Indonesia Expands Emissions Trading to Captive Coal Plants and Gas
- Sep 18, 2025
- 3 min read
Indonesia is preparing to expand its Emission Trading System (ETS) in 2025 to cover captive coal-fired power plants (CFPPs) and gas-fired power plants, marking a significant policy shift in the country’s approach to industrial emissions. These off-grid facilities – especially prevalent in energy-intensive sectors like nickel, steel, alumunium smelting – have so far operated outside the regulatory scope of carbon pricing. Their exemption has long been a blind spot in Indonesia’s climate strategy, as these captive plants are estimated to account to more than 35% of national power sector emissions and growing rapidly. Including them in the ETS signals a clearer commitment to holding all major emitters accountable and aligning industrial growth with climate goals. It also represents a political step toward addressing criticsm that Indonesia’s decarbonization policies have been unevenly applied. Still, the effectiveness of this expansion depends heavily on how the system is designed and enforced and whether it can send the right market signals.
Captive Power Plants: The Gap Being Closed
Captive CFPPs are privately owned coal plants that supply electricity directly to industrial users rather than selling into the public grid. The rapid expansion especially in Sulawesi and North Maluku has raised concerns over Indonesia’s ability to meet its climate targets. Some projections suggest captive coal capacity could increase by 180% in the next seven years if left unchecked.
Gas-fired power plants, which currently make up around 17% of Indonesia’s power generation, will also be brought into the ETS fold. This reflects the government’s broader intention to regulate all fossil fuel-based power.
ETS Expansion Timeline and Design
Indonesia’s ETS was launched in 2023 as Southeast Asia’s first, beginning with grid-connected coal plants. It follows a hybrid model: emissions are capped and excess emissions must be compensated either through allowance purchases or a carbon tax. In the first compliance year, allowance price averaged around IDR 30,000-35,000 per ton (USD 2-2.30), with transaction volumes reported at just under 500,000 tons CO2e. Liquidity has remained low due to generous caps and limited demand for additional units.
In 2024, the scheme expanded to more plants over 25 MW, and in 2025 captive coal and gas plants will follow. But current ETS designed and implemented by sector, with each ministry setting its own rules and caps. The energy sector, under the Ministry of Energy and Mineral Resources (MEMR), is the only one participating so far, meaning there’s little harmonization across other sectors like industry, forestry, or waste. This fragmented approach may limit the long-term scalability and efficiency of the national carbon credit market.
Market Frictions: Too Little Liquidity
Although the coal power sector is the first under the ETS, real trading activity remains limited. According to market observers, the caps (PTBAE – Penetapan Batas Atas Emisi) are set too close to actual emissions levels, leaving little room for meaningful trade. Most participants receive just enough allowances to meet their needs, reducing demand for external purchases or offset credits. As a result, transaction volumes remain low, and the market signal is weak.
This creates a missmatch between the policy’s climate ambition and its practical effect on emitters’ behavior. Without broader sectoral coverage, deeper cap reductions or a more active carbon pricing mechanism, the ETS risks functioning more as a compliance formality than a true driver or decarbonization.
Policy Signal or Investment Signal?
The inclusion of Captive CFPP’s and gas plants is a policy milestone, and it signals to industry that the regulatory environment is tightening. But for this to translate into cleaner investment decisions, additional measures like tightening future caps, improving MRV systems, and integrating other sectors, will be essential.
Conclusion
Indonesia’s decision to expand its ETS to cover bot captive coal and gas fired power plants reflects a broader recognition that all major sources of emissions must eventually be regulated. While the move closes an important gap in coverage, it also highlights persistent limitation in the current market design including low liquidity soft emission caps, and lack of integration across sectors. For the ETS to evolve from procedural mechanism int a genuine driver of decarbonization, Indonesia will need to introduce stronger price signals, clearer cross-sectoral governance, and long-term policy certainty for investor and project developer. The direction is right but the system’s strength will depend on the details, and whether regulators are willing to make the tough adjustments needed to build a credible, effective carbon market.
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