Carbon Offset: Addressing Climate Change and Optimizing Economic

Potential

As is known, the consequences of climate change have impacted people’s lives. To address climate
change and its impacts, the Government of Indonesia has committed to contributing to the
reduction of Greenhouse Gas (“GHG”) emissions. In measuring climate change mitigation efforts,
carbon serves as an important indicator which is reflected in the Nationally Determined
Contributions (“NDC”). Carbon also holds a significant economic value and international
dimensions.

Further, as a country with great potential in the renewable energy sector, Indonesia is currently
developing a carbon trading system as a concrete step to mitigate climate change and its impacts
as regulated under Presidential Regulation No. 98 of 2021 concerning The Implementation of
Carbon Pricing to Achieve the Nationally Determined Contribution Target and Control Over
Greenhouse Gas Emissions in The National Development (“PR 98/2021”).

So, what exactly is meant by carbon trading, and how does it relate to climate change? According
to PR 98/2021, carbon trading is a market-based mechanism aimed at reducing GHG emissions
through buying and selling carbon units. Simply put, companies or individuals can use this
mechanism to offset their GHG emissions by buying carbon credits from entities that produce GHG
emissions below the cap. This trading mechanism is expected to reduce global GHG emissions and
minimize the impact of climate change.

Understanding the Basic Concept of Carbon Offset

Pursuant to PR 98/2021, there are two regulated carbon trading mechanisms, i.e., emission
trading/the cap-and-trade and carbon offset.

The cap-and-trade mechanism or GHG emission trading involves transactions between business
actors with emissions exceeding the specified emission limit and business actors with emissions not
exceeding the limit. On the other hand, the Carbon Offset mechanism is where businesses and/or
activities reduce GHG emissions to compensate for emissions produced elsewhere. As previously
explained in our article Carbon Offset: The Way To Achieve Indonesia’s NDC Target In 2030, simply
put, the carbon offset mechanism does not require an initial quota (allowances) because
commodities traded by business actors have been given carbon credits), which are certified results
from the implementation of carbon emission reductions projects.

Carbon Offset in the Forestry Sector

Drawing upon the guidelines of PR 98/2021, carbon trading activities can be conducted across
various sectors, including the forestry sector. Given Indonesia’s extensive and rich forestry natural
resources, the country has significant potential to capitalize on carbon trading through the carbon
offset mechanism in the forestry sector. Indonesian’s active participation in carbon trading is
expected to yield a multiplier effect, while simultaneously curbing GHG emissions and fostering
Indonesia’s economic growth.

Quoting from the Indonesia Carbon Trading Center, as published by the Katadata Insight Center
that according to data from the Coordinating Ministry for Maritime Affairs and Investment,
Indonesia ranks third as the country with the largest tropical rainforest, covering an area of 125.9
million hectares, which has the potential to absorb carbon emissions of 25.18 billion tons.
Meanwhile, the area of mangrove forests in Indonesia reaches 3.31 million hectares, estimated to
be able to absorb carbon emissions of 33 billion tons, and peatlands covering an area of 7.5 million
hectares, estimated to be able to absorb carbon emissions of 55 billion tons. Therefore, when these
three assets are concluded, the total absorption capacity is approximately 113.18 gigatons.

For the above reason, carbon offset in the forestry sector becomes an important strategy to tackle
the climate change. Furthermore, the implementation of this mechanism also provides
opportunities for the country and businesses to contribute to GHG reduction while supporting a
sustainable economy and the well-being of the Indonesian society.

Newest Regulations on Carbon Trading in the Forestry Sector

Through the Ministry of Environment and Forestry, the government has issued Regulation of the
Minister of Environmental and Forestry Number 7 of 2023 regarding the Procedure for Carbon
Trading in the Forestry Sector (“MEFR 7/2023”). This ministerial regulation serves as a
comprehensive guideline for the implementation of PR 98/2021, which specifically governs carbon
trading activities within the forestry sector, the primary focus of which is to regulate the execution
of carbon trading and the utilization of GHG Emission Offsets/Carbon Offsets within the forestry
sector. The key points pertaining to these regulations will be further elaborated in the subsequent
explanation.
Where Can the Carbon Offset Mechanism be Applied in the Forestry Sector?

