Can Indonesia grow its economy and keep its forests?

November 26, 2011 in Phase

• Published 8:38 AM, 16 Nov 2011
• Updated 8:12 AM, 17 Nov 2011

Patricia Parkinson

President Susilo Bambang Yudhoyono’s commitment to dedicate the last three years his term to delivering “enduring results that will sustain and enhance the environment and forests of Indonesia” was met with a standing ovation at the Forests Indonesia Conference in Jakarta on September 29.

The previous day, Hadi Daryanto, from Indonesia’s Ministry of Forestry, and Dr Deddy Saleh, Director General for Foreign Trade, appeared in front of a Sydney audience to discuss Indonesia’s shift to a low-carbon economy and its management of “the paradox” of Indonesia’s pledge to reduce its greenhouse gas emissions by at least 26 per cent by 2020 (and up to 41 per cent with international assistance), while also achieving an annual growth rate of 7 per cent per annum.

“Indonesian Forestry – Charting a Sustainable Path,” the title of the Sydney conference initiated by the Indonesian Embassy, is an issue that is key to Indonesia’s future prosperity. But the ministers’ reference to a “paradox” touches on a persistent belief that environmental sustainability, and specifically conservation and sustainable management of  forests conflicts, with economic growth. As Pavan Sukhdev’s studies on “The Economics of Environment and Biodiversity (TEEB)” have demonstrated, there cannot be sustainable economic growth without the conservation of environmental and biodiversity capital. The TEEB study estimates losses to natural capital from global deforestation and forest degradation at $US2-$US4.5 trillion per year. In Indonesia, illegal logging alone is estimated to cost the country about $4 billion per year. In contrast, the plantation and forestry-related sectors have contributed to only 0.1 per cent of GDP growth in 2010.

Indonesia has much to gain from forest conservation and sustainable forest management. Its tropical forests, the third largest in the world, are bio-diverse and productive, providing a range of essential economic social and environmental services. Importantly, they support the livelihoods of most of the country’s indigenous and local communities. But Indonesian forests are disappearing at the rate of over one million hectares per year, due mainly to illegal logging, chronic and disastrous forests fires, and conversion to other land uses, such as agriculture, plantations for oil palm and pulp wood, and mining. Deforestation also creates social tensions between government and Indigenous and local communities who rely on forests and forests’ commodities for their livelihood.

Approximately 85 per cent of Indonesia’s greenhouse gas emissions are linked to deforestation, land-use change and peat land degradation. And with its large coastal area and its high incidence of natural disasters, Indonesia is particularly vulnerable to climate change impacts. Contributing to the global effort to mitigate catastrophic climate change impacts, by conserving and sustainably managing its remaining forests is therefore in its national interest. The emerging carbon-constrained world offers Indonesia an opportunity to benefit from international support for its transition to a green economy.

Industrialised countries have committed to support developing countries adapt to and mitigate climate change impacts. And while the progress of the negotiations to agree to global climate action and a binding international climate agreement are painfully slow, negotiations on REDD+ is one area where progress is expected to be made at the 16th UNFCCC Conference of the Parties in Durban starting at the end of this month. REDD+, or Reducing Emissions from Deforestation, Forests Degradation and sustainable management of forests, is an incentive mechanism to reward developing countries for reducing emissions from deforestation, and has the potential to eventually transfer up to $30 billion annually from developed to developing countries. Indonesia would be well placed to reap substantial financial benefits from it. A recent UN report estimates that the carbon value of peat-rich forests ranges from $US3,711 ($3800) to $11,185 a hectare across a 25-year period, or about three times more revenue than clearing them for palm oil plantations.

Significant technical and financial additional assistance has started to flow to Indonesia through bilateral and multilateral arrangements to assist in creating the conditions for REDD+ and developing REDD+ demonstration projects.

The government of Norway has earmarked $US1billion to assist Indonesia in preparing for REDD+ under the Letter of Intent signed in May 2010. The Indonesia-Australia Forest Carbon Partnership, including the Kalimantan and the Sumatra Forest Carbon Partnerships demonstration REDD+ projects, is worth $A70 million. Other initiatives include the United States’ Indonesia Forest and Climate Support (IFACS), and the EU’s FLEGT (Forest Law Enforcement Governance and Trade). Development banks (World Bank, Asia Development Bank) are also active in supporting forestry and REDD+ assistance programs in Indonesia, and the United Nations Development Program (UNDP) has just signed a MOU with the Indonesian government and opened the first office for forest protection in Indonesia.

