Putting a Price on the Air We Breathe: Understanding Carbon Economic Value in Indonesia

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Dinda Fauzani

Post Date

21 September 2026

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Every time a factory emits carbon dioxide into the atmosphere, someone else pays the price.

This is the central problem that carbon economics tries to solve. And Indonesia, as one of the world’s largest emitters with equally enormous green potential, is still at a crossroads on how this problem should be addressed.

The Invisible Bill We All Share

Imagine ordering a seafood platter at a restaurant, enjoying it, but mysteriously a bill for a steak from the next table is included in yours. That, in essence, is how carbon emissions have worked for decades.

In economic terms, this is called an “externality”, a cost (or benefit) from an activity that is not reflected in the market price. Carbon emissions are a classic negative externality: industries burn fossil fuels to produce goods, but the damage to the climate, i.e., more intense floods, rising sea levels, and worsening air quality, is borne by society at large, not by the emitter.

To this challenge, Indonesia has developed the concept of Nilai Ekonomi Karbon (NEK), or Carbon Economic Value. In short, NEK is the method for attaching an economic value to actions that reduce or eliminate greenhouse gas (GHG) emissions. NEK aims to incentivise climate action through carbon trading, carbon offsets, and other market-based mechanisms, and to help Indonesia transition to a low-carbon economy.

Why Put a Price on Carbon?

At first glance, it might seem strange to put a monetary value on carbon. After all, carbon dioxide is invisible, and for decades it has been treated as a free by-product of economic activity. The problem is that the polluter is often free to make emissions, but the impacts (rising temperatures, floods, droughts, and ecosystem degradation) are borne by society as a whole. Putting a price on carbon helps reveal these hidden costs. If companies are to be responsible for the emissions they produce, then the reduction of emissions becomes an economic issue as well as an environmental one. Suddenly, cleaner technologies, energy efficiency measures, and low-carbon investments look more attractive.

Economists call this “internalising an externality”, that basically brings environmental costs into the economics of decision-making. So the price of goods and services will also reflect the environmental impact, creating a fairer system. Hopefully, this will make businesses and communities to pursue cleaner and more sustainable alternatives.

How Carbon Pricing Actually Works

NEK isn’t a single mechanism, it’s a family of instruments, each suited to different contexts. NEK is implemented under Presidential Regulation No. 110 of 2025, through a number of economic instruments that create value for emission reductions and removals, such as carbon trading, carbon levies, results-based payments, and other market-based mechanisms. The revised framework seeks to incentivise mitigation actions, mobilise climate finance and support Indonesia’s carbon market ecosystem, not just penalise emissions. Below are the different instruments of carbon pricing that can be applied.

Emission Trading Systems (ETS), or cap-and-trade, set a cap on the total amount of emissions from a sector. Companies are given or buy permits to emit. If they produce less than their quota, they can sell the surplus. If they are over it they have to buy more. This creates a carbon market in which emission reductions become tradable commodities. In the Indonesian system, this cap is formalised through a document called Persetujuan Teknis Batas Atas Emisi (PTBAE), a technical approval that establishes a company’s emission ceiling.

Carbon Credits (Offset) operate differently. Carbon offsets look at individual projects, not entire industries. First, a project sets a “baseline”, which is the amount of pollution that would normally happen if the project didn’t exist. The project then proves it actually reduced pollution below that baseline. Once an independent reviewer verifies this difference, it becomes a carbon credit that can be sold to others who want to offset their own pollution.

Carbon Tax is as simple as it gets: emit a ton of CO2, pay a set fee. Unlike ETS, it doesn’t guarantee a specific emission reduction target, but it creates steady revenue that governments can channel right back into green initiatives.

Result-Based Payments are basically “pay for performance.” Instead of buying and selling credits on an open market, an international group or government pays local initiatives directly once they prove they’ve cut emissions. It’s a huge driver for protecting high-risk areas like tropical forests and peatlands.

Put them all together, and carbon moves from an abstract environmental threat to real economic value. Major industries are subject to top-down rules from systems such as carbon taxes and emissions trading. At the same time, carbon offsets and results-based payments work from the ground up, directly giving incentives to local communities and projects to protect nature.

These tools are not competing under Indonesia’s carbon pricing (NEK) framework, they are working in synergy. Taxes and market demand provide the money that funds local conservation and offset projects. Cutting pollution is no longer just a legal headache, but a profitable business strategy through smart regulations and market incentives.

Carbon Credits ≠ Carbon Stocks

A common misconception worth clarifying: the potential carbon credit from a project is not the same as the total carbon stored in a forest. Carbon credits are based on the delta, the difference between a “business as usual” scenario and what actually occurs when a carbon project is put in place.

A forest that would have been cleared but is instead protected generates credits proportional to the emissions avoided. A rehabilitation project generates credits based on the carbon newly captured over time. The forest’s existing carbon stock, impressive as it is, doesn’t automatically translate into sellable credits, it requires a project, a methodology, monitoring, and verification.

This distinction matters for setting realistic expectations and designing credible projects.

Looking Ahead at the Carbon Market

Indonesia’s domestic carbon market is growing, but it remains in its early stages. The domestic carbon standard, Sertifikat Pengurangan Emisi GRK (SPE-GRK), provides a national certification pathway, but businesses can also pursue internationally recognized standards such as the Verified Carbon Standard (Verra) or the Gold Standard, or participate in bilateral mechanisms such as Japan’s Joint Crediting Mechanism (JCM).

One of the major constraints is still financing. Most Indonesian banks and financial institutions are still unfamiliar with the structure and risk profile of carbon projects, making alternative financing channels (international carbon buyers, development finance institutions and blended finance) increasingly important.

The economic value of carbon is no longer just a concept that is discussed by policymakers, economists or climate experts. It is increasingly becoming part of the everyday decision-making for governments, businesses and communities across Indonesia.

As carbon markets begin to take shape, the need to understand NEK is becoming increasingly important. It could mean new sources of funding and investment for companies. It could give communities that manage forests, peatlands or other natural resources the opportunity to profit from activities that reduce emissions and protect ecosystems. At the same time, it generates new rules, responsibilities and expectations that stakeholders need to navigate.

Indonesia has already come a long way in building its carbon economy. The real test isn’t just about cutting carbon emissions anymore, it’s about making sure local communities actually profit, nature is protected, and the people living there have a say. At this point, carbon is as much a matter of economics as it is about the environment.

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