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Carbon finance could mean billions for Indonesia

Carbon finance could mean billions for Indonesia

Carbon finance could mean billions for Indonesia
November 5, 2006

Indonesia could earn billions of dollars for reducing its deforestation rate through a carbon finance mechanism under consideration this week at U.N. climate negotiations in Nairobi, Kenya.

The initiative, put forth a year ago by a coalition that now includes 15 developing countries, calls for compensation from industrialized nations in exchange for rainforest conservation. The plan relies on the concept of “avoided deforestation” whereby developing countries are paid to prevent deforestation that would otherwise occur. The principal is based on the carbon storage capabilities of tropical forests: when trees are cut and burned, carbon is released into the atmosphere contributing to global warming. Indonesia is the world’s largest producer of greenhouse gases that result from forest clearing. Worldwide about 20 percent of greenhouse gas emissions are produced by deforestation. By preventing deforestation, developing countries can effectively cut emissions of heat-trapping gases. These “carbon credits” can be exchanged with industrialized countries for cash.

Carbon finance has recently won endorsement from the U.N., the World Bank, and the United States. Policymakers and environmentalists alike find the idea attractive because it could help fight climate change at a low cost while improving living standards for some of the world’s poorest people and preserving biodiversity and other ecosystem services. analysis of U.N. deforestation data suggests that an avoided deforestation initiative could be worth $375 million to $5.614 billion per year to Indonesia, depending on how much deforestation it could “avoid” and the market price for carbon offsets.

Between 2000 and 2005 Indonesia lost an average of 1.87 million hectares of forest per year — the second highest amount of forest loss after Brazil — according to figures from the Food and Agriculture Organization of the United Nations (FAO). How much carbon does this represent? At the low end, FAO estimates that each hectare of Indonesian forest stores an average of 50 metric tons of carbon in above-ground biomass (more exists in below-ground biomass, dead wood, vegetation litter, and soil) that would be otherwise released by deforestation and subsequent land conversion for agriculture or pasture. Other research suggests that net carbon released from deforestation of secondary and primary tropical forest, allowing for the carbon fixed by subsequent land use, is of the order of 100-200 metric tons per hectare. So deforestation in Indonesia releases on the order of 50-150 metric tons of carbon for each hectare of cleared or converted for agriculture. As such, Indonesia’s annual deforestation rate of 1.87 million hectares may produce 94-281 million tons (megatons) of carbon emissions per year.

Assuming a market rate of $4 per metric ton of carbon dioxide — the current trading price of CCX Carbon Financial Instrument contracts on the Chicago Climate Exchange, but higher in Europe — Indonesia’s avoided deforestation could be worth at minimum $374 million – $1.123 billion per year, using a simplified model for calculating carbon values. At the higher end, using studies that show “carbon damage” is closer to $20 per ton, avoided deforestation could be valued from $1.871-5.614 billion per year. Of course determining what constitutes “avoided deforestation” is a matter of definitions but nonetheless funds from avoided deforestation could make an important economic contribution.

What is the opportunity cost to Indonesia of reducing its deforestation rate? Well, this is a bit more difficult to calculate but a recent World Bank study said that land worth $200-500 per hectare as pasture could be worth $1,500-$10,000 if left as intact forest and used to offset carbon emissions from industrialized countries. Using this figure, avoided deforestation could be a net economic benefit to Indonesia in addition to the ecological payoffs afforded by leaving forest intact.

This paper is based on an earlier article: Avoided deforestation could help fight third world poverty under global warming pact

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