Polluter Pays: Understanding Critical Environmental Compensation Cost and Regulatory Compliance

The polluter pays principle is a cornerstone of Environmental Law, ensuring that those responsible for pollution bear the cost of environmental damage.

Environmental Compensation as an Embodiment of the Polluter Pays Principle

Environmental pollution and/or damage caused by a party has in fact harmed the right to a good and healthy environment held by every Indonesian citizen as mandated in Article 28H paragraph (1) of the 1945 Constitution. This then raises a fundamental question: how does the law regulate the responsibility of the party causing the harm?

One of the instruments used is environmental compensation, which is a legal instrument to seek compensation for losses resulting from environmental pollution or damage caused by the party responsible for such pollution or damage.

Indonesian law has regulated environmental compensation in Law No. 32 of 2009 on the Environmental Protection and Management, as lastly amended by Law No. 6 of 2023 on the Enactment of Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation into Law (“Environmental Law”). The legal basis for environmental compensation is contained in Article 87 paragraph (1) of the Environmental Law, which stipulates that every party responsible for business and/or activities that commit unlawful acts in the form of pollution and/or damage to the environment which incurred losses to other people or the environment are obliged to pay compensation and/or take certain measures. The elucidation of Article 87 paragraph (1) of the Environmental Law explains that environmental compensation is the implementation of the polluter pays principle as stipulated in Article 2 letter j of the Environmental Law.

This article will focus on the regulatory overview and implementation of environmental compensation in relation to the government’s right to claim compensation for environmental pollution and/or damage. It will not discuss the unlawful aspect of the claim and its evidence.

Government’s Right to Claim Compensation for Environmental Pollution and/or Damage

Article 90 paragraph (1) of the Environmental Law stipulates that government agencies and local governments in charge of environmental matters have the authority to lodge claims for compensation and certain measures against businesses and/or activities that cause pollution and/or damage to the environment which incurred environmental losses. Furthermore, Article 31 of Supreme Court Regulation Number 1 of 2023 concerning Guidelines for Adjudicating Environmental Cases (“SC Reg. on Environmental Case”) stipulates that central and local government agencies in charge of environmental matters may lodge a claim for compensation and/or certain measures, either independently or jointly, and if the claim a quo is lodged by one of the agencies, whether central or local government, it shall not render the claim lacking in parties.

Environmental Losses

Minister of Environment Regulation No. 7 of 2014 concerning Environmental Losses Due to Environmental Pollution and/or Damage (“MoE Reg. on Environmental Losses”) emerged as an embodiment of Article 90 paragraph (2) of the Environmental Law, which mandates the establishment of ministerial regulations to regulate environmental losses. MoE Reg. on Environmental Losses provides guidelines for central and local government agencies in charge of environmental matters in determining environmental losses and calculating environmental compensation costs.

The Environmental Law and MoE Reg. on Environmental Losses define environmental losses as losses resulting from environmental pollution and/or damage that is not privately owned.

Read Also: Implementation of Strict Liability in Environmental Dispute

Article 3 and Chapter II of Appendix II of MoE Reg. on Environmental Losses stipulate the types of environmental losses, which include:

• losses due to excess of environmental quality standards as a result of failure to implement all or part of the obligations regarding wastewater treatment, emissions, and/or management of hazardous and toxic waste;
• losses for reimbursement of costs incurred in resolving environmental disputes, including costs for: field verification, laboratory analysis, experts, and supervision of the payment of environmental compensation;
• losses for reimbursement of costs incurred in mitigation of environmental pollution and/or damage and environmental restoration;
  compensation costs for this type of loss include:
  • mitigation costs;
    When environmental pollution and/or damage occurs, immediate action must be taken to mitigate the environmental pollution and/or damage so that it can be stopped and prevent it from becoming more severe. These measures may be taken by the business and/or activity actors, and/or by the government. If the government takes measures to mitigate environmental pollution and/or damage and has incurred costs for such measures, the total amount of these costs must be reimbursed by the business and/or activity actors that caused the environmental pollution and/or damage.
  • restorarion costs
    The polluted and/or damaged environment must be restored and, as far as possible, returned to its original state before the pollution and/or damage occurred. These environmental restoration measures apply to the public environment, which is the right and authority of the government, as well as the community environment, which includes the rights and authority of individuals and groups of people. If the responsible party for the business and/or activity and/or individual who causes environmental pollution and/or damage is unable to carry out the obligation to restore the environment, they are required to pay the cost of environmental restoration to the government given that the central or local government will carry out the task of restoring the environment.
• ecosystem losses;
  Environmental pollution and/or damage has a wide-ranging impact that can cause damage to ecosystems. For example, in the case of forest fires, the ecosystem losses suffered include the loss of the forest’s capacity to retain water, prevent erosion, prevent sedimentation, loss of habitat for biodiversity, etc. Environmental damage, as illustrated above, is calculated based on the extent of the damage and the duration of the damage.
• economic loss
  Economic loss is calculated based on two parameters, namely the loss of useful lifespan of polluted or damaged land/area and lost profits.

