Have you ever heard of companies buying or selling carbon credits? Behind these transactions are efforts by businesses to reduce greenhouse gas emissions (“GHG Emissions”), while giving the resulting emission reductions economic value.
Various human activities, including business operations, can generate GHG Emissions that contribute to global warming and climate change. One type of greenhouse gas (GHG) is carbon dioxide (CO₂), a gas composed of carbon and oxygen. Carbon itself is a chemical element naturally found in various parts of the environment, including living organisms and soil, as well as in various compounds in the atmosphere. However, an increase in atmospheric CO₂ concentrations caused by human activities can intensify the greenhouse effect and contribute to global warming.
As part of efforts by businesses to control GHG Emissions, the government supports these efforts by developing a carbon trading mechanism. Through this mechanism, GHG emission reductions or removals can have economic value. In this context, the term “carbon” does not refer to the physical trading of the carbon element or CO₂ gas. Rather, it relates to units representing emission allowances or the results of GHG emission reductions, in accordance with the applicable mechanisms.
In Indonesia, carbon trading is facilitated through the Indonesia Carbon Exchange (IDXCarbon). However, before they can be traded, Carbon Units must meet the requirements of the applicable scheme. This means that not every activity with a positive environmental impact automatically generates tradable carbon credits. Technical and legal requirements must be met, ranging from emission measurement and reporting to verification, certification, and registration.
So, what exactly are carbon credits? How can an activity generate Carbon Units? How does carbon trading work in Indonesia, and what legal aspects should companies consider before engaging in carbon transactions?
What Are Carbon Credits, and Why Do They Have Economic Value?
Scientifically, carbon is a chemical element that forms part of various compounds, including carbon dioxide (CO₂). In the context of climate change, carbon is closely associated with greenhouse gas emissions (“GHG Emissions”), which refer to the release of greenhouse gases into the atmosphere.
Under Article 1 points 4 and 5 of Presidential Regulation No. 110 of 2025 concerning the Implementation of Carbon Economic Value Instruments and National Greenhouse Gas Emissions Control (“Presidential Regulation No. 110/2025”), a Greenhouse Gas (“GHG”) is a gas in the atmosphere that absorbs and re-emits infrared radiation, while GHG Emissions refer to the release of GHGs into the atmosphere within a specific area over a specific period. Examples of GHGs relevant to emissions inventories include carbon dioxide (CO₂), methane (CH₄), and nitrous oxide (N₂O).
Because different GHGs have different characteristics and warming effects, emissions are generally expressed in carbon dioxide equivalent (CO₂e). This unit allows emissions from different types of GHGs to be compared using a common measure.
How does this relate to carbon credits?
In simple terms, carbon credits are commonly understood as units representing GHG emission reductions, avoidance, or removals that meet the requirements of the applicable scheme. Under Indonesian law, Article 1 point 18 of Presidential Regulation No. 110/2025 defines a Carbon Unit as a result of emission reduction and/or removal certified under a domestic certification scheme, an international certification scheme, or a GHG Emission Allowance scheme, expressed in tonnes of CO₂e.
For example, a mangrove restoration project may increase GHG removals, while a renewable energy project may reduce emissions compared with a GHG Emissions Baseline. However, these activities do not automatically generate tradable Carbon Units. As stipulated in Presidential Regulation No. 110/2025, measurement, reporting, and validation and verification must be carried out in accordance with the applicable requirements to establish the results of GHG emission reductions or removals.
Once the applicable requirements have been met, Carbon Units can have economic value because they may be transferred or traded through the prescribed mechanisms. By selling Carbon Units, their holders may generate revenue, while buyers may use them for emissions management or offsetting purposes, subject to the relevant requirements.
However, to be tradable, Carbon Units must originate from activities that meet the requirements of the applicable scheme. How, then, can an activity generate carbon credits that are eligible for trading?
How Are Carbon Credits Generated?
Not every environmentally friendly activity automatically generates tradable carbon credits. To obtain Carbon Units through the GHG Emission Offset trading mechanism, the person in charge of a business and/or activity must meet the applicable technical and administrative requirements.
