Building the Missing Finance Mechanisms for Indonesia’s Carbon Market

Sep 15

Indonesia’s carbon market is taking shape: the SRN registry is operational for some sectors, Mutual Recognition Arrangements (MRAs) are signed with leading standards, and the long-awaited Perpres on Carbon Economic Value is on the horizon. Together, these steps are turning carbon markets from a policy concept into a regulated space.

But investors remain cautious. Regulation alone is not enough. What is still missing are the finance mechanisms that make projects bankable and investment-grade. For Nature-Based Solutions (NBS) in particular — forestry, mangroves, agroforestry — as well as waste-to-energy and industrial decarbonisation, the gaps are clear.

To unlock institutional capital, Indonesia needs blended finance structures, risk mitigation tools, and forward contracting mechanisms that make credit flows predictable while safeguarding quality and accountability.

Where the Gaps Are

Carbon finance in Indonesia today is still project-level and transactional. Developers register projects, sell credits, and buyers treat these as procurement. That may work for smaller voluntary projects, but it cannot attract institutional investors, who need structured risk allocation and predictable returns.

For NBS: upfront costs are high, payback periods long, and revenues uncertain.
For waste and energy: projects are capex-heavy and politically exposed.
For industry: carbon finance is marginal without long-term credit contracts.

The pipeline exists — but without the financial scaffolding to make projects investable at scale.

Blended Finance: The Bridge Between Policy and Bankability

Blended finance is one of the most effective tools to unlock private capital in high-risk markets. It works by combining different layers of capital, each with a distinct risk appetite:

Concessional or catalytic capital (from DFIs, climate funds, philanthropic investors) absorbs early-stage risk.
Commercial equity and debt (from private equity, infrastructure funds, banks) provide growth capital once risks are mitigated.
Carbon revenues add a results-based stream that improves project viability and IRRs.

For NBS in Indonesia, blended structures can fund the engagement stage — land tenure resolution, community consultations, biodiversity baselines, and MRV system design — costs that are typically prohibitive for developers and too risky for private investors.

By shouldering this early risk, concessional capital creates the conditions for responsible forward contracting: credits can be presold with greater confidence that the project will deliver, while still embedding safeguards for quality and community benefit.

Forward Sales: Linking Capital and Projects Responsibly

Forward sales of credits are already happening in Indonesia, but often without consistent standards. For institutional investors, forward contracting can be highly effective — if structured with proper checks and balances.

Benefits of forward sales for investors:

Early access to projects: Investors secure supply in competitive markets before issuance.
Long-term relationships: Forward contracts link investors to projects over 5–10 years, creating visibility and impact continuity.
Potential value upside: Credits contracted at development stage may appreciate significantly if market prices rise by the time they are verified and issued.

Benefits for developers:

Provides critical upfront working capital for feasibility studies, MRV systems, and initial operations.
Reduces dependence on short-term or concessional funding.
Aligns project incentives with long-term quality and delivery.

But risks exist. Poorly structured forward sales can lead to under-delivery, reputational harm, or projects cutting corners to meet contract volumes. This is why risk mitigation in the project engagement stage is critical.

Risk Mitigation During Project Engagement

For forward sales to work responsibly, the following mechanisms need to be in place:

Conservative baselining: Avoid overpromising credit volumes; structure contracts on conservative estimates verified by independent experts.
Independent MRV systems: Ensure measurement and reporting are overseen by accredited third parties.
Performance-based tranching: Link disbursements to milestones (e.g., land tenure secured, communities engaged, baselines verified).
Guarantee facilities: Pool-backed guarantees to cover partial under-delivery risk.
Transparent revenue-sharing: Clear agreements with local communities and government to reduce political or social backlash.

With these in place, forward sales become not just a financing tactic, but a tool to align capital, developers, and communities around credible delivery.

Other Finance Mechanisms Still Missing

Beyond blended finance and forward sales, Indonesia’s carbon market also needs:

Insurance products: Covering political risk, reversal risk (in NBS), and delivery failures.
Standardised contracts: Model terms for forward sales, akin to PPAs or ISDA agreements, to reduce legal complexity.
Aggregation platforms: Bundling smaller projects into investable vehicles, reducing transaction friction.
Carbon-linked bonds: Issuing debt instruments backed by future credit revenues to mobilise upfront capital at scale.

These tools are not yet in place — but they are the next frontier for Indonesia’s market.

Checks and Balances for Institutional Capital

To mobilise institutional money, finance tools must be paired with checks and balances that reduce perceived risk:

Host-country authorisation clarity under the Perpres.
Transparent registry integration through SRN.
Standardised, enforceable contracts to reduce counterparty risk.
Quality ratings for credits and projects by independent agencies.
Predictable revenue-sharing mechanisms between developers, government, and communities.

These are the safeguards that allow pension funds, sovereign funds and DFIs to engage while fulfilling fiduciary and ESG responsibilities.

What It Means for Investors

For now, most institutional investors remain in a wait-and-see position. They recognise Indonesia’s enormous potential — particularly in NBS, where mangroves, peatlands and forests represent one of the world’s largest untapped carbon sinks — but without the right finance mechanisms, participation is limited.

The moment blended finance, guarantees, and structured forward sales are established, however, the floodgates can open. These tools not only derisk investment, they also give investors long-term exposure to project pipelines, reputational benefits from early entry, and potential upside from price appreciation as credits are verified.

Where Masdar Arche Fits

Masdar Arche sits at the intersection of policy, finance and project development. Our role is to:

Help developers secure SRN registration and Article 6 compatibility.
Work with DFIs and climate funds to design blended structures that absorb early-stage risk.
Support investors in structuring forward contracts with strong safeguards.
Ensure project pipelines are financially, technically and socially robust before capital is committed.

Carbon finance in Indonesia will not scale through regulation alone. It requires a financial ecosystem that can bridge development risks, structure long-term credit flows, and add the governance safeguards investors demand.

That ecosystem does not yet exist in full — but the building blocks are clear. The opportunity for investors is not only to enter the market, but to help create the financial tools that will define it.