As stipulated in MEFR 7/2023, carbon trading in the forestry sector, particularly through the
mechanism of carbon offset or GHG Emission Offset, can be implemented across various areas and
types of forests and peatlands i.e., Permanent Production Forest Areas, Convertible Production
Forest Areas, mangroves, and blocks designated for the utilization of Protected Forest Areas, either
those burdened or unburdened with Forest Utilization License/Perizinan Berusaha Pemanfaatan
Hutan (“PBPH”), Approval of Social Forestry Management, or management rights.

Further, carbon trading is also implemented within peatland and mangrove areas inside and
outside Forest Areas, Conservation Forest Areas, Customary Forests, Rights Forests, and State
Forests that are not designated as Forest Areas are included. Therefore, carbon trading efforts in the
Forestry Sector can encompass diverse regions and forest types to achieve effective GHG emission
reduction.

What are the Provisions for Implementing Carbon Offset in the Forestry Sector?

The following are provisions for implementing carbon trading through the carbon offset mechanism
in several zones referring to Article 7 of MEFR 7/2023:

No. Zone Provision

Permanent Production Forest Areas,

Convertible Production Forest Areas,
Carbon offset within these zones can be
and Protected Forest Utilization Blocks,
carried out by PBPH holders, Social Forestry
1. either those burdened or unburdened
Management Approval holders, or
with PBPH, Social Forestry Management
management rights holders.
Approval, or management rights, shall
remain as such.

Carbon offset can be carried out by

2.
Other Protected Forest Area Blocks considering the carbon stock and obtaining
the Minister's approval.

Carbon offset can be carried out after

3. Peatland and mangrove areas within obtaining the PBPH, Social Forestry
the Forest Area Management Approval, or management
rights.
 Carbon offset can be carried out after
obtaining approval from the governor,
4. Peatland and mangrove areas outside
regent/mayor, or the respective
the Forest Area
minister/head of the institution in
accordance with their authority.

Carbon offset can be carried by considering

the carbon stock and after obtaining
approval from the regent/mayor (for large
5.
Conservation Forest Area forest parks within districts/cities), governor
(for trans-regency forest parks), or the
Minister (for conservation areas other than
large forest parks).

Carbon offset can be carried out by

6. indigenous customary communities
Indigenous Forest
engaged in the efforts and/or activities of
GHG Emission Offset.

Carbon offset can be carried out by forest

7.
Community Forest rights holders engaged in the efforts and/or
activities of GHG Emission Offset.

Carbon offset can be carried out after

obtaining the designation of location and/or
8.
Non-Forest State Land approval from the governor or minister as
authorized by the applicable laws and
regulations.

In addition to the above provisions, the implementation of carbon offset mechanism must also
comply with the following requirements:

Firstly, holders of PBPH, management rights, and forest ownership rights must possess certificates
of sustainable forest management, legality certificates of forest products, or declarations of forest
product compliance with the provisions of laws and regulations.

Secondly, holders of Social Forestry Management Approval must obtain at least a silver
classification in the implementation of social forestry in accordance with applicable regulations.

Lastly, indigenous communities, holders of Social Forestry Management Approval, and forest
ownership rights communities engaging in GHG emission offset activities must receive support or
be supervised by partners with experience and expertise in carbon measurement, planning, project
implementation, or accessing carbon markets.
Process and Stages of Implementing Carbon Offset in the Forestry Sector

1. Preparation and establishment of a Carbon Trade Roadmap for the Forestry sector. The primary
objective of this roadmap is to set out carbon trading as a strategy for mitigating environmental
impact of climate change.
2. Determination of an emission reduction reserve or commonly referred to as a “buffer”. This
reserve is crucial as it allows for flexibility in achieving emission reduction targets in the forestry
sector.
3. Determination of the Baseline GHG emissions for the forestry sector and of the target for GHG
emission reduction in the forestry sector in order to establish clear objectives.
4. Preparation and validation of the Climate Change Mitigation Action Document/Dokumen
Rancangan Aksi Mitigasi Perubahan Iklim (“DRAM”), which serves as a guideline for
implementation.
5. Submission of report on the validated DRAM results in order to ensure the accuracy and success
of the mitigation measures taken. This report on the implementation of Climate Change
Mitigation Actions is prepared and verified to monitor the progress and effectiveness of
mitigation actions, for which the Measurement, Reporting, and Verification (“MRV”) team is
assigned to formulate and review the steps that have been taken.
6. Issuance of Greenhouse Gas Emission Reduction Certificates/Sertifikat Pengurangan Emisi GRK
(“SPE-GRK”), which serves as evidence of emission reduction by Business Entities and/or
activity participants who have been through the MRV process.

