Indonesia forest decree to help CO2 projects, enforcement key

SINGAPORE (Reuters) - A landmark forest protection ruling by Indonesia might be good for investors trying to save carbon-rich forests, but only if a ban is enforced and progress is made in using the market to save the environment.

President Susilo Bambang Yudhoyono signed an order this month imposing a two-year ban on new licenses to clear primary forests and peatlands, a key part of a $1 billion climate deal with Norway last year.

The decision, delayed by five months, has earned praise and concern from green groups but broad support from investors and analysts as a first step toward better protection and more transparent management of Indonesia's dwindling rainforests.

"The next two years are critical ... they have to set the stage for sustainable management in the long run," said Frank Sperling, senior adviser on climate risks, forests and carbon at WWF Norway.

The decision also bolsters a U.N.-backed program that aims to reward poorer nations for saving their forests by putting a price on the carbon stored in the soil and in trees. Forests soak up lots of planet-warming carbon dioxide and can play a major role in slowing the pace of climate change.

The program, called reduced emissions from deforestation and degradation (REDD), uses carbon offsets to reward projects that protect forests under threat of clearing. Each credit represents a tonne of carbon locked away.

Indonesia has about 40 REDD projects and the program could develop into a multi-billion dollar global market in forest carbon credits if nations agree on a new climate pact.

Bank of America-Merrill Lynch and Macquarie are investing in Indonesian REDD projects and firms such as Gazprom have committed to buy forest carbon credits.

"It's definitely a step forward for REDD because if you didn't have this, what you have is basically no moratorium on logging and you would have the peat being cleared," said Martijn Wilder, global head of Baker & McKenzie's environmental markets practice in Sydney.

The challenge is implementing the moratorium.

And that's where Indonesia has often fallen short because of lack of manpower, corruption and powerful oil palm, timber and pulp and paper companies pushing to expand their landholdings.

ENFORCEMENT

"There is no a clear system for monitoring, verifying and reporting the success and failure of the implementation of the moratorium except using the indicative map which will be revised six-monthly," said forest policy analyst Fitrian Ardiansyah.

As part of the presidential ruling, the government released a map of the areas to be protected. Agus Purnomo, special climate change adviser to the Indonesian president, told Reuters the area covered by the moratorium totaled 72 million hectares, out of the nation's total forest area of 188 mln ha.

"Also, there is no clear indication for enforcement system so that the moratorium and the overall reform of land use and forestry can be achieved successfully," said Ardiansyah, of the Australian National University in Canberra. Failure to enforce the ban would undermine the deal with Norway, which is aimed at promoting efforts to protect Indonesia's forests and develop skills to measure, verify and report real emissions reductions from forest preservation.

That could scuttle a government program to develop a REDD framework that aims to support REDD investments nationally, several of which are nearing the issuance of credits.

With the lack of a global carbon market for REDD, investors rely on selling offsets on the unregulated voluntary carbon market in which corporates buy the credits to meet emissions reduction goals.

To boost prices and integrity, many REDD projects are applying for credits to be issued under the strict rules developed by the Washington-based Verified Carbon Standard (VCS), which has developed global benchmarks for offsets.

The 100,000 ha Rimba Raya project in Central Kalimantan developed by Hong Kong-based InfiniteEARTH hopes the moratorium will speed up the final government approvals to make it Indonesia's first REDD project to earn VCS offsets. The project aims to prevent 100 million tonnes of carbon emissions over 30 years.

Some investors say they fear the moratorium would deter new REDD investments because the ruling meant the VCS could not issue credits now that the two forest types were protected.

The VCS will only issue credits to projects that aren't common practice, need the additional income to be viable and, in the case of REDD projects, if the land is under threat of clearance. But it's not that simple, given the moratorium is for an initial two years and the threat of illegal clearing remains.

"When is common practice established? Unfortunately the experience of most countries shows that you don't stop land-clearing with the stroke of a pen," said Jerry Seager, director of program development at the VCS, told Reuters in an email.

"It takes time and a lot of on-the-ground effort to change established economic behaviors."

(Additional reporting by Alister Doyle in Olso; Editing by Robert Birsel)