Ministry of Environment and Forestry Regulation No. 7 Year 2023: Procedures for Carbon Trading in the Forestry Sector (“MoEF 7/2023”)

The Ministry of Environment and Forestry ("MoEF") has finally enacted a regulation regarding procedures for carbon trading in the forestry sector on 15 June 2023. MoEF 7/2023 serves as the implementation procedures for (i.) Presidential Regulation No. 98 of 2021 concerning the Implementation of Carbon Pricing for Achieving Nationally Determined Contribution Targets and Control of Greenhouse Gas Emissions and (ii.) MoEF Regulation No. 21 of 2022 concerning Procedures for the Implementation of Carbon Economic Value ("MoEF 21/2022").

MoEF 7/2023 aims to regulate carbon trading procedures specifically in the forestry sector, focusing on (i.) GHG emissions offset and (ii.) emissions trading. The regulation specifically addresses climate change mitigation efforts in this sector, such as reducing GHG emissions by curbing deforestation, restoring peatlands, rehabilitating mangroves, reforesting former mining areas, establishing permanent nurseries, implementing eco-riparian projects, and other relevant actions.

The regulation was put forward to further improve the previous Minister of Forestry Regulation P.50/MENHUT-II/2014 concerning Trading of Indonesian Certified Emission Reduction. MoEF  7/2023 forms the basis to control the implementation in reducing greenhouse gases (“GHG”). Moreover, this regulation aims to encourage businesses to achieve the nationally determined contribution (“NDC”) target in line with the Paris Agreement to the United Nations Framework Convention on Climate Change.

MoEF 7/2023 revokes three previous MoEF regulations regarding carbon emissions reduction in the forestry sector, which are the following:

1. Regulation of the Minister of Forestry Number P.68/MENHUT-II/2008 concerning Implementation of Demonstration Activities for Reducing Carbon Emissions from Deforestation and Forest Degradation;
2. Regulation of the Minister of Forestry Number P.20/MENHUT-II/2012 concerning Implementation of Forest Carbon; and
3. Minister of Forestry Regulation P.50/MENHUT-II/2014 concerning Trading of Indonesian Certified Emission Reduction.

Key points introduced by MoEF No. 7/2023 include the following points:

MoEF 7/2023: PROCEDURES FOR CARBON TRADING

1. Implementation of Emission Trading and GHG Emission Offset

   MoEF 7/2023 defines carbon trading as a market-based mechanism for reducing GHG emissions through buying and selling of carbon units ("Carbon Trading"). Carbon Trading is carried out by the following mechanisms: (i) emissions trading (“Emissions Trading”) and (ii) GHG Emissions Offset (“GHG Emissions Offset”).

   Emissions Trading is a transaction mechanism between business actors who have emissions exceeding the upper limit determined GHG emissions, while GHG Emissions Offset is the action of GHG emission reductions carried out by businesses and/or activities to compensate for emissions made elsewhere.

   The two mechanisms are carried out upon various type of forests, as follows:

   No.	Area	Requirements
   Carbon Trading Mechanism : GHG Emissions Offset
   1.	Permanent production forest area, forest area convertible production and utilization blocks of protected forest areas that have Forest Utilization License (Perizinan Berusaha Pemanfaatan Hutan / “PBPH”), social forestry management agreement, or management rights	Implemented by holders of PBPH, social forestry management agreement, or management rights.
   2.	Permanent production forest areas, convertible production forest areas, and protected forest area utilization blocks that do not have PBPH, social forestry management agreement, or management rights;	Implemented after obtaining PBPH, social forestry management agreement, or management rights.
   3.	Blocks of other protected forest areas.	Implemented after obtaining Minister’s approval.
   4.	Conservation forest area.	Implemented after having approvals of: regent/mayor, for a forest park located within a district/city. governor, for forest parks that are located across districts. Minister, for conservation areas other than forest parks as referred to in number (i) and number (ii).
   5.	Customary forest (Hutan Adat).	Implemented by indigenous people who carry out GHG Emissions Offset activities.
   6.	Private forest (Hutan Hak).
   7.	State-owned forest that is not recorded by the government.	Implemented after obtaining location determination and/or approval from the governor or minister with their respective authorities under the prevailing laws and regulations.
   Carbon Trading Mechanism : GHG Emissions Offset and/or Emissions Trading
   8.	Peatlands and mangrove areas that are inside a government-recorded forest.	Implemented after obtaining PBPH, approval for social forestry management, or management rights.
   9.	Peatlands and mangrove areas that are outside government-recorded forest.	Implemented after obtaining approval from governor, regent or mayor, or minister or head institutions with their applicable authority.

