INTERVIEW: Indonesia sets blueprint for countries to address 'carbon sovereignty'

Indonesia’s newly launched carbon market infrastructures and respective policies serve as a blueprint for all countries that want to better monitor and control domestic carbon assets to follow, Bai Bo, chairman and co-founder of Singapore-based green fintech group MVGX, told S&P Global Commodity Insights in a recent interview.

MVGX recently announced a commercial partnership with BDO in Indonesia, a member of BDO International Limited, one of the world’s largest accounting, tax and advisory firms, to support ESG ratings and carbon-related capacity buildings for companies in the country.

On Sept. 26, Indonesia launched its government-backed Indonesia Carbon Exchange. The government also recently launched carbon policies along with a national carbon registry, to support emissions trading.

Bai highlighted the latest rules by Indonesia's Financial Services Authority, or OJK, require all new carbon projects and new credits to go through a domestic registration process, which is currently managed by Sistem Registri Nasional under the Ministry of Environment and Forestry.

"This is important as more countries, especially emerging economies in Asia, wake up to the 'passport issue' of carbon credits," Bai said.

The "passport" of a carbon credit refers to inbuilt documentation that certifies where the credit is from, when it was created, and who created it, and tracks how it has been transacted between different countries, Bai said.

"In my opinion, this is a very important move as it prevents 'smuggling' of carbon credits and upholds the concept of carbon sovereignty," he said.

Carbon sovereignty and integrity

"Carbon sovereignty is something I keep talking about, and I don't think the global market is paying enough attention to the issue," Bai said.

Under Article 6 of the Paris Agreement, countries are required to make a corresponding adjustment for each cross-border trade of carbon credits, to avoid the integrity issue where one carbon credit is claimed twice by both exporter and importer countries, as fulfillments of their climate targets.

"This [the launch of a national registry and respective policies] is the first step for Article 6.2, 6.4 to be effectively implemented," Bai said.

Given the nascence of carbon markets, not all countries have set up the necessary infrastructure -- such as national registries -- that are essential to enhance integrity and boost confidence in the market.

Altering voluntary carbon market routines

Article 6 is expected to focus on inter-governmental emissions trading, while the private sector is more active in the international voluntary carbon market. There has bene no clarification yet in terms of whether VCM credits should be correspondingly adjusted in future.

Bai said there have been challenges in the VCM when it comes to exports of credits, and establishing national registries can help tame any chaos.

In the past two years, several project-hosting countries, including Indonesia, have announced a halt to VCM credit exports from projects in their territories, which have severely hurt investor confidence in carbon projects.

"When projects are registered with a national registry, investors should see this in a favorable light," Bai said. "We've talked to some investors who welcome such moves because this removes the uncertainty around carbon sovereignty.

"You're not going to be in a situation where your carbon credits may be registered in Verra, Gold Standard, or some of the other countries' registries," he said.

"[Otherwise,] when you had transactions from country A to country B, country A's government may say 'wait for a second, that is not right'. That was one part of the market's pain points -- the huge uncertainty about the regulatory risk and particularly the carbon sovereignty risk."

Bai clarified Indonesia's launch of its national registry doesn't limit buyers from engaging VCM standards, such as Verra and the Gold Standard. "However, the argument is that certified projects [following VCM standards] should no longer be listed on these meta [VCM] registries and instead on Indonesia's national registry."

Cap-and-trade market

Bai said another remarkable development is the introduction of Indonesia's cap-and-trade system, adding that this marks the implementation of a compliance emissions trading scheme in the largest economy in Southeast Asia.

The cap-and-trade market in Indonesia currently only covers the coal-fired power sector.

Bai said the evolution of China's compliance carbon market is an analogy for what to expect in Indonesia's compliance carbon market.

Similar to China, Indonesia's compliance carbon price is expected to start low to avoid putting the economy at risk, and then the price will gradually increase as companies become more comfortable with the market.

Bai added that like China and other compliance markets worldwide, Indonesia is developing a mechanism that will allow companies to use voluntary carbon credits to offset a certain percentage of their emissions covered by the compliance market.

Due to such fungibility, a low compliance carbon price also implies a low domestic voluntary carbon price in Indonesia, Bai said.

"This then makes the whole international system that allows the government-approved exports to be even more important."

Bai said another trend similar to China is that emissions-intensive companies have started to hire carbon professionals and build subsidiaries specialized in carbon asset management.

He added that MVGX also worked with some export-oriented companies in Indonesia to manage their "carbon balance sheets", which refer to product-specific, lifecycle emissions accounting that addresses companies' non-domestic carbon liabilities, particularly the Carbon Border Adjustment Mechanism, a tariff on emission-intensive commodities to be implemented by the EU.