Beyond Carbon Cowboys: Private sector engagement & experience in REDD+ in Asia

“Forest Carbon projects are not quick and easy, and they are not cheap“, say private sector forest carbon project developers across Asia. How has the private sector engaged across the region? What have been the main challenges in different countries? What lessons have been learnt?

The private sector is one of the key actors developing forest carbon projects across several countries in Asia along with government agencies, NGOs, and multilateral and bilateral donor projects. By private sector engagement, we mean projects developed by private enterprises or with private sector investment in the early stages. We exclude projects where the private sector acts purely as a late-stage carbon credit buyer.

How significant is private sector engagement in different countries across Asia and what proportion is it of overall activity on the ground?
Answer: Difficult to tell precisely given the absence of national project registries and many projects being initiated and then abandoned for one reason or the other.

Based on readily-available information and some interviews, we derive an estimate of 36 active projects with private sector involvement across Asia versus 58 projects without private sector involvement. The numbers do not include projects in fuzzy early exploratory stages. Bulk of the total 94 projects are in Indonesia (38) followed by India (11), Philippines (9) and China (9). Cambodia, Laos, PNG and Vietnam follow with 5 projects each.

Bulk of the private sector projects are also in Indonesia, India, Philippines and China. Private sector projects dominate in India (72%) and the Philippines (55%). In the other 6 countries with 5 projects or more, 20-45% of the projects have been developed by the private sector. We are personally aware of 10 more private sector proposals for REDD+ projects in Lao PDR, and some in India, Vietnam and Thailand.

What project types have the private sector taken up in different countries?
Looking at the known and defined 36 private sector projects, 18 are AR, 15 are REDD and 3 are IFM. Of the AR projects, 14 are CDM projects and 4 are voluntary market projects. The private sector has focused on REDD in Indonesia and Cambodia, countries with substantial forest cover and high deforestation rates. It has focused on AR in India and China, countries with low and stable to rising forest cover. The private sector started both AR and REDD projects in Laos and the Philippines and initiated IFM projects in Malaysia and PNG.

Many AR projects are validated and registered while REDD projects are primarily in initial development stages. All project types are increasingly focused on the voluntary carbon standards and markets while awaiting an international compliance mechanism and market.

Project sizes and expected credit volumes
The private sector AR projects range in size from 106 -18,000 hectares and expect to generate < 0.1-10.7 million tCO2 over 20-30 years. Private sector REDD projects are much larger, ranging in size from 58,000-750,000 hectares with expected credit volumes of 7-100 million tCO2 over 20-30 years. The IFM projects are intermediate with expected credit volumes of 10-37 million tCO2 over 40-100 years.

Project motivations and land types
In Indonesia , the private sector is developing REDD projects on “Ecosystem Restoration Concessions”, a licensing system that allows different actors to apply for degraded forests to restore the ecosystem and benefit from the sale of environmental services generated. Another area of private sector focus is avoided conversion of forests to oil palm within existing oil palm concession areas.

In India, private sector developers have developed numerous AR projects on small farmer lands for enhancing their livelihoods through carbon sequestration. In China, domestic forest development companies are involved in the rehabilitation of degraded state and village lands.

Private sector experiences across Asia

The tenure challenge, high investment costs and low government support in Indonesia
As per current regulations, private sector investment possibilities in REDD+ in Indonesia include sustainable forest management (SFM) in existing logging concessions, avoided forest conversion within existing oil palm and industrial plantation concessions, applying for ecosystem restoration concessions, and collaborating on community forestry areas. Most commercial REDD+ projects are applying for ecosystem restoration licenses for 60 years plus an additional 35 year extension period given the clear legal framework.

“However, registering such a concession is a complex process involving multiple endorsements from different levels of government,” says Mr. Frank Momberg, Development Director of the NGO Fauna and Flora International‘s (FFI) Asia-Pacific Programme. FFI has been working with the private sector to develop forest carbon projects in Indonesia. “It can take two years or more. So far no forest carbon projects have obtained tenure and at least five projects are waiting for approval by the Ministry of Forestry. Once tenure is obtained, they then have to apply for a carbon trading license which could again take a substantial amount of time. All in all the formal and informal costs in this process are very high.”

