RPT-SPECIAL REPORT-Making forests pay in a warming world
away because the forest has been protected from being cleared, dry-season fires prevented and logged areas replanted.
Crucially, a portion of any credit sales would flow to local communities and central government coffers.
But to maximise the benefits, investors need a market.
"We cannot be sustainable in five years without a market for the credits," Kusumaatmadja's business partner Hartono, 36, told Reuters in Jakarta. "We're fighting a losing battle if there's no transaction," said the U.S.-trained former investment banker for J.P. Morgan, who runs private firm PT RMU. More than $2 million had already been invested in the project, he added, with another $4.5 million to be paid up front when the central government issues a special licence.
Underpinning hopes for that new market is a U.N.-backed scheme called REDD, or reducing emissions from deforestation and forest degradation.
The idea is to reward developing nations that preserve their forests, boost the carbon stock, and have sustainable forestry management. Kusumaatmadja and Hartono's project is one of nearly 40 early REDD prototypes, the Indonesian government says.
Those rewards would ultimately take the form of an annual sale of forest carbon credits to rich nations to help them meet part of their mandatory emissions reduction targets in market that could be worth $30 billion a year, the U.N. REDD programme estimates.
That's the theory.
Two years ago it seemed to be falling into place with the United States and Australia proposing domestic emissions trading schemes that would have allowed companies to use large amounts of offsets from overseas. Legislation to enact those schemes foundered in both countries, however.
Only Europe and New Zealand currently have emissions trading schemes, but the EU bars use of REDD credits and it is unclear if it will allow them to be used in the third phase of its trading scheme from 2013.
U.N. talks are far from sealing a broader climate pact to expand or replace the existing Kyoto Protocol from 2013 , in which REDD would be a central part, casting yet more uncertainty over the plan.
That leaves the newly passed California emissions trading scheme and a planned bilateral carbon offset programme by Japan as the only real potential buyers at the moment.
The lack of major demand for credits comes as an irony, since over the past two years, governments and institutions, including the World Bank, have stepped in to finance pilot REDD projects in developing countries in Asia, South America and Africa.
The voluntary carbon market has also developed rigorous standards for projects to ensure the carbon reductions are real, measurable and verifiable to give investors confidence.
Yet the voluntary market remains miniscule. It shrank 47 percent in 2009 to $387 million, compared with the EU's 100 billion euro ($134 billion) emissions trading scheme. Only a fraction of the voluntary market volume covered trade in avoided deforestation offsets.
WHERE'S THE DEMAND?
"Two years ago, mainstream investors didn't want to get involved in projects that appeared to be run by cowboys with ridiculous return expectations," said Chris Knight, assistant director of PricewaterhouseCoopers' climate change, forestry and ecosystems advisory.
Now, because of much improved standards, investors are less concerned about the risk at the project level, he told Reuters last month by telephone during a REDD conference in Malaysia.
Instead, investors are looking for more certainty over demand for the carbon credits, said London-based Knight, who is working on ways to draw in private-sector financing until there are stronger REDD policies in place in developing countries.
Some banks, such as Bank of America Merrill Lynch and Australia's Macquarie, have invested in projects or bought credits once projects pass a tough auditing process. Macquarie, in a 2009 report, estimated the potential emissions reductions from reducing deforestation at two billion tonnes of CO2 by 2030 and 1.3 billion tonnes for reforestation.
Karmali of Bank of America Merrill Lynch signed an agreement in early 2008 to buy carbon credits from a 750,000 ha project in Indonesia's Aceh province that aims to cut deforestation in the Ulu Masen forest area by 85 percent.
A deal with the government of Aceh in northern Sumatra and Singapore-based firm Carbon Conservation aims to reduce 100 million tonnes of emissions over 30 years and boost local livelihoods to prevent logging.
The credits, though, are still some way off, with the project still to complete the carbon auditing process by the respected Voluntary Carbon Standard based in Washington. But the project has already been approved by the equally respected Climate, Community and Biodiversity Alliance standard.
Karmali said it was essential to reward early action by REDD investors. It was also essential for the public sector to leverage private capital to drive investments in the forestry sector that would ultimately prove to be a cheap way of cutting greenhouse gas emissions.
"The other thing you could do is you could have a purchaser of credits of last resort," he told Reuters from London. This was an idea raised in the 2008 Eliasch Review for the British government. That report estimated that doing nothing to halt deforestation could lead to climate change costs to the global economy of $1 trillion a year by 2100.
Karmali pointed to the need to have some sort of global public sector fund that could buy up emissions reductions.
"If such a mechanism were deployed, it would be de-risking private capital," he said.
A BRIDGE TO FINANCE
For project developers, time is running out. East of PT RMU's Katingan project in Central Kalimantan, Hong Kong-based Infinite Earth is hoping its Rimba Raya project will be the first REDD investment to be fully validated by the Voluntary Carbon Standard by the end of this year, subject to the Indonesian government granting it a special license.
The nearly 100,000 ha project on the edge of a national park has forward-sold enough credits to cover operations for the next five years, but at a substantial discount to the 5 to 7 euros per carbon credit mentioned by brokers.
"Appetite for Rimba Raya credits has been good but definitely we need a compliance (emissions trading) market to support the prices REDD needs in order to be competitive with alternate land uses, such as palm oil," Infinite Earth CEO Todd Lemons told Reuters.
Knight of PwC said some sort of bridging financing or guarantee mechanism was crucial for investors until a global market evolved. "Unless you provide some sort of bridging finance before there's regulatory certainty then the risks are just too high for the private sector," Knight said.
One possibility was to ramp up the use of environment funds to help disburse some of the billions of dollars pledged by rich nations for REDD. These are often endowment funds and therefore independent of governments. Another was revolving funds, in which a portion of any REDD credit proceeds are returned to the fund to keep it running.
In the interim, large amounts of public money from governments, foundations and conservation groups are vital.
Earlier this year, dozens of nations teamed up to create an interim REDD partnership to guide spending of about $4 billion in pledged funding, build institutions and develop pilot projects between 2010 and 2012. To date, more than 70 nations have signed up.
Billionaire investor George Soros has also stepped in.
In a letter to U.S. President Barack Obama on Aug 21 this year following a trip to Indonesia, Soros said $10 billion a year would be sufficient to put a price on avoiding and reversing carbon emissions from rainforests.
He proposed a 5 pe
- Tweet this
- Share this
- Digg this