Potential A/R CDM Project and its Contribution to Sustainable Development in Indonesia

Nur Masripatin

Ministry of Forestry, Indonesia

E-mail : nur_masripatin@indo.net.id

FOREST AND FORESTRY IN INDONESIA

Forest lands in Indonesia (MoF, 2001)

Covers seven geographical areas started from beach forest, peat forest, mangrove forest, low land and high land tropical rain forests, savanna, and mountain forest.

State forests, managed by government, private sectors, and community.

Forest land uses : Production forest (58.26 million ha), with the main function for producing forest products. Protection forest (33.5 million ha), with the main function for protecting a live support system like watershed protection, flooding and erosion control, soil conservation. Conservation forest (20.5 million ha), with the main function for conservation of biological diversity. Convertible forest (8.01 million ha), forest area which can be converted for other uses. This forest category is not recognized under Forestry Act No. 41/1999, and conversion of forest into non-forest land is presently not permitted.

Total : 120.3 million ha or about 60 % of the country land area.

LAND COVER IN INDONESIA

Lowland ForestHighland ForestMontane Forest MangroveWetland ForestUnproductive dry Unproductive wet AgricultureEstate plantationOtherResidentialLake/water

Role of Forestry Sector (last three decades)

Foreign exchange earning resources where many people depend for

their subsistence and customary activities Create employment opportunity support development of other sectors e.g :

agriculture, transmigration, industries, mining, energy/power generation, public work, public health, and tourism.

Rehabilitation and Conservation (focus of forest policy for the next 20 years)

Within the next twenty years, forestry sector policy will be focused on rehabilitation of the degraded forest land and conservation of the remaining forest.

Under Forestry Act (UU No. 41/1999), Article 41, rehabilitation is intended to restore, to protect, and to improve forest function, so that carrying capacity, productivity, and the role of forest as life support system can be retained.

Conservation should be seen in a broader scope, that is in sustainable forest management context. Hence, conservation activities are not only carried out in the protected areas (protection forest and conservation forest), but also in production forest.

POTENTIAL A/R CDM PROJECTS AND ISSUES TO BE TACKLED

InternationalCarbon Market

Dynamic

National Capacity to Absorb Global Carbon Market

International Negotiation Process

National capacity National

Share to globalC-market

Ex: change in cap,Shifting base year

(time for reforestation)

Ex: Domestic action, Selling of hot air

Ex: Regulation, institutional setting, risk, barrier

Suitable lands for and types of A/R CDM projects

There are at least 23.9 million ha of forest area need to be rehabilitated (MoF, 2001). Among the 23.9 million ha, 15.49 ha was in Production forest, while the remaining 8.44 ha was located in protected areas (Conservation forest and Protection forest).

These large area of forest and non-forest land are available for afforestation and reforestation projects. In the context of CDM, however, the suitability of forest land for AR-projects will be much influenced by both requirements under international arrangement as well as policy and regulations in the host country.

At the national level, as part of long-term policy on forest and land rehabilitation, the Ministry of Forestry has targetted approximately 3 million ha to be rehabilitated for the next five years (2003-2007) through various activities. Among the 3 million ha, 1.4 million ha of the area is forest land while the other 1.6 million ha is non-forest land.

Under international arrangement, definitions of Afforestation and Reforestation for CDM will affect the eligibility of lands to be AR-CDM project, especially the threshold of land area to be considered as a forest, tree height and tree crown cover, as well as the base year of non-forest condition.

Forest and land rehabilitation plan (2003-2007)

NoLand use category

Possible activity

Area (ha)

Implementer

A Forest land

1Conservation Forest

•Reforestation•Enrichment

66.40094.800

Government

2 Protection forest

•Reforestation

•Social forestry

221.600

203.900

•Government, Community,State/Private owned companies, •Community

3 Production forest

Reforestation/ Industrial plantation,Enrichment

422.650500.000

State/Private owned companies, Community

BNon forest land

private forest/social forestry, afforestation and soil conservation

250.0001.350.000

Community

Total 3.109.350Note : source of funding mainly Reforestation Fund, through loan (for commercial purposes) and non-loan (e.g. soil conservation, rehabilitation in conservation forest)

Forest and land rehabilitation plan (2003-2007) : target per annum

Target areas per annum : * 2003 : 300.000 ha,* 2004 : 500.000 ha, * 2005 : 600.000 ha, * 2006 : 700.000 ha,* 2007 : 900.000 ha.

