10 Strategy for the implementation of CDM and carbon trade in Indonesia

Y.S. Hadi^[17] and M.B. Saleh

ABSTRACT

Indonesia’s market share in the CDM scheme is very small (6 percent) compared to its potential carbon supply. According to the data interpreted from satellite image of 2000, the area potentially to be rehabilitated is about 44 million ha. The Ministry of Forestry has set a target of rehabilitating 18 million ha of forest land in the next five years. Rehabilitation of forest land is a highly important activity; however, from previous experience, this type of activity is difficult to implement, particularly with the never ending economic crisis and transition of decentralizing the governance. To benefit from the opportunity offered by environmental services, a strategy to implement the CDM-Carbon trade in Indonesia must have the following characteristics: small acreage, medium contract duration, intensive marketing, direct payment, being a part of rural development, and availability of enabling incentive. Enabling incentive is better provided by international, central and local governments simultaneously. The type of enabling incentive to be provided should include competitive price of carbon, low information expense, low transaction expense, long-term payment guarantee and a simple mechanism. To reduce the rate of tropical forest degradation, it is better to give enabling incentives for the rehabilitation of secondary forests and implementing reduced impact logging.

BACKGROUND

For the study of global environmental problems, particularly those that also involve local ones, mapping the influence of a broad assemblage of actors is needed. For example, little is known about how local level institutions or ordinary citizens are involved in global environmental policy processes and what motivates public demands for global environmental quality, especially for those pervasive environmental problems like global climate change and sustainable development that require the attention and acquiescence of ordinary citizens (Auer 2000). A variety of non-sovereign actors, including non-governmental organizations (NGOs), inter-governmental organizations (IGOs), market-oriented actors (e.g. transnational corporations), and knowledge-based communities participate in solving global environmental problems (Litfin 1993, Kauffman 1997, Schreurs 1997, McKormick 1999). Princen et al. (1994) state that global solutions require local approaches when global environmental crisis results from both the aggregation of local resource decisions and from the impact of the global political economy on local communities. Moreover, to the extent that local approaches approximate the conditions for sustainable economies, global solutions must necessarily be based locally. Young (1997) correctly notes that more attention must be paid to the connections between top-down and bottom-up policy arrangements bearing on international environmental problems. The logic that sustainable development succeeds only when local actors are key players throughout the policy process is averred in recent declarations by bilateral and multilateral aid agencies.

The demand of CDM and carbon trade compared with its potential supply is relatively small. On the other hand, the critical land in Indonesia is huge. Forest resources in Indonesia during the last three decades have contributed immensely to national economy and other positive impacts like foreign exchange earnings, labour employment and also economic growth and development. However, such harvesting activities have caused considerable damage to the environment. Interpretation of year 2000 Landsat image showed that forest and land which requires rehabilitation (excluding Papua) is 96.3 million ha (50.3 percent of Indonesia area) consisting of 43.60 million ha of Land Cover Group I (shrubs, opened area, mixed dryland agriculture), 36.36 million ha of Land Cover Group II (secondary forest, logged-over forest) and 16.37 million ha Land Cover Group III (mining, dryland agriculture, settlement, rice field) (Badan Planologi Kehutanan 2002).

POTENTIAL SUPPLY OF CDM AND CARBON TRADE

The Clean Development Mechanism (CDM) has two goals: it is designed to lower the overall cost of reducing greenhouse gas (GHG) emissions released to the atmosphere, and also to support sustainable development initiatives within developing countries. These twin objectives reflect the need to coordinate action between differently positioned developed and developing countries, which nevertheless share a common aim of reducing the buildup of GHGs (Duncan et al. 1999).

The study on CDM for Land Use, Land-Use Change and Forestry (LULUCF) has identified the following three factors that may affect the size of the carbon market that can be absorbed by Indonesia (Ministry of Environment 2003):

• international negotiation process;
• international carbon market dynamics; and
• national capacity.

Internationally there will be rather complex rules and modalities in implementing forest carbon projects under CDM. The implementation of activities aimed to mitigate global GHG emissions is more cost-efficient in developing countries than in most of the industrialized world. The main reason is that many abatement opportunities are less expensive in developing countries. GHG emissions contribute equally to climate change irrespective of where they occur; globally the impact on the environment is the same (Duncan et al. 1999). Thus it has been a major, but contentious, topic in the climate negotiations to allow crediting of emissions reduction in developing countries towards domestic emission targets of industrialized countries (Dutschke and Michaelowa 1998). On the contrary, the sink market under CDM has been restricted with a cap of 1 percent. Technical issues related to definition of forest and accounting methodologies (including baseline, additionality, leakage and permanence) are being resolved at the international level.

