How The Alliance of Forest Lords Will Shape Global Carbon Markets

leaders shaking hands at cop27
Katadata
,
Sharm el-Sheikh, Egypt

How The Alliance of Forest Lords Will Shape Global Carbon Markets

Brazil and Indonesia are 16,430 kilometers apart, but what happens in the Brazilian capital affects important policies in Indonesia.

A week before COP27 was held in Sharm el-Sheikh, Lula da Silva won the Brazilian election defeating incumbent Jair Bolsonaro. When Lula was the president from 2003-2010, he was known for his contribution to curbing deforestation in the Amazon. During his time in power, deforestation in the region dropped by 70%.

Bolsonaro, on the other hand, is known as the culprit of environmental destruction. During his four years in power, the Amazon faced numerous fires and forest encroachment. According to data from Brazil’s National Institute for Space Research, more than 3,980 square kilometers of the Amazon were cleared in the first six months of 2022, the highest figure in at least six years.

In his victory speech on October 31, Lula emphasized that he would do everything possible to save the Amazon forest.

"Let us strive for zero deforestation," Lula said, as quoted by the Washington Post.

While Brazilians are preparing for a new future under Lula's leadership, Indonesia is doing a balancing act between two important agendas: The United Nations Framework Convention on Climate Change Conference of Parties, or COP27, which takes place November 6-18, and the G20 Summit in Bali on November 15-16, 2022. Vice President Ma'ruf Amien replaced President Joko Widodo at COP27, as Widodo was unable to attend prior to G20.

Other high ranking officials who attended the first week of COP were the Minister of Forestry and Environment (KLH) Siti Nurbaya Bakar and Minister of Marine Affairs and Fisheries (KKP) Wahyu Sakti Trenggono.

In the first week of the climate talks, the Indonesian Pavilion in Sharm el-Sheikh was packed with several consecutive events. The Indonesian delegation this year brought with them representatives from at least two big state-owned enterprises. PLN, state utility company, and Pertamina, state energy provider, presented fresh perspectives on the country’s net zero emission ambitions.

However, perhaps one of the most critical events in the agenda took place on day two. In a joint session with representatives from Brazil and the Democratic Republic of Congo, Indonesia introduced a strategic alliance between the three countries, to cooperate on forest preservation.

Alliances and cooperation between countries are not new at important events like the COP. However, the trilateral alliance of the tropical rainforest countries is an interesting one to observe. The combined tropical forests of Indonesia, Brazil and DRC make up 52% of the world's forests.

"It is important for these three countries to strengthen strategic alliances to increase influence in climate change negotiations at the global level," said Indonesia’s coordinating minister for maritime affairs and investment Luhut Binsar Pandjaitan via video link during the session at the Indonesian Pavilion.

In the context of COP27, this strategic alliance has an important meaning. The annual climate talks agenda in Egypt focuses on, among other important issues, Article 6 of the Paris Agreement which regulates carbon trading. Meanwhile, according to a number of Indonesian and Brazilian officials whom Katadata met at the conference, one of the goals of the alliance is to attract investment and financing for sustainable forest management, which ultimately impacts the carbon market.

The election of Lula as President of Brazil paves the way for the future of this alliance, simply because it is hard to imagine that an alliance to regulate sustainable forest management can be realized under Bolsonaro’s ruling. Still, not much information can be extracted about the mechanism of the alliance between the countries.

Katadata met with with Nani Hendriarti, the deputy minister for Environment and Forestry at the Coordinating Ministry for Maritime Affairs and Investment to learn more.

"It hasn't been officially launched yet. The term here is ‘road-to’," Hendriarti said. Hendriarti, who represented Minister Pandjaitan at COP27 and the announcement, said the initiative had stemmed from talks at the COP26 in Glasgow last year.

Top officials from the three countries sat together to discuss the alliance in Glasgow. Following that talk, more meetings ensued and Pandjaitan met with Lula before he was elected President, where Lula expressed his excitement about the alliance. The current political constellation in Brazil that brought the left-wing politician into the Presidency has given the alliance the concrete foundation it needs, but they are still waiting to make an official announcement on his side.

