Carbon Trading May Reward Indonesians for Saving Rainforest

By Jim Efstathiou Jr.

Feb. 7 (Bloomberg) -- Carbon trading markets may be used for the first time to help villages in Indonesia preserve trees, part of the global effort to stop deforestation that is speeding climate change.

Under a plan to be announced today to save the 1.9 million- acre Ulu Masen forest in Indonesia's Aceh province, about $26 million in revenue from the sale of carbon credits will go to villages that stop logging. The proposal hinges on the sale of credits to companies and individuals seeking to offset emissions and burnish their environmental reputations. The credits typically cost $4 to $8 per ton of pollution reductions.

There is no international agreement to reward developing countries for halting the burning of forests that accounts for 20 percent of global warming emissions, said John-O Niles, chief science and policy officer for Carbon Conservation, a project sponsor. The Ulu Masen plan to reduce emissions by 100 million tons over 30 years may help convince critics that saving forests can help slow the planet's warming, Niles said.

"There is for the global community and for the atmosphere a lot of value to maintaining the forests," Halldor Thorgeirsson, head of emissions trading at the UN Framework Convention on Climate Change, said in an interview. "It's important that value is somehow transferred to the people that make decisions on the ground."
The preservation plan for Ulu Masen will reduce emissions equivalent to Mexico's annual greenhouse-gas output, Niles said. It is the first project for avoiding deforestation to meet standards set by the Arlington, Virginia-based Climate, Community & Biodiversity Alliance to assure tradable carbon credits.

Energy Conversion

Trees store carbon dioxide, which is used in the conversion of light energy to chemical energy. Deforestation is the third largest source of carbon emissions after fossil fuel use and industrial operations, according to the UN.

Reducing emissions by saving forests was a priority at climate-change talks in December on the Indonesian island of Bali. The World Bank has launched funds to help developing countries monitor emissions reductions and market them, said Werner Kornexl, a senior technical specialist at the Washington- based bank.
"What we want to do in this partnership is set the stage for bigger market demand," Kornexl said in an interview. "There is broad interest for this."

Interest in credits from projects like Ulu Masen depends on standards that "ensure the action is real," said Elliot Diringer, director of international strategies at the Pew Center on Global Climate Change, based in Arlington, Virginia.

'Stronger Action'

"It's a huge source of emissions and there's a willingness on the part of the tropical forest countries to undertake stronger action," Diringer said in an interview.

The Ulu Masen project was certified by the Climate, Community & Biodiversity Alliance, which includes non- governmental organizations such as The Nature Conservancy and the Rainforest Alliance and companies such as Intel Corp. and Weyerhaeuser Co. The designation means the project is "extremely likely" to produce credits beginning in 2009, Niles said.

Sponsors expect to reduce logging by 85 percent at Ulu Masen, which will generate credits representing 3.3 million tons of carbon a year, Niles said. At a projected price of $5 a ton, credits will generate $16.5 million.

Local villages will receive payments once they demonstrate trees haven't been logged, said Joanna Durbin, director of the alliance. Progress will be monitored on the ground by forest wardens and from the air through satellite images. Payments are projected to reach $26 million over the first five years.

Investor Risk

"The payments are based on results," Durbin said in an interview.
Certification to alliance standards also guarantees community and biodiversity benefits, such as maintaining wildlife habitats and clean water supplies, said Duncan Marsh, director of international climate policy at the Arlington-based Nature Conservancy. The forest is home to Sumatran elephants, clouded leopards, Sumatran tigers and Sumatran orangutans.

"Community and biodiversity aspects are an important attraction to investors," Marsh said.

Investors will also focus on risk, Marsh said. Credits for halting deforestation may not be used by companies to meet pollution targets under the European Union's greenhouse gas program or by countries under the Kyoto Protocol, an international accord to limit global warming gases.

'No Guarantee'

"If investments they make now do become eligible for credits in a future compliance regime, then the credits would be worth a lot more," Marsh said. "There is no guarantee that will happen and those credits may continue to have the value they do on the voluntary market."

Carbon credits from wind farms and solar power stations eligible in Europe's program and under the Kyoto pact traded at 14.25 euros ($21.09) Feb. 5 on the Nord Pool ASA exchange in Lysaker, Norway. There is little trade in credits from projects such as Ulu Masen, said Jason Patrick, director for greenhouse- gas services for the credit broker, Evolution Markets.

"There's a slow evolution from avoided deforestation as something that never happens to something that could be part of a future compliance system," Patrick said. There is "speculative activity in avoided deforestation projects today with the expectation that there will be some sort of compliance value down the road."
To contact the reporter on this story: Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net.

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