Rimba Raya Debacle Casts Pall Over Indonesian REDD

Marigold Norman

Bureaucratic machinations on the part of Indonesia’s Ministry of Forestry have knocked the wind out of a pioneering forest carbon project that had become one of the first to attract big-league financing, lured in part by the promise of a profitable carbon market. Many are now left wondering about the future of REDD and its risky business.

12 September 2011 | The world has eagerly watched as Indonesia pilots public and private investments to curb the country’s massive forest losses while still meeting economic development goals. But conflicting interests between the nation’s leadership turned ugly last month when a leading forest conservation project in Central Kalimantan was halved to offer a concession to a palm oil company.

Developed in 2008 by InfiniteEarth and the Orangutan Foundation International, the Rimba Raya Biodiversity Reserve REDD Project was designed to conserve 91,000 hectares of tropical rainforest and peat swamp in Central Kalimantan, Indonesia. Over the next 30 years, it would have prevented the release of nearly 100 million tonnes of carbon dioxide and funneled hundreds of millions of dollars to the rural poor and the Ministry of Forestry.

But the country’s own government turned more than half of those hectares over to a palm oil plantation to feed a longstanding cash cow for the Ministry of Forestry, with potentially devastating implications for efforts to reduce greenhouse gas emissions from deforestation and forest degradation (REDD).

“The Rimba Raya case calls into question the true level of Indonesia’s commitment to REDD,” says Todd Lemons, the CEO of the Rimba Raya’s project developer InfiniteEarth. “That will have a profound effect on investor confidence.”

Full Speed Ahead

Frequently cited as an exemplary project, Rimba Raya was on track to issue the world’s first REDD credits under the Verified Carbon Standard (VCS) and expected to achieve a triple gold rating under the Climate, Community and Biodiversity (CCB) Standard. The project was even enticing enough to attract a subsidiary of Gazprom, the Russian energy giant, to invest in the project, and had already lined up buyers for many of the expected carbon credits.

And yet, despite high level support for reducing deforestation (including a $1 billion agreement with the Government of Norway to develop and implement a national REDD strategy) and ongoing commitments from Indonesia’s President, Reuter’s reported last month that after years of consultation, the forestry ministry reneged on early commitments to the project by carving off half the project area and handing it to the PT Best Group for palm oil development. Progress on Rimba Raya is now stalled as the project developers decide what to do next.

These developments raise significant questions about the likely success of REDD in the absence of strong and coherent political will in a space where forest and agricultural industry interests continue to have substantial and alluring clout.

While this may not be the end of the Rimba Raya project, Zubair Zakir, Head of Carbon Sourcing at the CarbonNeutral Company, still laments the outcome.

“We were not expecting a setback like this in such an instrumental country so early on,” he said.

Two Roads Diverged in a Wood?

The experiences of those working on the Rimba Raya project highlight a number of ongoing issues facing REDD project developers – chief among them the need to demonstrate economic viability, not just for project investors but also for the host nation (and its government).

“Clearly, none of us in the REDD industry have done enough to bridge the gap between the ‘conservation versus economic development’ argument,” says Lemons.

For all the focus on environmental benefits associated with REDD, less emphasis has been placed on convincing national stakeholders of the economic benefits of restricting forest clearing and leaving the forests intact. While carbon markets currently offer a price for each metric tonne of CO₂ removed or kept out of the atmosphere, forests such as those under threat in Indonesia are also known to offer a broad suite of ecosystem services such as filtration and water regulation, provision of wildlife habitat, and more. But these forests also make a prime target for conversion to lucrative palm oil plantations and other development projects that degrade or remove large swathes of forest in the country every year.

“Economic growth and environmental sustainability do not have to be mutually exclusive to one another” argues Lemons.

Clarity in the REDD space has been touted as key to increasing support in Indonesia as well. Iman Santoso, the Minister of Forestry’s Director General for Forestry Business, articulated a problematic lack of clarity in the nation’s REDD policy framework, which he claims has made it difficult for Indonesians to see how they will benefit from REDD projects.

This attitude is further supported by market players such as Zakir, who emphasizes that a clear price on forest carbon may help level the playing field and earn REDD a place in Indonesia’s development toolkit.

“You can very easily demonize other industry sectors and government officials, but in reality economic growth is so important for Indonesian development,” he says.

This lack of clarity, whether around policy, price and legal frameworks or the economic and environmental co-benefits of REDD, continues to impact decisions made on the ground in Indonesia. But even while these broader issues suggest sustained difficulties for developing REDD projects, the longer term outlook for several market players for REDD in Indonesia still appears very positive.

The Rimba Raya Effect

The effects on investor confidence are already evident as Gazprom Marketing & Trading (a key financier of the Rimba Raya project) has announced that it is putting over $100 million worth of green investments in Indonesia on hold.

But even those directly involved in Rimba Raya stress that any potential investor concerns about Indonesian REDD projects will only be short term. Gary Paoli of Daemeter, a consultant on the Rimba Raya project notes “Realistically, I would not say that it means the end of private sector interest in REDD.”

Instead, Paoli predicts that the Rimba Raya effect will most likely be a shift in “the composition of REDD investors towards companies and investors with deeper pockets and longer time horizons… especially those interested not only in carbon credits but also the real estate value of the land they will manage under REDD.” For these investors with a long view, says Paoli, “a few years of delayed investment return while Indonesia sorts out governance issues is not a deal breaker.”