With these stages, climate change mitigation actions are expected to be effectively implemented,
yielding significant positive impacts.

In accordance with applicable regulations, administrative sanctions are imposed on carbon offset
activities that do not adhere to the aforementioned guidelines and explanations.

What adds a fascinating twist is that before the enactment of MEFR 7/2023, which outlines the
procedures for carbon trading in the forestry sector, the Indonesian Government had established a
program related to GHG emission control in the forestry sector called Indonesia's Forestry and Other
Land Use (FOLU) Net Sink 2030.

Through this program, Indonesia has demonstrated its commitment to contributing to global
temperature regulation and addressing climate change by implementing a new program following
up on Regulation PR 98/2021.
Indonesia's FOLU Net Sink 2030

The FOLU Net Sink 2030, also known as the Indonesia Forest and Other Land Use Net Sink 2030, is
an initiative of the Government of Indonesia aimed at reducing GHG Emissions through mitigation
actions in the forestry and land-use sectors. This program seeks to ensure that the level of carbon
absorption equals or surpasses the carbon emission levels by the year 2030.

This policy is mandated through Regulation PR 98/21 Article 3 paragraph (4), which states that the
reduction of GHG emissions as referred to in paragraphs (2) and (3) is primarily supported by the
forestry sector as a carbon sink through the Carbon Net Sink approach i.e., the amount of carbon
absorbed exceeding the amount or carbon emitted.

This initiative program involves policy corrections and forestry measures implemented over several
years to address persistent issues such as forest fires, a moratorium on new permits, weather
modification, rehabilitation efforts, and law enforcement against encroachment and illegal logging.
These measures have resulted in the deforestation significantly decreasing in 2021.

Referring to Decree of the Minister of Environmental and Forestry Number

SK.168/MENLHK/PKTL/PLA.1/2/2022 concerning Indonesia’s Forestry and Other Land Use (FOLU)
Net Sink 2030 for Climate Change Control, the operational design of Indonesia’s FOLU Net Sink
program is quite challenging. This is because the program employs a spatial analysis approach and
takes into account factors such as forest quality, carbon absorption, and forest and land fire
prevention. However, as a result, this program can also be seen as providing numerous benefits,
including measurable emission reductions, increased forest coverage, improved ecosystem
functions, biodiversity conservation, and community well-being.

There are at least 15 mitigation action activities included in Indonesia’s FOLU Net Sink 2030
program:

1. Reducing the rate of deforestation in mineral lands.

2. Reducing the rate of deforestation in peat and mangrove areas.
3. Reducing the rate of degradation of mineral land forests.
4. Reducing the rate of degradation of peat and mangrove forests.
5. Establishing plantation forests.
6. Sustainable forest management.
7. Rehabilitation with rotation.
8. Non-rotation rehabilitation.
9. Peatland restoration, and improvement of peat water management.
10. Mangrove rehabilitation and afforestation in former mining areas.
11. Biodiversity conservation.
12. Social forestry.
13. Introduction to ecosystem replication, green open spaces, and riparian corridors.
14. Development and consolidation of indigenous forests.
15. Monitoring and law enforcement to support the protection and security of forest areas.

In summary, this program is a government initiative aimed at halting deforestation, restoring

damaged forests, and effectively managing peatlands in order to preserve and enhance Indonesia’s
net sink (carbon absorption). By involving all stakeholders and fostering collaboration of various
stakeholders, including ministries/agencies, local governments, the business sector, communities,
and international partners, this country has the opportunity to make Indonesia’s FOLU Net Sink
2030 a reflection of its strong commitment to combating climate change while promoting
sustainable development and well-being for all Indonesian society.
For more information about Carbon Offset: Addressing Climate Change and Optimizing Economic
Potential, please contact our firm.

Contact Us:
Aditya Kesha Wijayanto
Senior Partner
[email protected]

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