North Sumatra. The government's issuance approval of recent monitoring periods covered vintage 2017 to vintage 2020. The credit issuance of vintage 2021 is pending further notice from Verra.

According to S&P Global Commodity Insights' sources, the Indonesian government had earlier sent a letter to Verra and a few other voluntary market standards saying that its permission would be needed for issuances of credits 2021 onwards.

South Pole said April 7 in an email to S&P Global that the government of Indonesia has, over the past few years, initiated steps to regulate and provide more direction on carbon pricing, and the use of carbon finance in the context of their national climate plan, or nationally determined contributions.

"One of these is the presidential regulation concerning the economic value of carbon. However, at this point in time -- taking into account all existing, applicable regulations in Indonesia -- the development of a carbon project does not violate any law/regulation," said the developer.

South Pole emphasized that no credits had been rejected and that they were merely on hold until there was further clarity on the regulation. "The only thing that project developers such as South Pole are encouraged to do is to report the project status and credits in the SRN [national registry]. Once the regulation is clear, voluntary carbon projects should be able to move ahead again," said South Pole.

Presidential regulation

This decision relates to the Presidential Regulation No. 98 of 2021 on the implementation of carbon economic value (CEV) for the achievement of nationally determined contribution (NDC) targets and greenhouse gas (GHG) emissions control in national development. The regulation was passed by President Joko Widodo just ahead of the COP26 Conference in Glasgow, where a decision was reached on Article 6.2 regarding corresponding adjustment.

It refers to several tools the government plans to use to meet its climate goals like the setting up of emissions caps, a carbon tax and detailed tracking and valuation of carbon units under a national registry called the SRN PPI. The regulation's various provisions indicate that the carbon market in Indonesia might be heavily regulated in the future. Further details are expected to be streamlined in the coming months.

Almost five months since Glasgow, players in the voluntary carbon market are still unclear about how regulations under Article 6.2 will be implemented and what the timeline will be. The Indonesian government seems to be one of the first countries to actively intervene in the voluntary market post Glasgow by regulating credit issuances from their country.

While the presidential regulation does refer to cross-border trading, the exact implementation path is unclear.

In November 2021, Indonesia's finance minister had indicated that the country would not allow international carbon trading until its own domestic targets were met. In November, the Finance Minister Sri Mulyani Indrawati had said that because of the low prices of credits in Indonesia, international buyers from countries with high prices would be jostling to buy Indonesian credits for their offset requirements leaving few credits for the country's own requirements.

Market response

When asked how they perceived this development and its impact on the voluntary carbon market overall, South Pole said, "While clarifying the regulation may translate into a temporary constraint on market availability of units from Indonesia, we do not anticipate a big impact overall, and expect this to be resolved shortly."

Other market sources, however, were concerned about the overall implications on the development and supply of credits from Indonesia in the aftermath of these developments.

A market source told S&P Global that they were trying to get clarification from the Indonesian government about what types of projects would need permission. A second source said, "I wouldn't say this development is entirely unexpected, but it does hamper developer and buyer confidence severely."

A third market source, also a developer, said it was too early for governments to implement corresponding adjustments as the market needed more transitional time.

"We need more integrity in a few years for sure. But we don't need this ironing out of everything right now when everyone is suffering from high energy prices," said the source.