For 2003, the activities will be focussed in 21 watersheds, located in 14 Provinces and 122 districts.

Assuming the 3 million ha target of the above plan will be achieved, there will be still a large area of degraded forest and land need to be rehabilitated by the end of 2007.

Policy issues towards AR-CDM projects in Indonesia Government Regulation (PP) No. 34/2002

regulates the utilization and development of forest-based environmental services.

The challenges are some inconsistencies will be found if the scheme to be operated under international agreements, and so some adjustments or other legal measures are needed.

Policy issues towards AR-CDM projects in Indonesia (continued)

Sustainable development issues. In forestry sector, there are two inseparable objectives namely prosperous community and sustainable forest resource. Hence, A/R CDM projects need to also consider these two objectives.

Linkage between conventions. There is a need of inter-linkages between related conventions especially between UNFCCC, CBD, and CCD. Indonesia has committed to interlink the implementation of the three conventions.

Position in negotiation process. A number of technical issues of A/R CDM still need to be tackled at the international level (SB/COP).

Proposed sustainable development criteria and indicators for forest carbon projects, based on criteria and indicators developed by FSC, CIFOR, ITTO, LEI (NSS-CDM forestry Team, Indonesia, 2003)

Principle Criteria Indicator

1. local sources 2. external sources

1. Adequate source of funding

3. long-term 4. use of proper forestry practices 5. fire risks

2. Forest and land resource sustainability 6. secured access to forest/land

7. company financial health 8. staff professionalism

3. Business sustainability

9. demonstrated re-investment 10. reserved fund economic policies exist 11. anti-corruption measures

4. National and regional economical policies exist 12. regional land-use plan

13. estimate government rent capture 14. estimate operator rent capture

Economic sustainability

5. Equitable distribution of economic rent 15. estimate local dweller

1 .genetic vadation/sp. richness 2. changes in habitat diversity

1. Biodiversity maintenance

3. endemic species protected 4. water yield and availability 5. seasonal vadations 2. Water conservation 6. watershed functions 7. erosion and sedimentation 8. soil fertility 3. Land degradation 9. area of abandoned land 10. ecological sensitive area protected 11. ecological important area managed

Environmental sustainability

4. Ecosystem stability of protected areas 12. intensity of wildlife disturbance

1. number of representative 2. two-way communication

1. Local community participation in planning 3. voice heard

4. adopted proven techniques 5. publicity

2. Recognition locally-invented practices

6. dissemination/impacts 7. adopted proven institutions 8. intergenerational links

3. Recognition locally-invented institutions

9. dissemination 10. role of informal leaders right 11. decision-making process 12. agreements on right and resp 13. property rights and land

4. Recognition of customary right

14. secured tenure system

Social sustainability

5. Legal framework on forest and land

15. transformation concession allocation

Outstanding technical issues relating to A/R CDM projects (NSS-CDM forestry Team, Indonesia, 2003)

The issue: Explanation Problems, solutions or

comments Indonesian context

Definitions of forest,

afforestation and reforestation.

No definitions specified yet for the CDM.

Annex 1 definitions may be adopted for the CDM, with National level specifications needed.

Definitions will influence the type of projects that will be eligible under the CDM.

Additionality

Project activities need to be additional to the business as usual or baseline case.

Lack of clarity on how to define additionality Difficult to assess what will be the likely condition in future in the absent of project. Historical data may be used to reflect future condition in the absence of CDM project.

Define on a project by project case. It is very likely that without any new initiatives national carbon stock will decrease. Thus any new initiatives for increasing planting rate should meet additionality criteria.

Baselines

Present condition and likely conditioning the future in the absence of the CDM projects. Two types of baselines: static and dynamic. In static baseline, it is assumed current condition will last to the future.

No decision for CDM-LULUCF when one can use static or dynamic baseline Given that the baseline trend is for increasing emissions, baseline revision may not be so critical Regular revision of baseline within a certain time interval. Control location may be needed.

