The Carbon Market

A carbon market is a system for putting a price on a tonne of greenhouse gas and allowing that tonne to be traded.

It comes in two forms. In a compliance market, a government sets a cap on what covered installations may emit and issues allowances up to that cap. An operator that emits less than its allocation can sell the surplus; one that emits more must buy. The cap falls over time, and the price emerges from the gap between what the cap permits and what the economy would otherwise emit.

In a crediting market, a project that reduces or removes emissions — protecting a forest that would otherwise be cleared, replacing diesel generation with solar, capturing landfill methane — has that reduction measured against a counterfactual baseline, independently validated and verified, and issued as a credit. The credit is then sold to a buyer who uses it against an obligation or a voluntary commitment.

Both rest on the same physical fact: the atmosphere does not care where a tonne is avoided. A tonne not emitted in Kalimantan has exactly the same effect as a tonne not emitted in Rotterdam. That indifference is what makes trade possible at all.

The market is not a mitigation instrument. It is an allocation instrument, and that is precisely its value.

The cost of avoiding a tonne of CO₂e varies enormously by where and how you do it — by orders of magnitude, not percentages. Retrofitting an efficient European plant to squeeze out a further tonne can cost many times what it costs to keep a hectare of Indonesian peat swamp wet. Without a market, every emitter abates inside its own fence, and the expensive tonnes get bought while the cheap ones go unfunded. The same money buys a fraction of the reduction.

A price fixes that. When a tonne has a transferable value, capital moves toward the cheapest real reductions available anywhere in the system, and the total cost of hitting a given target falls. Equivalently — and this is the part that matters for ambition — for any given budget, a market buys more abatement. Every serious cost study of the Paris goals reaches the same conclusion: cooperative approaches make the target affordable, and affordability is what makes a target politically survivable.

Three conditions have to hold or the logic collapses. The reduction must be additional — it would not have happened anyway. It must be permanent, or its reversal must be insured against. And it must be counted once, by one party, in one registry. A credit that fails any of these is not a cheap tonne; it is a licence to emit issued against nothing, and it makes the outcome worse than having no market at all. The integrity machinery — baselines, validation, verification, registries, corresponding adjustments — is not bureaucratic overhead. It is the entire product.

Indonesia now has a functioning legal and institutional framework, built in stages over five years, and it has moved faster than most of its peers.

The foundation was laid in 2021. Perpres 98/2021 established carbon economic value as a national instrument, covering trading, results-based payment and a carbon levy, across six sectors. The same year, the tax harmonisation law created a carbon tax with a rate pegged to the prevailing market price — deliberately tying fiscal policy to the exchange rather than to a fixed schedule.

The machinery followed. Ministerial regulations set the operating rules sector by sector: power generation first, where an emissions cap now applies to generators, then forestry, which carries most of the national supply. Law 4/2023 classified exchange-traded carbon as a capital-market transaction, which put OJK in charge of the venue and brought intermediaries under securities licensing. IDX Carbon opened in September 2023, connected to the national registry, with the exchange recording ownership and transfer.

October 2025 was the turn. Perpres 110/2025 replaced the 2021 umbrella and changed four things that matter commercially: trading no longer waits on Indonesia achieving its NDC; a new unit registry, SRUK, becomes the central record; projects certified under recognised international standards are permitted provided they also register domestically; and international sale of credits from Indonesian projects is allowed again under stricter conditions, ending a four-year freeze. Mutual recognition agreements with the major voluntary standards followed.

What remains is capacity rather than law. The pipeline is far larger than the number of accredited validation and verification bodies can process, the implementing regulations under the new umbrella are still arriving, and the relationship between the old and new registries is not yet fully settled. Those are execution problems — real, but of a different kind from the ones Indonesia faced in 2021.