Indonesia’s total CDM volume is 36 Mt CO₂ per year (market share of 6 percent), from which the forestry sector contributes 28 Mt CO₂ per year with a total revenue of about US$7 million per year. Thus 32.5 million ha of land can be potentially included in the forest carbon projects and half of this is eligible for CDM projects (Ministry of Environment 2003). The price of carbon is too low; observed prices in the current marketplace for permits that are likely to be CDM compliant are in the range of US$3 to US$8 per tonne CO₂. Based on forest plantation of Pinus taeda (loblolly pine) in the southern US, the average costs of sequestering an additional tonne of carbon on land already intensively managed vary from US$4.18 to US$181.27 and the average costs of sequestering an additional tonne of carbon on unstocked land ranges from US$0.74 to US$27.32 (Huang and Kronrad 2001). Ideally conservation of soil and water as main goals for the rehabilitation of land and forest activities are adequate enough an incentive for various parties, considering the long-term direct and indirect benefits. However, the need for quick and adequate earnings and lack of income for the community and also the existence of policy, market and institution failures have progressively decreased the area of critical land.

Efficiency and effectiveness of forest rehabilitation are too low, caused by not balancing the local factors and a non-uniform incentive which is based solely on the efficacy of planting. Therefore the approach of watershed management, which emphasizes participatory management, coordination and perception adjustment before implementation, could be used in implementing forest rehabilitation.

Table 1. Outstanding technical issues relating to CDM-LULUCF projects

Source: Ministry of Environment (2003).

Structuring forest rehabilitation following the logical framework of watershed management and emphasizing the involvement of all stakeholders are crucial. In line with decentralization, the Ministry of Forestry needs to facilitate these efforts because of many local autonomous communities that must be coordinated with agreement reached. Forest and land rehabilitation concerns various parties that have different interests. Their efficacy is therefore determined not solely by the direct executors in the field, but by all parties from the planning through monitoring and evaluation stages. Societies represent the protagonist element while government acts as the element of authority of policy and facilitator. There are other parties, such as the academic institutions, research and development agencies, and NGOs, which partake to support the efficacy of management of forest and land rehabilitation. Therefore this link between the local and global importance has to be developed through some forms of transparent contract.

CDM IN NATIONAL INTEREST

The market share of Indonesian CDM is very small due to the acreage of critical land as can be see in Annexes 1, 2 and 3. But we need to implement forest and land rehabilitation to make better use of Indonesia’s forest resources. For the next five years, the Ministry of Forestry has set a target of rehabilitating about 18 million ha (Ditjen RLPS 2002). According to the Ministry of Environment (2003), the allocation for the CDM in forestry is only in afforestation and reforestation. The types of forest carbon projects are outlined in Table 2.

Table 2. Types of forest carbon project according to the afforestation and reforestation definitions of the Marrakech Accord

Source: Ministry of Environment (2003).

These days development in Indonesia, especially in forestry development, is in a state of flux in almost all aspects. However, these changes generally are not strengthening the governmental and community role in reducing forest damage. The problem in essence is not technical, but institutional. It is caused by divergence of policy, different interests and also the capacity of the government to implement the policy relative to the problems that are always expanding. Therefore forestry policy must strengthen the existing institutions. In the field, the results of this policy could be indicated by the increase in forest cover from rehabilitation and also the increase of the sense of belonging and interest of protecting the forest.

The sense of belonging of the community to the forest is basically generated by the available choices. The effort to reduce forest damage and strive towards rehabilitation is a long-range and correct choice. This could be triggered through various efforts, like appropriate economic incentive, guarantee of community/society rights, local institutional reinforcement, and also reinforcement of the capacities of local governments which are managing directly the activities of rehabilitation. On a national scale, the efforts are in the form of:

• precondition preparation for forest and land rehabilitation;
• synchronization of the benefit aspects, justice and legality in realizing the needed regulation;
• effectiveness of the Ministry of Forestry and local governments in forest and land rehabilitation.