Define on a project by project case. Evaluate government plan on forest rehabilitation program by considering level of success of the past rehabilitation program

Leakage

Project may affect activities outside the project location which lead to the increase or decrease in carbon stock outside project areas

Well designed project will have low or no negative leakage risk Ensure that project boundaries are carefully set and leakage is considered and mitigated Select location and project types with low possibility of leakage

Identify locations and project types that may have low risk of leakage Potential for leakage varies with land use competition. As result, risk posed by leakage will vary with location. Provide guidelines for accounting for leakage.

Non-permanence

Carbon credit resulted from LULUCF-CDM projects only valid temporary

No decision is made on this issue and it is still opened for negotiation Sequestration may be reversed through destruction of vegetation

This provide flexibility to the government or host country to use CDM project lands for other activities

Crediting period (CDM Project

life)

Two crediting period have been adopted, i.e. 10 years and 21 years with two times of baseline revision, year 7 and year 14.

Unclear whether this is for LULUCF activities. If so, will provide an incentive for fast growing species over slower growing (often native) growing species.

This may be relevant to PP34 where permits for forest activities related to environmental services (e.g. C-projects) are limited to 10 years. But this may discourage investors.

The consequence of adopting the existing forest definition (Article 3.3 KP) on types of eligible CDM projects (NSS-CDM forestry Team, Indonesia, 2003)

Forest definition1 Eligible Projects Non-eligible projects

Tree crown cover 10% with height 2 meters and with minimum area of 0.05 ha

‘Simple agroforest system’ (coffee-based agroforest etc.)

Any project that meets the definition will be eligible

Enrichment planting of degraded forest. By having a lower crown covers large areas of currently degraded forest areas may qualify as forest. This will reduce available Kyoto lands.

Tree crown cover 10% with height 2 meters and with minimum area of 1 ha

‘Simple agroforest system’ (coffee-based agroforest etc.) with size not less than 1.0 ha

Projects under one hectare would not be eligible unless bundling of land area is allowable, however it is unclear if this has to be in a contiguous block. For Indonesia, this means that activities taking place on blocks of less than one hectare may not be available.

Tree crown cover 30% with height 5 meters and with minimum area of 0.05 ha

Enrichment planting of highly degraded forest

Agroforest (multi tree species types and added complexity, rubber-based agroforest) in land not less than 0.05 ha that will grow and meet the forest definition

Reforestation which use tree that can grow and meet the forest definition.

‘Simple agroforest system’ that can not grow and meet the forest definition

Tree crown cover 30% with height 5 meters and with minimum area of 1 ha

Enrichment planting of highly degraded forest

Agroforest (multi tree types and added complexity, rubber-based agroforest) in land not less than 1 ha that will grow and meet the forest definition

Agroforest (multi tree types and added complexity, rubber-based agroforest) in land less than 1 ha

Costs and Benefits of A/R CDM Project (NSS-CDM forestry Team, Indonesia, 2003)

Production costs: Costs directly related to the production process of a specific good, in our case, carbon (e.g. implementation, operation and maintenance costs, opportunity costs of land and capacity building, etc.)

Transaction costs: the cost of doing business selling a commodity (e.g. search costs, information costs, enforcement etc.)

Social Costs (e.g. valuation of loss of diversification activities that can occur within a patch of land, inequities in the distribution of social benefits and compensation, etc.

Environmental costs (e.g. impacts of biodiversity~specifically when a land change occurs or when monospecific plantations are settled, and ecological disruptions, such as nutrient cycling, water cycling, fire regimes and pests)

Transaction Costs (NSS-CDM forestry Team, Indonesia, 2003)

Baselines and additionality test costs Risk mitigation (e.g. insurance, risk management) CDM management costs (administration at the

local and regional level) Legal costs and requirements Validation and certification of carbon Leakage measurement and coverage (boundary) Monitoring of carbon Measurement of sustainable development

Baseline and Additionality (Boer, 2003; NSS-CDM forestry Team, Indonesia, 2003)

The development of criteria for baseline forecasting and additionality testing

Benchmarking Test of actual methods and guides with pilot

projects Assessment of risks and barriers, especially

those ones that prevent investment on CDM-LULUCF projects on a regional and local scale.

