Carbon credits and Indonesia: Silver lining in a dense situation?

John McBeth, Straits Times 18 Dec 07;

IT IS hard enough rehabilitating Indonesia's peatlands and saving its remaining rainforests, but the decision to proceed with a fast-track 10,000MW coal-fired power plant shows the juggling act developing countries face in reducing their carbon emissions.

Coal and oil make up close to 70 per cent of state- owned power utility Perusahaan Listrik Negara's (PLN) total installed capacity of 24,000MW - far more than it should, given Indonesia's abundant natural gas, geothermal resources and biofuel potential.

Ten new coal-fired stations, with a total 6,900MW output, are expected to go online on the Java-Bali grid by 2010 as PLN tries to keep pace with an annual 9 per cent growth in demand. Plants are planned for other islands as part of an US$8 billion (S$11.5 billion) expansion.

So, officials were understandably silent over the programme in the lead-up to the UN climate change conference in Bali this month, but it does underline the problem of getting large developing countries to commit to a set reduction in carbon dioxide emissions if it risks hampering their economic growth.

Why coal? It is the quickest and probably the cheapest to bring into operation. The boost to the country's overall generating capacity will add at least 65 million tonnes to the 45 million tonnes of carbon dioxide equivalent that Indonesia's coal-fired stations already pump into the atmosphere each year.

But while Jakarta is adding more smokestacks, it is also trying to undo some of the damage caused by former president Suharto's ill-fated scheme in the 1990s to convert 1 million ha of Central Kalimantan peatland into productive rice fields.

The resulting ecological disaster helped push the country into third place among the world's biggest carbon emitters - a position it contests, but which was still a source of profound embarrassment to the hosts of the just-concluded Bali conference.

Kalimantan is only part of the problem. More damage has been done by loggers and oil palm planters in Riau - so much so that the Sumatran province contributes 70 per cent of the 516 million tonnes of carbon Indonesia's degraded peatlands emit each year.

In all, that adds up to 82 per cent of South-east Asian peat emissions, 58 per cent of global emissions and twice what Indonesia burns annually in fossil fuels - just some of the statistics trotted out to support the inclusion of reforestation and avoided deforestation in a new addendum to the Kyoto Protocol.

Overall, deforestation, degradation and land-use changes are responsible for 18 per cent of global greenhouse gas emissions, yet there is no incentive in the current protocol for Indonesia and 10 other developing countries to curb them or do more to slow the destruction of their forests.

Jakarta wants peatlands in the proposed Reducing Emissions from Deforestation and Degradation (Redd) pact for a good reason. Simple re-flooding and other rehabilitation will bring far more short-term benefits than reforestation and reduced logging in any global carbon trading market.

'Peatlands are the low- hanging fruit, given their huge value of emissions and the fact that they bring few economic benefits,' said Mr Meine van Noordwijk, regional coordinator for the International Centre for Research and Agroforestry.

'If they are not included, about 50 per cent of Indonesia's emissions will not be within the domain.'

Carbon trading offers financial incentives for businesses not to pump greenhouse gases into the atmosphere. It is already a US$30 billion business, but Mr Anthony Moody, executive chairman of Sindicatum Carbon Capital, believes it could soar to US$200 billion over the next three years.

The ultimate goal of climate change negotiators is to map out a two-year path aimed at forging a global system for imposing and enforcing emission reductions.

Some developed countries do not want to pay for actions that are not taken and worry about the difficulty of measuring avoided deforestation, particularly in countries such as Indonesia, where graft is rife and rules notoriously slippery.

Under Kyoto, so-called Annex 1 countries - all developed nations except the US - set a ceiling on the greenhouse gases they can can emit in a year. When Europe implemented its cap-and-trade system, which sets a benchline for emissions, it did not specifically give offset credits for avoided deforestation because it feared they would flood the system, though it did make some exceptions.

London is the financial centre for carbon trading because Britain and the European Union signed up early to Kyoto, and the financiers quickly got to work and figured out how to profit from it.

Indonesian businessmen say carbon credit trading will not work because it is just too difficult. But they said the same thing when the Jakarta Stock Exchange opened in 1988 with 24 listed companies and little else.

'It involved a process, and you had to go through the process and be transparent,' recalled Ms Agnes Safford, director of Singapore-based AsiaWorksAsia.

'You are dealing with the same thing in the carbon market - auditors, accountants and engineers are the only people who understand it.'

In the short term, a lot can still happen because power plants, industry, transportation, landfills - even lighting in city buildings - can all create carbon credits by making efficiency savings and shifting away from fossil fuels.

Mr Moody's Sindicatum recently hooked up with petroleum firm Odira Energy Persada in eight projects that will cut 20 million tonnes of carbon dioxide emissions by converting flared gas to liquid petroleum gas for use in diesel and coal-fired power stations.

Swiss-owned Indocement, Indonesia's second-largest cement maker, has already introduced substitute fuels and efficiencies in power usage to generate emission credits that can be offset in Switzerland.

The Swiss should be cleaning up their own country, but it is cheaper to do it in Indonesia, which has only nine projects registered so far with the UN Convention for Climate Change.

Of course, for climate change activists, the idea of offsets is not as attractive as absolute cuts which, as the US has stubbornly shown, are tough to attain in an industrialised giant seeking to keep its extravagant living standards.

Indonesia can do it easier, but Ms Safford said the earliest actual credits for reforestation and avoided deforestation will probably not be paid until 2014, two years after Redd is enshrined under a new protocol and Jakarta decides on an emissions cap.

Until then, investors can trade in voluntary emission reduction (VER) credits - private deals in which carbon credits for maintaining a forest can be used - not traded - to offset carbon emissions.

In the first pilot project of its kind, the Borneo Tropical Rainforest Foundation has a deal with East Kalimantan's Malinau district to carry out a study of carbon stocks in 325,000ha of virgin forest. It aims to create a baseline for Indonesia's future voluntary carbon market. That means coming up with a comprehensive assessment of the amount of carbon dioxide a forest absorbs, given the fact that different trees do not suck up the same amount of carbon.

Ms Safford said a VER credit in Indonesia is worth US$2 to US$3 a tonne, against US$20 or more for those traded in Europe. So far, the global VER market only amounts to about US$50 million, largely because the bureaucracy is not involved and a lot of the deals are built on trust.

'But the minute it falls under a new protocol, you will start seeing forest deals done,' said Ms Safford. 'Why? Because all the big funds see the writing on the wall - they see the Western world will pay for this. In the end, I am sure it is going to be a conscience thing.'

But back to that huge increase in coal-fired power generation. What might happen if the price of carbon doubles and suddenly scrubbers and other clean technologies become a profitable part of the electricity business?

Ms Safford said: 'It will happen eventually, but we still have to go through this tedious process to get there. The framework has to be in place before the private sector can pile in.'

That is the good news. The bad news, she acknowledged, could be that polluters are able to buy credits to clean up their mess cheaper than it costs to actually clean up.

Many experts argue that to get over that, carbon should have a floor price of at least US$50 a tonne.