Even securing tenure for community forestry (Hutan Desa) is a new, long and complex process. Projects may be easier done in existing oil palm and logging concessions. “However, voluntary carbon market prices do not match oil palm opportunity costs,” states Momberg, “Emerging markets demanding certified palm oil may provide the economic incentive.”

The private sector itself has been mixed in its performance. High initial investment costs are a major obstacle and numerous ‘carbon cowboys’ entered the scene without sufficient investment backing. “The long and costly processes have weeded out the undercapitalized companies and the ones with larger investments are still functional,” says Momberg, “FFI has learned from the early experiences and has now teamed up with the Australian Macquarie Capital to ensure sufficient upfront capital through the development process.”

Additionality is not an issue given the high forest cover and high deforestation rates. Demand is also not a problem as there is already substantial pledged funding for forest carbon.  However, there is enormous political and regulatory uncertainty and tensions between different government institutions and levels which generates substantial investment risk.

Government support for the private sector is low in Indonesia now. “Recent large top-down government-to-government agreements have all but killed the private sector forest carbon markets in Indonesia,” says Mr. Scott Stanley, Managing Director of Forest Carbon, a technical consulting firm based in Indonesia. “Focus and priorities have shifted to building national level processes and institutions while efforts to support the voluntary markets have come to a standstill.”

Regulatory uncertainty and additionality questions in the Philippines
An example of a private sector project in the Philippines is the REDD project bring developed by Tokyo Electric Co. in collaboration with the NGO Fauna and Flora International on 100,000 hectares of ancestral domain lands in Southern Luzon. This approach would actually support tenure and carbon rights for indigenous people based on the Philippines’ Ancestral Domain Act and its emerging REDD regulations.

Momberg of FFI suggests that low-forest low-deforestation countries like the Philippines are more supportive of projects since they are not swamped with donor money that focuses on national-level readiness. “Number of projects are still limited because such countries do not jump to mind when thinking about REDD and there is the question of additionality. Developers tend to head for Indonesia with high forest and high deforestation rates and therefore greater potential carbon savings to be made,” he observes.

The Philippine Peñablanca  Sustainable Reforestation Project (PPSRP) in Cagayan being conducted by  Conservation International (CI) and Toyota Motor Corporation has been validated under the CCB Standard at the Gold Level and expected carbon sequestration has been calculated as a part of CCBS requirements. Mr. Yoji Natori of CI clarified that the PPSRP was not a carbon credit project and that it emphasizes community and biodiversity benefits. With this clarification, he outlined the general challenges faced by forestry projects on the ground.

“We are trying to implement on the ground something very new to local communities. There is a lot to explain and it usually takes much longer than expected while the project term is limited and set. ” “The government is open to and supportive of private sector engagement in the Philippines,” Natori notes, “but basic rules such as “Who owns the forest carbon?” are  still being decided in the process of establishing the national policy on this issue.”

Uncertain role, finding eligible project areas and bureaucratic process in Vietnam
In Vietnam, it is mostly Afforestation Reforestation or AR. A lot of interest is being shown by the private sector in developing forest carbon projects in Vietnam. However as Frank Momberg of FFI states, “How the private sector will engage in REDD+ in Vietnam is not yet known, as a legal framework for REDD is still in the making. A possibility is the 5 million hectares rehabilitation program area under smallholder ownership.  There is already legislation in place for PES and business contracts for other environmental services.”

The other possibility is working with state forest enterprises on lands under their jurisdiction. CO2OL Carbon Consult, a consulting agency that is part of the ForestFinance group, has an AR project on State Forest Enterprise land in Vietnam. Andreas Schnall of CO2OL indicated that the project was on hold at the moment. The key challenges they faced were: a) unclear land use and carbon rights, b) finding eligible areas with no forest for the last 10 years as required by the Carbonfix standard and of sufficient size (> 500 ha), c) the substantial paperwork and long process to sign even a small letter, and d) the low awareness and capacity of private companies on developing such projects.

Positive AR experience and REDD challenges in India
Many private sector developers have undertaken afforestation projects on small farmer lands for sequestering carbon and enhancing livelihoods. “It is not easy”, said Mr. Satyanarayana, Advisor to VEDA Climate Change Solutions, a private company helping farmers develop a CDM AR project, “We started in 2004 and it took seven years to register the project. The commercial private sector would have given up a long time ago but for us it was an intellectual challenge. Of course it was all new then, there were no methodologies and everybody had to learn what to do. Now the situation is better and we plan to develop more projects since the social benefits are good. Poor farmers can generate additional income through agroforestry and carbon revenues on their degraded lands.”