National perspective : baseline and additionality (Boer,

2003; NSS-CDM forestry Team, Indonesia, 2003)

Considering past experience in most developing countries that is unable to meet government plan, the use of historical trend (using simple logical arguments) in developing baseline should be acceptable.

Following the above argument that capacity of non-Annex 1 countries to reforest their degraded lands and forests is lacking, and there is an indication that without any new initiatives national carbon stock in many developing countries tends to decrease (baseline case), any new initiatives for increasing planting rate should meet additionality criteria.

Possible components of dditionality for A/R CDM projects in Indonesia (NSS-CDM ForestryTeam, Indonesia, 2002) :

GHG or emissions additionality , refers to the actual difference between the project’s emissions or sequestration profile and that of the baseline scenario.

Programmed additionality , requires a project to demonstrate that its emission reductions are additional to what is required by law and government policy initiatives. Where a project’s activity falls within an existing or anticipated program or scheme, which has obligations and/or targets set by government, emission reductions would not generally be additional unless relevant targets or obligations were exceeded.

Investment additionality, a project might demonstrate additionality through financial analyses, proving that the creation of carbon credits is likely to involve additional incurred costs compared with those of comparable baseline activities. Although this is not a requirement per se, if a GHG emission reduction project either provides a lower rate of return or involves higher risk than is conventional to that type of investment within the sector, this would clearly demonstrate the project’s additionality.

Financial additionality, funding for the implementation of CDM projects must not be provided by developmental and environmental assistance funds. This applies to country level Official Development Assistance transfers, funding mechanisms under the Framework Convention on Climate Change, and the various multilateral development bank and development agency activities. It is likely, though, that projects may be able to receive developmental funds for activities not directly related to the implementation of the project, such as capacity building, training, or feasibility studies.

LEAKAGE

Type of Leakage (SGS, 1998; Moura Costa et al., 1997)

Primary Leakage, refers to leakages that occur when the GHG benefits resulted by the project causes an increased or decreased GHG emissions elsewhere.

Secondary leakage, refers to leakages that occur when a project’s outputs create incentives to increase or decrease GHG emissions elsewhere.

Leakage Assessment

Need to understand linkage between ‘baseline drivers’, ‘baseline agents’, ‘causes and motivations’, and ‘indicators’ (Auckland et al., 2002, Boer, 2003)

Baseline driver: are defined as activities predominantly taking place in the absence of the project, and that the project will replace

Baseline agent: are actors who are engaged in those activities

Causes and motivations refer to factors that drive the baseline agents to do the activities and these can be represented by indicators

Main baseline drivers, agents, causes and indicators, for different types of projects (NSS-CDM forestry, Indonesia, 2003)

Project type Baseline drivers Baseline agents Causes or motivation

Main indicator

Deforestation

Subsistence farmers, commercial farmers, cattle ranchers, urban developers, mining companies

Opportunity cost of land, (securing land tenure, food supply, financial returns), land use policy, fiscal policy

Forest cover

Conservation

Logging

Logging companies, small scale extraction by individuals

Financial returns, need for forest products, land use policy

Area logged

Large scale plantation forestry

No economic activity, fallow, agriculture, ranching

Small or large scale farmers, cattle ranchers, absent land owners

Financial returns, policy

Current use of land, area under plantations versus other land uses in a larger landscape, rate of planting at landscape level

Small scale plantings or agroforestry

No economic activity, fallow, agriculture, ranching

Small or large scale farmers, cattle ranchers, absent land owners

Financial returns, supply of agricultural products, policy

Current use of land. area under plantations versus other land uses in a larger landscape, rate of planting at landscape level

Conventional logging

Logging companies

Financial returns, lack of technology and knowledge

Damage levels and area logged

Reduced impact logging (alternative technologies) Deforestation

(commercial)

Logging companies, cattle ranchers, commercial and subsistence farmers

Opportunity cost of land, need for land

Forest cover

Negative Leakage (Boer, 2003)

Forest

Community Group-A (CGA)

Community Group-B (CGB)

CGA opens forest in other areas

CDM Project

Project Boundary

Positive Leakage (Boer, 2003)