"We still have to wait for Lula to be officially inaugurated as President, in January 2023," Hendriarti said. Currently, Hendriarti adds, the details of the alliance are still being discussed at the deputy minister level. However, in principle, the alliance is a partnership that will devise a framework on forests for climate, covering mitigation, adaptation and investment.

“We want funding for our forests [first], don’t go directly into the carbon part yet,” Hendriarti said. She cited an example: Funding can be applied into ecotourism projects in mangrove forests to develop them into a conservation area using the blue carbon approach.

On the funding mechanism, whether it will be grant or loan scheme, Hendriarti said it’s still under discussion. “We will start with three countries first. Hopefully other forest nations such as Congo, and Peru, can come on board," Hendriarti said.

Director General of Sustainable Forest Management of the Ministry of Environment and Forestry Affairs (MoEF), Agus Justianto, in a session at the Brazilian Pavilion on November 11, explained funding through result-based payment (RBP) is possible, as it has been applied for the reducing emissions from deforestation and forest degradation program, or REDD+.

As a push towards saving one of the world’s lungs, Indonesia has received funding to cut emissions from the forestry sector. In May 2020, Norway approved the payment of US$56 million for the 17 million tons of CO2 emissions it has reduced in its forestry sector through the RBP scheme.

On Tuesday at the COP27, the World Bank announced an initial payment of US$20.9 million or around Rp 320 billion for a REDD+ project in East Kalimantan. This program is part of the Forest Carbon Partnership Facility (FCPF) project where Indonesia will receive a total of US$ 110 million, following the completion of an independent third-party verification of the reported emissions reductions.

Brazilian Deputy Environment Minister Marcus Paranagua said the three countries should lead global negotiations on forests, especially on conservation issues and carbon markets. He said Indonesia, Brazil and the DRC are also ready to collaborate for important forums such as the CBD COP15 biodiversity summit to be held in Montreal in December. Paranagua explicitly mentioned that tropical forests in these three countries represent an enormous wealth of biodiversity that should be considered an important asset in terms of remuneration.

"We are currently finalizing the joint communique and it will be officially launched in the near future," he said, at the Indonesian Pavilion.

From deforestation, funding, to social forestry

Although details remain murky, Justianto at least gave an initial idea of how the Indonesia, Brazil and DRC alliance scheme will work. Justianto added that there are several focus areas to be achieved through this alliance. First, reducing deforestation. Agus said that Indonesia has succeeded in reducing the rate of deforestation through a series of policies and law enforcement.

"Indonesia's deforestation rate is currently the lowest level in the last 30 years," Justianto said.

Second, forest fire management, an area where Justianto said Indonesia has performed better, evident through reduced number of forest fires in recent years. The third focus is social forestry and community-based forest management, and fourth, climate finance for forestry. In this case, Justianto commended Brazil's success with the Amazon Fund. The fifth issue is related to sustainable agriculture, especially in the context of agroforestry.

In addition, Justianto also mentioned land administration management, biodiversity, and legality of timber certification.

"We also want to propose mangrove rehabilitation and conservation projects," he said.

Meanwhile, for Brazil, the three-country alliance is not just about forest management.

"This alliance must be political, with important values including democracy, just transition, and diversity," said Izabella Teixeira, Brazil's former environment minister during the same session. Teixeira, a close friend of Lula’s, who is predicted to enter the new cabinet said, Brazil had experienced both progress and setbacks in forest management. She hopes this alliance will strengthen the three countries’ position in international negotiations.

Political challenge

The alliance between Indonesia, Brazil and the DRC looks promising and comprehensive, and leaders of the three countries also seem very enthusiastic to make it a new force at the global level.

Daniel Murdiyarso, a forestry expert whom Katadata met at Sharm el-Sheikh, said the trilateral alliance would be very beneficial under the new Brazilian leadership. Murdiyarso also said Brazil is more advanced in terms of forest management, even at the civil society level.

"Lula's leadership in the environmental sector will be better. He is favored by scientists and activists," Murdiyarso said.

However, challenges loom especially from the Indonesian side. Murdiyarso believes that the alliance is likely to commence after the 2024 elections in the country; a lot of the public attention will be focused on the democratic process in Southeast Asia’s largest economy.

"There will be a cloud of doubts the next two years, on the Indonesian side. The implementation of this alliance will not necessarily be carried out by the current government," said Murdiyarso.