Rehabilitation of forest and land, in the form of afforestation and reforestation, solely rely on governmental initiatives, with little public participation. Limited access to exploitation of the forest by the local and traditional societies has generated a separate set of problems. The government has yet to identify and map the forest under customary rights, thus generating vagueness in accountability in forest management. Incidences of degradation outside forest areas basically resulted from excessive exploitation, not applying proper soil conservation and also due to weak institutions.

Problems of forest and land rehabilitation can be classified into:

• problems in the field, such as certainty of status, economic infrastructure, seed availability, etc;
• problems of available management rights for local community in rehabilitation activities;
• administrative problems, concerning financing, funding scheme, planning, controlling, etc;
• problems of regulation related to controlling of exploitation permits of forest resources;
• problems of institutions responsible for managing the rehabilitation activities, their capability and coordination with the other relevant institutes.

During this transition period to decentralization, there was no common perception of public policy among the stakeholders. The confusion has in fact caused more forest damage.

As the criterion of efficacy of afforestation/reforestation is not well defined, it has limited impact at the programme level. The external effects of afforestation are also very difficult to assess. Indonesian forestry is strongly influenced by external factors from within the country and outside:

• economic crisis, which shifted priority from rehabilitation programme;
• decentralization pushing the local government to accelerate economic growth through exploiting the natural resources;
• forestry industrial structure, which is big and concentrated at the upstream leading to the deficit of raw material;
• global market demand for “green products” through mechanism of ecolabelling;
• global commitment concerning forestry like biodiversity conservation, carbon trade, and “debt for nature swap”;
• pressure in the political system to implement the principles of democratization, human rights and gender equality.

The efficacy of afforestation/reforestation is determined more by forest area certainty and also the ability and readiness of the implementers than the availability of funds. Enabling incentive has become so important and rehabilitation in most cases will fail without supporting activities (Faculty of Forestry IPB 2001). Market mechanism should be used to motivate the private sector, which is profit oriented, to involve in rehabilitation while the execution of rehabilitation to provide benefits for the public would remain to be the government’s obligation.

For commercial forest plantation development, the problem is not simply whether the activity is financially, socially and ecologically viable, but how the investor or the communities in and around the forest should be involved. Should the local communities leave the area, or could they continue with their previous activities? The fundamental issue is how the communities could rationally accept this new activity of rehabilitation of forest and land. The “market situation” or more precisely an incentive structure, which should include transaction cost besides consideration of financial eligibility, could help. The biggest transaction cost is the expense of preparation of the area, and also expense to obtain the subsidy or loan. The communities (including the entrepreneur) pay both these expenses. Other transaction costs are the expense of preparation and/or stipulating the organizer (especially by communities that stay in and around the forest), coordination expenses, and also expenses of monitoring and evaluation. All these expenses ought to be the responsibility of the government. In applying CDM, attention is needed simultaneously on the production, social and environmental aspects, therefore

• relevant ministries such as the forestry, agriculture, environment, foreign affairs and internal affairs, need to provide the information; and
• provincial and district governments have to provide the promotion expense.

CDM-CARBON TRADE: INCENTIVE OR DISINCENTIVE?

Without careful assessment of the non-carbon attributes, there is a danger that CDM will become little more than a cost-reduction tool for developed countries legitimizing many of the incidental secondary benefits that may or may not be consistent with a developing country (Duncan et al.1999). On the other hand, the forest and land in Indonesia need to be rehabilitated. For Indonesia, CDM-Carbon trade could become an incentive as well as a disincentive. Tropical forest in Indonesia that has been degraded is about 36 million ha, but in the CDM scheme this type of forest is ignored as potential carbon project. This might cause a disincentive for rehabilitation to reduce deforestation of tropical rain forest.

Incentive in rehabilitating forest and land in principle is not limited to economic incentive, but covers various other instruments, especially law, policy and various social development instruments. In designing and implementing a new incentive, the whole context has to be considered, including its social and political aspects. There are at least three macro aspects which must be considered in the designing and implementation of incentives:

• Formal constraint: law, policy and ownership rights, for example, for tax or subsidy to rehabilitate the forest and land; or legalizing and arranging the market for the products/services resulted from rehabilitating the forest and land.

• Social constraint: a lot of unwritten orders governing economic and social activities are based on belief system, inclusive of cultural norms, social agreements, mores, ethics, traditions and taboos. Communities bow to the social constraint not because of law, but because of agreement.