Mr. Joseph Rexon of TIST tree planting India Ltd. indicated that they had similar experiences given the newness of the process but now it was more doable. Their CDM AR project also supports small farmers to generate multiple benefits through afforestation on lands they cannot use for agriculture. “Farmers are not able to do agriculture on a large scale given the erratic rainfall, so they are interested in the AR project. We plan to expand to other states now,” he said.

The project developers indicated that the government including local forest departments had been supportive of such projects and markets were also not a problem. Buyers have been coming in recently and purchasing the credits. Even if the Kyoto Protocol failed, they were confident they could sell the credits in the voluntary markets. However, it is not big money and more of a social business rather than a financially profitable venture.

The agencies would continue to support the farmers through the implementation stage and this was important. Private sector partnerships were useful for technical and logistical assistance and to provide markets for the timber and other products generated through the projects. Satyanarayana pointed out the key remaining challenges for developing such projects, “The gestation period for returns is long. You need to work with many small farmers and technical consultants are difficult to find. So there are not as many projects as there could be.”

Up-front investment was critical. The TIST project was backed by its parent company Clean Air Action Corporation in the USA and VEDA’s project had sold its credits early on to the multilateral BioCarbon Fund managed by the World Bank. “The Bank’s representatives will be coming in September to release the first carbon payments directly to the farmers. This is a big accomplishment for us,” said Satyanarayana.

The Indian government is actively engaged in international REDD+ discussions and the first REDD pilot projects are being explored. Dr. Nina Sengupta, a conservation and development consultant, suggests that REDD is difficult to implement in India given the current forest land tenure situation. Numerous reports and media articles state that the 2006 Forest Rights Act of India restituting rights to forest-dwelling populations has not been implemented effectively. Community ownership is not recognized and is even contested by the authorities in places. Sustainable management of the forests by non-state actors and linking to REDD markets will require clear and secure tenure arrangements.

Limited data access and slow government process in Laos
The Government has received proposals from numerous private enterprises seeking to develop forest carbon projects in Laos. The Department of Forestry recently organized a workshop to facilitate information-sharing with and feedback from the private sector. Mr. Bounthang from Prime Consultancy Co., Laos said, “Obtaining information such as GIS, social data and history of the project sites is really difficult. There is not much staff and the information is not easily accessible by the public. Accessible data and quick government support is vital for the projects to proceed quickly. Ultimately a comprehensive legal framework is needed.”

Mr. Oupakone Alounsavath, Director of the Planning Division, Department of Forestry acknowledged that the government approval and support process may be long now but it was new to them and they were learning by doing. They appreciated advice on process and could support mainly feasibility studies at the moment.

Mr. Aimilios Chatzinikolaou from the World Bank’s International Finance Corporation (IFC) indicated that they were looking to partner with large plantation companies with global experience such as Stora Enso, Oji and Birla to support agroforestry models outside their concession areas in Laos and determine whether carbon finance could provide adequate social revenue. “Lack of knowledge on where to start and how to proceed is the biggest issue we face.”

Unfavourable REDD and IFM baselines, and high opportunity costs for AR in Malaysia
Face the Future, a Dutch forest project development company, has been working on the INFAPRO rainforest rehabilitation IFM project in Sabah, Malaysia since about 1992. It is one of the earliest forest carbon projects in the region and Dutch energy companies used the carbon credits to voluntarily offset their emissions. Mr. Martijn Snoep, Carbon Project Manager of Face the Future, indicated that they did not face many challenges in project implementation. “We have long-term relations with local counterparts, an NGO helps manage the project site and we resolved the technical challenges early on. We are now switching to the Verified Carbon Standard (VCS) and have found new buyers for the credits over the last decade.”