Articles 4 and 5 of MoE Reg. on Environmental Losses stipulate that the calculation of environmental losses must be carried out by experts and shall be based on the guidelines as stipulated in Appendix II of MoE Reg. on Environmental Losses.

Calculation of Environmental Losses

Chapter III of Appendix II of MoE Reg. on Environmental Losses explains the methods and components for calculating compensation for each type of loss as mentioned above, which are regulated as follows:

Losses due to excess of environmental quality standards

Three methods may be used to calculate this type of environmental loss:

• Accumulation of pollution unit values
  This method is based on the accumulation of pollution unit values for each waste parameter. The pollution unit value for each waste parameter and the basis cost per pollution unit are determined based on the extent of the impact of pollution on the environment and health.

• Operational costs
  This method uses the operational costs per M³ of properly treated waste that meets quality standards in one industry as a benchmark for other similar industries.

• Full cost principle
  Calculations using the full cost principle method (including labor, energy, chemicals, maintenance, and depreciation/amortization of investment value) for existing waste treatment facilities (in cases where waste treatment facilities are already owned but their capacity is undersized and/or they are operated incorrectly and/or deliberately not operated) or new waste treatment technologies are selected in accordance with process requirements (in cases where waste treatment facilities are not yet owned or are already owned) in order to meet waste quality standards.

Losses for reimbursement of environmental dispute verification costs, laboratory analysis, experts, and environmental compensation payment monitoring costs

The costs incurred in the settlement of environmental disputes must be reimbursed by the party responsible for the environmental pollution and/or damage, including:

• Environmental dispute verification costs
  The total actual expenses for various activities, including the planning stage, implementation stage, and evaluation of data and periodic reports.

• Supervision costs
  The total actual expenses for various activities, including supervision planning; supervision implementation; and monitoring of supervision implementation results.

Losses for reimbursement of costs incurred in the mitigation of environmental pollution and/or damage and environmental restoration

• Mitigation costs for environmental pollution and/or damageThe amount of costs depends on the extent of environmental pollution and/or damage that is occurring and consists of actual costs incurred.
• Environmental restoration costs
  All costs incurred to restore the environment to its condition prior to pollution and/or damage.

The components of environmental restoration costs due to environmental pollution are calculated per type of media, including:

• the clean-up/restoration costs for soil, include:
  • bioremediation;
  • bioventing;
  • landfarming;
  • landspreading;
  • soil vapor extraction;
  • natural attenuation and monitoring.
• the clean-up/restoration costs for water, include:
  • air sparging;
  • bioremediation;
  • natural attenuation and monitoring;
  • pumping and treatment.

The components of environmental restoration costs due to environmental damage include:

• the cost of procuring materials to replace damaged ecosystems (actual costs);
• revegetation costs;
• reservoir construction costs;
• nutrient recycling costs;
• waste decomposition costs;
• biodiversity costs;
• genetic resource costs;
• carbon release costs;
• carbon reduction costs.

Each component is calculated based on the formula specified in Appendix II of MoE Reg. on Environmental Losses. The results of the nine components are then added together to determine the total cost of environmental restoration.

Read Also: Carbon Capture and Storage (CCS) and Carbon Capture, Utilization, and Storage (CCUS): Potential and Regulation in Indonesia

Ecosystem losses

The following components are calculated to obtain the cost of ecosystem loss:

• cost of restoring water management functions;
• constructing reservoirs costs;
• water management costs;
• erosion and runoff control costs;
• soil formation costs;
• nutrient recycling costs;
• waste decomposition costs;
• biodiversity costs;
• genetic resource costs;
• carbon release costs;
• erosion costs;
• biodiversity restoration costs.

Each component is calculated based on the formula specified in Appendix II of MoE Reg. on Environmental Losses. The results of the 12 components are then added together to determine the amount of compensation for environmental damage.

Article 8 of MoE Reg. on Environmental Losses stipulates that payments for environmental compensation by the defendant constitute non-tax state revenue and shall be paid to the state treasury.

