On 22 February 2023, the Indonesian Ministry of Energy and Mineral Resources (MEMR) announced the launch of a mandatory, intensity-based emissions trading system (ETS) for the power generation sector.
The new system will cover facilities with a production capacity of more than 100 MW, though smaller coal and fossil fuel plants may also be included at a later point. The system will initially cover 99 coal-fired power plants that account for 81.4% of the country’s national power generation capacity. These facilities belong primarily to the state-owned electricity company, Perusahaan Listrik Negara (PLN). The government will establish intensity targets, which determine the number of allowances each facility receives for every MWh of electricity generated. It is estimated that allowances worth a total of 20 million tCO2e will be allocated.
The ETS will be implemented in three phases. The first phase will run from 2023 to 2024 and only cover coal-fired power plants. In the second (2025-2027) and third (2028-2030) phases, the government plans to expand the coverage of the ETS to oil and gas-fired power plants and other coal-fired power plants not connected to PLN’s grid.
The launch of the ETS is the result of years of preparation. In 2017, the Indonesian government issued “Regulation No. 46 on Environmental Economic Instruments”, which required the implementation of an emissions and/or waste permit trading system by 2024. Building on this foundation, the government issued a “Presidential Regulation No. 98 on the Instrument for the Economic Value of Carbon” in 2021, which provides a national framework for carbon pricing instruments, including an ETS. In 2021, a voluntary intensity-based pilot was conducted in the power generation sector. The pilot involved 32 facilities, representing more than 75% of power sector emissions, with an average carbon price of USD 2 per tonne of CO2. The pilot familiarized stakeholders with ETS compliance and offset mechanisms, and informed the development of the mandatory national ETS.
In October 2022, the Ministry of Environment and Forestry released Regulation 21/2022 “Guidelines for Carbon Economic Value Implementation”, which provided the legal basis for the implementation of a cross-sectoral ETS in Indonesia and covered details on offsets, sector-specific carbon trade roadmaps, MRV procedures, and institutional arrangements. The MEMR’s Regulation 16/2022 “Guidelines for Carbon Economic Value Implementation for the Power Generation Sub-sector” followed in December last year, providing the legal basis for implementing the ETS for power generators.
The new ETS will eventually work as a hybrid “cap-tax-and-trade” system alongside a carbon tax that was set out under the 2021 “Law No. 7 on the Harmonization of Tax Regulations”. Facilities that fail to meet their obligations under the system will be subject to the tax, the rate of which will eventually be linked to the price of the domestic carbon market. Initially to be introduced in April 2022, the carbon tax has now been postponed likely until 2025.
Looking ahead, the MEMR expects a reduction of 500,000 tCO2e in the sector through the ETS in the first year alone.