   Aside from the requirements illustrated above, business actors of Carbon Trading must also comply with the following stipulations:

   1. PBPH holders, management rights, and private forest owners must have certificates of sustainable forest management, forest product legality certificates, or forest product declarations in accordance with statutory provisions.
   2. The holder of the social forestry management approval at least obtains a silver classification in the implementation of social forestry in accordance with the provisions of laws and regulations.
   3. Customary law communities, holders of Social Forestry Management Agreements, and private forest owners who carry out GHG Emissions Offset businesses and/or activities must receive assistance or partners who have experience or expertise related to carbon measurement, project planning and implementation or accessing carbon markets.
2. The Requirements of Emissions Trading and GHG Emissions Offset

   Here are the basic requirements for implementing Emissions Trading activities under the MoEF 7/2023:

   1. Preparation and determination of the trade road map.
   2. Determining the provision of emission reduction reserves (buffers).
   3. Determination of technical approval of the allowed amount of carbon emission per year (PTABAE) peatlands management in sub-sectors of peatlands and mangrove management.
   4. Set and determine PTBAE applied for business actors that produce carbon emissions;
   5. Stipulation of quotas for peatlands management in sub-sectors peatlands and mangrove management.
   6. Actual emissions measurement.
   7. PTBAE report submission.
   8. Verification result report.
   9. Implementation of:
      1. domestic emissions trading; or
      2. storage on the remaining use of GHG emission quota that is not used.

   Here are the basic requirements for implementing GHG Emissions Offset activities under the MoEF 7/2023:

   1. Preparation and determination of the trade road map;
   2. Determining the provision of emission reduction reserves (buffers);
   3. Determination of projected annual GHG emission production in the forestry sector;
   4. Determination of forestry sector emission reduction targets;
   5. Climate Change Mitigation Action Plan Document (“DRAM”) arrangement;
   6. DRAM validation;
   7. DRAM validation result report;
   8. Report on the results of the implementation of change mitigation actions climate;
   9. Verification of reports on the results of the implementation of mitigation actions climate change;
   10. Preparation of the verification result report on the implementation of the action climate change mitigation;
   11. Formation and review by the measurement, reporting, and verification team (MRV) established by the national registry system under MoEF (“SRN-PPI”);
   12. Issuance of emission reduction certificate (“SPE-GRK”) by the SRN-PPI.

   All of the above requirements may be obtained through the administration from the Directorate General of Sustainable Forest Management under the MoEF (“Ditjen PHL”). The administration to obtain SPE-GRK from SRN-PPI may either be initiated by a land license holder e.g., PBPH holder, or any third party appointed by such PBPH holder. MoEF does not distinguish the two mentioned parties in terms of submitting requirements for SPE-GRK issuance. Notwithstanding that, failure(s) to comply with the prevailing provisions of laws and regulations, whether in administration or execution of the business itself, would remain the license holder's liability.

   Please be noted that there are still several prevailing procedures of Emissions Trading and GHG Emissions Offset under the MoEF 21/2022. For instance, in line with MoEF Regulation No. 8 of 2021 regarding Forest Administration and Preparation of Forest Management Plans, and Forest Utilization in Protected Forests and Production Forests, arrangement of DRAM must be included in the forest utilization business planning documents (commonly known as RKUPH and/or RKTPH).

3. Non-Tax State Revenue on Carbon Trading

   It is worth noting that under the MoEF 7/2023, the government has obliged business actors in the field of Carbon Trading to pay state levies (non-tax state revenue). Such mentioned state levies are collected from the revenues of business actors that utilize carbon sequestration and/or carbon storage activities. Hence, any revenues coming from the transactions of both Emissions Trading and GHG Emissions Offset mechanisms should be paid through the non-tax state revenue information system (Sistem Informasi Penerimaan Negara Bukan Pajak / SIPNBP).

4. Reporting, Evaluation, and Development

   Carbon Trading business actors in protected and production forests which are carried out by PBPH holders are required to submit periodic monthly reports on their business activities. Such report will be submitted through national registry system (SRN-PPI) to the director general of Ditjen PHL, which later will be the basis for evaluation. The elements that will be evaluated are the followings:

   1. Realization of construction of Carbon Trading business infrastructure.
   2. Correctness of the Carbon Trading business methodology.
   3. Correctness in calculating carbon potential from the Carbon Trading business.
   4. Use of documents and business requirements for Carbon Trading.

   Evaluation of the performance of Carbon Trading business actors is carried out at least once a year. Please be mindful that failure to comply with the above stipulations are subject to administrative sanctions in accordance with the provisions of laws and regulations.

CONCLUSION

MoEF 7/2023 provides a more compact regulation for Carbon Trading, specifically for the separated mechanisms of Emissions Trading and GHG Emissions Offset, compared to the previous regulations. By introducing guidelines and procedures for Carbon Trading, the regulation aims to promote transparency, accountability, and sustainability in these activities. It establishes requirements for registering and reporting carbon credits and offsets, as well as guidelines for monitoring and reporting emissions data. The regulation also addresses compliance obligations and enforcement mechanisms to ensure adherence to the outlined procedures.

Nevertheless, there are still aspects that require further observation, particularly in terms of international Carbon Trading implementation and the participation of non-domestic platforms for carbon issuance and verification. These areas will need ongoing monitoring to ascertain their specific details and implications.

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:

Iwan Nurjadin Partner + 62 21 5151788 iwan.nurjadin@nurjadinet.com		Vera Noviani Harwanto Partner + 62 21 5151788 vera.noviani@nurjadinet.com
Jenica Susanto Associate + 62 21 5151788 jenica.susanto@nurjadinet.com		Mahir Karim Associate + 62 21 5151788 mahir.karim@nurjadinet.com