Greenhouse gas emissions in Southeast Asia (SEA) are rising rapidly – Indonesia’s carbon emissions have increased from 281 million tonnes in 2000 to 812 million tonnes in 2024, and the Philippines and Vietnam have registered significant increases too due to economic growth and coal use. This underscores the urgent need for effective policy tools like carbon pricing to help meet the Paris Agreement targets.
Carbon pricing has proven effective in reducing emissions, especially when combined with complementary policies such as renewable subsidies and coal phase-out plans. However, it remains politically sensitive, particularly in fossil fuel-dependent economies, due to potential increases in energy costs, making careful policy design crucial.
Countries in the region are taking steps forward: Indonesia launched its carbon exchange (IDXCarbon) in 2023, the Philippines is exploring an emissions trading system (ETS) and Vietnam plans to pilot one in 2025. Supporting these efforts, the EASE programme (2024-29) focuses on developing carbon markets, fiscal tools and trade-related strategies to enable inclusive, low-carbon growth.
Indonesia
Current status and recent developments
Indonesia has made significant progress in establishing a legal and regulatory framework for carbon pricing. Key laws and regulations are in place, including provisions for a carbon tax, emissions trading and carbon market governance. A new presidential regulation in 2025 has strengthened the ETS, aligning it more closely with global practices. Supporting regulations outline detailed procedures for carbon trading, emission monitoring and sector-specific implementation, particularly in the power sector. Several ministries are also developing carbon reduction road maps.
In practice, Indonesia has begun operationalising its carbon market. The country launched its carbon exchange, IDXCarbon, in 2023 and has since taken steps to enable international carbon trading, including signing mutual recognition agreements with global standards. However, trading volumes remain low and the carbon tax, though legislated, is yet to be implemented.
The ETS currently covers a growing share of coal-fired power plants and it is planned to extend ETS to other fossil-fuel-based industries by 2027. While systems for monitoring emissions are being strengthened, the effectiveness of the ETS remains limited due to high emissions thresholds and low compliance demand, resulting in minimal trading activity.
Recommendations for the Government of Indonesia
Indonesia should continue strengthening its monitoring, reporting and verification (MRV) system to support credible carbon markets and enable greater participation in international trading. It should also finalise and publish carbon-pricing road maps for additional sectors to provide clarity on emission measurement, caps and trading mechanisms.
The government should implement the already legislated carbon tax, even at a low rate, to signal commitment to carbon pricing, while exploring effective revenue recycling mechanisms. Care must be taken to ensure the tax does not act as a price cap within the ETS; it should be set higher than compliance costs to maintain the incentive to reduce emissions.
Further, tightening ETS allowances is essential to create meaningful compliance demand and drive behavioural change. Indonesia should also prepare for the impact of carbon border adjustment mechanisms (CBAMs) by assessing trade implications and coordinating with stakeholders. Finally, reforming fossil fuel subsidies can reinforce carbon pricing efforts while freeing up fiscal resources, provided measures are in place to protect vulnerable groups.
Philippines
Current status and recent developments
Carbon pricing in the Philippines is still at an early stage, with ongoing discussions around the design of an ETS. Several draft bills in the Philippines seek to promote carbon pricing by encouraging low-carbon investments and establishing an implementation framework. In support, the Department of Energy issued the General Framework for Carbon Credits in the Energy Sector (September 2025), outlining rules for generating and trading carbon credits from activities such as coal plant retirement, renewable energy deployment, energy efficiency, and electric vehicle adoption. Key design debates include sector coverage, allowance allocation, cap setting, pricing mechanisms, use of offsets and revenue reinvestment, all of which will shape the system’s long-term effectiveness.
Efforts are also under way to strengthen the broader carbon market framework. The government is exploring opportunities to attract investment in projects such as forestry- and nature-based solutions to generate tradable carbon credits, including under international mechanisms. At the same time, institutional arrangements, such as the management of a national carbon registry, are still being finalised.
Carbon taxes currently face limited support due to concerns over rising electricity costs and economic competitiveness, while an ETS is seen as more acceptable if designed carefully. Although near-term effects of global carbon border measures may be modest, the Philippines will need to focus on low-carbon industrial development to maintain long-term competitiveness in a decarbonising global economy.
Recommendations for the Government of the Philippines
The government should evaluate and model different carbon-pricing approaches to build a shared vision, assessing their effects on emissions, prices and welfare, and the revenue recycling options. It should also establish strong MRV systems and the necessary infrastructure to support both domestic and international carbon markets.
Developing an effective ETS is key, ensuring it drives low-carbon investment while maintaining affordability. The government should also promote informed public debate to improve understanding of carbon pricing and build support by highlighting its broader economic and energy benefits.
Vietnam
Current status and recent developments
Vietnam has made strong progress in establishing a legal framework for carbon pricing, led by its Law on Environmental Protection and updated 2025 regulations that define the structure of its carbon market and ETS. Detailed guidance has also been issued for MRV across key sectors.
The ETS pilot, launched in 2025 and running until 2028, covers major sectors such as power, steel and cement, with plans for broader expansion. While implementation is progressing, challenges remain, particularly in building sufficient technical capacity for emissions verification and delaying the start of trading to 2026.
Vietnam is prioritising a domestic carbon market while allowing relatively high use of offsets for compliance. However, international carbon trading remains limited due to evolving legal frameworks, though new regulations are under development. The country is also revising environmental taxes, though these are not yet aligned with carbon content.
Overall, progress is driven by Vietnam’s net zero target for 2050 and strengthened climate commitments, alongside external pressures such as the EU’s carbon border measures, which are expected to significantly affect key export sectors like steel.
Recommendations for the Government of Vietnam
The Government of Vietnam should continue to prioritise the ETS pilot. It has made strong progress on the legislative foundation of the ETS; it now needs to focus on the practicalities of building a registry, as well as determining and allocating allowances. It also needs to build capacity to undertake MRV of the key facilities to enable it to collect the necessary data to operationalise the ETS.
In parallel, there is a need to extend trade policy analysis: the Ministry of Industry and Trade is developing a comprehensive strategy to address the potential impact of CBAMs on Vietnam and is keen to understand carbon leakage risks and mitigation options.
Further, revising the Environmental Protection Tax Law could strengthen the overall policy framework. The government may wish to consider revising the Environmental Protection Tax Law, either to make environmental protection taxes more closely reflect the carbon content of fuels and/or to include greenhouse gas emissions as pollutants liable for the payment of environmental protection fees.
Conclusions and recommendations for development partners
Implementing carbon pricing is a complex and gradual process that requires time to build legal, institutional and market systems. Countries can benefit significantly by learning from global experiences rather than starting from scratch. Importantly, carbon-pricing design must reflect each country’s unique economic and political context, as no single model fits all. Political feasibility also varies, making it essential to carefully sequence reforms and build long-term support through clear public communication on the benefits of carbon pricing.
Development partners can play a key role by providing technical assistance and helping build systems such as registries, MRV frameworks and trading platforms. Sharing both successes and failures from international experience is critical to avoid repeating mistakes. Support should be closely aligned with domestic priorities and sensitive to local political and economic conditions. Finally, a long-term approach is essential, recognising that effective carbon markets evolve gradually and require sustained collaboration.
This is an extract from a recent report, “Implementing Carbon Pricing in Southeast Asia”, published by the International Institute for Sustainable Development.
