NEWSLETTER

28 August 2023

UNPACKING OJK REGULATION 14/2023:

ONE STEP FORWARD TO CARBON
TRADING THROUGH INDONESIAN
CARBON EXCHANGE

Overview Pramudya A. Oktavinanda

Managing Partner and Head of Mergers &
Acquisitions, Restructuring, and Special
The long-anticipated Financial Services Authority (Otoritas Jasa Situations Practice Group
Keuangan/OJK) Regulation No. 14 of 2023 on Carbon Trading through Carbon +62 811 165 906
Exchange (OJK Reg 14/2023) was officially enacted on August 2, 2023 – which (pramoctavy@umbra.law)

brings Indonesia (that is aiming to launch its carbon exchange in September) a Carbon Law Specialist:
step closer to implementing carbon trading through carbon exchange in
Kirana D. Sastrawijaya
Indonesia.
Head of Power and Renewable Practice Group
+62 819 3246 4089
(kirana@umbra.law)

Establishment of an Indonesian Carbon Exchange? Angela Vania Rustandi

Associate
OJK Reg 14/2023 does not establish the carbon exchange or designate a (vania@umbra.law)

particular entity to be a carbon exchange. Securities and Exchange Specialist :

It, however, specifies certain requirements for the establishment of an Ahmad Zakaria
Head of Securities and Corporate Compliance
Indonesian carbon exchange and its carbon exchange operator, such as, Practice Group
(i) minimum capital requirement of IDR 100billion (all of which must not +62 818 0867 5834
(zaka@umbra.law)
be funded by way of debt/loan), prohibition of nominee arrangement
Leanna Leonardo
scheme, and foreign ownership restriction of max 20% shares with voting
Associate
rights; (ii) the requirement to be licensed by OJK; (iii) certain guidelines (leanna@umbra.law)

on the minimum requirements to facilitate the carbon exchange (such as, UMBRA – Strategic Legal Solutions
prohibition for the operator to trade for its own benefit, settlement
mechanism that can be conducted directly and/or through an
intermediary such as the depository and settlement agency, engagement UMBRA - Strategic Legal Solutions
with a third party to settle the carbon trading transaction which is
expected to follow the usual stock exchange settlement mechanism
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employing a clearing mechanism and/or be backed by a guarantee).

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It further emphasizes that the licensing, supervisory and development of
an Indonesian carbon exchange, including the licensing of such carbon
exchange operator, will fall within the authority of OJK – which also puts
an end to the debate as to whether carbon unit should be treated as
futures (komoditas berjangka) falling under the authority of Commodity
Futures Trading Supervisory Agency (Badan Pengawas Perdagangan
Berjangka Komoditi).

However, these requirements as stipulated in OJK Reg 14/2023 suggest

that the carbon exchange operator does not necessarily have to be the
Indonesia Stock Exchange (IDX) – as often reported as the plan of the
Government). Regardless, the IDX most likely would be the entity that
has more readiness to fulfill the requirements under OJK Reg 12/2023
given the similarities of the proposed mechanics of carbon exchange with
securities exchange.

Further, the carbon exchange operator is also expected to be a self-

regulatory organization by establishing internal regulations that must be
complied with by both the operator and the participants in the carbon
exchange. This is similar to the status of the IDX as a self-regulatory
organization that has the authority to issue regulations on trading
activities under the umbrella of IDX.

How to Trade?

(i) Registration

The carbon unit must first be registered at the Indonesian Climate

Change Control National Registry System (Sistem Registri Nasional
Pengendalian Perubahan Iklim or SRN PPI) and with the carbon exchange
operator. Please see here for our previous client alert explaining SRN
PPI.

However, OJK Reg 14/2023 does not set out further the procedures for
registering carbon unit with the carbon exchange. OJK is currently
preparing a circular letter on carbon trading via the carbon exchange
which we suspect may regulate the detailed procedures on the above
registration of carbon unit. The registration procedure will also be set out
further in the carbon exchange operator's regulations that must be
approved by OJK.
(ii) Trading and Settlement Mechanism

Unfortunately, as OJK Reg 14/2023 focuses on the establishment of

carbon exchange and its operator, it has not yet set out in detail the
mechanics and procedures for carrying out carbon trading via the carbon
exchange.

However, it briefly mentions that the carbon trading system is expected

to facilitate the matching of buy and sell offers for carbon units (either
directly and/or through an intermediary such as the depository and
settlement agency - in the realm of currently running capital market
activities, the depository and settlement agency activities are conducted
by The Indonesia Central Securities Depository/PT Kustodian Sentral Efek
Indonesia), alongside effecting settlements that involve both financial
transactions and the transfer of carbon units.

