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Indonesia's Carbon Certification: Accountability and MSMEs Inclusivity

MANDALA CONSULTING, AUGUTS 29, 2023

Under the Paris Rulebook, finalized during COP26 in 2021, countries made the commitment to limit the increase in global warming to below 1.5 degrees Celsius. Specifically, this involves achieving net-zero global carbon emissions by 2050. In response to this urgent mandate and the obligation to meet their Nationally Determined Contributions (NDCs), countries began to rigorously regulate greenhouse gas emissions from industries and carbon footprints of their residents. The aim was an alignment with their stated goals.

Indonesia, recognizing the importance of the obligation to reduce its emissions, took steps to strengthen its commitment and revised its NDC two years ago. The country pledged to reduce greenhouse gas emissions by 29% from 2030 business-as-usual scenario. To fulfill this commitment, governments can impose regulations to curb emissions from industries and households, a concept known as compliance offsetting. Concurrently, private sectors and investors can influence the trajectory by favoring investments that incorporate environmental and social responsibilities.

Among the avenues available for companies and individuals to counterbalance their carbon emissions, carbon offsetting stands out. The effectiveness of the carbon offset market hinges on how governments regulate it, ensuring the credibility and measurability of carbon offset certificates. Carbon offsetting presents an appealing synergy between environmental impact and commercial viability. This is further accentuated by regulatory compliance. Notably, in 2020, Morgan Stanley estimated the global voluntary carbon offset market to be worth around $2 billion, with projections suggesting growth to $250 billion by 2050. This trend to develop carbon offset projects has taken root in Indonesia since 2016, where the country’s vast forested areas make it an attractive candidate for carbon sequestration initiatives, covering 94.1 million hectare area of forest that accounts to 50% of the country’s total land size.

Acknowledging this trend, Indonesia’s Ministry of Environment and Forestry (MEF) introduced the National Registry System (Sistem Registri Nasional or SRN) to oversee climate change actions. SRN operates within the Directorate General of Climate Change Control. Serving as a vital instrument in Indonesia’s carbon market, SRN is the sole requirement for carbon certificates to be tradeable in the country. The purpose of certification or standards is to ensure reliability, transparency, and ecological soundness of carbon projects, while also establishing a consistent methodology for measuring, reporting, and verifying emissions reductions. However, SRN faces two critical challenges. The first revolves around convincing international buyers that SRN’s carbon offset certificates hold the same caliber as those from international certifiers. Secondly, there’s a lack of inclusivity, particularly concerning Micro, Small, and Medium Enterprises (MSMEs).

Indonesia is presently formulating regulations for the international carbon market, aiming for equivalency between SRN and established international certification standards. While SRN’s standards remain nationally recognized, gaining international recognition poses a challenge. Assuring global carbon offset buyers that SRN’s standards align with the likes of Verified Carbon Standards (VCS) and others  is an ongoing task. Some global corporations even mandate certification by specific entities like VCS, Gold Standard, Climate Action Reserve, American Carbon Registry, or Plan Vivo in their operational procedures to purchase carbon offset certificates.

Comparatively, SRN encompasses 48 methodologies for emissions reduction, whereas VCS encompasses 48 project methodologies, 53 project modules, 5 project tools, and 5 Jurisdictional and Nested REDD+ modules and tools. Although SRN is contextualized for Indonesia’s conditions such as there are methodologies to calculate carbon offset of fuel switching from RON 88 to above RON 88, conversion of kerosene to liquid petroleum gas, and usage of efficient electric fan, there is room for growth, particularly in terms of international alignment. Addressing these challenges requires harmonizing methodologies and communication strategies for Indonesia’s carbon projects with global standards. Notably, even with established market standards, issues of actual emissions reductions that do not match project claims persist. The controversy surrounding Verra’s carbon offset projects serves as a stark example, with significant numbers of credits not genuinely translating to emission reductions. Verra issued more than 1 billion carbon credits and approved a quarter of all voluntary offsets. 40% of the approved credits by them were for rainforest protection programs. Two groups of researchers, a University of Cambridge team, and further investigation by journalists analyzed Verra-approved active projects; they concluded that only a few projects showed evidence of meaningful deforestation reductions, and most of the credits produced should not have been approved. In that matter, Verra listed one project in Kalimantan that overvalued the project area by 38% when comparing the project description and its land area permit from one province in Kalimantan.

While SRN has made strides, opportunities for enhancement remain, particularly regarding inclusivity. Around 35% of SRN methodologies are feasible for individuals or MSMEs. Enhancing Indonesia’s carbon offset market necessitates consideration for small-scale projects, accommodating various entities. Regulatory frameworks and methodologies need to foster MSME participation. SRN’s obligation spans both large and small projects, with potential limitations that exist in methodologies and verification processes. The utilization of recycled materials, organic waste, and rainwater usage instead of groundwater and/or municipal waterworks are among the projects MSMEs could undertake.

In conclusion, Indonesia’s endeavor to enhance its carbon offset market reflects global efforts to mitigate climate change. Overcoming challenges of assuring international carbon offset buyers and fostering inclusivity among carbon offset project developers necessitates the alignment of carbon offset methodologies with international standards. Concurrently, it is imperative to ensure that businesses of all sizes are included in these efforts to mitigate climate change. The involvement of MSMEs presents a unique opportunity to foster economic growth among smaller stakeholders. While their participation can enhance the availability of carbon offsets, it is important to acknowledge that there might be a potential compromise in terms of quality. Therefore, the challenge exists in ensuring that SRN remains inclusive, while simultaneously upholding the standards of quality. The cornerstones of successful carbon offset initiatives stand in establishing credibility and achieving measurable offsets, both of which are pivotal for shaping a sustainable future.

Indonesia, a top ten emitter of greenhouse gasses, must transition to a green economy due to costly impacts of climate change that disproportionately affect vulnerable populations, and positive economic opportunities in the long run, including potential GDP growth of 6.5% and creation of 2.8 million green jobs. The country’s mitigation plan is rated as “highly insufficient,” and no explicit net zero target has been communicated. The power, manufacturing, and transportation sectors account for 78% of Indonesia’s greenhouse gas emissions and must achieve the country’s emission reduction targets. However, the country faces significant challenges in reducing emissions in these sectors, such as the continued dominance of fossil fuels in the power sector and the heavy reliance on fossil fuels in transportation. Nonetheless, Indonesia has an opportunity to pursue policies and measures, such as revising planning documents, reducing reliance on coal and other high-emitting industries, boosting renewable energy development, and increasing the use of mass transportation and electric vehicles, to successfully transition to a green economy.

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THE PURPOSE OF THIS DOCUMENT IS TO PROVIDE GENERAL INFORMATION ABOUT INDONESIA'S CARBON CERTIFICATION: ACCOUNTABILITY ANDMSMES INCLISIVITY. THE CONTENTS OF THIS DOCUMENT SHOULD NOT BE CONSTRUED AS SPECIFIC RECOMMENDATIONS OR ADVICE. FOR QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT, PLEASE CONTACT MANDALA CONSULTING. THE INFORMATION IN THIS ARTICLE IS ACCURATE AS OF THE PUBLICATION DATE. HOWEVER, DUE TO THE RAPIDLY CHANGING NATURE OF THE LAW IN INDONESIA, THE ACCURACY OF THE INFORMATION CANNOT BE GUARANTEED WITHOUT UPDATES.

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