Snoep believes that Malayisa has only a few forest carbon projects because the investment required is high, there are few developers, the baselines are not favourable for REDD or IFM at present, and AR cannot compete with the opportunity costs of developing oil palm on non-forested lands. “Production forest management practices have improved since the 1990s leaving little room for additional carbon gain in an IFM project. There is less conversion of forest to oil palm now after establishment of reserves, but that could change depending on the political situation and if there is insufficient money for sustainable forest management,” says Snoep. “There may be more room for REDD+ in Sarawak. There is more forest there and activities are less organized.”

Challenging processes and negotiations in Cambodia
Cambodia appears to have two REDD projects on the ground where private sector developers are involved along with international NGOs and government agencies. Another project by the British Company Tricor may be in the offing though there has been little information on this since its announcement in January 2011.

Ms. Amanda Bradley, Program Director of the NGO PACT in Cambodia, works with private sector developer, Terra Global Capital of the USA on the Oddar Meanchey REDD project. She describes some of the main challenges faced by the project, “It has been a long 3.5 year process of project development to date. The new methodology took time to develop followed by prolonged negotiations of roles and benefit-sharing between the different groups involved – government, private sector and NGO/community.”

Bradley adds, “There has not been much funding for project development, especially for communities in this time and things can go out of control on the ground. It has been difficult to find donors willing to invest in project start-up.”

Some lessons for private sector developers across Asia
Developing forest carbon projects in Asia is not quick and easy, and may not make sense from a purely commercial perspective. Even in the most enabling environment, it is a new and long process, there are many steps, it involves informing and working with stakeholders on the ground and governments at different levels, inaccessible data has to be drawn out, a methodology selected, documents have to be prepared and the project design has to be validated. Companies driven by “more than profit” motivations and prepared for a relatively long process stand a better chance.

Developing a forest carbon project in Asia is not cheap. Carbon measurements, socialization processes, and PDD development and validation call for sufficient up-front investment backing through the long development process.

Unclear and uncertain forest land tenure is a major issue in most countries and securing tenure over the project areas can be a long and complex process in places with high costs. That said, managing the forests for REDD+ demands clear and secure tenure arrangements to become operational. REDD+ thus has the potential like no other mechanism before it to help clarify and secure forest land tenure and rights for communities and other actors on the ground. Project developers will likely need to engage with clarifying tenure on the ground as a part of project activities.

Market interest and demand does not appear to be a problem for forest carbon projects. Buyers are attracted to the forest carbon project story − forest conservation or enhancement, benefits to local communities and climate change mitigation. Even if a compliance market fails to develop, developers are confident of demand for forest carbon in the voluntary carbon markets.

It is easier to start projects on sites where NGOs and others have already been working on natural resource and community issues in the area. Site and social data is available, a base exists for introduction and socialization of the new concepts, and an experienced local partner exists for facilitation and long-term implementation of the project.

Projects may have higher financial viability and be easier for the private sector to execute in areas that offer large credit volumes (such as peatlands and avoided high forest conversion) and have clear and secure tenure arrangements (existing private or community tenure, or clear tenure process for operating on state lands).

With evolving policies and attempts to devolve forest land use rights to communities, there is emerging scope for private-public partnerships in community and small farmer projects for multiple benefits including carbon across Asia. These projects may not provide high carbon returns and may involve high transaction costs. However, they could offer reduced social conflict and significant social benefits attractive for Corporate Social Responsibility (CSR) motivations.

Unlike transport and renewable energy projects, forest carbon projects are wrapped in a spectrum of highly-sensitive issues related to the land, forests, biodiversity and people. Playing by the rules, i.e. conducting FPIC (Free Prior Informed Consent) processes, ensuring truly participatory and transparent procedures, helping secure tenure, making clear and equitable benefit-sharing arrangements, and certifying to strong social and environmental quality standards will help private companies  discharge their social responsibilities and present a credible public image.

At present there is substantial regulatory uncertainty both in the international and national arena. Policies and mechanisms are just evolving. Private sector investments under current unclear legal frameworks face policy and market risks. Besides, government support and facilitation of the private sector is limited in most Asian countries.  Projects face long and tedious bureaucratic processes to obtain data and approvals.

So what are the future prospects for sustainable private sector engagement in forest carbon projects across Asia? “There is a big potential future for well-planned and sustainable private sector projects in Asia given high market demand and relatively low management costs here, but the legal and institutional processes need to be ironed out,” sums up Schnall of CO2OL Carbon Consult.