Quoting the IPCC report, Climate Change 2021, human influence causes significant global warming and this will depend heavily on greenhouse gas emissions or carbon emissions . Indonesia itself has committed to reduce its carbon emissions. The government has set an unconditional target of 29% and a conditional target of up to 41% compared to the Business as Usual (BaU) scenario in 2030.

As time goes on, so does the acceleration of global warming. The whole world must immediately make a significant contribution in reducing carbon emissions . This is where carbon credits play a role as an efficient mechanism.

Carbon credit concept

Carbon credit is a representation of the right for a company to emit a number of carbon emissions or other greenhouse gases in its industrial processes. One unit of carbon credit is equivalent to reducing the emission of 1 ton of carbon dioxide (CO2). Carbon credits become units traded on the carbon market for carbon offset activities.

Carbon offsets are activities of balancing a number of carbon emissions resulting from certain activities by purchasing carbon credits (in the voluntary market). Activities that produce carbon emissions include industrial activities to daily activities.

Where do carbon credits come from?

Carbon credits are derived from emission reductions made by voluntary projects, where the project specifically aims to reduce emissions; such as turbine construction, methane reduction projects, or forest restoration.

Naturally, plants are able to absorb carbon dioxide and release oxygen back into the air through the process of photosynthesis . However, the rate of production of carbon dioxide is much faster than the ability to absorb it. With industrial and population growth, the area of forest is getting smaller to be converted into plantations, settlements, factories, and the like.

In simple terms, green projects can submit calculations of their land absorption capacity to an internationally recognized carbon credit verification agency. After obtaining certification for a number of carbon credits (each equivalent to 1 ton of CO2), these carbon credits are recorded in a depository (the institution responsible for storing these carbon credits). Only then can carbon credits be traded on the carbon market.

Indonesian carbon credit potential

Based on data from the Coordinating Ministry for Maritime Affairs and Investment, Indonesia has the 3rd largest tropical rainforest in the world with an area of 125.9 million hectares which can absorb carbon emissions of 25.18 billion tons. Meanwhile, the area of mangrove forests in Indonesia currently reaches 3.31 million hectares which can absorb carbon emissions of around 950 tons of carbon per hectare or the equivalent of 33 billion carbon. Indonesia also has the largest peatland in the world with an area of 7.5 million hectares which can absorb carbon emissions of up to 55 billion tons.

From these data, the total carbon emissions that Indonesia can absorb are approximately 113.18 gigatonnes. If the Indonesian government can sell carbon credits at a price of USD 5 on the carbon market, Indonesia´s potential income will reach USD 565.9 billion or equivalent to IDR 8,000 trillion.

Carbon Credit Trading

Carbon unit trading or carbon credit trading is a mechanism that allows for market-based incentives for those who are successful in making efforts to reduce carbon emissions. Countries that apply the cap and trade mechanism will determine a company´s carbon emission quota for a certain period based on predetermined criteria. Companies whose carbon emission audit results have succeeded in achieving emission levels below the set quota, can sell the remaining quota through the carbon market. Meanwhile, companies that exceed the quota must buy emission quotas from other companies or face large fines.

Developed countries have long implemented this carbon trading mechanism. As a result, companies from various fields have taken concrete actions to reduce the carbon footprint generated by their business activities. Even regions such as the European Union have reached an understanding that net-carbon emission efforts cannot be achieved as long as imported products consumed by the European Union are still produced in regions that have not implemented emission reduction efforts. The result is a Cross Border Adjustment Mechanism (CBAM),namely efforts to ensure imported products comply with regulations related to carbon emissions that apply in the European Union. If an imported product is deemed not to have met the carbon emission requirements, European importers must purchase carbon credits to offset the carbon emissions produced in the manufacture of the product. This of course will make the price of these products more expensive and difficult to compete in the European Union.

Even before Indonesia´s carbon emission regulations were enacted, this policy in the European Union had certainly had an effect on Indonesian producers exporting to the European Union. If producers in Indonesia do not make efforts to mitigate carbon emissions, it will be difficult for their products to compete in the European Union.

Carbon Neutral Business Development

Then what about local product producers who do not export? How about a business that only involves electricity, paper, and fuel oil? Once again, trading carbon emissions will generate incentives for those who can reduce emissions. Meanwhile, emission reduction efforts are not as easy as turning the palm of the hand. Preparation and processes are needed to achieve net-carbon emission business activities . By starting steps to achieve net-carbon emission business conditions from now on, it is an investment to anticipate the implementation of carbon emission regulations in Indonesia.

In addition, with increasing global awareness regarding net-carbon emissions , companies that can achieve net-carbon emissions will find it easier to become partners for companies that have awareness regarding these carbon emissions. So that efforts to reduce emissions that are being carried out from now on, in addition to the potential results from the carbon market, also have the potential for better business development in a carbon neutral business environment .

Maintaining the Amount of Carbon Emissions Through Carbon Trading on the Exchange

The urgency of tackling climate problems due to carbon emissions is increasingly pressing. Not only the public, the government and the private sector also need to make a global commitment to this problem.

On December 12, 2015, as many as 195 countries including Indonesia, agreed to a global climate agreement known as the Paris Agreement (Paris Agreement). This agreement is completely voluntary, in which all participating countries commit to reduce their greenhouse gas emissions and ensure that global temperatures do not rise by more than 2°C (3.6°F); keep global temperature rise below 1.5°C (2.7°F). The Paris Agreement became effective on 4 November 2016.

Continuing the agreement, global carbon trading schemes were implemented to maintain the amount of carbon emissions released into the atmosphere. Regarding monitoring of carbon emissions, carbon trading is generally carried out through stock exchanges with certain standard units.

The "carbon" referred to in carbon trading on the stock exchange is carbon credits. Carbon credits themselves have been recognized internationally as a commodity. Therefore, the stock exchange ecosystem will facilitate organized and efficient carbon trading.

Source: www.icdx.co.id