Implementation of Environmental Compensation Costs in Court Decisions

Ministry of Environment and Forestry v. PT Tiesico Cahaya Pertiwi, Decision No. 44/Pdt.G/LH/2024/PN Jmb jo. Decision No. 74/Pdt.Sus-LH/2025/PT JMB

In the case between the Ministry of Environment and Forestry (Kementerian Lingkungan Hidup dan Kehutanan, “KLHK”) as the plaintiff and PT Tiesico Cahaya Pertiwi (“PT TCP”) as the defendant, KLHK lodged a claim against PT TCP for a land fire covering an area of 3,480 hectares in Musi Banyuasin Regency, South Sumatra. The land fires occurred in the area covered by the Mixed Forest Timber Forest Product Utilization Permit (Izin Usaha Pemanfaatan Hasil Hutan Kayu Hutan Tanaman Campuran, “IUPHHK-HTC”) controlled and operated by PT TCP.

Based on the expert testimony which KLHK appointed in relation to the analysis and observation of environmental damage, the fires that occurred have caused damage to peatlands as they have met the standard criteria for damage (based on Government Regulation No. 4 of 2001 concerning the Control of Environmental Damage and/or Pollution Related to Forest and/or Land Fires, “GR on Environmental Damage or Pollution”) and shall disrupt the balance of the ecosystem in the forest area.

Read Also: Environmental Dispute: Unlawful Act by State and/or Government Institution in the Severe Smoke Fog due to Forest Fires

In its claim, KLHK stated that PT TCP must be held responsible for environmental losses caused by land fires that occurred in the IUPHHK-HTC area controlled and operated by them based on the polluter pays principle and the provisions of Article 87 of the Environmental Law.

KLHK appointed experts to calculate the environmental losses in the fire-affected area, and all calculation components used by the experts referred to MoE Reg. on Environmental Losses.

The components of environmental losses based on expert calculations are as follows:

• Losses for reimbursement of costs incurred in resolving environmental disputes amounting to IDR 130,907,800 (one hundred thirty million nine hundred seven thousand eight hundred Rupiah);
• Ecological damage amounting to IDR 257,303,490,000 (two hundred fifty-seven billion three hundred three million four hundred ninety thousand Rupiah), consisting of:
  • Water storage amounting to IDR 220,980,000,000 (two hundred twenty billion nine hundred eighty million Rupiah);
  • Water management amounting to IDR 104,400,000 (one hundred four million four hundred thousand Rupiah);
  • Erosion control amounting to IDR 4,263,000,000 (four billion two hundred sixty-three million Rupiah);
  • Soil formation amounting to IDR 174,000,000 (one hundred seventy-four million Rupiah);
  • Nutrient recycling amounting to IDR 16,042,800,000 (sixteen billion forty-two million eight hundred thousand Rupiah);
  • Waste decomposition amounting to IDR 1,513,800,000 (one billion five hundred thirteen million eight hundred thousand Rupiah);
  • Biodiversity amounting to IDR 9,396,000,000 (nine billion three hundred ninety-six million Rupiah);
  • Genetic resources amounting to IDR 1,426,800,000 (one billion four hundred twenty-six million eight hundred thousand Rupiah);
  • Carbon release amounting to IDR 1,409,400,000 (one billion four hundred nine million four hundred thousand Rupiah);
  • Carbon reduction amounting to IDR 493,290,000 (four hundred ninety-three million two hundred ninety thousand Rupiah).
• Economic losses amounting to IDR 210,540,000,000 (two hundred ten billion five hundred forty million Rupiah).

Thus, the total environmental losses arising from losses for the reimbursement of costs incurred in resolving environmental disputes, ecological losses, and economic losses as claimed by KLHK amount to IDR 467,974,397,800 (four hundred sixty-seven billion nine hundred seventy-four million three hundred ninety-seven thousand eight hundred Rupiah).

In its consideration, the Panel of Judges stated that PT TCP had committed an unlawful act because it was proven that it did not have adequate facilities and infrastructure to mitigate forest and land fires in its business license area and did not fulfill its obligation to report the results of monitoring related to the prevention of forest and land fires every six months to the competent authority as stipulated in Article 13 Jo. 14 GR on Environmental Damage or Pollution, so that the defendant was declared to have committed negligence in relation to forest and land fires in its business license area, which posed a serious threat to environmental sustainability.

In relation to the calculation of environmental compensation, the Panel of Judges granted compensation to be paid by PT TCP for ecological damage in the amount of IDR 257,303,490,000.00 (two hundred fifty-seven billion three hundred three million four hundred ninety thousand Rupiah) and economic losses amounting to IDR 210,540,000,000 (two hundred ten billion five hundred forty million Rupiah). The Panel of Judges argued that the calculation of ecological damage and economic losses had been carried out by experts appointed by the KLHK in accordance with the rules and guidelines for calculating environmental losses in MoE Reg. on Environmental Losses, so the Panel of Judges was of the opinion that the compensation claimed by the KLHK was legally justified to be granted.

