Challenges in carbon markets - lessons for emerging emission trading system (ETS) and offset markets (case study: Indonesia)

Abstract

Carbon markets are increasingly recognized as vital instruments for reducing greenhouse gas (GHG) emissions and addressing climate change. As developing countries adopt market-based climate policies, understanding the operational challenges and potential of these markets becomes essential. This thesis examines the key regulatory, structural, and integrity-related issues facing Indonesia’s carbon market, with a focus on its Emissions Trading System (ETS) and offset programs. Using a mixed-methods approach combining document analysis of global case studies and in-depth stakeholder interviews, the research explores the institutional, technical, legal, and financial dimensions shaping Indonesia’s carbon market development. Sources include EU ETS literature, ASEAN regional reports, World Bank publications, and national regulatory presentations. The findings indicate persistent challenges such as fragmented governance, low liquidity, inadequate MRV and registry systems, and unclear legal frameworks. Stakeholders further identified untapped opportunities in nature-based solutions, digital innovation, and cross-border cooperation. Drawing lessons from the EU and ASEAN, the study emphasizes the need for phased policy rollout, stronger institutional alignment, price transparency, and fraud safeguards. Ten policy recommendations are proposed, including capacity-building, legal reforms, and alignment with Article 6 of the Paris Agreement. The novelty of this research lies in its triangulated methodology and its actionable synthesis of international best practices tailored to Indonesia’s context. This work contributes to the emerging literature on carbon markets by offering both diagnostic insights and policy-oriented solutions for market credibility and scalability.