Sovereign governments embark on treating carbon credits as national resources by planning to govern, levy, or embargo carbon credits generated within their jurisdictions. Host countries are shaping up their domestic frameworks due to the increasing scrutiny against the VCM coupled with their NDCs’ ambitions toward the Paris Agreement, leaving host countries with decisions to balance their climate targets with international investment opportunities from the carbon market. Topics surrounding corresponding adjustment and credit authorisation to export carbon credits sparked the debate, with Article 6 merely providing the general framework for international carbon trading (under Article 6.2 and Article 6.4) while countries still need to decide how to operationalise these trades. This article will look into the different approaches host countries’ governments take with a deep dive into Indonesia.

To authorise or not authorise

Under Article 6, the Paris Agreement made it clear that credits that are transferred outside the host country’s jurisdiction and want to be counted towards the destination/buyer country’s National Determined Contribution (NDC) must be correspondingly adjusted. This statement leaves room for the host country to stipulate as they are not obliged to authorise Corresponding Adjustment (CA) for Voluntary Carbon Market (VCM) credits. At the same time, the opacity of the VCM, especially regarding pricing, impairs the host country’s ability to make informed decisions on this. Countries might be cautious about selling CA credits as doing so might impede them from achieving their NDCs; hence such measures could refrain countries from deepening their national climate ambition.

Furthermore, the notion of double claiming corresponding to double counting caused a dispute between stakeholders, as some believe that a corporate (voluntary buyer) cannot claim the same carbon credits used by a country in their NDC accounting. However, this argument is not entirely valid. Just because the same credits are claimed twice doesn’t mean they will be counted twice under the Paris Agreement accounting system, simply because the credits bought by voluntary buyers will not be counted towards their (the buyers) countries’ NDCs. Nevertheless, as corporates face greenwashing accusations, they might seek correspondingly adjusted credits to mitigate the risk of double claiming.

How are countries engaging with the voluntary carbon market?

In the voluntary carbon market space, the corresponding adjustment debate centers around the notion of whether voluntary credits could be counted towards countries’ NDCs while being claimed as “offsets” for companies’ net-zero targets. Governments are adopting different measures regarding the use of the corresponding adjustment for VCM, revenue sharing, and export of credits. For instance, Ghana announced it would not stipulate CA for VCM credits, though it would be willing to provide one if demand for correspondingly adjusted credits arises. Meanwhile, Zimbabwe, Tanzania, and Kenya imposed regulations on revenue sharing, with Zimbabwe pulling a bold move by mandating 50% revenue for the government and a 30% cap for foreign investors. The Government of Kenya announced that at least 25% of the revenue must go to the local community, while Kajiado’s county governor has revoked all carbon trading deals within the county as they put local communities at a disadvantage. On the other hand, Tanzania requires all VCM projects to be registered with the Tanzanian government and proposes to allocate 61% of sales to property owners while giving the rest for project development. Meanwhile, Papua New Guinea, Honduras, and Indonesia have temporarily restricted the export of carbon credits while they work on their domestic frameworks.

How can international investors manage risk?

Though certainties coming from clarity, stability, and predictability are what the VCM needs, this will also influence the countries’ attractiveness from the investor’s point of view. Political instability, a ban on international carbon trading, and the delivery of CA credits are among the common risks international investors and project developers raise. In response, the Multilateral Investment Guarantee Agency (MIGA), the World Bank’s insurance arm, will provide insurance covering carbon credit projects to facilitate large-scale investment in high-risk countries. Still, there needs to be further clarification about what those “high-risk” countries are and the projects’ criteria MIGA can cover.

