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On the 20th of January, Indonesia officially launched its international carbon market. Its domestic carbon exchange platform, IDXCarbon, was established in 2023 to allow the trading of carbon credits between the country’s electric power plants. Now, with the market open to foreign investors — an initiative announced by Environment Minister Hanif Faisol Nurofiq — Indonesia hopes to draw greater investment into its climate mitigation efforts.

Foreign investment is crucial if Indonesia is to meet the ambitious emission reduction targets that President Prabowo Subianto began promoting in the wake of his election last October—claims that have raised more than a few concerns about their substance. Meanwhile, the very carbon credits now introduced to the international market have already drawn criticism from analysts, who argue they are too closely tied to fossil-based projects.

Between natural gas and forests, the doubts over Indonesian carbon credits

The international expansion of Indonesia’s carbon market follows agreements reached at COP29 in Baku, where a framework for the global carbon credits market was set out. According to the official press release, this initiative is part of the Prabowo Subianto government’s efforts to live up to the commitments made at the climate summit.

Moreover, the announcement reflects a broader trend across Southeast Asia. Thailand, for instance, recently declared its intention to launch a carbon market in 2025, while Malaysia and Singapore have long been competing to attract investment through carbon credit trading.

On the 20th of January, the IDXCarbon platform opened to international investors with approximately 1.78 million credits, representing the emissions — measured in tonnes of CO2e — saved by five electric power plants owned by state utility PT Perusahaan Listrik Negara (PLN). Among them, one is a mini-hydro facility (Gunung Wugul), another is a steam generation project with heat recovery developed by Indonesia Power, while the remaining three are natural gas-fired plants. These gas plants were included because, according to the official statement, they have improved efficiency, thereby reducing emissions.

That some of these credits are linked to fossil fuels such as natural gas should come as no surprise. As we have previously reported in Renewable Matter, and as Japanese economist Sayuri Shirai has also explained, this approach falls under the umbrella of so-called transition finance, which is essential at this stage to enable the decarbonisation of developing economies that are still heavily reliant on coal, such as those in South East Asia.

However, according to international analysts interviewed by the Financial Times, these credits linked to fossil sources may not be very attractive to large buyers, who are more interested in offsetting their emissions through solar or wind projects. And this is a problem.

The Indonesian government has also declared that, in the near future, carbon credits could extend to nature-based solutions projects, based on the country’s vast forest resources and their potential as a carbon sink. The problem, as several NGOs have been quick to highlight, is that Indonesia is known for its high deforestation rate, and because of this, until now, its forests have been a net source of emissions, releasing an average of more than 300 million tonnes of CO2 per year between 2001 and 2023, according to Global Forest Watch data.

Finally, analysts caution against the risk of double counting — where emission reductions are recorded twice, once by the buyers and again by the Indonesian government to achieve its climate targets. When questioned on the issue, however, Minister Nurofiq offered reassurances. Speaking at the official presentation, he stated: "The Indonesian government guarantees that every certificate issued for international carbon trading has been verified and authorised, as an effort to safeguard against double counting, double payments, and double claims."

Indonesia towards net zero?

Indonesia is currently the largest consumer of coal in Southeast Asia, with more than half of its energy requirements met by this source. This heavy reliance on coal has also made it one of the world’s largest emitters.

However, with Prabowo Subianto’s rise to power, decarbonisation now appears to be a central focus for the Indonesian economy. Perhaps to follow in the wake of China's overwhelming transition, the new president has made bold promises regarding the nation's climate targets.

Indonesia's 2022 Nationally Determined Contribution (NDC) set a target to reduce emissions by 31.89% by 2030 through domestic measures, or by 43.2% with international support, with the long-term aim of achieving net-zero by 2060.

Upon assuming power, however, Prabowo advanced the net-zero target by a decade, committing to reach it by 2050, along with a full coal phase-out by 2040.

Needless to say, analysts and climate policy experts have viewed the Indonesian president's statements as somewhat reckless. According to BloombergNEF, achieving this goal would necessitate investments of 3.8 trillion dollars in energy transition infrastructure and electric vehicles. Meanwhile, according to Ember, to phase out coal from the national energy mix — especially given that energy demand will continue to rise — renewables would need to account for 65% of the mix by 2040 (and today they are at just over 20%, mostly from hydroelectric).

In short, the carbon credit market alone will not be enough to secure Prabowo's ambitious decarbonisation targets. However, Southeast Asia is a rapidly growing region and is likely to present unexpected developments in the near future.

Cover: photo by Jeremy Bishop, Unsplash