Painting the Town REDD: Merrill Lynch Inks Massive
Voluntary Forest Deal
by Steve Zwick
In a major demonstration of confidence in the viability of voluntary carbon
offsets as a strategic investment, Merrill Lynch is raising equity for a 100-million-ton,
for-profit avoided deforestation project in Aceh, Indonesia. Tellingly for
the future of the forestry market, the decision to take the plunge had more
to do with the cultural and biodiversity benefits than with the carbon itself.
The Ecosystem Marketplace examines the deal
and its significance.
"Pre-Bali, no one wanted to touch avoided deforestation," says Dorjee
Sun, CEO of Australian project developer Carbon Conservation. "Now people
are starting to recognize AD as the next big thing, and they are looking for
ways to participate with an edge."
On Thursday, Carbon Conservation and Merrill Lynch confirmed that the investment
bank will be offering its retail and commercial clients voluntary carbon credits
from a massive Indonesian AD project that could yield up to 100 million metric
tonnes of offsets over 30 years.
To put this number into context, Ecosystem Marketplace tracked just over 24
million tons of voluntary credits transacted in 2006.
More importantly, says
Sun, the project is part of a larger scheme to build Aceh's economy along what
he calls a "Green Paradigm" incorporating
not only culture and biodiversity standards attached to the carbon, but also
sustainable agriculture.
Coffee and the Economic Ecosystem
The longer-term plan involves
new financing mechanisms designed to jump-start the cultivation of sustainable
palm oil, coffee, and cocoa, which will then be marketed under the brand name "Aceh
Green." It is this later phase,
details of which are still to be announced, that convinced Merrill to take
the plunge, according to Abyd Kamali, the bank's Global Head of Carbon Emissions.
"The
overall approach being proposed in Aceh is truly innovative and reflective
of the need for forestry, carbon, and softs to be treated as one economic ecosystem," he
said.
Climate Community and Biodiversity
Both the future green commodity project and the current carbon project are
centered on 750,000 hectares of the Ulu Masen Ecosystem. (For a detailed examination
of the project and the challenges of implementing it, see It's
Not Easy Being Green in Aceh, Indonesia).
Carbon Conservation began developing the project together with Fauna & Flora
International and the government of Aceh Province in February, 2007. One year
later, on February 6, 2008, the project became the first forest conservation
project to achieve Climate
Community and Biodiversity (CCB) certification when the Rainforest Alliance
SmartWood Program signed off on it.
"I can't emphasize enough the significance of being approved by SmartWood," says
Sun. "Jeffrey Hayward raked us back and forth over the coals until he
was convinced that we could implement the plan as presented, for the money
budgeted, and in the time allotted."
The Economics of Quality
Sun is banking on the idea that the extra money spent on preserving biodiversity
and supporting the local economy will pay off in spades when it's time to get
the emission reductions certified - and the resulting certificates sold.
Both he and Karmali say the project wouldn't have happened without strong local
support, and they give credit for that to Aceh Governor Irwandi Yusuf, who
Karmali first met in September. "Meeting the Governor of Aceh, as well
as the other stakeholders involved in the project, left a strong impression
about the collaborative approach that has been employed – and the strong
buy-in from all stakeholders on this project," he says.
Local buy-in, however, wasn't a foregone conclusion, and the next five years
will be critical in maintaining it. That is the time over which the first $48
million will be spent - more than half on economic development in local villages.
"Deforestation isn't caused by big companies coming in and chopping down
trees," says David Pearse, who is overseeing the land use aspect of the
project for Carbon Conservation. "It's caused by local people having
no other source of income than the forests."
"Aceh still has standing forests because of the war between the Aceh rebels
and the Indonesian government," adds Sun. "Now that they have peace,
illegal deforestation has started going rampant. The governor understood the
loose structure of carbon credits, and tied it into a moratorium on logging."
Jostling
for Post-Kyoto
Sun says he expects the first tranche sold through Merrill Lynch to bring in
$5 to $10 per tonne of CO2 sequestered, which is a slight premium to the price
of voluntary allowances trading on the Chicago Climate Exchange.
Over time, however, he believes the social benefits of the project will boost
the prices of his credits to a level more in line with those of the compliance
market – especially if avoided deforestation becomes a recognized offset
vehicle for carbon emissions in a post-Kyoto world.
"If we monitor our vintages right, we will be on the right track for compliance
credits, and will be pushing a compliance price," he says. "In the
meantime, people will be looking at prices of carbon under the European Union
Allowance (EUA) scheme, and then looking at voluntary methods, and they will
realize that projects that can show additional benefits are worth paying extra
for."
The challenge now, of course, is to actually deliver. "This is only the
first step," says Governor Irwandi. "The hard work will be in financing
and implementing our proposed project to help preserve the largest remaining
bloc of unprotected Sumatran forests."
Steve Zwick is managing editor of the Ecosystem Marketplace.
He may be reached at steve.zwick at gmail.com.
First published: February 8, 2008
Updated: February 11, 2008
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