SZ: And this is all something that you think every country will have to go through?
HP: They can try to bypass some of it, but they will then find they don’t have the data they want. We realized early on that if we don't have the data that we want, then we will not be able come up with a trusted system, and that actually is the hinge of all market mechanisms. Market mechanisms are built on trust.
Whether you are talking about a financial market, a commodity market, or a futures market, you need trust. If you're underlying isn't trustworthy, how can you proceed? So from the national perspective, building trust will be the agenda. From the global perspective, the agenda will be the competing tasks of harmonizing to create a holistic approach and addressing the local issues. Those are two big issues here.
SZ: I see the issues philosophically, but I don’t see how you’re going to get from A to Z in practical terms – how you’re going to finance it.
HP: There is a way to scale up using REDD-based “payments for performance” instead of offsets. I propose that we can make early payments that are delineated in tons of reductions but aren't offsets. Here’s an example:
Let’s say I want to get started in REDD+, and I have one hectare that we know sequesters at least 1000 tons, but it could be as much as 10,000 tons, because it’s peatland. And let’s say the price that I can receive is between $5 and $20 per ton. So, the least I can get is $5,000 and the most I can get is $200,000.
Now, I could negotiate and try to get the most possible, or I can prime the pump and take a lower amount. Or I could do a hybrid: accept the lowest amount, but leave the door open to more. Which makes more sense to you?
SZ: I’d say the third option – because 10% of something is better than 100% of nothing…
HP: Well, it’s lower than 10% in this example, but there is an option for more. Still, you’re right: the lowest amount is the path of least resistance, and it primes the pump. Then you have your bilateral connections for public funds, but there is a condition: that the early payments are not offsets.
SZ: So, the country making the payment can pay you based on the amount of carbon you sequester, but they can’t write it off their own emissions.
SZ: But then is it payment for an ecosystem service?
HP: Maybe we can call it a down payment for ecosystem services? The reason is that, once the trade is happening based on minimum-minimum and you start getting results, then you can say, “It works!” Then, once you know your emission factors, you can go to private investors on a B2B (business-to-business) basis. Let’s say you now know that the same piece of land has an emission factor of 7500 tons per hectare and not 1000. Now you really know your environmental impact, so you know what you’re selling. And then on price, because we’re further along, you can negotiate on that as well. So, maybe you get $15 per ton for that plot. Then you go back and deduct the down payment.
SZ: But how do you make sure this isn't just like a money pit, where you keep asking for more money to keep the land secure?
HP: That is what needs to be worked out upfront. You have the initial phase, which is the readiness phase, and you would agree that it goes to create this assessment. We may then find that the B2B element only applies to a small part of all this – but right now, we have nothing.
SZ: When should the payments be B2B, and when should they be G2G (government-to-government)?
HP: That depends on a lot of factors. A lot of the B2B could be internal – remember, we are hoping to grow our economy over this period as well – so we could see offsets coming from within the country. This goes back to our earlier discussion about Rimba Raya.
To answer your question, we have to consider that our objective in connecting climate change with development is to make sure the land is being used in the most judicial way, the most fair way, and the most sustainable way. All discussion has to flow from that. But we first have to identify the kind of fund that’s paying into this. If it’s the public fund – and we can include the Soros Foundation or the Gates Foundation or even Corporate Funds beyond CSR – those that are for public good instead of private benefit need to be treated as pubic goods. They should not be offsets.
Let’s look at the Norwegian money – and we can apply this thinking to the BioCarbon Fund and the FCPF or FIP as well – this is REDD Readiness money. This is the transformation phase that comes before payment for results. Everyone agrees on this, but they don’t agree on what “readiness” means.
SZ: There are benchmarks – RRPs, the Reference Levels…
HP: Right. And we looked at the questionnaire that’s being used by UN-REDD and FCPF to get a sense for what it is and how to use it. When I studied it for the REDD+ partnership, it was in some places misdirecting and in some other places empty of the local needs. Our recommendation is to make use of the frame to set the national imperative. If it’s not there, you don’t have anything.
SZ: But will these down payments really be enough for countries to get rolling in that direction?
HP: The down payments come later. The first phase is really readiness for readiness, because readiness needs to be funded, so you need a readiness need assessment. I need funds to create terms of reference and start creating the template for our country. You need a seed fund, and then after that then you get assistance to develop your risk assessment, and then after that you go to the next step.
We had Norway for that. The first $30 million is for that preparedness. We did our strategy, designed our organization, and designed our funding instrument. Now we have to identify our emission level.
SZ: As I understand it, you've set a target of 26% below a business-as-usual scenario by 2020 with or without international support, and by 41% if you do get international support, but I’m not clear on how you determine the reference level.
HP: Our aim is to grow continuously by at least 5.5% GDP wise, and that means you have to have a lot of infrastructure built. That becomes: “Should I build roads or should I build railways?” Those kinds of real development questions come into the picture during the transformation stage, and it’s based on the condition on the ground. Then if I want to grow by 5.5%, what is my main source of income? Export? Export of what? Palm oil? Pulp and paper? Coal? Suddenly you look into the plan that’s going to effect emissions, and that needs to be factored into your emission levels as business as usual. Now, that is the emission level I want to reduce by 41% from, but I don’t want to reduce the speed of my growth. So you need to prepare the development plan that’s continuously giving us growth at the same time it’s protecting the environment and providing social equity. That’s the whole work of a government – besides dealing with insurance and the salary of teachers. (laughs)
This is big time in terms of creating the reference emission level and going back and saying, “Sorry, you don’t build that road there – build it somewhere else.” That is the second stage of funding, and it has to be agreed with the funder, where you say, “This is how we measure it,” because that’s how bilateral works. It’s much easier than compulsory things. Having that, you then start working to reduce emissions. And emissions are not a central government work. It is a local government work. So, people talk about nesting and sub-national and investing – these are all nice words, but from my perspective that is how it has to be framed.
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