Why Can’t Indonesia Unravel Red Tape And Break Into Carbon Credit Trading?

Fidelis E Satriastanti, Jakarta Globe 3 Feb 10;

Carbon trading has been a mainstay in the fight against climate change since long before last year’s Copenhagen summit, with more and more developing countries racing to get into the potentially lucrative market, but Indonesia continues to lag behind.

Despite the global popularity of carbon trading — in which companies buy and sell “credits” to emit carbon — the potential of the domestic market remains untapped. This can be seen in foreign companies’ lack of interest in engaging in green development here under a Kyoto Protocol scheme known as the Clean Development Mechanism.

The CDM allows companies from developed nations to invest in greenhouse gas-reducing projects in developing countries, instead of similar but more expensive projects back home.

The main objective of CDM projects is to create Certified Emission Reductions (CERs), normally known as carbon credits. These credits have a monetary value and get traded in the fast-growing carbon market.

In addition to the CDM, the Kyoto Protocol stipulates something called Joint Implementation as a method of carbon trading. This is similar to the CDM, but involves only developed nations interacting with each other.

There are also voluntary carbon offsets, in which companies agree to trade credits in the carbon market outside Kyoto-sponsored programs.

Each signatory to the Kyoto Protocol is obliged to set up a Designated National Authority (DNA) — a body that has been given the right to assess CDM projects and deliver them to the oversight body, the United Nations Framework Convention on Climate Change.

But in Indonesia, government red tape and a lack of support from sectors like banking and industry have hindered CDM development, leaving the country trailing other Asian nations, most notably India and China.

Agus Sari, country director of green consulting firm EcoSecurities, said Indonesia had tremendous potential for CDM, ranging from geothermal projects to water infrastructure to waste disposal, but he said the country’s business climate was not conducive to the projects.

“In short, it is very hard to open up a green company here because of red tape,” Agus said.

“Take geothermal, for example. If one wanted to apply for geothermal CDM projects, one would face lots of problems with land permits and concessions, which could take up to five years. Investors would be exhausted before even starting CDM applications.”

In a country with so much potential to take advantage of this scheme, CDM’s catchy abbreviation takes on an entirely new meaning: Completely Difficult Mechanism.

Since the establishment of a DNA here in 2005, 119 business ventures have applied for CDM projects and 114 have been approved, but only 43 have been registered with the UNFCCC. Just six of those have obtained their CERs.

Dicky Edwin Hindarto, division head of the Carbon Trading Mechanism at the National Council on Climate Change, said he was optimistic about the future of CDM in the country because of the high level of interest, but he acknowledged red tape and other factors could slow projects to a standstill.

“Ever since the DNA was established, there have been plenty of CDM requests, however not all projects can be automatically qualified, even though they’re aiming to reduce emissions,” Dicky said.

“It [CDM] is a difficult mechanism and requires higher transparency, which is why most companies would prefer to go to a voluntary carbon market. It is lots easier, and they could just sell their carbon [credits].”

“But I am still very optimistic about the future of CDM in Indonesia, especially if we can get support from the banks by using it as collateral,” Dicky said. “If a company wanted to invest in a CDM project, they could put up their CDM certificate as collateral to the bank instead of their company.”

Another problem, he said, is that the process to get CERs here can take as long as two years, with one year being the fastest.

According to UNFCCC data, there are around 4,200 CDM projects in the pipeline worldwide. Some 2,029 of those have been registered with the UNFCCC by their national DNAs and 44 projects are requesting registration. The combined 2.9 billion CERs from those 4,200 projects represent 2.9 billion tons of carbon dioxide.

China represents the largest portion of the global market, with 732 CDM projects registered with the UNFCCC. India follows with 481, compared with Indonesia’s 43 registered projects.

Agus said that CDM has huge potential to reduce emissions in Indonesia, with CDM projects here contributing a possible total reduction of 100 million to 150 million tons by 2012.

“So, if the market pays $10 to $12 [per credit], then the country could potentially earn about $1 billion from carbon trading,” he said, noting that that amount would also contribute about 2 percent of emission reductions globally.

Despite all the uncertainties for CDM projects in Indonesia, the Australian Trade Commission has initiated the Australian Carbon Cluster, a value chain of carbon companies that will serve as a “one-stop shop” to get carbon credits for CDM projects. It will be introduced to Asean countries starting in March.

“It has been difficult to get CDM projects registered in Indonesia, and there are various reasons for that, but the projections are that the country has a growing population, a growing gross domestic product, a growing energy demand, relatively, if not a large deficit in electricity supply right now, and also an increasing middle class,” said Garth Taylor, Australian trade commissioner for clean energy and environment to Asean.

“All of this brought us to new sources of energy coming to the market, and what CDM offers is a strong chance for Indonesia to leverage finance, tech and services to meet this need.”

Taylor added that major benefits for CDM projects in Indonesia were the country’s excellent water and geothermal resources, and land areas.

“I think with those resources, and good will, there’s a strong growth potential for Indonesia,” he said.