Protection Forest

Project boundary

Degraded Buffer zone

Community involve in CDM

Agroforestry Project (Illegal

logging decrease~ 500 ha/yr)Positive Leakage

(1000-500=500 ha ~ 50000 tC/yr)

Illegal logging (Rate~ 1000 ha/yr)

Barrier for Implementation (Ardiansyah et al. 2002, NSS-CDM Forestry Team, Indonesia, 2003)

0.115

0.130

0.119

0.108

0.085

0.067 0.0660.073

0.1150.121

-

0.020

0.040

0.060

0.080

0.100

0.120

0.140

Social Forestry,Social Forestry,Mangrove,Mangrove,Private Forest,Private Forest,and Bioenergy, and Bioenergy, have lower have lower BarriersBarriers

Sample : Sample : 6 districts6 districts

Social Forestry,Social Forestry,Mangrove,Mangrove,Private Forest,Private Forest,and Bioenergy, and Bioenergy, have lower have lower BarriersBarriers

Sample : Sample : 6 districts6 districts

Capacity Building activities to address barriers identified in the proposed project types for CDM (NSS-CDM forestry Team, Indonesia, 2003)

Types of Barriers Barriers and capacity building activities

Technical Difficulties to access to location, access to technology, availability of planting materials, availability of technical guideline, expert availability, labour availability, land availability, land productivity, land suitability etc.

Strengthening the capacity of relevant institutions in building, managing, and providing information on necessary information such as : access to location, land availability and site quality, site-species matching, and planting stocks availability.

Strengthening the capability of project developers in improving land productivity, the quantity and quality of the planting materials

Provision of technical guideline

Improving skills of local community on planting techniques, prevention from fires, pest and diseases

Institutional/regulation Low commitment of local government, possibility of having low community support, potential of conflict due to land tenure problem, difficulties in getting permit and inconsistent policy and regulation

Awareness raising for local governments and other stakeholders such as local community, private sectors, on the CDM in forestry

Empowering stakeholders to enable active participation in CDM forestry implementation

Strengthening coordination and harmonization of policies and planning among related sectors at various levels.

Economic Difficulties to access to credit or getting support from other financial sources, low benefits, high opportunity costs, long gestation period, small market size.

Facilitation in mobilizing various funding sources and schemes for small scale project activities such as community forest, patches small multipurpose trees plantation, and bio-energy.

Provision of information services on the market of carbon, other forest-based services, and non wood forest products,

Facilitation on the creation of market opportunity for other forest-based services, and non timber forest products.

Risk and its mitigation options (NSS-CDM Forestry Team, 2003)

Mitigation Type Risk

International National Project

1. Policy Risks Protocol doesn’t

come into force -

- Carbon sale contracts have force majure

Changes in UNFCC/Kyoto Protocol

No retrospectivity

- Anticipates changes

in project design

Eligibility activity No

retrospectivity - Carbon sale contracts

have force majure Indonesia not

ratify -

- Carbon sale contracts have force majure

Changes in national CDM policy

-

No retrospectively Build broad

political and social support

Anticipates changes in project design

Carbon sale contracts have force majure

Conflict in domestic and intergovernmental policy

- Seek to reduce conflict and policy

-

2. Sovereign Risks

Macro economic -

Sound macro economic policy

Apply financial risk management techniques

Realistic economic assumption in project plan

Asset appropriation

- - Insurance

Legal/business certainty

- Improve framework

Due diligence

Risk and its mitigation options (continued)

Mitigation Type Risk

International National Project

3. Market Risks

Immature market development

Develop market framework

Capacity

building

Capacity building

Flexibility in market arrangement

Future price risk (temporary crediting)

- -

Apply financial risk management technique

Development non-

Kyoto market Promote

consistency Flexibility in

arrangement 4. Project Risks

Technical risk (Fire, pest and diseasesetc)

- -

Good project design Certainty boundary

project Parallel accounting Buffering

Project underperformance

- - Good project design Buffering

Loss community support

Good project design

Benefit sharing

Land tenure - Clarify land tenure arrangement

Good contract Due diligence

Important Research Questions I (NSS-CDM Forestry Team, Indonesia, 2003)

How can development projects minimize transaction, environmental and social costs (particularly in projects that involve small holders)?

