This year’s forest and peat fires in Indonesia have reached unprecedented scale. The Global Fire Emissions Database[i] estimates that by 16 November, more than 122,000 forest and peat fires will have emitted 1.75 billion metric tons of CO₂ equivalent. The World Resources Institute (WRI) calculated that as of 16 October, emissions from fires had exceeded those of the total US economy – more than 15 million tons CO₂ per day – on 26 separate occasions, noting that the U.S. economy is 60 times larger than Indonesia’s.

Put another way, in just three weeks, emissions from fires in Sumatra and Kalimantan exceeded the annual emissions of Europe’s largest economy, Germany.[ii] The fires have caused environmental havoc, a surge in respiratory illnesses and other health impacts, and economic losses around the region. After mounting international pressure, President Widodo announced radical new caps on peat use: an end to licensing for concessions on peat lands, a review of existing licensing, recognition of high carbon value lands, and the creation of a program to restore the carbon-rich forests and peatlands. The government is reportedly exploring the establishment of a new Peat-land Management Agency to spearhead efforts.

This is not the first time moratorium-like measures have been announced in Indonesia. Success will lie in the extent of implementation and especially, in enforcement. But there is very real potential here for Indonesia to transform the way peat is used, particularly in the agricultural sector—with international assistance. Indonesia’s peatlands and tropical peat swamp forests, store more carbon than any other terrestrial ecosystem and are important reservoirs of biodiversity and ecosystem services such as water filtration. There is global significance in the efforts to find ways to rehabilitate peat forests degraded due to deforestation and inefficient agricultural practices.

The Indonesian government and its partners are not starting from ground zero. Significant technical work has already been undertaken that offers important lessons on how degraded peatland can be rehabilitated effectively, and what barriers need to be overcome to attract private investment in peat rehabilitation at scale.

The Australian government-funded Kalimantan Forests and Climate Partnership (KFCP), one of the earliest (and most controversial) large-scale REDD+ demonstration activities in Indonesia, offers some insight. Climate Policy Initiative‘s study Lessons from the Kalimantan Forest and Climate Partnership (CPI 2013), which examined the peatland rehabilitation and preservation component of the KFCP highlighted the role of international public finance in supporting the development and testing of approaches that have high potential to generate public goods but have little or no associated profit. Technical knowledge gained through the project is likely to reduce costs for future investors, and includes:

• An innovative design for a system of peat rehabilitation.
• Continuous monitoring of peat, water table, and vegetation.
• Improved approaches to peat forest rehabilitation including small dam construction and determining which plant species and plantation development methods can be used for reforestation of degraded peatlands.

Lessons from the KFCP also highlight the centrality of effective community engagement to successful peatland rehabilitation activities. Future project developers will be obliged to ensure free, prior and informed consent of communities in REDD+ activities, including by helping them develop additional income sources, and will need to implement proven mechanisms to fulfill this obligation.

The Outlook for Peat Interventions in Indonesia

Engaging private investors in Indonesian peatland rehabilitation activities is essential if Indonesia is to deliver its goals. The potential for achieving financial viability is good, assuming risks can be managed. CPI analysis, based on simple assumptions, is highly uncertain, but suggests that if the KFCP saved 26 million tons of verifiable carbon units over a 30-year period (as projected by experts advising the KFCP), with prevailing carbon market prices of between AUD 4 and AUD 23 per ton, had it been commercially oriented the project could have generated average annual returns over a 20 year period of between AUD 3.5 million and AUD 20 million. In comparison, costs for designing and implementing peatland rehabilitation activities are estimated to be AUD 14.1 million.

Urgent policies are needed to clarify tariff and revenue sharing arrangements, to enable investors to fully assess project profitability and reduce risk exposure in REDD+ and/land use projects. In the absence of an established benefit sharing system, there is little certainty about who stands to share in future revenue streams. The taxation of REDD+ activities needs to be carefully defined by the Government of Indonesia, and income tax and VAT or other additional REDD+ specific tariffs could significantly impact the balance sheets of REDD+ projects and thus incentives for private investors.

Effective management and regulation of land and various classes of land rights will be essential to reconcile Indonesia’s environmental and economic development goals. Continuing support for policy improvements to clarify land tenure is needed to encourage potential private backers of REDD+ activities in Indonesia. Without a national framework that sets out consistent requirements at the central, provincial, and district level, private sector investors will not easily be able to navigate governance arrangements.

While the KFCP ultimately fell short of its objective to demonstrate effective peatland rehabilitation at scale, the case highlights the importance of clarifying project standards, social engagement, and future revenues. Public sector reforms to address these issues will be technically and politically challenging. However, it is such reforms that have the greatest potential to reconcile Indonesia’s need to achieve sustained economic growth, particularly in the agricultural sector, while ensuring development is environmentally sustainable. Substantial, well-targeted public sector finance, from domestic or international actors, is likely to be required to support national policy makers to achieve these reforms in the short to medium term. As Indonesia works to ensure the fires of this year aren’t repeated, these lessons will be important to keep in mind.

At COP21, Jane Wilkinson will share lessons learned from efforts in Central Kalimantan to implement multi-stakeholder landscape management approaches to palm oil that can support local governments to develop incentives for sustainable palm oil initiatives. The presentation will be part of a panel discussion that applies these lessons to East Kalimantan. The panel will be moderated by Wahjudi Wardojo of The Nature Conservancy and will be held on Thursday 3 December 2015 from 15.00- 17.00 at the Indonesia Pavilion.

[i] http://www.globalfiredata.org/updates.html accessed 25 november 2015

[ii] WRI ‘Indonesia’s Fire Outbreaks Causing More Daily Emissions than Entire US Economy http://www.wri.org/blog/2015/10/indonesia%E2%80%99s-fire-outbreaks-producing-more-daily-emissions-entire-us-economy