REDD forest offset demand 3-7 years away

JAKARTA/SINGAPORE Mon Oct 11, 2010 5:47am EDT

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JAKARTA/SINGAPORE (Reuters) - A global market in forest carbon offsets under a U.N.-backed scheme will take three to seven years to develop in part because of the stalled U.S. climate bill, a top Indonesian forest investor said.

The United Nations says the scheme, called reduced emissions from deforestation and degradation, or REDD, could be worth billions of dollars a year to developing nations, which would earn money from protecting and rehabilitating carbon-absorbing rainforests.

But the scheme hinges on rich nations putting in place mandatory emissions trading schemes that underpin demand for large volumes of internationally tradeable REDD credits. At present, REDD credits are sold in the unregulated voluntary market.

"No one will do anything until the U.S. comes to the table and I think that will happen in the second term, assuming Obama wins the election again in 2012," said Dharsono Hartono, president and director of Jakarta-based private company Rimba Makmur Utama.

His firm is the developer of a vast REDD pilot project in Indonesia's Central Kalimantan province.

Under REDD, credits would be bought by firms and governments of rich nations, which would use the offsets to partially meet mandatory emissions reduction targets.

A portion of the money would go to local forest communities in poorer nations to boost livelihoods.

The stalled U.S. climate bill has the potential to draw in hundreds of millions of offsets a year.

Hartono said there was growing skepticism Australia would pass a similar climate bill soon but that Japan could prove to be a major buyer through bilateral carbon offset deals.

REDD offsets could help Japanese companies meet the government's pledged emissions cut of 25 percent by 2020 from 1990 levels.

GREATER AWARENESS

"Best scenario, I think 2013," he told the Reuters Climate and Alternative Energy Summit on Monday, referring to demand from mandatory emissions trading markets in rich nations.

"I think the worst-case scenario (would be) 2017. By that time, the economy is getting better, people's awareness of climate change is much higher, there will be a lot of disasters between now and 2017 and people will say that's all because of climate change."

The United Nations is aiming to have an expanded form of REDD to be part of a new climate pact from 2013 and the shape of the scheme is already well advanced in the negotiations.

The world body predicts that financial flows for greenhouse gas emission reductions from the broader form of REDD, which incorporates sustainable management of forests, could reach up to US$30 billion a year.

Future pricing is still unclear but voluntary REDD credits sell in the forward market for between $3 and up to $10 each, representing a metric ton of carbon locked away, brokers say.

For the moment, demand for REDD credits has eased from two years ago when there was a much greater expectation of the U.S. climate bill passing the Senate, Hartono said.

"I think demand is still very limited. We have seen corporate buyers who aggressively approached us a few years ago are now less aggressive," he added, but still saw interest from banks.

Hartono and business partner Rezal Kusumaatmadja of consultancy Starling Resources have spent the past two years developing a project to save an area of pristine and degraded peat swamp forest in central Kalimantan.

The 227,000 hectare (560,900 acres) project is about three times the size of Singapore and will require the repair of drained peat canals and long-term replanting of areas damaged by illegal logging and mining. Engaging local communities was key.

"By doing REDD now, we can inform all stakeholders how things work on the ground," Hartono said, adding: "There is a risk if we came too early but, in the end, the risk of inaction is much greater."

REDD could also help drive greater regulatory reform in Indonesia through better and more transparent forestry management, he said, as well as large-scale REDD demonstration financing by other governments and agencies, such as the $1 billion REDD partnership between Norway and Indonesia announced earlier this year.

(Editing by Ed Lane)

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