National Institutional Arrangements for REDD Case Study - Indonesia (as of December 2009) - WWF

 
National Institutional Arrangements for REDD Case Study - Indonesia (as of December 2009) - WWF
Report No. 7
                                                                          December 2009

                National Institutional Arrangements for REDD
                Case Study – Indonesia (as of December 2009)
                                                                                    Prepared by
                                                                                 WWF-Indonesia
                                                                  Fitrian Ardiansyah, coordinator

                             International Financing for REDD
                            A Project of WWF US Policy Program

This is a report of the project “International Financing for REDD,” undertaken by WWF US
Policy Program between July and December 2009, as part of WWF FC NI Program “Engaging
Civil Society in REDD Programs.
The focus of the “International Financing for REDD” project was: (a) To further UNFCCC parties‟
understanding of the role and sequencing of public, private and market funding for REDD; and,
(b) To discuss institutional and funding arrangements for REDD at international and national
level
The project worked by (a) engaging in the international REDD discussion in the run-up to
COP15; (b) producing or participating in the production of technical reviews, reports and
proposals; (c) advising WWF network on these issues; and (d) collaborating with WWF country
offices in the review of country level arrangements for REDD.
This scoping exercise on the state of Indonesia‟s REDD arrangements as of late 2009, was
jointly commissioned by this project and by WWF Indonesia. To speed up its distribution we are
releasing this document as a technical discussion that does not necessarily represent the official
position of WWF Indonesia on these subjects.

Please direct queries regarding the project to its director Pablo Gutman at
Pablo.gutman@wwfus.org and questions regarding WWF REDD work in Indonesia to Fitrian
Ardiansyah at fardiansyah@wwf.or.id

Table of Contents

                                                1
National Institutional Arrangements for REDD Case Study - Indonesia (as of December 2009) - WWF
1. Introduction………………………………………………………...……………………………….. 2
  1.1. Legal and Illegal Deforestation in Indonesia .................................................................................. 3
  1.2. Forest Governance in Indonesia .......................................................................................................... 5
2. Indonesia’s Readiness: Progress on Key Elements of the REDD Design ...................... 8
   2.1. Overall REDD Strategy: Paving the Way for REDD Implementation....................................... 9
   2.2. Reference Emission Level (REL) ....................................................................................................... 11
   2.3. Monitoring, Reporting and Verification (MRV)........................................................................... 11
   2.4. Funding Preference ............................................................................................................................... 12
   2.5. Readiness and Voluntary REDD Activities .................................................................................... 13
3. The National Institutional Design of REDD: Some Possible Options ........................... 14
   3.1. Options for the Implementation Design of REDD ....................................................................... 14
   3.2. Options for a Revenue Distribution Mechanism......................................................................... 17
   3.3. Social Safeguards – Indigenous Rights ........................................................................................... 18
   3.4. Environmental Safeguards ................................................................................................................. 19
   3.5. Anti-Corruption Measures .................................................................................................................. 20
4. Conclusion: What can be learned from Indonesia’s experience? ................................. 20

Annex 1. Indonesia REDD Strategy............................................................................................................... 23
Annex 2. The Application Process for Licenses to Implement REDD .............................................. 24
Annex 3. The Distribution of REDD Revenues between Stakeholders ............................................ 25
Annex 4. A Summary of Current National Institutional Functions for REDD in Indonesia ...... 26

____________________________________________________________

1. Introduction
The alarming rate of deforestation in Indonesia has become a major concern nationally and
globally. The Ministry of Forestry reported that the deforestation rate in the country had
increased from 1.6-1.8 million hectares per year during 1985-1997 to 2.83 million hectares per
year during 1997-2000. Although this upward trend declined after 2000, deforestation in
Indonesia still reached 1.08 million hectares per year in 2000-2005. Deforestation and forest
degradation have made Indonesia one of the major greenhouse gasses emitters. Greenhouse
gases (GHG) emitted from deforestation and forest degradation in Indonesia are estimated at
1,880 MtCO2 in 2005 (NCCC, 2009).1 Together, the carbon emissions from deforestation and
forest degradation in Indonesia and Brazil are estimated to be approximately four-fifths of the
annual reduction target of the Annex 1 countries of the Kyoto Protocol (Santilli et al, 2005).2

1National Council of Climate Change (NCCC), 2009, Indonesia GHG abatement cost curve, National Council of Climate Change,
Indonesia.
2
  Santilli, M, Moutinho, P, Schwartzman, S, Nepstad, D, Curran, L & Nobre, C 2005, "Tropical Deforestation and the Kyoto Protocol:
An Editorial Essay", Climate Change, vol. 71, pp. 267-276.

                                                                             2
A “Reducing Emissions from Deforestation and Degradation Plus” (REDD+) scheme has been
recently adopted as one of the global efforts to mitigate climate change under the UN
Framework Convention on Climate Change (UNFCCC). The scheme aims to provide incentives
for developing countries to reduce emissions from the forestry sector, including actions to
reduce deforestation, forest degradation, increasing afforestation and reforestation projects, and
enhancing forest carbon in developing countries. The participating countries under the scheme
would be eligible for financial benefits if they meet a number of criteria by performing forestry-
related activities to reduce emissions.

