Indonesia possesses approximately 13.4 million hectares of tropical peatlands, making it one of the world's largest natural carbon storage systems. Protecting these ecosystems plays a vital role in reducing greenhouse gas emissions while helping Indonesia achieve its Nationally Determined Contribution (NDC) under the Paris Agreement. Through the country's Nilai Ekonomi Karbon (NEK) framework and IDXCarbon, restoration companies can generate revenue by selling Sertifikat Pengurangan Emisi Gas Rumah Kaca (SPE-GRK) after successfully restoring degraded peatlands.
Despite this opportunity, the financial structure of the carbon market contains a critical weakness. Carbon credits cannot be sold immediately after restoration activities are completed. Instead, companies must wait between 12 and 24 months for the mandatory Measurement, Reporting, and Verification (MRV) process before receiving tradable certificates. During this waiting period, companies continue paying for canal maintenance, fire prevention, monitoring, and restoration activities without receiving any carbon revenue. According to the authors, this creates an "illusion of liquidity," where projects appear profitable over the long term but struggle to survive short-term cash shortages.
To examine this challenge, Azizah Mumtazah Efson and Octofa Yudha Sudrajat developed an integrated System Dynamics simulation model. Rather than relying on traditional financial calculations, the model combines corporate cash flow, ecological conditions, climate variability, and Indonesia's carbon market regulations into a single dynamic framework.
The researchers used secondary data from multiple sources, including:
- Historical rainfall and El Niño records from BMKG.
- IPCC Tier 2 emission factors for tropical peatlands.
- Operational expenditure data from publicly available peatland restoration projects.
- Historical carbon prices from IDXCarbon.
- Indonesian carbon market regulations under Presidential Regulation No. 98 of 2021 governing the SRN-PPI verification system.
Five simulation scenarios were developed, ranging from normal operating conditions to extreme El Niño events accompanied by declining carbon prices and longer verification delays. This approach allowed the researchers to evaluate how climate shocks and institutional delays influence the financial resilience of restoration companies.
The simulations reveal that financial performance depends not only on carbon prices but also on how quickly companies can access their carbon revenue after investing in restoration activities.
Several important findings emerged:
- Normal conditions remain financially sustainable. Companies maintain sufficient cash reserves until the first carbon payment arrives approximately 18 months after restoration activities begin.
- Moderate El Niño significantly increases financial pressure. Operational costs rise by about 40%, mainly due to additional canal maintenance and fire prevention. Although companies experience cash stress, they remain operational.
- Extreme El Niño creates an insolvency trap. Operating costs increase dramatically while carbon revenue remains delayed. Companies begin reducing maintenance spending to preserve cash, causing groundwater levels to decline. This increases carbon emissions, reduces future carbon credits, and ultimately eliminates the project's primary revenue source.
- Ecological deterioration accelerates financial collapse. Once maintenance is reduced, degraded peatlands produce higher emissions, making projects less capable of generating carbon credits. The loss of future income further weakens company finances, creating a self-reinforcing downward cycle.
The study also introduces the concept of a Minimum Cash Threshold (MCT)—the minimum working capital required for restoration companies to survive the MRV waiting period.
Simulation results indicate that required cash reserves increase sharply under more severe climate conditions:
- Baseline scenario: IDR 68.97 billion
- Moderate El Niño: IDR 96.55 billion
- Extreme El Niño: IDR 172.42 billion
- Extreme stress scenario with lower carbon prices: IDR 367.82 billion
These figures suggest that many restoration companies may underestimate the amount of financial capital required to maintain ecological infrastructure until carbon revenues are received.
Another significant finding challenges a common policy assumption. Reducing the MRV waiting period from 18 months to 12 months improves liquidity but does not prevent collapse under severe El Niño conditions. Earlier payments alone cannot offset rapidly increasing restoration costs caused by extreme drought and fire risks.
Instead, the researchers argue that financial resilience requires broader policy support, including:
- Larger contingency cash reserves before projects begin.
- Emergency bridge financing during prolonged MRV periods.
- Climate-adjusted financial planning based on projected El Niño risks.
- Regulatory requirements for restoration projects to disclose their Minimum Cash Threshold during project approval.
These measures could strengthen Indonesia's nature-based carbon market by ensuring restoration companies remain financially stable while continuing to protect peatland ecosystems.
According to Azizah Mumtazah Efson and Octofa Yudha Sudrajat from the School of Business and Management, Bandung Institute of Technology, the success of peatland carbon projects depends not only on their long-term carbon storage potential but also on their ability to survive temporary liquidity shortages created by institutional verification delays. Their findings suggest that ecological sustainability and corporate financial sustainability should be managed as interconnected systems rather than separate policy objectives.
The study also contributes to the broader literature by extending Financial Distress Theory into nature-based carbon markets. Unlike conventional industries, financial distress in peatland restoration can permanently damage ecological assets, reducing future carbon sequestration capacity and making recovery considerably more difficult.
Author Profile
Azizah Mumtazah Efson is a researcher at the School of Business and Management, Bandung Institute of Technology (ITB). Her research focuses on sustainable finance, carbon markets, climate policy, and system dynamics modeling for environmental decision-making.
Octofa Yudha Sudrajat is a researcher and academic at the School of Business and Management, Bandung Institute of Technology (ITB). His expertise includes business strategy, system dynamics, sustainability management, and environmental policy analysis.
Source
Efson, Azizah Mumtazah, & Sudrajat, Octofa Yudha. (2026). Financial Distress in Nature-Based Carbon Markets: A System Dynamics Model of Corporate Liquidity Under Climate Shocks and Revenue Deferral. Formosa Journal of Multidisciplinary Research, Vol. 5, No. 7, 2026.
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