Indonesia – open to the international carbon market

After holding off issuances for post-2020 credits for over a year, the position paper published on June 5th, 2023, signals that Indonesia is open to the international carbon market, with all credits required to be registered through the country’s national registry system (Sistem Registrasi Nasional). All credits must be traded through the Indonesia Stock Exchange starting this September, overseen by Indonesia’s Financial Services Authority, allowing the government to keep track of carbon export activities, where they will be used, and prices. The Government of Indonesia has published numerous policy updates for the past couple of years, including Presidential Regulation No. 98/2021 about implementing carbon pricing to achieve the nationally determined contribution target and control greenhouse gas emissions in the national development; Ministry of Environment and Forestry (MoEF) Regulation No. 21/2022 about implementing carbon economic value; Position Paper from the MoEF on May 2023 about international carbon trading; and lastly, MoEF Regulation No. 7/2023 about carbon trading within the forestry sector.

Indonesia – carbon market framework

Within the position paper, the MoEF defined carbon trading as transferring carbon ownership rights, stating that mitigation activities can only be claimed and counted towards the emission reduction of buyers; hence double claiming is not allowed. The recent MoEF Regulation No. 7/2023, published on 14 June, is a foundation for carbon trading activities in the forestry sector. MoEF sets out 22 mitigation activities within the forestry subsector and mangrove and peatland management subsectors, including sustainable forest management, peat restoration, biodiversity conservation, and other activities following the development of science and technology.

The MoEF will determine the number of exported credits per project and detailed requirements for credit buffers in the upcoming roadmap for carbon trading in the forestry sector. To address the risk of reversals, the MoEF regulation No. 21/2022 indicates that up to a 5% buffer would be required for offsetting within Indonesia, a 10-20% buffer for offsetting outside Indonesia, and a minimum 20% buffer for offsetting outside Indonesia and outside of the scope of Indonesia’s NDC. Furthermore, projects must receive approval from regents and mayors, with governor approval for forest parks across districts and ministerial approval for conservation areas other than grand forest parks. The new regulation also highlighted the non-tax state revenue from carbon trading; as per Government Regulation No. 12/2014 about non-tax state revenue in the forestry sector, the tariff was set at 10% of the value of the carbon trading transaction in the forestry sector. However, considering the recent development in the international carbon market, this value might change in the future.

Indonesia Carbon Trade Association (IDCTA) formed a joint task force with Verra to support the development of carbon projects in Indonesia, ensuring those projects comply with Indonesian law and VCS program requirements and are registered in the Indonesian National Registration System (SRN) and the Verra registry. The task force will consider adopting specific Verra methodologies and the possibility of trading Indonesian carbon credits as Verra’s VCUs while considering further consolidation in the future. As a reference, the MoEF regulation No. 21/2022 stated that carbon projects must use methodologies either set out by the Directorate General of Climate Change Control (DJPPI), the National Standardization Agency (BSN), or acknowledged by the UNFCCC.

Indonesia – current state of carbon projects

Until recently, Indonesia has issued up to 88.5 Mt VCUs in Verra, of which 55% have been retired. 85% of issued credits come from agriculture, forestry and other land use (AFOLU) projects. The country also has one REDD+ project (VCS2403) currently on hold that has the second biggest estimated annual emission reduction (after VCS1477 Katingan Project). Based on this, we expect the MoEF to prioritise adopting VM0007, VM0004, and AR-AM0014 methodologies. This further alignment is expected to boost the volume of credits, especially REDD+ projects from Indonesia.

One holistic approach

Eventually, host countries must decide to what extent international carbon trading contributes to their NDCs’ achievement while considering the coexistence of compliance and voluntary carbon markets. The domestic frameworks will have to address the distinction between double claiming and double counting, as host countries’ decisions will influence the institutional framework that can either boost or hinder the current demand and future supply of carbon credits. While greater clarity through regulatory frameworks is crucial to building confidence, an overly regulated market framework could lead to a stringent environment that might not be feasible for international investors. At the same time, as a market that relies heavily on trust, gaining confidence is critical. A more fundamental problem for the VCM is to both address and pre-empt criticism since it will always be heavily scrutinised. Furthermore, despite the market impact of the different approaches made by host countries, they also represent progress in the market and a sign that the VCM is maturing. If done right, a consistent framework between Article 6 and the VCM in host countries’ domestic frameworks will give market actors in both the demand and supply sides the confidence they need to scale the market.