Carbon-neutral policies in Indonesia

    By Denia Isetianti Permata and Robert Reid, Soemadipradja & Taher
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    As the climate crisis becomes more apparent, businesses are taking a critical role in implementing strategies to help Indonesia achieve its net-zero emissions commitment by 2060 or sooner. This article highlights the key legislative changes around sustainable development that companies are encouraged to explore and use to their benefit.

    Key legal developments

    The Indonesian government has issued a number of specific policies encouraging businesses to embrace a low carbon economy, including:

    Green finance. The Financial Services Authority of Indonesia (Otoritas Jasa Keuangan, or OJK) encourages green finance through various regulations that support sustainable development financing, including:

    (1) Green Bond Regulations (GBR). The GBR identify “green bonds” as debt securities to finance or refinance part or all of an environmentally sound business activity, including activities relating to renewable energy and eco-efficient products. The GBR require a minimum of 70% of the issuance proceeds to finance environmentally sound business activities, after which the issuer must report to the OJK on the use of funds.

    In 2018, Sarana Multi Infrastruktur (SMI) became the first green bond issuer in the country, where 100% of proceeds are being used to finance various projects including a renewable energy power plant.

    Denia Isetianti Permata
    Partner at Soemadipradja & Taher
    in Jakarta
    Tel: +62 21 5099 9879
    Email: denia_isetianti@soemath.com

    (2) Sustainable finance. To develop a greener financial and capital market ecosystem, the OJK also requires financial services institutions, issuers and public companies (each a relevant entity) to implement sustainable finance practices in their business activities based on sustainable finance regulations issued in 2017. Sustainable finance practices require a relevant entity to prepare a sustainable finance action plan that must be notified to its shareholders and the OJK annually.

    As investors are looking for sustainable finance, investments continue to increase, and green bonds will be increasingly in demand. This is partly because investment in green bonds generates environmental benefits and, at the same time, such investment needs to satisfy the OJK’s stringent sustainable finance requirements. It also sends a strong message that investors and issuers encourage socially responsible investment.

    Electrification and renewable energy transition. Indonesia has significant fossil fuel supplies and reserves, leading to a strong reliance on fossil fuels. However, under the National Energy Policy, the country aims to reduce its dependence on fossil fuels and develop cleaner energy sources. Consistent with such commitments, the government encourages public and private sectors to use renewable energy in their business activities, e.g. by utilising solar power as an electricity source, and battery-powered vehicles for transportation. Some recent legal developments in encouraging solar and battery-powered energy are set out below.

    (1) Rooftop solar power plant system. The government has issued its Rooftop Solar Power Plant Regulations (RSR) to encourage solar energy as an electricity source. The RSR provides: (i) a more favourable “net metering” system between rooftop solar customers and the holders of licences required to construct or operate electricity distribution systems, so customers can benefit from any surplus electricity they generate; and (ii) a framework to engage in a carbon credit trading scheme, which will be regulated separately. Recent media reports indicate that, as of the publication date of this article, the government is already revising the RSR, which are now on hold. So we are anticipating that further RSR will be issued in the near future.

    Indonesia soon will have the largest solar power plant in Southeast Asia and the first floating solar power plant. This 145MW floating solar power plant project is scheduled to commercially operate in 2022 to generate clean energy for 50,000 houses and offset 214,000 tonnes of carbon emissions annually.

    (2) Electric vehicles (EVs). Under the Battery-Powered Vehicles Regulation (BVR), companies wishing to engage in the EV industry must obtain appropriate business licences, build a manufacturing facility in Indonesia, and fulfil the local content requirements. Further, battery waste from the EV industry must be recycled and/or managed by a company licensed to manage battery waste.

    Robert Reid
    Foreign counsel at Soemadipradja & Taher in Jakarta
    Tel: +62 21 5099 9879
    Email: robert_reid@soemath.com

    Various incentives are available to companies wishing to engage in the EV industry, including import-duty exemptions for EV products (fiscal incentives), and government grants of production rights for certain EV technologies (non-fiscal incentives).

    An Indonesian company spearheading the use of EV technology for all their business lines is the ride-hailing decacorn, Gojek, through its joint venture called Electrum. The plan is for Electrum to manufacture electric two-wheel vehicles, set up battery packaging and battery-swapping infrastructure, and provide loans to develop a sophisticated EV ecosystem in Indonesia.