The case of Rimba Raya is also likely to influence how investors engage with Indonesian officials moving forward. This “will definitely shift the strategies potential investors employ for ensuring government support for their projects and in particular how to obtain Ministry of Forestry approval” Paoli said.

“Indonesia needs to be part of the global REDD+ scheme,” says Zubair Zakir. As the country with single largest deforestation and land-use related emissions in the world, Indonesia is also something of a bellwether. “If Indonesia cannot demonstrate it can get a project through [the development and implementation stages] like other countries are beginning to, then this is a disappointment,” he continued.

Indonesia seems well aware of this perception. Iman Santoso has also stressed Indonesia’s longer term commitment to carbon trading. “Why would we sideline [carbon trading and REDD] for other investments that have worse impacts?” he told the Jakarta Globe. “We might not see the benefits of carbon trading immediately, but it’s much better for the environment in the long run.”

Desperately Seeking a Partner in the Government

Though Santoso appears to talk the talk, not all officials within the Ministry of Forestry have been convinced that REDD is worth the effort. The divide between the aspirations of President Yudhoyono’s national REDD+ Taskforce formed just last year and the Ministry of Forestry has already become apparent.

One of the central commitments Indonesia made in a $1 billion REDD deal with Norway last summer was the institution of a nationwide ban on forest clearing concessions. Political infighting and turf-wars quickly ensued as both the REDD+ Taskforce and the Ministry of Forestry submitted conflicting versions of a Presidential Draft Decree needed to formally authorize the moratorium. The debate waged for more than four months and President Yudhoyono ended up choosing the concessionaire-friendly terms from the forestry ministry.

The Ministry of Forestry’s Secretary-General Hadi Daryanto recently laid out his deep skepticism of REDD plainly when speaking to Reuters.

“Who will pay for the dream of Rimba Raya? Who will pay? Nobody, sir!” he proclaimed.

If more last-minute deal breakers like this take place, Daryanto may be right, but not because there is unwillingness to invest. Project developers need partners in government willing to make these projects work.

Moving forward from the Rimba Raya case, several market players we have interviewed believe that increased pressure on the Indonesian government will ensure that President Susilo Bambang Yudhoyono’s REDD commitment is strongly implemented across the board, helping to provide more clarity for investors.

The success of the Norway Indonesia Partnership also rests on a consistent and coordinated approach to REDD+. Per Fredrik Ilsaas Pharo, the Deputy Director of Norway’s International Climate and Forest Initiative admitted that while “we are not making any changes in our fundamental approach [as a result of what happened with the Rimba Raya project], both we and not least our Indonesian partners are continually adjusting course as circumstances change”.

But this uphill battle may require more than political will alone. Forest concessions have long been a graft-prone stream of cash for the Ministry of Forestry, and Indonesia’s Corruption Eradication Commission was recently tasked to investigate the concession process. Weaning the Ministry of Forestry from its longstanding reliance on concessions to clear and develop many of the forests most valued for conservation and REDD projects will likely require more than just the flick of a pen or an artful speech.

Risking It All

The case of Rimba Raya is a far cry from the end of investments in REDD, but the need to mitigate risks from these types of political machinations is clearer than ever. Zakir notes that investors and developers “absolutely need some kind of insurance product that will deal with political risk.”

This concern is also voiced by Lemons, who suggested that “in the absence of adequate political risk coverage, this risk will necessarily have to be reflected in the price,” which could lead to Indonesia being priced out of the market and attracting limited investment.

While there have been a limited number of commercially viable or feasible private insurance options to date (Rimba Raya was not covered by any political risk insurance provisions), Terra Global Capital and the Overseas Private Investment Corporation (OPIC) announced a new political risk contract covering investment in an Asian REDD project that is thought to be the first in the world.

At the announcement of the groundbreaking deal back in June, Leslie Durschinger, Managing Director of Terra Global Capital emphasized “the value of having political risk insurance as a mechanism to reduce investor’s risk cannot be overstated in this emerging sector.”

REDD project insurance for political risks could offer some confidence for investors but the current options from OPIC covering political violence and expropriation can only be secured once legally binding agreements are in place with the government detailing their support for the project.

Before a legally binding agreement has been set up, project developers and investors still take on the risk burden. While there are a number of lingering questions and issues with insurance options to date, there is ultimately great need for insurance providers in the REDD marketplace. Project developers are likely to work with emerging insurance providers and begin learning from experiences on the ground for how and when to seek insurance coverage.

Learning from Rimba Raya

Rimba Raya has highlighted a number of ongoing obstacles that continue to face project developers. Far from signaling a bleak outlook, however, those directly involved in the project and the forest carbon market at large predict continuing growth and successes in the longer term.

“We have to learn through failures. We cannot just learn through successes,” notes Zakir. “The case of Rimba Raya can provide some lessons on managing political risk.”

Such difficulties in developing and delivering the Rimba Raya project should be seen as a way to steer those working in the forest carbon and REDD space towards addressing some of the lingering questions around clarity, transparency and risk in this emerging market.

In the mean time, Todd Lemons will be trying to salvage his project, and Indonesia will continue to wait for its first forest carbon project to make it all the way through the pipeline to the global marketplace.