Indonesian Government May Take On New Role: Forest Carbon Offset Buyer

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By Steve Zwick

As an antidote to less-than-ideal demand for carbon offsets from forestry projects, the Indonesian government may take a step that is unusual for a developing country: buying carbon offsets itself to support domestic forest conservation activities.

26 February 2014 | JAKARTA | Building on a proposal to develop a REDD+ funding mechanism for Indonesia’s ground-breaking REDD+ Agency, the government may actually enter the voluntary carbon market to purchase REDD offsets, a top official said in an interview with Ecosystem Marketplace.

Agus Sari, chair of the Working Group on Funding Instruments for the Presidential Task Force on REDD+, proposed in 2013 the creation of an interim financing mechanism called Financing REDD+ in Indonesia, also known as FREDDI, that would act as a “fund of funds” administered under the REDD+ Agency to support forest conservation.

Sari says the REDD Agency can act as an intermediary between domestic and international carbon markets.

“Here in Indonesia, we want to reduce our domestic emissions by 41% [below a business-as-usual scenario] by 2020, and in REDD terms that could mean about 1 billion tons of emission-reductions by 2020,” he says.

“We intend to fulfill part of our domestic targets through purchasing of emission-reduction performances from projects, because that not only helps us achieve our goals, but catalyzes the domestic market.”

The former head of Southeast Asia for EcoSecurities, Sari said the agency can also securitize domestic carbon offsets and package them for international sale.

“We would not only buy and sell like traditional dealers, but we could package them so that we buy insecure credits and we sell secure credits, and that increases the value quite considerably,” he says.

Indonesia was the first country to create a high-level REDD+ Agency, and it is seen as template model for other governments looking to implement similar REDD strategies, meaning Sari’s proposal could have global ramifications.

Stepping into the Void

The Indonesian government is considering direct purchasing of forest carbon offsets due to the insufficient market demand that has created financial obstacles to additional project development.

Carbon finance is supporting the management of forests spanning 26.5 million hectares worldwide after businesses in 2012 injected $216 million into projects that plant trees, avoid deforestation, improve forest management, and support low-carbon agriculture, according to Ecosystem Marketplace’s State of the Forest Carbon Markets 2013 report. Although the volume of forest carbon transactions rose 9% in 2012, however, the report found that the overall value declined 8% as some projects struggled to find buyers amid the UN’s failure to date to secure binding emissions reduction targets.

Sari argues that the Indonesian government could offer offset buyers a degree of certainty that they may not currently enjoy when purchasing offsets directly from private projects. “If I buy from multiple projects in such a way that if one dies I have 200 others that survive, then any buyer will look at us as a secure intermediary.

“Because of that,” Sari continues, “buyers will be willing to pay the higher price from us, which means we can buy at a higher price, and because we can buy at a higher price, we can enlarge our portfolio.  Because we enlarge our portfolio, we are even more secure, and that means the buyer will be even more willing to buy at a higher price. That’s the virtuous cycle that we’re looking for.”

Sari can’t say when that cycle will begin, but he says the feedback on his proposal has been promising.

“Everyone I’ve presented this to likes it,” he says. “I’m optimistic.”

The Agency

The government’s intervention may be critical. Southeast Asia has more than 27 million hectares of forested peatland, and peat releases devastating amounts of methane and carbon when drained or burned. Approximately 80% of the world’s peat land is in Indonesia, and much of it is slated to be converted to palm oil plantations, thanks to land-use concessions granted well before the decidedly green President Susilo Bambang Yudhoyono took office a decade ago.

The Indonesian government is implementing a detailed strategy to harness finance from the carbon markets that will enable it to shift such concessions from forested areas to degraded lands. The country is also seeing a proliferation of smaller, private conservation efforts such as the Rimba Raya “REDD” Project, which has rescued 47,000 hectares of forested peatland from imminent demise.

Heru Prasetyo heads Indonesia’s REDD+ Agency that is charged with implementing the country’s National REDD+ Strategy, which would complete re-engineer the country’s massive agricultural economy over the next five years.

Some of the Agency’s programs aim to leverage country-to-country REDD finance facilitated under the United Nations Framework Convention on Climate Change to persuade palm oil companies with rights to forested land to instead shift their activities to degraded land.

It’s a massive “land swap” that requires first sorting out hundreds of competing claims on various parcels of land, and then reorganizing Indonesia’s agricultural economy – from multinational agroforestry companies down to small-scale farmers – around more forest-friendly land-use plans.

The strategy lays out a detailed sequence of activities to “ready” its economy for such a transition – beginning with institutional efforts including necessary changes to laws and statutes, and the “One Map” initiative that is slated to wrap up this year that consolidates scores of conflicting land-use and tenure maps from various agencies and districts in one consolidated, consistent database.

The strategy is built on five pillars, with the private conservation financing initiative – including the proposed purchasing of forest carbon offsets – falling under the strategic programs pillar.