Unlocking the Green Potential

The need to address climate change is more urgent than ever.

Unfortunately, efforts to counter damaging activities are slow compared to the increase in environmentally harmful practices.

While changing long-established industry technologies will take time and may not be the fastest solution, we require a more efficient mechanism to achieve a low-carbon economy, which brings us to the concept of the carbon market.

Based on the Indonesia Commodity & Derivatives Exchange, Indonesia plays a significant role in the global carbon credit market, contributing 75-80% of the world's carbon credits. This positions the country with tremendous potential to spearhead the implementation of carbon credit trading.

The establishment of a carbon market in Indonesia could have a substantial economic impact, potentially contributing over USD 150 billion to the nation's economy.

To underline its commitment, Indonesia has set ambitious targets to reduce emissions by 31.89% unconditionally and by 43.2% conditionally by 2030, demonstrating its determination to combat climate change and pave the way for a more sustainable future.

In Indonesia, the Development and Strengthening of the Financial Sector Act (P2SK) serves as the legislative basis for the establishment of carbon exchanges.

According to the P2SK, carbon exchanges can only be operated by market operators that have obtained the necessary licenses from the Financial Services Authority (OJK), with the Indonesia Stock Exchange (IDX) being the designated operator in this context.

The Financial Services Authority (OJK) is scheduled to issue the OJK Regulation (POJK) concerning the carbon exchange on July 11, 2023 and the launch of the carbon exchange is planned for September 2023.

While the exact mechanisms and timelines of the carbon trading system are still under development, the IDX is actively collaborating with relevant stakeholders such as the OJK, the Coordinating Ministry for Maritime Affairs and Investment, the Ministry of Environment and Forestry, the Ministry of Energy and Mineral Resources, and the Ministry of Finance.

The progress towards implementing a carbon trading system in Indonesia aligns with the region's overall economic trajectory.

With sustained economic growth averaging around 5.3% since 2006, the ASEAN economic region is on track to become the fourth largest economy globally. This positive momentum sets the stage for continued development and paves the way for the timely establishment of the carbon exchange system in the coming years.

This industrial expansion means that emissions within the region are likely to see an equivalent increase and it is for this reason that ASEAN must now consider the role it will play with regards to global emissions reductions.

Singapore, for instance, recently made an important announcement regarding carbon credits and their role in carbon tax payments starting in 2024. This move is aimed at supporting Singapore's goal of achieving Net Zero emissions by 2050.

Carbon Taxes in Different Countries

As one of Asia's leading financial centers, Singapore has seen a rise in greenhouse gas emissions, reaching 51.6 million CO2 tonnes in 2019. To address this, the government introduced a carbon tax in 2019, making it the first country in the ASEAN to do so.

By allowing high-quality international carbon credits to replace a portion of the tax, Singapore expects to drive demand for carbon credits and become a hub for carbon services by 2030. The voluntary carbon market is also expected to experience significant growth, with global demand projected to increase in the coming years.

Singapore's Climate Action Plan

Meanwhile, Malaysia has made significant strides in the carbon market with the Bursa Carbon Exchange (BCX) successfully conducting the nation's inaugural carbon credit auction in March 2023.

This auction marked a key milestone for Malaysia, with active participation from various industries and the introduction of new carbon credit products.

The auction showcased projects from China and Cambodia, attracting strong interest from domestic corporate sectors, including government-linked companies and financial institutions.

Both Singapore and Malaysia's efforts reflect the growing importance of carbon markets in the region and their commitment to addressing climate change.

Source: The ASEAN State of Climate Change Report

We believe that the carbon exchange should not merely focus on economic gains but also take into account the environmental impact, aiming to ensure the long-term preservation of our planet amid a growing population.

Certain sectors, particularly those associated with high carbon emissions like coal mining, are expected to face challenges as carbon trading initiatives come into effect.

On the other hand, environmentally friendly stocks that can maintain carbon emissions below the established thresholds stand to benefit from the carbon exchange, promoting a shift towards sustainable investment choices.

For instance, PT Barito Pacific Tbk (BRPT IJ) has already recorded sales of USD3.573 million in FY22 from the carbon credit segment. Pertamina Geothermal Energy (PGEO IJ) has certified carbon credits with an estimated annual GHG reduction of 181,030 tCO2e.

PT SLJ Global Tbk (SULI IJ) is exploring a transition to carbon projects, while PT Integra Indocabinet Tbk (WOOD IJ) holds licenses for significant forest areas and is in the process of converting mangrove areas into carbon projects.

The emergence of carbon trading within the Indonesian market highlights a significant step towards a more sustainable future.

As the IDX and relevant authorities work towards finalizing the necessary regulations and system readiness, the potential benefits of carbon trading for both the economy and the environment become increasingly evident.

By creating economic incentives for emission reduction and promoting sustainable practices, carbon trading can serve as a catalyst for building a greener and more prosperous society.

Moreover, you can read our Extreme On-The-Ground of Carbon Credit.