Indonesia forest CO2 rules need finance clarity: experts

SINGAPORE Fri May 8, 2009 11:15am EDT

A view of a destroyed rainforest in Kotawaringin Timur district in Indonesia's central Kalimantan province, October 9, 2007. REUTERS/Hardi Baktiantoro

A view of a destroyed rainforest in Kotawaringin Timur district in Indonesia's central Kalimantan province, October 9, 2007.

Credit: Reuters/Hardi Baktiantoro

SINGAPORE (Reuters) - The world's first rules for generating tradeable carbon credits from protecting forests were a good start but Indonesia needed to clear up doubts over the government's share of the revenues, analysts and industry said Friday.

Indonesia's forestry minister signed the rules last Friday, making Indonesia the first nation to formally enact regulations governing a U.N.-backed scheme called reducing emissions from deforestation and degradation (REDD).

The scheme aims to generate billions of dollars in carbon credit revenue for developing nations in return for long-term protection of forests or rehabilitation of forest land.

Forests soak up vast amounts of carbon dioxide and reversing the rate of deforestation is seen as crucial to braking the pace of climate change.

About 20 percent of mankind's greenhouse gas emissions come from clearing and burning forests and Indonesia has been a large contributor of that pollution through logging and clearing for palm oil plantations.

Under the Indonesian rules, a foreign party can join up with an local entity to develop a REDD project and the credits could be used to offset emissions in the developed world.

The rules also spell out what types of forests are eligible and the licensing requirements. A national REDD commission would vet projects, which could run 30 years and possibly be extended.

"What is clear is who can do a REDD project and where a REDD project can be carried out -- who the REDD proponents are, who can be the national and international entities," Jakarta-based lawyer Luke Devine told Reuters Friday.

"It's a bit like a CDM scheme framework of pairing a national project developer with an international carbon buyer," said Devine, head of the climate change practice at Baker & McKenzie member firm Hadiputranto, Hadinoto & Partners.

The U.N.'s Clean Development Mechanism allows rich nations to invest in clean-energy projects in the developing world in return for U.N. backed carbon credits.

The world body wants to extend the same idea to REDD and aims to have the scheme formally included in a broader climate pact to replace the Kyoto Protocol from 2013.

For the moment, early REDD projects fall under the voluntary carbon market and a U.N.-backed REDD credit trading scheme won't be operating until at least 2013 and probably later.

TAX OR LEVY?

Devine said the government had not announced how REDD revenue would be handled or what the government's share would be.

"The earlier draft talked about a 30 percent share of the REDD entitlements going to the central government. The signed regulation just says it will be separately regulated."

He said the finance ministry was studying how to treat REDD credits, whether they should be taxed, whether the government should impose a levy on the value of the credit as with, say, timber, or whether the government should take a physical share of the credits as with oil and gas.

The rules have been more than a year in the making and investors have been waiting for clarity. The World Bank said earlier this year there were about 20 REDD projects in Indonesia at various stages of development.

"From a private sector perspective, these new REDD regulations are really encouraging as they provide more certainty on process and procedure to implement a project," Dorjee Sun, CEO of Carbon Conservation, told Reuters.

"Investors are still missing one key piece of information which is the state revenue share requirement in Article 20 but this is a challenge that is being met by the Ministries of Finance and Forestry," said Sun.

Carbon Conservation is working with the Aceh government in Indonesia on Ulu Masen, the world's first independently validated REDD project covering 750,000 ha (1.87 million acres).

The United States and Australia see REDD schemes as a viable way of offsetting domestic emissions, although some green groups say REDD will help rich nations dodge carbon-cutting measures.

A draft climate bill by U.S. Congressmen Henry Waxman and Edward Markey proposed incentives that would help cut deforestation in developing countries between 2012 and 2025.

Earlier this week, Australia said it would raise its 2020 emissions reduction target to 25 percent from 2000 levels if other rich nations pledged equally ambitious cuts. It said a fifth of that target could be met through overseas offsets, including future U.N.-backed REDD credits.

For the moment, Indonesia needed to spell out how credits from early REDD projects could be traded, said Fitrian Ardiansyah, program director for climate and energy for WWF-Indonesia.

"Some of the groups at the international level are talking about whether they can bank the credits that are generated from today till 2012 and then try to sell after 2012," he said, adding investors wanted clarity on how to fund early REDD projects.

"The parts affecting economic viability of the project have yet to be laid out," said Devine.

"We may therefore be looking at donor money for the early REDD projects, with investor money to follow once the full picture is presented."

(Editing by Michael Urquhart)

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