Nations see REDD in rush for carbon credits

In the far north of Indonesia's Sumatra island lies a vast stretch of forest brimming with orangutans and rare Sumatran tigers and elephants. In a quirk of fate, a decades-long insurgency in Aceh province prevented illegal loggers from stripping the place bare.

SINGAPORE (Reuters) - In the far north of Indonesia's Sumatra island lies a vast stretch of forest brimming with orangutans and rare Sumatran tigers and elephants.

In a quirk of fate, a decades-long insurgency in Aceh province prevented illegal loggers from stripping the place bare.

Apart from its wildlife and timber, though, the forest is rich in another resource; the carbon locked up in the soil and very trees coveted by loggers -- legal and illegal.

Keen to earn money from the forest, called the Ulu Masen ecosystem, the government of Aceh province joined a leading conservation group and the financial market to save it.


In return, the province is set to earn millions of dollars through the sale of carbon credits to investors, with a portion of the cash flowing to local communities to encourage them to halt illegal logging and pay for alternative livelihoods.

Money from the initial sale of credits for this project is expected to flow in the coming months.

"I strongly believe there should be a market for carbon credits and forests. It's about the only mechanism that could provide local incentives," said Frank Momberg, project director for international NGO Fauna and Flora International, the group at the heart of the Ulu Masen forest conservation project.

The model is being studied and repeated across Indonesia and other tropical developing nations as the world turns to saving the remaining rainforests in the battle against climate change.

The U.N.-based scheme, called reduced emissions from deforestation and degradation, or REDD, could be worth tens of billions of dollars a year for developing nations, with rich nations buying forest credits to meet mandated emissions curbs.

With so much money potentially at stake, banks and carbon trading firms are ramping up their interest.


But much has to be sorted out, such as how to ensure the forests aren't cut down, how to accurately measure the amount of carbon saved over time, the best method to trade REDD credits and how to ensure local communities get a fair share of the money.

Satellite monitoring as well as developing national carbon accounting systems will be key, and so too will be avoiding "leakage" in which preventing deforestation in one area causes logging to occur in another.

Some conservation groups also fear rich nations will merely buy up vast amounts of REDD credits to meet their emissions targets while doing little to clean up their own industries. Europe also fears a flood of cheap REDD credits could overwhelm its existing emissions trading scheme, depressing offset prices.

"For us the main point, from a trading stand-point, where REDD projects are difficult is on their permanence," said Trevor Sikorski, director of commodities research for Barclays Capital in London.

"If it's about deforestation but then that deforestation goes ahead in three years then that carbon would still be released into the air. So it's all about the reversibility of forests as carbon sinks and that's the real core issue that has to be addressed," he said.

Forests soak up vast amounts of carbon dioxide, acting like a set of lungs for the planet. But clearing and burning them is contributing to about 20 percent of all mankind's carbon emissions that are warming the planet.

The United Nations aims to incorporate REDD into the next phase of the Kyoto Protocol from 2013.

The idea is to complement an existing Kyoto scheme, called the Clean Development Mechanism, that allows wealthy states to invest in clean energy projects in the developing world in return for CO2 offsets called CERs. These are presently trading around 16 Euros per tonne.


"The dimensions are massive. If you compare with a CDM project of 60,000 tonnes a year, these projects are sometimes 200 times bigger, so if this comes through, it's going to be a huge market," said Renat Heuberger, managing partner of global carbon project developer and advisory firm South Pole Carbon.

Indonesia has rapidly become the center of REDD trial schemes in Asia because it still has large areas of forest, despite rapid deforestation.

FFI has teamed up with Australia's Macquarie Group to develop three REDD projects in West Kalimantan and Papua. Investment group New Forests, headquartered in Sydney, has signed a deal with the government of Papua to protect 200,000 ha of forest that could save up to 40 million tonnes of CO2 being emitted over the project's lifetime.

The Australian government has pledged A$30 million as part of a scheme to protect 50,000 ha of forest in Kalimantan and rehabilitate at least 50,000 ha of drained peat swamp.

The Ulu Masen scheme aims to save 3.4 million tonnes of CO2 being emitted each year, or 100 million tonnes over the project's lifetime.

To market the credits, the government of Aceh last year teamed up with U.S. bank Merrill Lynch and Australian firm Carbon Conservation to sell the offsets, called VERs, into the voluntary carbon credit market.

Carbon Conservation is acting as a broker and joined FFI to develop the project.

The project hinges on regular monitoring of the forest from the air and on the ground and FFI is running a program to recruit and train 1,000 forest rangers, some of them ex-rebels from Aceh's former GAM separatist group.


Community development was also key, said Momberg.

This meant plowing part of the proceeds directly back to the estimated 130,000 people who live around the forest to develop sustainable biofuel production, biomass power generation, mini-hydro power projects as well as promote growth of alternative cash crops.

Failure to do so would mean villagers returning to illegal logging. An estimated 2,000 to 3,000 villagers were involved in the lucrative trade around Ulu Masen, according to a 2006 report by World Bank-backed Aceh Forest and Environment Project.

"If you don't involve the local communities in either an alternative business or something that is good for them to actually preserve that forest, there's no long-term suitability of that project," said Pep Canadell, executive officer of the Global Carbon Project.

"It's critical and I haven't really seen a package of interesting possibilities," said Canadell, a member of an Australian government advisory panel on REDD.

Some conservation groups, such as Friends of the Earth, fear placing a greater value on forests risks a jump in land rights abuses by governments and corporations in the rush for carbon credits, threatening the livelihoods of indigenous communities.

More than a billion people worldwide depend of forests for their livelihoods, so REDD is a huge threat to them if not managed properly, the group says.

FFI's Momberg said the key was to limit the direct involvement of national governments in funding schemes for local communities. REDD schemes should also meet stringent verification standards to ensure permanence, community involvement and protection of forests' biodiversity.

"If everything is vested in the national government, that's where you will find it very difficult to have that fair level of participation at the community level," said Jeff Hayward, of U.S.-based conservation group Rainforest Alliance.

"Fundamental to verification criteria is who owns the carbon, what rights do they have, how have they decided upon the use of those rights, how fairly are they being compensated, are they informed," said Hayward, manager of the alliance's climate initiative.

Momberg said interest in REDD investments has jumped since the United Nations formally backed the scheme last December.

"I'm getting phone calls every month from investors into REDD. The appetite for REDD and voluntary carbon credits was non-existent two years ago."