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San Giorgio Group Case Study: Kalimantan Forests and Climate Partnership

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Published: November, 2013

Executive Summary

Emissions from deforestation and forest degradation make up nearly one fifth of global greenhouse gas emissions (IPCC 2007). Reducing Emissions from Deforestation and Forest Degradation (REDD+) is a high level framework that aims to assist developing countries to slow, halt, and reverse forest loss and associated emissions. It sets out three sequential elements: (a) the development of national strategies or action plans, policies and measures, and capacity-building; (b) the implementation of these strategies, plans, policies and measures in ways that could involve further capacity-building, technology development and transfer, and results-based demonstration activities; and (c) results-based actions that should be fully measured, reported, and verified.

With estimated costs of halving emissions from deforestation and forest degradation by 2030 ranging between USD 17 to USD 23 billion (UNEP FI 2011), the projected level of investment needed far exceeds available public resources, and significant private funding sources will undoubtedly be required. However, until operational, transparent, and effective national REDD+ strategies and frameworks are implemented, private investors face significant policy risks and disincentives, and have few economic reasons to support REDD+ activities.

For Indonesia, a major part of the REDD+ effort will need to focus on emissions from degraded tropical peatlands. Peatlands, and in particular 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. With around half of the global peatland area within developing countries located in Indonesia (BAPPENAS 2009), finding ways to rehabilitate peat forests degraded due to deforestation and inefficient agricultural practices, and to mitigate future emissions, has potential global significance. The race is on to understand whether degraded peatland can be rehabilitated effectively to avoid the emission of millions of tons of CO2 and conserve other important ecosystem services, and what barriers need to be overcome to attract private investment at scale. 

The Australian government-funded Kalimantan Forests and Climate Partnership (KFCP) is one of the earliest large-scale REDD+ demonstration activities in Indonesia. One of the four components of this project aimed to demonstrate effective approaches and techniques to rehabilitate peatland at scale and preserve threatened peat swamp areas. In this case study, we analyze the KFCP peatland rehabilitation component to distill lessons that might inform the implementation of a national REDD+ framework and provide early insights to future REDD+ project developers.

Some lessons learned

The KFCP peatland rehabilitation component began in 2009 and concluded in June 2013 before achieving its objectives in full. While the KFCP did not prove the feasibility of peatland rehabilitation, the project as a whole has generated key insights, improving the prospects of designing a defensible and robust technical approach in the future.

In particular, the case highlights the role of international public finance in supporting the development and testing of approaches that have high potential to generate public goods that benefit all members of society but little or no associated profit. Contributions made by the KFCP to technical knowledge of peatland rehabilitation are likely to reduce costs for future investors, and include:

An innovative design for a system of peat rehabilitation. Although only components were implemented and tested, lessons about these as well as lessons about how much time is needed for preparation and approvals, are of high value and should be disseminated broadly, particularly given the partnership studied, monitored, and evaluated all interventions irrespective of outcomes.

Continuous monitoring of peat, water table and vegetation. Recorded data is a crucial basis for peat science, emissions estimation, and peatland rehabilitation.

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.

The KFCP also highlights the centrality of effective community engagement to the success of peatland rehabilitation activities. Future public and private project developers will be obliged to ensure the ‘full and effective participation’ of communities in REDD+ activities and will need to implement proven mechanisms to fulfill this obligation. The KFCP’s ‘Village Agreements’ provide a potential model for engaging communities located on or near REDD+ sites, and achieving agreement to community-implemented activities that support peat forest rehabilitation, develop additional income sources, and lay a foundation for permanent emissions reductions.

Some lessons pending – issues for future REDD+ investments in Indonesia

The business case for future commercially oriented investors in Indonesian peatland rehabilitation activities remains uncertain. As a public partnership, the KFCP did not set out to generate financial returns. Nevertheless, KFCP data does provide information for some preliminary estimated revenues that compare favorably with the cost estimates for rehabilitating peatland of AUD 14.1 million. Our analysis shows 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 or and AUD 23 per ton, the project could generate average annual returns of between AUD 3.5 million and AUD 20 million. Calculations are based on simple assumptions and are highly uncertain. Still, they suggest the potential for achieving financial viability is good, assuming all other risks can be managed.

Work is needed to clarify tariff and revenue sharing arrangements, to enable investors to fully assess project profitability and reduce their exposure to risk in REDD+ 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 is also still being 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.

National policies and mechanisms to minimize transaction costs and underpin the robust measurement and verification of emission reduction units will be essential to attract commercially oriented investors. Future financial returns, whether these streams come from performance-based mechanisms or from carbon markets, are likely to rely on the generation of verifiable emission reductions. There will therefore be additional costs to investors for complying with related requirements (e.g. project level monitoring and reporting, and social and environmental safeguards). An effective, operational national framework for these requirements is under development, including through the recent establishment of the Indonesia REDD+ Agency in September 2013. Whether this framework tackles barriers across landscapes, or on a project-by-project basis, has important cost implications for 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 approaches at scale to the rehabilitation of peatland, 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 and protects high value ecosystems or ‘natural capital’. 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.