- Overview of Carbon Trading in Indonesia
- Benefits of Carbon Trading
- Climate Justice Issues in the Carbon Credit System
- Toward Inclusive and Equitable Carbon Trading
Carbon trading is increasingly becoming a key global instrument to reduce greenhouse gas emissions, and Indonesia is no exception. Since the issuance of Presidential Regulation No. 98/2021 on the Economic Value of Carbon, followed by Law No. 4/2023 and POJK No. 14/2023, the legal foundation for domestic carbon credit trading has grown stronger. The launch of the Indonesian Carbon Exchange (IDXCarbon) in January 2025 marks a new phase: carbon is no longer viewed solely as an environmental burden, but also as a tradable commodity that can finance decarbonization efforts.
Despite the economic potential of carbon credits, particularly from forestry, renewable energy, waste management, and agriculture, climate justice aspects are often overlooked. Are the financial benefits truly distributed equally among all stakeholders, especially Indigenous peoples and local communities living upstream? This article attempts to explore the social and economic dynamics of the carbon credit system, highlight emerging disparities, and formulate steps toward inclusive and equitable carbon trading in Indonesia.
Overview of Carbon Trading in Indonesia
The regulatory framework for carbon trading in Indonesia revolves around three key instruments. Presidential Regulation No. 98/2021 sets out the pricing mechanism and carbon certification, establishing emission calculation methodologies and verification requirements. Law No. 4/2023 opens financial sector involvement, allowing banks and investment institutions to design green products based on carbon. Meanwhile, POJK No. 14/2023 provides operational details for the Indonesian Carbon Exchange, from transaction governance and participant registration requirements to oversight mechanisms by the Financial Services Authority (OJK).
Generally, Indonesia’s carbon trading adopts two approaches: cap-and-trade and carbon offsetting. The cap-and-trade scheme sets emission limits (caps) for major corporations, allowing for the exchange of carbon quotas between emitters. The offsetting scheme enables businesses that exceed their emission limits to compensate (offset) by funding carbon absorption projects, such as reforestation or peatland restoration. These two methods operate concurrently on the exchange, offering flexibility to various sectors in meeting emission targets.
Indonesia’s carbon economy holds tremendous potential. With tropical forests covering over 94 million hectares and extensive peatland reserves, the estimated value of carbon credits could reach USD 565.9 billion when calculated based on each ecosystem’s absorption capacity. However, domestic carbon prices currently hover around USD 4.50–5.00 per ton of CO₂, far below the global market average, which may reach USD 20 per ton. This price gap poses financial feasibility challenges for local-level projects, particularly in remote regions.
Benefits of Carbon Trading
In practice, large corporations especially in oil & gas, electricity, and agribusiness are the dominant players. They have sufficient capital access, global networks, and trained technical teams to design large-scale offset projects. For example, a palm oil corporation may collaborate with international consultants to map forest areas using satellite imagery, seek certification under VCS (Verified Carbon Standard), and trade its credits on the global exchange. The profit flow tends to be significant, thanks to the premium pricing they can secure in international markets.
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Meanwhile, Indigenous peoples and local communities upstream who function as forest guardians are expected to enjoy direct benefits from the ecosystem services they manage. In reality, they often serve as contract labor in conservation projects, without ownership rights over certificates or access to long-term income. Contributing factors include limited technical capacity for emission verification, a lack of price negotiation skills, and overlapping land governance among local governments, corporations, and recognition of customary rights.
Intermediaries such as NGOs, environmental consultants, and investors also play increasingly critical roles. While intended to connect communities and corporations, they do not always act as advocates for local interests. Frequently, urban-based NGOs coordinating projects take the largest share of administrative and technical funding, leaving minimal financial incentives for villages. In this context, regulatory oversight from OJK, the Ministry of Environment and Forestry (KLHK), and the Ministry of Energy and Mineral Resources (ESDM) must be firmer in ensuring benefit flows don’t stop at the elite level.
Climate Justice Issues in the Carbon Credit System
One of the most pressing issues is the gap between domestic carbon pricing and the actual cost of local conservation. When prices are set too low, projects involving Indigenous communities become economically unviable. Maintaining one hectare of peat forest that actively absorbs carbon can cost up to USD 500 per year covering management team stipends, monitoring expenses, and restoration activities. If credits only sell for USD 5, the profit potential for communities is severely limited.
In line with Murti et al. (2024), the implementation of carbon credits in Indonesia continues to face serious obstacles in benefit distribution and community involvement, especially regarding access to offset projects and emission verification systems. This indicates that, even with a legal framework in place, technical limitations and land governance complexities frequently hinder the participation of people who are most capable of maintaining national carbon ecosystems.
Transparency is another weak point. ESG reports published by corporations are generally open to the public and often contain detailed data on emissions reductions. However, reports on benefit distribution to local communities are usually published in aggregate terms, without disclosing the exact amount received by each family or village. The absence of independent audits on fund flows reduces social inclusion to little more than a slogan.
Greenwashing risks arise when offsetting claims lack adequate field verification. Some projects conduct only one survey over five years, despite the forest’s condition potentially changing rapidly due to illegal logging or wildfires. As a result, the credits sold may not reflect actual carbon absorption, harming both ecological and social ecosystems
Toward Inclusive and Equitable Carbon Trading
First, policies must mandate a minimum share of carbon credit revenue to be directly allocated as royalties to communities. Daily wage schemes should be replaced with profit-sharing systems based on verified tonnage, so that local residents become long-term beneficiaries. Second, the use of blockchain technology to record transactions from certificate issuance to fund distribution can ensure transparency and facilitate third-party audits.
Third, public participation must be realized through village and district forums involving customary leaders, local governments, and corporate representatives. In these forums, project design including minimum carbon pricing and verification mechanisms is discussed collaboratively from the planning stage. Fourth, a strong commitment to local capacity building is essential: training in carbon measurement, field reporting, and price negotiation with global buyers. These skills reduce dependency on intermediaries and enhance community bargaining power.
At the regulatory level, OJK, KLHK, and the Ministry of Energy and Mineral Resources need to harmonize rules for registering and certifying local carbon business units. Such integration can lower transaction costs and provide legal certainty for all parties. Additionally, setting a minimum carbon price, say USD 8–10 per ton of CO₂ would prevent price dumping that undermines long-term conservation efforts.
Achieving fair carbon trading isn’t just about regulation, but also about sound strategy and execution. Ensure your project is strategically designed, verified, and truly benefits all parties with the guidance of experienced experts. Take advantage of IML Carbon’s Carbon Project and Offsets Advisory Services for comprehensive guidance on designing and managing your carbon project effectively and sustainably.
Author: Nadhif
Editor: Sabilla Reza
References:
Murti, R. K., Widyaningsih, M., & Nugroho, A. (2024). Analysis of carbon credit implementation in Indonesia in an effort to realize global climate mitigation and sustainability of an environmentally friendly business world. International Journal of Business and Technology Management, 6(4), 14–23. https://myjms.mohe.gov.my/index.php/ijbtm/article/view/28462