The Carbon Project Ecosystem: Who's Who

Imagine a carbon project as a village where everyone has a specific role. Just as a village needs farmers, traders, and administrators to function, a carbon project requires multiple stakeholders working in harmony:

The Landowner (often local communities or concession holders) provides the land where carbon sequestration occurs. They're like the farmer who owns the rice field.

The Project Developer designs and implements the carbon project. Think of them as the agricultural expert who knows which crops to plant and when.

The Carbon Credit Buyer purchases the verified carbon credits. They're similar to the rice wholesaler who buys the harvest.

The Verifier (third-party auditor) confirms the carbon credits are real and measurable. Consider them the quality inspector at the market.

The Government sets the rules and issues permits. They're the village administration ensuring everything runs smoothly.

Indonesia's Two Carbon Markets: Compliance vs. Voluntary

1. Compliance Carbon Market

What it is: Mandatory carbon trading for companies exceeding emission caps
Who must participate: Coal-fired power plants (mandatory since 2023, with phased implementation per Regulation of the Minister of Energy and Mineral Resources No.16 of 2022)
Key features:
• Government-set emission limits (caps vary by plant capacity and age)
• Currently only applies to the power sector

2. Voluntary Carbon Market

What it is: Optional carbon credit generation and trading
Who can participate:
• Any entity with qualifying projects
• International buyers seeking offsets
• Companies with voluntary net-zero commitments
Key features:
• Market-driven pricing
• International standards accepted (VCS, Gold Standard)
• Greater flexibility in project types
• Can sell to international buyers

Factual Condition: Most current Indonesian projects operate in the voluntary market.

What Exactly is a Carbon Credit in Indonesian Law?

Under Indonesian law, carbon credits have two legal framework approaches depending on how they're traded:

For Exchange-Traded Carbon Credits: As of 2023, carbon credits traded on carbon exchanges are classified as securities under Regulation of Otoritas Jasa Keuangan (OJK) No. 14 of 2023.

This means:

• Subject to capital market regulations and OJK oversight
• Enhanced investor protections apply
• Standardised documentation requirements
• Can be used as underlying assets for derivative products

For Privately-Traded Carbon Credits: Carbon credits traded outside exchanges (bilateral/OTC transactions) are classified as "intangible movable objects" (benda bergerak tidak berwujud) under the Civil Code.

This means:

• Can be bought, sold, and traded through private contracts
• Subject to general contract law principles
• More flexibility in deal structuring
• Can be used as collateral (though frameworks are still developing)
• Ownership transferred through a simple agreement

Practical Impact: This dual approach creates a two-tier market. Exchange trading offers greater liquidity and standardisation, while private transactions provide more flexibility for tailored deals.

Key Contractual Relationships and Required Legal Framework

1. Project Development Agreement (PDA)

Purpose: Establishes rights to develop carbon project on specific land
Parties: Landowner ↔ Project Developer
Key Commercial Terms:

• Land use rights duration (typically 20-30 years).
• Revenue sharing formula (often 70:30 or 60:40 split).
• Roles and responsibilities.
• Community benefit provisions.

Essential Legal Framework to Understand:

• Civil Code: Ensures the contract is legally binding
• Law No. 41/1999 and its implementing regulations: If the project involves forest land
• Law No. 5/1960 and its implementing regulations: If the project involves non-forest land (all other land titles applicable except forest land)
• Presidential Regulation No. 98/2021: Defines carbon economic value and ownership rights
• Regulation of the Minister of Environment and Forestry No. 21/2022: Technical requirements for carbon projects

Practical Checklist:
☐ Verify land ownership/concession rights
☐ Include clear carbon rights transfer clause
☐ Define force majeure events (including regulatory changes)
☐ Specify dispute resolution choice

2. Emission Reduction Purchase Agreement (ERPA)

Purpose: Sale and purchase of carbon credits
Parties: Project Developer ↔ Carbon Credit Buyer
Key Commercial Terms:

• Volume and delivery schedule
• Price per ton CO2 (fixed or market-based)
• Quality standards and verification requirements
• Delivery shortfall penalties

Essential Legal Framework to Understand:

• Civil Code: Governs the sale and purchase provisions
• Presidential Regulation No. 98/2021: Carbon trading mechanisms
• Regulation of the Minister of Environment and Forestry No. 21/2022: Registry and transfer procedures
• OJK Regulation No. 14/2023: Securities trading requirements
• International standards compliance: Critical requirement - see below

International Standards Integration: Projects using international standards (VCS, Plan Vivo, etc.) must ALSO comply with Indonesian requirements:

• Register in SRN-PPI system
• Follow Indonesian MRV standards
• Obtain KLHK approvals
• Exception: International standards that have a Mutual Recognition Agreement with the Indonesian Government (for example, the Gold Standard Mutual Recognition Agreement with the Indonesian government)

Practical Checklist:
☐ Define credit vintage and delivery dates
☐ Specify which standard (Indonesian, international, or both)
☐ Include double registration requirements if using international standards
☐ Address potential conflicts between standards
☐ Include price adjustment mechanisms
☐ Specify registry account details (both SRN-PPI and international if applicable)
☐ Address regulatory change risks
☐ Include representations about credit quality

Common Pitfall: ERPAs often fail to address what happens if Indonesia restricts international transfers. Always include provisions for this scenario.

3. Project Financing Agreement

Purpose: Secure funding for carbon project development
Parties: Project Developer ↔ Financial Institution/Investor
Key Commercial Terms:

• Loan amount and disbursement schedule
• Interest rates and fees
• Security package (carbon credits as collateral)
• Financial covenants and milestones
• Repayment terms (often linked to credit generation and sales)

Essential Legal Framework to Understand:

• OJK regulations: For non-bank financial institutions
• Law No. 42/1999: For carbon credits as collateral under the fiduciary security framework
• Presidential Regulation No. 98/2021 & OJK Regulation No. 14/2023: Carbon credit legal status for financing
• Loan Market Association (LMA) documentation: For financing agreement, security documents, and cash account management agreement

Practical Checklist:
☐ Structure security over future carbon credits
☐ Define disbursement milestones tied to project progress
☐ Include carbon price floor/ceiling in financial models
☐ Address change in law risks affecting credit values
☐ Obtain lender consent rights for key project documents
☐ Create a waterfall payment mechanism for credit revenues

The Main Regulatory Framework You Must Know

1. Presidential Regulation No. 98/2021 (The Foundation)

What it does: Establishes carbon pricing framework for Indonesia
Key provisions for businesses:

• Defines carbon economic value
• Sets up carbon trading mechanisms
• Establishes which sectors must comply
• Creates the legal basis for carbon taxes

Practical impact: This regulation determines whether a project falls under compliance or voluntary markets.

2. Regulation of the Minister of Environment and Forestry No. 21/2022 (The Rulebook)

What it does: Provides technical implementation details
Key provisions for businesses:

• Registration procedures for carbon business actors
• Approved methodologies
• Monitoring, reporting, and verification requirements
• National Registry System (SRN PPI) operations

Practical impact: This is the operational bible—it tells us exactly how to register, report, and trade credits.

Carbon Project Development Framework

Final Thoughts

Yes, Indonesia's carbon market legal framework is complex, with multiple stakeholders, overlapping regulations, and evolving requirements. But here's why this complexity shouldn't discourage us: every challenge presents an opportunity for those willing to navigate it properly.

The more we engage with these regulations through projects, discussions, and practical applications, the clearer and more refined they become.

Disclaimer and AI Disclosure

As best practices for any lawyer who is authoring legal articles simplifying complex laws, please refer to the disclaimer and AI disclosure below:

This article provides general information about Indonesia's carbon market legal framework and should not be construed as legal advice. Laws and regulations change frequently, and their application varies based on specific circumstances. Before making any decisions or taking any actions based on this information, please consult with qualified legal professionals who can advise you based on your particular situation. The author does not assume any liability for damages or losses that may arise from implementing strategies or interpretations based on this article.

This content was created with the assistance of generative AI and has been reviewed and verified by the author, a qualified legal professional licensed to practice in Indonesia. While AI helps us deliver comprehensive information more efficiently, all legal interpretations and practical guidance have been carefully vetted for accuracy and applicability to the Indonesian legal context.