• Compliance: an incentive action will only be effective when all parties follow the rules of the game. The degree of compliance to certain rules of the game could vary among the parties, and thus needs to be considered when designing an incentive scheme.

In implementing forest and land rehabilitation, the following procedures are necessary:

• defining forest and land area to be rehabilitated, to be confirmed by a validation process in the field by all interested parties;
• categorizing the defined forest area by its function through a participative process;
• formulating a mechanism of rights allocation and cost-benefit sharing;
• developing a mechanism of controlling and monitoring.

Results of the study conducted at three watersheds, Ciliwung, Rokan and Dodokan, showed that the main factor that contributed to the efficacy of forest and land rehabilitation is not direct incentive, but enabling incentive, especially the reformulation and consistency of policy execution. Effectiveness of the direct incentive, like existence of cheap fund, preparation of seeds and fertilizers in forest and land rehabilitation, depends on the enabling incentive condition that prevails in the communities. Without this indirect incentive condition, the existence of direct incentive will only give the project a short life without community support. The performance of forest and land rehabilitation in the field is still dependent on the central and local governments which have yet to consider the weaknesses of indirect incentive, especially the enabling incentive, as a major constraint in the execution of forest and land rehabilitation. Direct incentive is still considered a primary factor, thus information about community condition related to enabling incentive has yet to become an important ingredient in the programme and projects of forest and land rehabilitation.

The selection of the rehabilitation site is determined by fund limitation of the government, probability of efficacy of rehabilitation and importance of the area. Execution of forest and land rehabilitation in every province has different constraints and problems, which must be investigated more thoroughly when determining the site. The difficulty level and/or the efficacy level of the rehabilitation programme is basically determined by two special circumstances, that is the critical level of the forest and land degradation and also the overall condition of its forest resources. Hence each region can be in one of the following categories:

• critical level of forest/land is high and forest resource almost used up;
• critical level of forest/land is low but forest resources almost used up;
• critical level of forest/land is low and forest resource still huge;
• critical level of forest/land is high but forest resource still huge.

The critical level of forest and land is determined by the acreage of degraded forest area, log production level and raw material needs. The forest resource is determined by the ratios of production forest area, protection forest area and conservation forest area, and the acreage of remaining forest cover. The provinces in Indonesia could be grouped into the following quadrants:

The execution of forest and land rehabilitation in each province must be appropriate to its conditions as classified above, so that incentive policy and other instruments can be implemented accordingly. In selecting the location of rehabilitation within or in the administrative boundaries, the following must be taken into consideration:

• first priority given to watershed;
• set a broader watershed;
• local initiative to rehabilitate;
• community cooperation with the investor/industrialist in rehabilitating;
• real market for the product of forest rehabilitation;
• more attention paid to upstream area compared with its downstream in a watershed;
• protection and conservation area given more priority compared to production area;
• residential and industrial area given more priority than remote area;
• poor area given more priority than rich area.

CLOSING REMARKS

Concluding from the above, the strategy for the implementation of CDM-Carbon Trade in Indonesia should incorporate these principles:

• small acreage: that can be handled by the community in a single village or group of villages;

• proactive marketing: building up other schemes rather than CDM only;

• short to medium period of contract (minimum of 10 years or two contracts of 7 years each);

• price paid directly to the executor;

• provide enabling incentives such as capacity building, infrastructure buildup, markets of rehabilitation products, reduced impact logging and enrichment planting;

• competitive price (not as a small percentage of all sequestering cost);

• low information expense due to the technical and research limitation;

• low transaction expense due to regulation and bureaucratic process;

• part of countryside development;

• well guaranteed and clear mechanism.

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Annex 1. Protected forests and conservation areas that need to be rehabilitated (1000 ha)

Source: Badan Planologi Kehutanan (2002).
Note: Land Cover Group I - shrubs, opened area, mixed dry land agriculture; Land Cover Group II - secondary forest, logged over forest; and Land Cover Group III - mining, dry land agriculture, settlement, rice field.

Annex 2. Production forests that need to be rehabilitated (1000 ha)

Source: Badan Planologi Kehutanan (2002).

Annex 3. Conversion forest and non-forest areas that need to be rehabilitated (x 1000 ha)

Source: Badan Planologi Kehutanan (2002).