Finland to fund sustainable energy from forests in Indonesia

(Reuters) - Finland is aiming to set up an scheme to produce renewable biomass energy from Indonesian forests next year, following in the footsteps of a lauded Norwegian agreement to tackle Indonesia's high deforestation.

Finland's scheme, with initial investment of four million euros, is small compared to the $1 billion pledged by Norway, but is a sign more countries may look to do bilateral deals if U.N. talks in Cancun fail to produce a global climate pact.

Australia said on Thursday it would increase its spending on climate change financing by giving Indonesia an additional $45 million for projects to reduce emissions from deforestation and degradation (REDD) and for climate change adaption.

Protecting forests is seen by some as the easiest and cheapest option in the fight against climate change. The Finnish project aims to support the forestry industry turn toward renewable energy production.

"The focus will be on the utilization of forest biomass and the residues of the wood processing industry as renewable energy sources," Päivi Alatalo, the deputy head of the Finnish embassy in Indonesia, told Reuters.

The projects are to be established in the regions of central Kalimantan on Borneo island and Riau province on Sumatra island, areas that have seen intense deforestation in recent years by timber and palm oil firms, both legally and illegally.

Indonesia has been pushing on the global stage for greater support in its efforts to reduce the costs of deforestation, though environment minister Gusti Muhammad Hatta rejected a proposal by Japan in Cancun this week that developing nations agree to legally binding targets to reduce emissions.

Indonesia has promised to slash its emissions by at least 26 percent from business as usual levels by 2020 but President Susilo Bambang Yudhoyono has also vowed to boost economic growth to 7 percent or more by 2014, with development of resources from palm oil to coal helping drive the economy.

Other big developing nations have rejected binding targets for a climate deal that developed nations want before they sign up to a pact to replace the Kyoto Protocol, in a rich-poor rift that has haunted the talks to agree a new global climate deal.

"Reducing emissions from deforestation and forest degradation, which accounts for 18 per cent of global emissions and more than 60 percent of Indonesia's total emissions in 2005, is critical to achieving a global outcome on climate change," said Australian foreign minister Kevin Rudd in a statement.

So far over $4 billion has been pledged to help Indonesia tackle deforestation from rich nations, including from the United States, Norway, Japan and now Finland.

However, the Indonesian government still faces numerous difficulties, such as lobbying by firms profiting from deforestation, competing vested interests within the forestry industry, weak governance and top-heavy bureaucracy, that is slowing the pace of action.

Norway's scheme, which proposes a two-year moratorium on new permits to clear natural forest, is meant to start in January but details of how it will work have still not been finalized.

"No projects have been finalized yet because we are still in the process of making a bilateral contract between Finland and Indonesia," said Finland's Alatalo. "But we are hoping that we will get this agreement finalized soon."

(Editing by Neil Chatterjee and Miral Fahmy)