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

1. 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

2. FOREST AND FORESTRY IN INDONESIA

3. 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.

4. Lowland Forest Highland Forest Montane Forest Mangrove Wetland Forest Unproductive dry Unproductive wet Agriculture Estate plantation Other Residential Lake/water LAND COVER IN INDONESIA

5. 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.

6. 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.

7. POTENTIAL A/R CDM PROJECTS AND ISSUES TO BE TACKLED

8. National Capacity to Absorb Global Carbon Market Ex: Domestic action, Selling of hot air International Negotiation Process International Carbon Market Dynamic National capacity Ex: change in cap, Shifting base year (time for reforestation) National Share to global C-market Ex: Regulation, institutional setting, risk, barrier

9. 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). • Theselarge 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.

10. Forest and land rehabilitation plan (2003-2007)

11. 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.

12. 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.

13. Policy issues towards AR-CDM projects in Indonesia(continued) • Sustainable development issues. In forestry sector, there aretwo 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).

14. 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)

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

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

17. 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)

18. 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

19. 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.

20. 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.

21. 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, aproject 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.

22. 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.

23. 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 motivationsrefer to factorsthat drive the baseline agents to do the activities and these can be represented by indicators

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

25. Negative Leakage (Boer, 2003) Project Boundary Forest Community Group-B (CGB) CDM Project Community Group-A (CGA) CGA opens forest in other areas

26. Protection Forest Illegal logging (Rate~ 1000 ha/yr) Community involve in CDM Agroforestry Project (Illegal logging decrease~ 500 ha/yr) Positive Leakage (1000-500=500 ha ~ 50000 tC/yr) Positive Leakage (Boer, 2003) Project boundary Degraded Buffer zone

27. Social Forestry, Mangrove, Private Forest, and Bioenergy, have lower Barriers Sample : 6 districts Barrier for Implementation (Ardiansyah et al. 2002, NSS-CDM Forestry Team, Indonesia, 2003)

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

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

30. Risk and its mitigation options (continued)

31. 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?

32. 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?

33. POTENTIAL CONTRIBUTION OF A/R CDM PROJECTS TO SUSTAINABLE DEVELOPMENT Basic philosophy : SUSTAINABLE FOREST MANAGEMENT FOR SUSTAINABLE DEVELOPMENT

34. 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 .

35. 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.

36. 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.

37. 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.

38. 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): • Presence of local institution, • Existence of community extension, • Presence of stakeholder network, • Commitment of the local government, • Biophysical factors such as occurrence of degraded lands, deforestation rate, accessibility, • Minimum social conflicts.

39. THANKYOU THANKYOU