Then, there’s also bureaucracy can further complicate the process. The alliance is currently under the coordinating ministry of maritime affairs and investment. However, the technical side and expertise are actually in the realm of the ministry of environment and forestry, and there will also be intersections with the ministry of maritime affairs and fisheries, especially for the blue carbon sector.

An Indonesian delegate who only agreed to speak under anonymity said, until now there has not been internal coordination on how to divide tasks in this alliance. When Pandjaitan mentions forests, this also includes mangroves, peatlands, and seagrass beds so a clear division of task and responsibility will be Indonesia’s greatest homework, for this alliance to work.

However, if successfully implemented, Murdiyarso assessed that the three-country alliance will form a great strength in the international scope, following the footsteps of a similar alliance between Indonesia and countries in the Congo Basin related to peatlands.

Carbon market

Despite political challenges, the trilateral alliance offers new hope for forest management and emissions reduction.

"I think this alliance will last for a long time," said Sassan Saatchi, founder of CTrees - a forest carbon monitoring institution including in Brazil, Indonesia and Congo Basin.

Saatchi, a NASA researcher who spent 20 years in Brazil, said that cooperation with Indonesia and Congo has actually been massive at the level of scientists and civil society. One of the initial initiatives was the exchange of data about forests and capacity building.

Saatchi, who has also worked on several forest projects in Indonesia, said the alliance will become a significant player in the global carbon market. Currently, 90% of the demand for carbon offsets comes from developed countries, while 80%-90% of the supply comes from developing countries such as Brazil, Indonesia and Congo.

"Demand for carbon offsets will continue to come until developed countries succeed in reducing their emissions through technology," he said. In the context of the carbon market, Saatchi added, the alliance of these three countries also has great potential to control the movement of carbon prices, just as OPEC controls oil prices. However, this will rely on how well these countries can control carbon quotas.

"But it must be understood that the energy market is different from the forest carbon market. Forest carbon investment is currently based on specific projects," he said. In Indonesia, the carbon market is not yet fully established. The current RBP mechanism is carried out through the REDD+ scheme, which is initiated by the World Bank.

But this scheme, Murdiyarso said, it is not the actual carbon market.

"That’s a voluntary government to government initiative. It's a kind of scholarship, not a business," he said. In fact, Murdiyarso added, the current carbon price in Indonesia is only US$3 per ton, which is still too cheap, while noting his pessimism about the establishment of carbon market in Indonesia.

"Now who wants to buy [carbon]? Show me the money. The private sector wants to sell, not buy," Murdiyarso said.

Similar sentiment was expressed by coastal and marine campaign manager of the Indonesia Environmental Forum(WALHI) Parid Ridwanudin. Apart from the very low price, the current carbon trading concept is also very unfair to developing countries, says Ridwanudin. The carbon offset mechanism that is currently running, for example, is actually a place for developed countries to 'wash their hands' of their extractive activities.

"This concept must first be clear. It doesn't mean that with offsets or taxes you can get away with it. They have ecological debt," Ridwanudin said.

In Indonesia, the carbon trading mechanism is still in its early stages. The provisions are regulated through a ministerial regulation on procedures for the Application of Carbon Economic Value (NEK), which was issued in October this year. Four carbon aspects are regulated under policy, namely carbon trading both at home and abroad, result-based payment (RBP), carbon tax, and other mechanisms.

However, the implementation of this regulation needs support from various institutions. For example, carbon trading will be organized by the Indonesia Stock Exchange (IDX). Therefore, the Financial Services Authority, that governs the IDX, needs regulatory and operational infrastructure.

"This is so that carbon unit instruments will be established as securities that can be traded on the carbon exchange," said OJK's Chief Executive of Capital Market Supervision, Inarno Djajadi, as quoted from Antara.


This story was produced as part of the 2022 Climate Change Media Partnership, a journalism fellowship organized by Internews' Earth Journalism Network and the Stanley Center for Peace and Security. It was first published in Bahasa Indonesia in Katadata on 14 November 2022 and has been lightly edited for length and clarity.

Banner image: Officials from Brazil, Indonesia and the DRC announce the forest alliance at COP27 / Credit: Katadata.

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