Financial Services Authority Regulation No. 14 Year 2023: Carbon Trading On The Carbon Exchange (“POJK 14/2023”)

Financial Services Authority Regulation No. 14 Year 2023: 

Carbon Trading on The Carbon Exchange (“POJK 14/2023”)

The Financial Services Authority of Indonesia (“OJK”) has issued a carbon trading regulation. OJK Regulation Number 14, 2023 (“POJK 14/2023”) aims to be guidelines and a reference for carbon trading on carbon exchanges that are carried out by market operators. The burgeoning trading of carbon units has allowed the enactment of POJK 14/2023 to serve as a turning point in Indonesia to enhance the practice of carbon unit trading.

POJK 14/2023 is a mandate of Law Number 4, 2023 concerning the Development and Strengthening of the Financial Sector (UU P2SK). Law Number 4, 2023 mandates further regulation of carbon trading on carbon exchanges.

We have listed the key points of the introduction of POJK 14/2023 as follows:

A. Exchange of Carbon Units

Carbon units traded on a carbon exchange are considered securities, and must first be registered in the National Registry System for Climate Change Control (“SRN-PPI”) and carbon exchange operators. The Carbon units that will be exchanged consist of Technical Approval of Upper Emission Limits for Business Players (PTBAE-PU) and a Green House Gas Emission Reduction Certificate (SPE-GRK). Fortunately, carbon exchange operators can trade foreign carbon units that are not registered under the SRN-PPI. If they are not registered, the carbon units must:

1. have be registered, validated, and verified by accredited institutions and/or the operator of the international registration system;
2. meet the requirements to be traded on an overseas carbon exchange ; and
3. meet other requirements stipulated by the OJK.

B. Authorized Market Operators of Carbon Exchanges 

The parties that engage in business such as carbon exchanges are market operators (“Carbon Exchange Operators”) who must obtain a business license from the OJK. Apart from handling carbon trading transactions, Carbon Exchange Operators may develop Carbon Unit-based products after obtaining approval from the OJK. Examples of Carbon Unit-based products that can be developed by Carbon Exchange Operators include derivative products with an underlying asset in the form of carbon units.

For minimum capital required by POJK 14/2023, it must be noted, that a Carbon Exchange Operator is required to have a paid-up capital of at least IDR 100 billion and are prohibited from obtaining the capital through debt or loan.

C. Implementation of Carbon Trading on Carbon Exchange Operators

Carbon Exchange Operators are required to facilitate the regular, fair, and efficient trading of carbon units. They are obligated to establish, provide, and use an electronic system to continuously match carbon unit transactions. These transactions can be directly conducted between parties or through intermediaries.

Carbon unit transactions may involve direct transactions between parties or through intermediaries. The exchange can establish agreements with other parties for customer due diligence and identity verification.

Carbon Exchange Operators must provide a trading system that includes matching bids and offers for carbon units, as well as settling transactions, either in terms of funds or carbon units, among parties in the same or different sectors, as per legal regulations.

D. Shareholders, Members of the Board of Directors, and Members of the Board of Commissioners of Carbon Exchange Operators

There are several requirements that are needed for Shareholders, Members of the Board of Directors, and Members of the Board of Commissioners of Carbon Exchange Operators:

Shareholders	sui generis institutions, Indonesian citizens, Indonesian legal entities, and/or foreign legal entities that have obtained a permit from the OJK or are under the supervision of the financial regulatory authority in their home country. Foreign legal entities, as mentioned, can directly or indirectly hold a maximum of 20% (twenty percent) of the total shares with voting rights
BOD of Carbon Exchange Operators	Members of the Board of Directors of the Carbon Exchange Operators must be domiciled in Indonesia. Carbon Exchange Operators are required to have a minimum of 2 (two) members on their Board of Directors. Among the members of the Board of Directors of the Carbon Exchange Operators, 1 (one) person must be designated as the Chief Executive Officer. Among the members of the Board of Directors of the Carbon Exchange Operators, 1 (one) person must possess knowledge or experience in the field of climate change management and carbon markets.
BOC of Carbon Exchange Operators	Carbon Exchange Operators are required to have a minimum of 2 (two) members on their Board of Commissioners. Among the members of the Board of  Commissioners of the Carbon Exchange Operators, 1 (one) person must be designated as the Chief Commissioner.

E. OJK’s Role Under POJK 14/2023 

The OJK supervises carbon trading on carbon exchanges which includes the supervision of Carbon Exchange Operators, market infrastructure supporting carbon trading, users of carbon exchange services, transactions and settlement of carbon unit transactions, carbon trading governance.

In addition, the OJK also oversees risk management, consumer protection, parties, products and/or activities related to carbon trading on carbon exchanges. Thus, to comply with stipulations of the OJK, Carbon Exchange Operators are obligated to draft a company regulation in carrying out its business activities.

CONCLUSION

The issuance of POJK 14/2023 marks a significant milestone in Indonesia's financial landscape. With a clear focus on carbon trading, this regulation not only serves as a guide for market operators conducting carbon exchanges but also aligns with the mandate set forth in Law Number 4 of 2023 concerning the Development and Strengthening of the Financial Sector (UU P2SK). As the nation takes a definitive step toward regulating and advancing carbon trading on designated exchanges, POJK 14/2023 stands as a testament to Indonesia's commitment to sustainable growth and responsible financial practices in the face of evolving global challenges.

We hope the above explanation is sufficient.

Please note that the information contained in this alert should be only used as a general guideline with respect to the subject hereof and may not contain legal advice for your specific cases. The information herein should not be used or relied upon in regard to any particular facts or circumstances without seeking legal advice from us. We will not be liable nor be responsible for any consequences, damages or other similar forms which may be suffered by any party who had used or relied upon this alert.

If you require further information on the new regulation, please do not hesitate to contact:

Nurjadin Sumono Mulyadi & Partners

Contact information:

Iwan Nurjadin Partner iwan.nurjadin@nurjadinet.com		Vera Noviani Harwanto Partner vera.noviani@nurjadinet.com
Mahir Karim Associate mahir.karim@nurjadinet.com		Syahrisa Seputra Associate syahrisa.seputra@nurjadinet.com