In general, the process involves the following stages:
- Project Planning. The process begins by identifying activities with the potential to reduce or remove GHG Emissions. The person in charge of the business and/or activity then prepares a Mitigation Action Design Document (Dokumen Rancangan Aksi Mitigasi or DRAM) or a Project Planning Document (Dokumen Perencanaan Proyek or DPP), as applicable, in accordance with the relevant requirements. These documents serve as the basis for implementing the activity.
- Validation of Project Documents. The DRAM or DPP is subsequently validated by an Independent Validation Body to ensure that it complies with the applicable methodologies and requirements.
- Implementation of Mitigation Actions. Once the project documents have been validated, the person in charge of the business and/or activity implements Climate Change Mitigation Actions in accordance with the prepared documents. Measurements are also taken to determine the extent of GHG emission reductions or removals achieved, based on the methodology used.
- Verification of Emission Reduction Results. The results of the mitigation actions are then verified by an Independent Verification Body to ensure that the reported GHG emission reductions or removals are consistent with the measured results of the activities.
- Issuance and Registration of Carbon Units. The verification results form part of the process for issuing Carbon Units under the relevant scheme. For Carbon Units in the form of Greenhouse Gas Emission Reduction Certificates (Sertifikat Pengurangan Emisi Gas Rumah Kaca or SPE-GRK), issuance follows the mechanism stipulated in Presidential Regulation No. 110/2025. Carbon Units generated through GHG Emission Offset trading are subsequently recorded in the Carbon Unit Registry System (Sistem Registri Unit Karbon or SRUK), in accordance with the applicable requirements.
Once Carbon Units have been issued and registered in accordance with the applicable requirements, the next step is to understand how they can be traded. In Indonesia, carbon trading may be conducted through regulated mechanisms, including through a carbon exchange.
How Does Carbon Trading Work in Indonesia?
Under Article 1 point 22 of Presidential Regulation No. 110/2025, Carbon Trading is a market-based mechanism for reducing GHG Emissions through the buying and selling of Carbon Units.
In simple terms, carbon trading connects parties that need Carbon Units with parties that have Carbon Units available for sale. For example, Company A needs Carbon Units, while Company B holds Carbon Units that are eligible for trading. Company B may sell those Carbon Units to Company A through a trading mechanism that complies with the applicable requirements.
One mechanism for conducting these transactions is through a carbon exchange. A carbon exchange is a system that facilitates carbon trading and/or the recording of Carbon Unit ownership. In Indonesia, carbon trading through an exchange is facilitated by IDXCarbon, a platform operated by the Indonesia Stock Exchange under a licence issued by the Financial Services Authority (Otoritas Jasa Keuangan or “OJK”).
Through IDXCarbon, Carbon Unit transactions may be conducted using various trading mechanisms, including auction, negotiated market, and regular market mechanisms, depending on the type of Carbon Unit and the applicable requirements. Each mechanism has its own transaction procedures, enabling sellers and buyers to trade in accordance with the carbon exchange operator’s rules.
To ensure that carbon trading through an exchange operates within the applicable legal framework, OJK regulates these activities under Financial Services Authority Regulation No. 10 of 2026 concerning Amendments to Financial Services Authority Regulation No. 14 of 2023 concerning Carbon Trading through Carbon Exchanges. These amendments include provisions on the registration of Carbon Units in the Carbon Unit Registry System (SRUK), the expansion of the scope of tradable Carbon Units, and the trading of foreign Carbon Units that are not registered in the SRUK.
What Types of Carbon Units Should Companies Know About?
When engaging with Indonesia’s carbon market, companies should understand the three types of Carbon Units that may be traded through a carbon exchange, as stipulated in Article 5 of Financial Services Authority Regulation No. 10 of 2026 concerning Amendments to Financial Services Authority Regulation No. 14 of 2023 concerning Carbon Trading through Carbon Exchanges.
- GHG Emission Allowances
GHG Emission Allowances refer to the amount of GHG emissions that a Regulated Installation is permitted to release into the atmosphere, as referred to in Presidential Regulation No. 110/2025.