The Panel of Judges then rejected the claim for compensation for losses to reimburse the costs of resolving the environmental dispute in the amount of IDR 130,907,800 (One hundred thirty million nine hundred seven thousand eight hundred Rupiah) on the grounds that the calculation did not specify what had been spent and was not supported by receipts/invoices for expenses such as transportation costs, expert services, laboratory services, and so on. Therefore, the Panel of Judges ruled that the claim for compensation for the costs of resolving the environmental dispute requested by KLHK was not legally justified and must be rejected.

Based on the considerations of the Panel of Judges, the compensation to be paid by PT TCP is IDR 467,843,490,000.00 (four hundred sixty-seven billion eight hundred forty-three million four hundred ninety thousand Rupiah).

The High Court upheld the first instance decision which ordered PT TCP to compensate for environmental losses as mentioned above through Decision No. 74/Pdt.Sus-LH/2025/PT JMB. However, this case is still in the cassation stage at the Supreme Court.

Ministry of Environment and Forestry v. PT Putralirik Domas, Decision No. 193/Pdt.G-LH/2020/PN Jkt.Utr jo. Decision No. 200/PDT/2022/PT DKI jo. Supreme Court Decision No. 3441 K/Pdt/2023 jo. Supreme Court Decision No. 79 PK/Pdt/2025

In the case between KLHK as the plaintiff and PT Putralirik Domas (“PT PLD”) as the defendant, KLHK lodged a claim against PT PLD for a land fire covering an area of 500 hectares in Kubu Raya Regency, West Kalimantan. The land fire occurred in an area controlled by the defendant for palm oil plantation activities.

In its claim, KLHK stated that PT PLD must be held responsible for the environmental losses caused by the land fires that occurred in the palm oil plantation area under its control based on the polluter pays principle and the provisions of Article 87 of the Environmental Law.

Based on the experts testimony which KLHK appointed in relation to the analysis and observation of environmental damage, the fire that occurred has caused soil damage because it has met the standard criteria for damage (based on GR on Environmental Damage or Pollution), so that it shall disrupt the balance of the ecosystem in the fire-affected area.

KLHK appointed experts to calculate the environmental losses in the fire-affected area, and all calculation components used by the experts refer to MoE Reg. on Environmental Losses.

The components of environmental losses based on expert calculations are as follows:

• Losses for reimbursement of costs incurred in resolving environmental disputes amounting to IDR 2,966,092,450 (two billion nine hundred sixty-six million ninety-two thousand four hundred fifty Rupiah), consisting of:
  • Environmental dispute verification costs, including transportation costs for the verification team, accommodation, laboratory analysis, and expert fees amounting to IDR 66,092,450 (sixty-six million ninety-two thousand four hundred fifty Rupiah);
  • Environmental restoration supervision costs, including supervision and laboratory analysis costs amounting to IDR 2,900,000,000 (two billion nine hundred million Rupiah).
• Losses for reimbursing the costs of mitigating environmental damage and restoring the environment and/or ecosystem losses amounting to IDR 196,577,950,000 (one hundred ninety-six billion five hundred seventy-seven million nine hundred fifty thousand Rupiah), consisting of:
  • Ecological damage, including:
    1. Water storage amounting to IDR 33,250,000,000 (thirty-three billion two hundred fifty million Rupiah);
    2. Water management amounting to IDR 15,000,000 (fifteen million Rupiah);
    3. Erosion control amounting to IDR 612,500,000 (six hundred twelve million five hundred thousand Rupiah);
    4. Soil formation amounting to IDR 25,000,000 (twenty-five million Rupiah);
    5. Nutrient recycling amounting to IDR 2,305,000,000 (two billion three hundred five million Rupiah);
    6. Waste decomposition amounting to IDR 217,500,000 (two hundred seventeen million five hundred thousand Rupiah);
    7. Biodiversity amounting to IDR 1,350,000,000 (one billion three hundred fifty million Rupiah);
    8. Genetic resources amounting to IDR 205,000,000 (two hundred five million Rupiah);
    9. Carbon release amounting to IDR 202,500,000 (two hundred two million five hundred thousand Rupiah);
    10. Carbon reduction amounting to IDR 70,875,000 (seventy million eight hundred seventy-five thousand Rupiah).
  • The total cost that must be incurred to reimburse the ecological losses incurred for the 10 components above is IDR 38,253,375,000 (thirty-eight billion two hundred fifty-three million three hundred seventy-five thousand Rupiah).
• Economic losses based on the loss of the useful lifespan of the fire-affected land amount to IDR 15,973,700,000 (fifteen billion nine hundred seventy-three million seven hundred thousand Rupiah);
• The restoration costs for restoring 500 hectares of fire-affected land include the costs of purchasing compost, transportation costs, and the cost of spreading compost in the fire-affected area, amounting to IDR 122,000,000,000 (one hundred twenty-two billion Rupiah).
• The cost of restoring lost ecological functions is IDR 4,350,875,000 (four billion three hundred fifty million eight hundred seventy-five thousand Rupiah), consisting of the following costs:
  • Nutrient recyclers;
  • Waste decomposers;
  • Biodiversity
  • Genetic resources
  • Carbon reduction
  • The cost of constructing/repairing the hydrological system (water management) on the fire-affected land is IDR 6,000,000,000 (six billion Rupiah).
  • Revegetation costs on the fire-affected land amounting to IDR 10,000,000,000 (ten billion Rupiah).

