Under the Paris Agreement, each country decides what its responsibilities are, through Nationally Determined Contributions (NDC) to determine what climate resilience actions they will take. In the NDC, Indonesia has pledged to stabilize its carbon emissions, and even reduce them if financially supported. To meet NDCs and at the same time sustain economic growth, Indonesia must switch to renewable energy-based power generation, use energy more efficiently, and stop recurring forest fires. Carbon pricing is an important component of completing the required policy package, which could be a carbon tax.
Charging a price that matches the impact value of greenhouse gas emissions will be expensive, but these costs can be minimized. According to the World Bank, using market-enabled carbon trading mechanisms can reduce climate change mitigation costs by more than 30 percent, and if appropriate international markets can be created, it can reduce global mitigation costs by more than 50 percent. This is because carbon trading, especially if there is an organized carbon exchange, both incentivize and enable behavior that ensures that emission reductions are achieved at the lowest possible cost. Concretely, organized markets through carbon-specific commodity exchanges can play two main roles.
First, as is the case in Europe, carbon exchanges can regulate the process of allocating and auctioning "pollution quotas" (commonly referred to as "carbon allowances") to companies that have to start paying for their greenhouse gas emissions (or so-called "cap-and-answer carbon policies"). trade”), and manage the logistics of these companies which then provide carbon allowances to pay for their actual emissions. Second, commodity exchanges can provide the infrastructure through which companies can buy, sell, store, manage price risk, obtain financing, and otherwise handle carbon sequestration. Currently, the largest such infrastructure is in Europe, but China has also started its carbon exchange in July 2021 and will soon overtake European market volumes. In simple terms, carbon offsets are documented evidence that carbon has been captured from the atmosphere in one way or another. For example, if a mangrove forest is managed properly, it can absorb 2-3 tons of carbon per year. Well-managed dryland forests (that is, where forest fires are tightly controlled) can sequester about 26 tonnes of carbon per year. If carbon sequestration is done well, they can be sold, either in the mandatory market or the voluntary market.
The voluntary market is where companies that have made zero-carbon commitments buy their offsets, and many of the world's biggest companies are now part of this movement. Indonesia, along with Brazil, has the largest potential in the world to produce carbon offsets, far greater than any other country. If all parties work together, Indonesia can produce carbon offsets at a rate that exceeds its fair share of NDC commitments, and can sell it worldwide. An Indonesian government report from 2018 stated that Indonesia could produce 500 million tonnes of offsets per year – and this is assuming somewhat lower prices, with offsets generated at USD2 per tonne of CO2 (more offset projects could be undertaken at higher costs) . How much it will be worth will depend primarily on the actions of the government. The government last received USD 5 per tonne, under the REDD+ project. In the European mandatory market, the price is now at USD65 per tonne, and in the voluntary market, the price is expected to increase to at least USD20 in 2030, and USD50 in 2050. To obtain an attractive price in the voluntary market, the government can take advantage of commodity exchanges that have already been established. exists to start operations, offering a range of services that Indonesian carbon offset producers and their buyers need (such as efficient storage functions and futures contracts).
Meanwhile, to be able to sell to the mandatory international market at the highest price, Indonesia will need a domestic commodity exchange to collect supply and demand, as well as climate policies that are considered fair and effective by the international community. In conclusion, by harnessing the power of an organized commodity exchange, Indonesia can minimize the costs of climate adaptation and maximize its opportunities. It must be admitted that setting up and managing an exchange as mentioned is expensive. However, Indonesia does not need to create a new stock exchange – the regulated exchange infrastructure already exists in Indonesia, and can move to the implementation of carbon allowances auctions as well as mandatory and voluntary markets very quickly.
As a commodity exchange, ICDX will participate in realizing a fair and transparent carbon trading market in Indonesia. Carbon credits themselves are internationally recognized as commodities. With its ecosystem and infrastructure, ICDX will enhance Indonesia's carbon market and maximize its potential on an international scale. Indonesia must move quickly. Lost time is wasted opportunity, so that only the burden of carbon taxes is felt, and high impact carbon offset projects in rural Indonesia, particularly in remote provinces, will remain unrealized.