The shift to sustainable land use, land use change and forestry also has the potential to boost the competitiveness of Indonesia’s exports. With a growing environmental awareness of consumers in industrialised countries, it will become increasingly difficult to find an export market for uncertified forest and plantation products, including palm oil. As Erik Solheim, Norway’s environment minister, put it when speaking at the CIFOR conference in June, forest conservation is good for business. He referred to the example of Brazil, where a 70 per cent decrease in deforestation rates and increasing agricultural production were achieved while lifting over 10 million people out of poverty. This, he said, was made possible by improving forest governance and strong law enforcement. There lies the critical challenge for Indonesia.

Strengthening law and governance is critical to achieving Indonesia’s sustainable development and poverty reduction objectives

The idea of rewarding financially developing countries for conserving or improving the management of their forests, while allowing developed countries to offset their emissions by purchasing carbon credits generated via REDD+ in developing countries is simple enough. Setting up an effective, efficient and equitable REDD+ mechanism is anything but simple. It involves the accounting and trading of an intangible commodity; international, national and local stakeholders and financial flows; technical capacity for carbon measurement and accounting; and the establishment of reliable and transparent monitoring reporting and verification processes. It also requires a transparent financial management system and, importantly, clear, predictable and accountable governance and the rule of law.

The matter is complicated by the fact that REDD+ is intended for implementation in developing countries that tend to have combine a wealth in tropical forests with weak governance and poor law enforcement. Without law and governance reform, the implementation of REDD+ may have unintended adverse effects; not only the risk of failure in its climate change mitigation goal, but providing new ground for corruption, and disempowering Indigenous and forest-dependent communities.

The recently released Global Witness Report, “Forest Carbon, Cash and Crime – The risks of criminal engagement in REDD+,” notes that “corruption in the forest sector has until now been overwhelmingly linked to logging, both illegal and legal, which in many countries has led to significant depletion of valuable tropical forests.” According to the report, “incentive mechanisms such as REDD are beginning to change the face of corruption in the sector.”

The implementation of REDD+ demonstration projects has brought to light a number of underlying law and governance issues in forestry and natural resources, including: land use and planning, tenure rights, forest governance to investment, transparency, accountability and public participation, customary law, decentralisation of powers, and compliance and law enforcement. New legal norms have to be established, such as rights to carbon ownership and trade, emissions reduction purchase agreements (ERPA), distribution of benefits and monitoring, reporting and verification (MRV).

REDD+ may constitute a unique opportunity and incentive to resolve these legal issues. The resulting strengthened legal environment would reverberate beyond the scope of REDD+, and create an attractive investment environment for the general benefit of economic development in Indonesia. But if REDD+ was to be attempted without resolving these legal issues, the results could be disastrous, for forest conservation and management, climate change mitigation, economic growth and poverty alleviation.

Indonesia and international development agencies have, until recently, been preoccupied with the technical and policy dimensions of REDD+. An increased awareness of the necessity to secure its legal and institutional basis is now emerging. This is reflected in Indonesia’s climate change and REDD+ strategies. In 2009, Indonesia’s National Planning Agency developed the Indonesia Climate Change Sectoral Road Map (ICCSR), as a “dynamic document” to make recommendations for new legal and governance measures to help achieve Indonesia’s emissions reduction target. They include law enforcement and best management practices in existing land under production use, including forests and agriculture crops; the revision of land allocation, forest conversion and land swaps, possibly using REDD as an incentive, that direct future development away from peat lands.