From the point above, it can be derived that the trading of carbon units
will most probably mimic the trading of traditional securities as
currently being implemented by IDX, especially given the fact that OJK
Reg 14/2023 clearly stipulates that carbon unit is part of securities (as will
be further discussed below).

What Can Be Traded?

(i) Indonesia carbon ownership certification

OJK Reg 14/2023 recognizes two types of Indonesian carbon ownership

certification that can be traded in a carbon exchange, namely (i) Emission
Ceiling Technical Approval for Business Actors (Persetujuan Teknik Batas
Atas Emisi bagi Pelaku Usaha or PTBAE-PU) and (ii) Greenhouse Gas
(GHG) Emission Reduction Certificate (Sertifikat Pengurangan Emisi Gas
Rumah Kaca or SPE-GRK). Please see here for our previous client alert
explaining PTBAE-PU and SPE-GRK.

(ii) “Securities” and the derivatives?

OJK Reg 14/2023 further reiterates the classification of carbon unit as

securities. The definition of “securities” under the Capital Market Law
also includes the securities’ derivatives. It is important to note that under
OJK Reg 14/2023 the carbon exchange can also carry out other activities
and develop carbon unit-based products such as derivative products
with carbon units as the underlying assets and its trading platform, after
obtaining an approval from OJK. This is similar to IDX's ability to list
derivative products for existing securities such as IDX LQ45 Futures
(contracts to buy or sell an underlying (can be index, stock, bond, etc.).

It is interesting to note if these provisions will allow the creation of future

derivative products of PTBAE-PU or SPE-GRK which later can be
approved as a carbon unit by OJK and traded in the carbon exchange. If
this is the case, this will boost carbon trading through Indonesian carbon
exchange.

(iii) Trading of international carbon units?

Interestingly, OJK Reg 14/2023 allows the carbon exchange to facilitate

trading of international carbon units that are either registered or not
registered in the SRN PPI (subject to certain requirements that must be
met). This international carbon trading can be carried out by foreign
parties or with carbon units issued by foreign countries/foreign parties.

It seems, OJK opens the opportunities for foreign parties with carbon
units that are not issued in Indonesia to trade such carbon units in
Indonesian carbon exchange. However, the limitation under Article 5 of
OJK Reg 14/2023 where only PTBAE-PU and SPE-GRK can be traded in
the Indonesian carbon exchange raises further questions on whether the
international carbon trading carried out by foreign parties must also
undergo mutual recognition first for the carbon units to be declared
equivalent to SPE-GRK and meet the requirements regulated in other
relevant ministerial regulations (such as: obtainment of approval and
authorization from the Minister of Environment and Forestry for
international carbon trading, buffer requirement for offset emission, etc).
 What’s Next?
The issuance of OJK Reg 14/2023 serves as a landmark development to
the highly anticipated carbon trading in Indonesia. OJK Reg 14/2023
manages to address crucial questions that have been debated since the
issuance of Presidential Regulation No. 98 of 2021 on Carbon Pricing for
Achieving Nationally Determined Contribution Target and Controlling
GHG Emission in National Development, such as that: (i) IDX and other
entities that meet the requirements in OJK Reg 14/2023 can organize a
carbon exchange, (ii) both SPE GRK and PTBAE-PU can be traded via the
carbon exchange, and (iii) international carbon trading (including a
trading scheme without the involvement of Indonesian parties) can be
carried out in the Indonesia carbon exchange.

However, given the focus of OJK Reg 14/2023 on the establishment of

carbon exchange and its operator, some other important issues have yet
to be resolved, such as: (i) the mechanics and requirements to carry out
carbon trading via the carbon exchange, (ii) the procedure for registering
SPE GRK and PTBAE-PU with the carbon exchange operator, and (iii)
whether international carbon trading carried out by foreign parties is
subject to the requirement for foreign carbon unit to conduct mutual
recognition.

OJK is currently preparing a circular letter on carbon trading via carbon

exchange which hopefully could provide further clarity on the detailed
implementation of the carbon exchange. Furthermore, the carbon
exchange operator must issue regulations relating to the carbon trading
implementation which means that the full implementation of carbon
trading will still have to wait for the issuance of those implementing
regulations.

While there is still much homework that the Government and carbon
exchange operator must do, the issuance of OJK Reg 14/2023 is a positive
first step for Indonesia to have its own carbon exchange and carbon
trading - a future that we all look forward to for the betterment of
Indonesia’s environment!

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