In brief

After months of negotiations, Indonesia and Japan signed a mutual recognition agreement for bilateral carbon trading (MRA) on 18 October 2024. The MRA, which came into effect on 28 October 2024, is expected to support Indonesia and Japan to meet their climate change mitigation efforts, and also to draw investors into the carbon sector for both countries.

Overview

Through its press release, the Indonesian Ministry of Environment and Forestry highlighted that the MRA represents one of the first bilateral cooperation schemes between nations within the framework of Article 6.2 of the Paris Agreement (which provides that any nations pursuing voluntary cooperation with other nations must apply robust accounting to ensure the avoidance of double counting).

Under the MRA, Indonesian carbon credits will be recognized as equivalent to Japanese carbon credits. Mitigation action projects carried out in Indonesia and funded from Japan are required to comply with the Indonesian national environmental regulations and to apply the Indonesian carbon certification system. The carbon credits generated by approved projects¹ will then be allocated to each country based on agreement between Indonesia and Japan.

Forecasting the Future

The mutual recognition scheme will make it easier to develop carbon projects and trade carbon credits between Indonesia and Japan. Given these advantages, we anticipate growing interest from Japanese investors in the Indonesian carbon sector. We also expect international investors to consider investing through Japan or in cooperation with Japanese sponsors, with a view to benefitting from this mutual recognition mechanism.

*Tesalonika Barus, Senior Associate, and Rahadiyan Prasetya, Associate, have contributed to this legal update.

1 The projects must be approved by the host country joint committee (set up between representatives of the host country government and the Japanese government).

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