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Fighting fire with money: can finance protect Indonesia’s forests?

Pek Shibao

Part 3 of 5 of a series on palm oil financing. Part I and Part II.



Note: this article draws heavily from Seymour el al 2015.


Rainforest canopy seen from the base of a compass tree
Rainforest canopy seen from the base of a ‘compass tree’ in Sumatra. Photos by Rhett A. Butler.


In previous articles, we have seen an overview of the problems with the Indonesian palm oil industry. Such problems are largely caused by rent-seeking politicians and businessmen, who are willing to sacrifice endangered wildlife, the health of their countrymen and long-term environmental stability in the pursuit of profit. These actors exert a significant influence on and within the Indonesian government. As a result, Indonesia remains conflicted between the opposing goals of conservation and economic growth.




Should we therefore pay Indonesia’s government to stop destroying its forests and start protecting them instead?




This is the idea behind the program known as REDD+, or Reducing Emissions from Deforestation and Forest Degradation, Plus Conservation, which was adopted by the United Nations Framework Convention on Climate Change in 2007. [1] The stated aim of REDD+ is to “create a financial value for the carbon stored in forests,” as well as to “(offer) incentives for developing countries to reduce emissions from forested lands and invest in low-carbon paths to sustainable development.” [2] In other words, REDD+ provides a framework for developing countries to get paid to reduce deforestation rates, a model known as payment-for-performance. Depending on the agreement between specific countries, the money for these payments may come from the foreign aid budgets of countries such as Norway and Australia, investments from private corporations, or a combination of both. [3] [4]




Indonesia and Norway signed a bilateral REDD+ agreement in 2010. [5] Under this agreement, Indonesia pledged to reduce carbon emissions through the creation of new monitoring and land use agencies, as well as stricter enforcement of forestry laws. [6] In exchange, the government of Norway would pay the government of Indonesia up to $1 billion, depending on how far emissions reduction targets were met. [7]




The agreement was designed to be implemented in three phases. The first phase, “Implementation,” would lay essential groundwork by establishing a dedicated Indonesian REDD+ agency, an independent system for monitoring, reporting and verifying deforestation rates – also known as an MRV system – and a mechanism for delivering payments. The second phase, “Transformation,” would test strategies to address key sources of carbon emissions in two pilot provinces, accompanied by enhanced law enforcement and a two-year ban on the creation of new logging concessions nationwide. This ban was implemented in 2011 and extended for another two years in 2013. [8] The third phase, “Contributions for Verified Emission Reduction,” would see Indonesia receiving the bulk of the payment – $800 million – in exchange for meeting emissions reduction targets. [9]




Deforestation in Riau in 2014.



The Indonesia-Norway REDD+ agreement was groundbreaking in a number of ways. First, the $1 billion promised by Norway represented the largest amount of money ever pledged by a single entity against deforestation in Indonesia, and the largest amount among the 21 countries currently approved to receive REDD+ funding. [10] Secondly, the agreement provided a long-overdue impetus to reform laws relating to forest management and land use. Forestry laws have long been ineffective in Indonesia, with poor enforcement and loopholes in legislation often exacerbating problems rather than solving them. For example, a 1998 decree attempted to control the spread of palm oil companies by limiting plantation areas to 20,000 hectares per province. [11] However, as publicly listed companies were exempt from this decree, the law created a perverse incentive for some companies to expand as fast as possible through illegal means, such as land grabs and slash-and-burn clearing, with the goal of escaping repercussions through a successful IPO. [12]




Thirdly, the agreement’s signing was the culmination of a wave of momentum that began with the adoption of the first substantial decision on REDD+ at the UN Climate Change Conference in Bali in 2007, [13] and continued through 2009, with then-President Susilo Yudhoyono announcing the first voluntary commitment by a developing country to reduce greenhouse gas emissions at the G20 Summit. [14] In the process, Indonesian deforestation and its contribution to global climate change were placed under a spotlight of unprecedented intensity by international governing bodies and the mass media. [15] [16] Many saw the Indonesia-Norway agreement as an important test of the payment-for-performance model; if successful, it could serve as a blueprint for future bilateral partnerships, as well as a bridge towards large-scale private financing of carbon emissions markets. [17]






Data released last week by researchers led by Matt Hansen of the University of Maryland shows that forest loss has been trending upward in Indonesia in recent years, although 2013 loss appeared to drop substantially compared to 2012. Hansen’s data includes tree cover loss rather than deforestation, meaning that it counts harvesting of timber plantations as “forest loss”. CLICK CHARTS TO ENLARGE.