Thus, the total environmental losses arising from losses for the reimbursement of costs incurred in resolving environmental disputes and losses for the reimbursement of costs incurred in mitigating environmental damage and restoring the environment and/or ecosystem losses, as claimed by KLHK, is IDR 199,544,042,450 (one hundred ninety-nine billion five hundred forty-four million forty-two thousand four hundred fifty Rupiah).

In its consideration, the Panel of Judges stated that PT PLD had committed an unlawful act because it was proven to have failed to fulfill its obligation to prevent fires and was proven to have conducted land clearing by means of burning, which is prohibited by applicable laws and regulations, and therefore could be classified as an unlawful act.

The Panel of Judges declared that the amount of compensation claimed by KLHK, amounting to Rp199,544,042,450 (one hundred ninety-nine billion five hundred forty-four million forty-two thousand four hundred fifty Rupiah) is legally justified and should be granted because the calculation of the losses was carried out by experts appointed by KLHK in accordance with the rules and guidelines for calculating environmental losses in MoE Reg. on Environmental Losses.

At the appellate level, the High Court only overturned the provisional claim previously granted by the first instance court, but did not overrule the first instance court’s considerations regarding the exception and the subject matter of the case, so that the environmental compensation costs remained in force for PT PLD. At the cassation and reconsideration level, the Supreme Court rejected the cassation and reconsideration requests from PT PLD.

MoE on Environmental Losses as a Standard Instrument for Calculating Environmental Losses

Based on these two precedents, it can be concluded that the panel of judges consistently uses MoE Reg. on Environmental Losses as the main reference in calculating environmental compensation costs. In the case of KLHK v. PT PLD, the panel of judges granted all environmental compensation costs submitted by KLHK on the grounds that the compensation value had been calculated by experts based on MoE Reg. on Environmental Losses.

In the case of KLHK v. PT TCP, the Panel of Judges rejected part of the environmental compensation costs claimed by KLHK, namely the item related to the costs of resolving the environmental dispute. The consideration was that the calculation of these costs did not clearly detail what had been spent and was not supported by evidence such as receipts or invoices for transportation costs, expert services, laboratory analysis, and so on.

This rejection is reasonable, especially when compared to the case of KLHK v. PT PLD, in which the panel of judges granted the same compensation. In the PLD case, KLHK explained in detail that the costs of resolving the environmental dispute were allocated for:

• verification costs, which included team transportation, accommodation, laboratory analysis, and expert services; and
• environmental restoration supervision costs, which included supervision and laboratory analysis activities.

These details are in line with Appendix II of MoE Reg. on Environmental Losses, thus providing sufficient grounds for the Panel of Judges to grant the claim.

Thus, the judge’s stance on MoE Reg. on Environmental Losses, as explained above, affirms that this regulation has become a standard instrument in determining environmental compensation costs.

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Sources:
Law and Jurisprudence

• Law No. 32 of 2009 on the Environmental Protection and Management, as lastly amended by Law No. 6 of 2023 on the Enactment of Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation into Law
• Minister of Environment Regulation No. 7 of 2014 concerning Environmental Losses Due to Environmental Pollution and/or Damage
• Supreme Court Regulation Number 1 of 2023 concerning Guidelines for Adjudicating Environmental Cases
• Supreme Court Decision 3441 K/Pdt/2023
• Supreme Court Decision No. 79 PK/Pdt/2025
• Decision No. 200/PDT/2022/PT DKI
• Decision No. 74/Pdt.Sus-LH/2025/PT JMB
• Decision No. 193/Pdt.G-LH/2020/PN Jkt.Utr
• Decision No. 44/Pdt.G/LH/2024/PN Jmb