For example, Company A has an emission allowance of 100,000 tonnes of CO₂e but its actual emissions amount to only 80,000 tonnes of CO₂e. If the applicable requirements are met, the remaining allowance of 20,000 tonnes of CO₂e may be traded to another company that needs additional emission allowances.
- Greenhouse Gas Emission Reduction Certificates (SPE-GRK)
SPE-GRK are certificates evidencing GHG emission reductions from a business and/or activity that have undergone measurement, reporting, and verification and have been recorded in accordance with the applicable requirements, as stipulated in Presidential Regulation No. 110/2025.
For example, Company B develops a solar power project that reduces emissions compared with the baseline scenario. Once the emission reductions have been verified and the applicable requirements have been met, the project may serve as the basis for issuing SPE-GRK, which can subsequently be traded in accordance with the applicable requirements.
- Non-SPE-GRK Carbon Units
Non-SPE-GRK Carbon Units are Carbon Units issued under international certification schemes in accordance with the applicable requirements of Presidential Regulation No. 110/2025.
For example, Company C develops a mangrove restoration project that removes carbon and follows an international certification standard. Once the project meets the applicable methodology, verification procedures, and approval requirements, it may generate Non-SPE-GRK Carbon Units that can be traded in accordance with the applicable requirements.
These three types of Carbon Units have different characteristics and requirements. Companies should therefore confirm the type of Carbon Unit involved, the applicable registration requirements, and the relevant trading mechanism before entering into a transaction.
What Should Companies Consider Before Entering into Carbon Transactions?
Carbon trading involves more than simply buying and selling Carbon Units. Companies need to ensure the legality of the project, the validity of the units, and the clarity of the parties’ rights to avoid potential legal issues in the future.
Errors in verifying Carbon Unit ownership, meeting registration requirements, or drafting transaction agreements may give rise to significant legal risks.
How Can Lawyers Assist Companies?
The success of a carbon project does not depend solely on technical considerations. The project’s legal status, rights to Carbon Units, registration requirements, and the validity of transactions must also be established from the outset.
Legal assistance may include:
- Regulatory Review: Reviewing the regulations relevant to the carbon project and transaction.
- Project Legality Review: Examining permits, rights to the project location or assets, and the authority of the parties involved.
- Legal Due Diligence: Identifying potential disputes and legal risks before a transaction takes place.
- Contract Drafting and Review: Ensuring that rights, obligations, the transfer of Carbon Units, and the allocation of risks are clearly set out.
- Legal Risk Mitigation: Anticipating compliance risks, environmental claims, and cross-border transaction risks in accordance with the applicable requirements.
Through this assistance, Mangatur Nainggolan Law Firm helps companies understand the legal aspects of carbon projects and transactions while identifying potential risks that may not be apparent at the initial stage.
Planning to develop a carbon project or enter into a carbon transaction? Make sure the legal aspects are properly addressed before proceeding.
Conclusion
Carbon trading creates opportunities for companies to participate in efforts to control GHG Emissions while developing business activities related to emission reductions and removals.
However, the economic value of a Carbon Unit depends not only on the environmental benefits it represents, but also on compliance with the applicable technical requirements, certification, registration, and legal provisions.
For companies looking to participate in the carbon market, understanding the types of Carbon Units, trading mechanisms, and legal risks is an important step before developing a project or entering into a transaction. With appropriate legal review and assistance, companies can make more informed decisions and anticipate risks associated with carbon trading.
Reference:
Presidential Regulation Number 110 of 2025 concerning the Implementation of Carbon Economic Value Instruments and National Greenhouse Gas Emission Control.
Financial Services Authority Regulation of Indonesia Regulation Number 10 of 2026 concerning Amendments to Financial Services Authority Regulation Number 14 of 2023 concerning Carbon Trading through Carbon Exchanges.
IDXCarbon, Komitmen Indonesia Terhadap Masa Depan Rendah Emisi, https://idxcarbon.co.id/id
ICDXGroup, Pengertian Istilah Kredit Karbon, https://www.icdx.co.id/news-detail/publication/pengertian-istilah-kredit-karbon
Author: Sonya Margaretha, S.H.
Editor: Yohana Maranatha, S.H.,M.Kn.