Five years on, how has the REDD+ partnership between Norway and Indonesia performed? Judging solely on the basis of reduced carbon emissions, the partnership has been a failure. Data from satellite imagery shows that Indonesian deforestation rates actually increased in 2011 and 2012, the years following the agreement. [18]




The agreement’s implementation has also been fraught with delays. A dedicated cabinet-level agency for REDD+ was only established in August 2013, three years after the agreement’s signing, and a full complement of staff was not appointed until June 2014. [19] FREDDI, the proposed mechanism for distributing payments, remains non-operational, meaning that there is no way to reward provinces that manage to reduce their emissions levels. [20] Due to these setbacks, Norway has only released about $50 million in funds to Indonesia, the amount earmarked for laying groundwork rather than as a reward for reduced emissions. [21]




On the other hand, it may be unfair to judge the effectiveness of the REDD+ model solely by its performance in Indonesia, a country with a particularly complex set of circumstances surrounding its forest industry. Some observers point out that a REDD+ program of similar scope [22] has been more successful at reducing deforestation rates in Brazil, [23] a country with a much stronger legislative foundation and existing set of reforms against deforestation. [24]



In addition, it is important to note that although Norway’s pledge of $1 billion is undoubtedly a large and compelling figure, it pales in comparison with the approximately $18.9 billion produced by Indonesian palm oil exports each year, [25] not to mention the revenue generated by other products of deforestation such as timber and paper. It is unlikely that funding on par with the export value of these commodities will be mobilized against deforestation in the near future, as the prospects for creating large-scale private carbon markets and publicly-financed “green” aid have faded in recent years. [26] Without an accompanying change in the fundamental business practices of the palm oil sector and other forest-based industries, it is probably unrealistic to expect a reversal in deforestation rates through financial incentives alone.



CLICK TO ENLARGE




In this light, the REDD+ agreement in Indonesia should be evaluated not in terms of how much it has reduced carbon emissions, but by how much it has laid the groundwork for future developments. Viewed in this way, the results appear more positive. Though the bulk of the promised $1 billion has not been disbursed, the prospect of money on the table has allowed progressive elements within the administration to rally for change. For example, the sum provided crucial political leverage for establishing a REDD+ Task Force and a REDD+ agency dedicated to overseeing reform. [27] The REDD+ Task Force, consisting of individuals committed to change both within and outside the government, has reached out to provincial-level officials and is beginning to amass increasing support. [28]





Indonesian peat forest in Central Kalimantan in 2013.



The REDD+ agreement is also improving transparency and creating important tools for monitoring and collaboration. One of these tools is the “One Map” initiative, which is consolidating data on land permits from various sectors to produce the first-ever complete and public map of forest and peatlands in Indonesia. [29] In the process, an important message of change is being sent to the entities that have traditionally controlled the Indonesian forestry sector. These include the Ministry of Forestry, which is notorious for corruption and turning a blind eye to exploitative business practices, and executives of commodities companies, who have long been able to hide questionable activities behind a veil of secrecy. [30] By cooperating with the Corruption Eradication Commission, the REDD+ Task Force has succeeded in bringing an increasing number of individuals guilty of forestry crimes to justice. [31]




Finally, the REDD+ agreement represents a radical departure from traditional models of aid, in that it allows the Indonesian government to retain a great deal of autonomy with regards to how reforms are directed and implemented. This has not only improved the perception of the agreement by Indonesian officials, but also increased cooperation and reduced disagreements by removing the power dynamic associated with the donor-recipient relationship. [32] Such an approach opens the door to organic, self-sustaining change, rather than short-term reforms imposed by an external donor.




That said, many obstacles still lie in the way of REDD+’s continued progress in Indonesia. In particular, the replacement of Yudhoyono with current President Joko Widodo (popularly known as Jokowi) in 2014 presents a major source of uncertainty. Many key REDD+ initiatives were introduced under direct instructions from former President Yudhoyono’s office, [33] and the new president’s era has already seen some of these changes reversed. For example, in January 2015, the REDD+ Agency was placed under the purview of the Ministry of Environment and Forestry, itself a new authority merged from the Ministry of Environment and the Ministry of Forestry. [34] This move may jeopardize the REDD+ Agency’s continued independence and operational effectiveness in the future, though its effects remain to be seen. Other crucial tools such as the One Map mapping effort and FREDDI have yet to be formalized and institutionalized, leaving them at risk of being undermined by elements within the government which favor the status quo. [35]




Rangers patrolling Ujung Kulon



One of the most major concerns is that forest conservation remains largely the agenda of NGOs and a handful of government officials. There is still no significant support base for conservation among the wider bureaucracy, and little awareness of the issue among the general Indonesian public. [36] In addition, powerful palm oil conglomerates and tycoons continue to exert a significant influence in politics. [37] As a result, the continued progress of REDD+ hinges critically on the support of top-level government officials, and above all on the decisions of the President and the Minister of Environment and Forestry.




In trying to drum up international support for a major REDD+ partnership, former President Yudhoyono made a bold commitment at the 2009 G20 Summit to reduce greenhouse gas emissions by at least 26% from a projected baseline by the year 2020. [38] At current rates of deforestation, it now appears increasingly unlikely that this target will be met. [39] It is hence crucial for President Widodo’s administration to solidify and institutionalize the initiatives introduced under the previous regime, in order to affirm Indonesia’s commitment to REDD+ and maintain its credibility in the eyes of the international community.




Some of the important steps that Widodo’s administration needs to take are clarifying and streamlining the system of land use permits, upholding the rights of indigenous peoples to land and representation, and strengthening the enforcement and monitoring of the current ban against new logging concessions.




Sumatran rainforest



This article is the third in a series exploring the links between business practices and deforestation in the oil palm industry. The next article will profile the international players in palm oil finance that are responsible for funding the global palm oil supply chain.




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