    Given the country’s objective to reduce reliance on fossil fuels, to realise this objective it is becoming imperative for businesses to find opportunities that adopt greener choices, and to invest in infrastructure that provides more eco-friendly solutions.

    Carbon pricing

    Carbon pricing is a tool for the government to regulate the objective costs of greenhouse gas emission units generated by human and economic activity. Under Presidential Regulation No.98 of 2021 on the implementation of the economic value of carbon (EVC) for achieving nationally determined contribution targets and controlling greenhouse gases in national development, and Law No.7 of 2021 on the harmonisation of taxation regulations (together forming the Carbon Law), the government introduced the schemes referred to below.

    (1) Carbon trading, a market-based mechanism to reduce greenhouse gas emissions by selling and purchasing carbon units (carbon ownership certificates) domestically and/or internationally. The two proposed mechanisms for carbon trading are:

    (i) An emission trading scheme, where the government will set a cap for the total emissions level across a given industry (determined cap). Businesses emitting more than the determined cap must purchase rights to emit from others that produce less than the cap. This scheme results in a transfer of carbon units; or

    (ii) A greenhouse gas emissions offset scheme, which applies to businesses without a determined cap. In this scheme, businesses obtain carbon units from their activities in reducing greenhouse gas emissions, which can be sold to entities requiring carbon units.

    One of the pioneer projects for emissions offseting is the Katingan Mentaya project, owned by Rimba Makmur Utama (RMU), which conserves large peat forest areas in Central Kalimantan. This project, reportedly one of the largest of its type in the world, will generate significant carbon offset units intended to be sold to various companies (including Volkswagen, according to media reports). The number of certified carbon units generated by the project is reportedly estimated to average 7.5 million, equivalent to taking two million cars off the road annually.

    (2) Results-based payment (RBP) is a form of carbon pricing scheme where international parties, national and provincial governments are able to incentivise (through payments) those who reduce carbon emissions or increase carbon reserves (by carrying out sustainable activities) based on verifiable results. However, the RBP scheme does not impact any transfer of carbon credit ownership and falls outside the carbon trading scheme. Accordingly, the RBP scheme is likely to be further regulated.

    (3) Carbon levies may be imposed in the form of taxes, duties and customs fees, or other state-imposed levies based on carbon content, carbon emission potential, emitted carbon amounts, and/or climate change mitigation actions. Carbon taxation is a new policy that will be enforced from April 2022. Companies generating emissions exceeding the government cap will be subject to IDR30 per kilogram tax for CO2 equivalent. Although a carbon tax has not yet come into force, companies with carbon emissions should prepare and run cost analyses to accommodate these additional costs and seek opportunities for innovative collaboration.

    Putting a price on carbon should now feed into the cost of doing business in Indonesia. In the long run, it appears inevitable that the government will continue to lower permissible carbon emission limits. Ongoing carbon-emitting projects should anticipate additional costs.

    Conclusion

    There is an ever-increasing market demand for green investment, internationally and in Indonesia. In a landmark 2021 case, a Dutch court ordered Royal Dutch Shell to significantly reduce its global net carbon emissions by 2030. Although Shell is appealing the order, it has paved the way for more climate change litigation, reflecting increased public concern about high carbon-emitting investments. Aligning to climate science is one of the best choices companies can make to increase their competitiveness and achieve net-zero emissions, including investing in greener projects, adopting renewable energy solutions, and offsetting emissions.

    Given the environmental and regulatory significance of emissions reduction, businesses are encouraged to anticipate and account for climate-related legal risks and greenhouse gas mitigation strategies. One of the most accessible ways to address such legal risks is by companies evaluating their internal corporate documents – particularly their good corporate governance guidelines and standard operating procedures – and reassessing their strategy to accelerate the transformation to a sustainable, low carbon emissions environment.

    Such actions are also important as the green financing, renewable energy and carbon reduction-related policies and regulations referred to above are likely to be the standard for business sustainability, and are also likely to be strengthened in the coming years.

    Associates Tjok Istri Dwi Wulandevi and Shabrina Khansa also contributed to this article

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