The more recent Indonesia REDD+ National Strategy (NASTRA)’s, prepared in 2010 to comply with the conditions of Indonesia’s agreement with Norway, included the “acceleration of the establishment of the legal base and strong guidelines for the implementation of REDD+ at the national and sub-national levels”, and the “establishment of the REDD Institution at the national and sub-national levels.” Further, NASTRA’s “Strategy for the Compliance of the Enabling Conditions” provides for a development planning reformation program in the land use sector. It also recommends the development of stakeholder’s participation process from village level through to central level; reform of planning at the “land-use” level, reform of planning at forest management unit level through the establishment of Forest Management Units (FMUs). NASTRA provides for the establishment of a REDD+ legal framework integrating the principles of climate friendly legal framework (CFLF), and reform of law enforcement relating to forest resources, in particular through the establishment of a One Roof Enforcement System (ORES), and the establishment of a ‘Green Bench’ (specialised judges).

The emphasis on law enforcement and on the harmonisation between the various levels of government, a notorious weakness of Indonesia’s legal system, is to be noted. Resources and capacity for law enforcement is key to the success, or failure, of any policy – as was proved by Indonesia’s consistent failure over the last decade to combat illegal logging. The devolution of powers to district and provincial authorities, as part of Indonesia’s decentralisation reform of 1999, coincided with a peak in deforestation that is referred to by some government officials as “the cost of decentralisation.” Adding to the complexity and introducing uncertainties, overlaps and loopholes in respective power and responsibilities, decentralisation has contributed to poor law enforcement and to corruption.

Nevertheless, Indonesia is to be commended for being the first country to attempt the introduction of a national legal regime for REDD with the Ministry of Forestry. In 2009, two decrees were issued, regulating demonstration REDD projects for the compliance carbon market (when it is created), and REDD projects intended for trading on the voluntary carbon markets. A more recent, and significant, legal development came in May this year, with the long awaited presidential decree imposing a two-year moratorium on the issuance of new concessions in Indonesian primary forests and peat land. The scope and soft wording of the moratorium, which does not cover secondary forests and is subject to a number of exemptions, came as a disappointment to many observers and environmental groups. It was delivered out as part of the $US1 billion agreement between the government of Norway and the government of Indonesia signed in May 2010.

Norway has undertaken to allocate funds totalling $US1 billion to Indonesia, subject to a number of very detailed “deliverables” over a three-phase period spanning six years. The aim is to establish the foundations for efficient, effective and equitable REDD+ outcomes. During the first “preparation phase,” in 2010, the deliverables are: 1) the completion of “a national REDD+ strategy that addresses all key drivers of forest and peat land-related emissions’; 2) the establishment of a “special agency reporting directly to the President to coordinate the efforts pertaining to the development and implementation of REDD;” 3) The development of a strategy to establish the initial framework of an independent institution for national monitoring, reporting and verification of anthropogenic forest and peat land GHG emissions by source and removal of sinks, forest carbon stocks and natural forest areas changes; 4) ‘To design and establish a funding instrument to be managed by an internationally reputable financial institution, and 5) To select a province-wide REDD+ pilot, and develop a REDD+ strategy for the province.

Some of these “deliverables” have been achieved, such as the national REDD+ strategy and the designation of the Province of Central Kalimantan as the first pilot REDD+ province. Some others are still work in progress, such as the establishment of the REDD+ special agency and of the funding instrument.

The second phase (2011-2013), described as the “transformation phase” aims to “make Indonesia ready for the Contributions-for Verified Emissions Reduction Phase, while also initiating large-scale mitigation action.” It focuses on building national capability, policy development and implementation, as well as legal reform and law enforcement. An additional full-scale province level REDD+ pilot is also to be selected. Key deliverables for this phase are: A country-wide MRV system; 2) Appropriate Indonesia-wide policy instruments and enforcement capabilities, including a two-year suspension of all new concessions for conversion of peat and natural forest; the establishment of a degraded lands database; and the enforcement of existing laws against illegal logging and trade in timber and related forest crimes, and the creation a special unit to tackle the problem. The third phase (2014-2016), when contributions for Verified Emissions should start, is to be defined at a later stage.

This is, by all measures, a very ambitious program, at the scale of what is required to chart a sustainable path for Indonesian forests and economic development. “Our success in managing our forests will determine our future and the opportunities that will be available to our children,” said President Yudhoyono in his opening address to the CIFOR conference. Let’s hope that he and his successor will remain committed to act on the legal and governance reform that will make it possible.

Patricia Parkinson is a consultant specialising in climate and sustainable development law.