How will CDM rules for baselines, leakage, monitoring, certification and verification affect transaction and production costs? And how do they relate to project type (e.g. projects with many land holders, reforestation)

How can social and environmental costs be internalized in such a way that Sustainable Development is achieved?

What are the ranges in project size that minimize costs? What is the community perception on potential project benefits? Does

the project address their livelihood needs? How do we ensure long-term benefits to all project stakeholders ? What are the necessary conditions to ensure local communities receive

project benefits and the host country receives net social gains?

Important Research Questions II : Permanence (NSS-CDM Forestry Team, Indonesia, 2003)

What are the various options for assigning credit for the carbon sequestered over time?

What are the administrative and other costs of the different approaches to assigning carbon credits?

What is the implication of using TCERs on the attractiveness of C-sink projects to investors?

Are the transaction costs of pay-as-you-go schemes lower than those schemes in which credit is given for long-term carbon storage?

What are the implications of the different approaches to carbon accounting for the distribution of income and assets of local people?

Who bears the production, market and other risks under different accounting options?

What are the impacts on carbon stocks, on biodiversity, and on other environmental services?

How can liability be assured over several decades? What provisions on liability should be specified in the LULUCF-CDM rules

and what should be left to private contracts and other mechanisms?

POTENTIAL CONTRIBUTION OF A/R CDM PROJECTS TO SUSTAINABLE DEVELOPMENT

Basic philosophy : SUSTAINABLE FORESTMANAGEMENT FOR SUSTAINABLE DEVELOPMENT

Sustainable Forest Management (SFM) and its constraints

At the global level (identified in International workshop of experts on Financing SFM, Oslo, 2001) :

Some of goods and services associated with SFM are not traded in markets,

and so, no revenue provided to producer unless payment is made by government.

Costs for producing market-based outputs through SFM including transaction costs for certification are higher than those from unsustainable forest management, but market compensation through consumer demand is not enough attractive to make producers to pay additional costs in a voluntary basis.

Since SFM practices generally require a longer-time period than unsustainable extraction, risks can be considerably high, both time period and risks may lead to lower risk adjusted profit.

For this reason, adequate consumer willingness to pay for ‘certified forest products’ has yet to show up in a widespread fashion in consumer markets.

At the national level . Major problems faced by Indonesia in forest management includes illegal logging and trade, forest fire, encroachment .

Possible contribution of A/R CDM projects As one of investment opportunities that

private sectors in Indonesia may participate as an incentive to encourage SFM practices,

As alternative funding sources for the government to finance rehabilitation activities that can not be covered by the available domestic funding.

Planning and designing A/R CDM projects

Philosophy under Article 12 of the Kyoto Protocol is that the benefits of CDM projects need to be seen from the interest of both Annex I country and the host country.

Unlike other investments CDM is unique in the sense that it is governed by international agreements and has to suit the objective and priority of the national development of host country.

A number of guidelines for CDM development and implementation have been published and may be adopted. However, it should also consider various aspects both technical and non-technical aspects.

Technical aspects includes : baseline and additionality, transaction costs

and who should bear the costs, leakage, permanence.

Non-technical aspects includes : national and autonomous government policy, land tenure, benefit for stakeholders.

Selecting project sites (NSS

CDM Forestry Team, Indonesia, 2003) In order to ensure that a proposed projects comply with the requirements under the Kyoto rotocol (international arrangements) and the sustainable development objectives of the host country, project screening need to be carried out by both sides at different levels, for example :

At the global level, investors may screen the most attractive countries for CDM investment,

At the national level the national authority (CDM Board) determines the eligibility of proposed CDM projects,

Project level screens will be used by investors and project developers to assess the attractiveness of individual project and by stakeholders to assess how well projects meet their requirements.

Selecting project sites (NSS CDM Forestry Team, Indonesia, 2003) (continued)

Six criteria identified in the study for initial screening to select project site (based on discussion with stakeholders):

1. Presence of local institution, 2. Existence of community extension, 3. Presence of stakeholder network, 4. Commitment of the local government, 5. Biophysical factors such as occurrence of degraded lands,

deforestation rate, accessibility,6. Minimum social conflicts.