In response to the existing REDD initiative, the Government of Indonesia (GoI) is currently
developing a national strategy to implement REDD. President Yudhoyono has also pledged a
26 percent cut in emissions by 2020 during the G20 summit, and the forestry sector was
expected to contribute about 14 percent of the 26 percent target. Indonesia has moved forward
in getting itself ready to implement REDD, however, a number of critical issues remain that may
stall the implementation process if they are not properly addressed. This report aims to highlight
the challenges and opportunities of REDD implementation in Indonesia and to provide
suggestions to improve the national institutional design. First, the report discusses the existing
situation of Indonesia‟s forests, including what drives deforestation and how Indonesia‟s forests
are governed. It then presents progress made thus far in building readiness to implement REDD
in Indonesia. The paper concludes by providing a number of suggestions on how to overcome
some critical issues (bottlenecks) to improve the national institutional design and highlighting
lessons learned from Indonesia‟s experiences in REDD implementation.

1.1.    Legal and Illegal Deforestation in Indonesia
The Ministry of Forestry categorizes deforestation in Indonesia as planned and unplanned
deforestation. The development of oil palm plantation expansion as so called planned
deforestation (supplying 11.7 % of the total GDP) has cleared 1.8 million hectares, much of it
because of rising biofuel demand. Planned deforestation mostly occurs in forests categorized
as conversion forests, which usually are allocated for forest plantation and crop estates.
Unplanned forest losses are caused by illegal logging, forest fires, forest encroachment, and
unsustainable logging practices from legally permitted forest concessions. Several drivers of
deforestation pointed out in the recent Indonesia REDD strategy paper include: 1) the growing
population, which requires land reform and reallocation of forest estate; 2) pressures from
forest dependent people due to their high reliance on forest products as their main source of
livelihood and limited alternatives of livelihood; and 3) the difficulty of controlling the boundaries
of production and protected forests, leaving them vulnerable to illegal logging.3 This situation is
exacerbated by a lack of law enforcement, insufficient economic incentives for communities
and local governments to maintain protected areas, and the low capacity of institutions
responsible for protected area management.

Complementing the official statement on deforestation above, it is important to discuss the
current state of Indonesia‟s forests. From 1996 to 2000, more than 22 million hectares of forest
were converted legally to other land use activities (GFW/FWI, 2002).4 Data from the Ministry of
Forestry (2006) reveals that there are another 22.7 million hectares of remaining conversion

3
  Ministry of Forestry, 2009, National Strategy Reducing Emissions from Deforestation and Forest Degradation in Indonesia:
Readiness Phase
4
  Forest Watch Indonesia (FWI) and Global Forest Watch (GFW), 2002, The State of the Forest Indonesia, World Resources
Institute, Indonesia.

                                                                3
forests that can be converted for other land use activities.5 Most of the conversion forests are
located in Riau, Central Kalimantan, Maluku and Papua. In the period of 2003 to 2006,
approximately 250,000 hectares of conversion forests were altered to be used as plantations.

Some forest conversions for other land use activities were allegedly driven by rent seeking
behaviors. It has been suspected that the companies obtaining these licenses are not genuinely
interested in pursuing the proposed original plan; instead, they only seek quick cash by
extracting timbers from forest clearance (FWI/GFW, 2002). Only a trivial portion of the cleared
forested-lands has actually been planted, leaving the remaining cleared forests highly degraded
and deforested. Less than 30% of 10 million hectares of land, which have been allocated for
timber plantations since 1990, have actually been planted even though a substantial area of that
has been cleared (The World Bank, 2006).6 A similar case is also observed in terms of the
conversion of forests for oil palm plantations. In the bordering provinces of East and West
Kalimantan, of the 2.5 million hectares of land allocated to oil palm companies only 20% had
actually been planted with oil palm by 2005 (Wakker 2006).7

Recent forest sector reviews found that deforestation and forest degradation in production
forests were caused by poor forest management, a lack of foresight, as well as a lack of
transparency of the logging concession holders‟ operations. The concession holders took little
responsibility for sustainable forestry management and there were insignificant signs of
improvement (GFW/FWI, 2002). Most forests under logging concessions were in damaged
condition as the firms violated the regulation on selective cutting. In 2006, the Department of
Forestry reported approximately 77.8 million hectares of forests were in critical condition,
ranging from critical to very critical. This is a sharp increase from the 2000 estimate that 23
million hectares were in critical or very critical conditions.

The magnitude of illegal activities in the forestry sector is also significant and concerning. The
supply-demand imbalance in Indonesia‟s forestry sector is considered to be an underlying
structural problem of illegal logging. The demand for timbers was approximately 60 million cubic
meters of round wood per year while the sustainable yield from natural production and timber
plantation forests was around 8 to 9 million cubic meters and 3 to 4 million cubic meters
respectively (The World Bank, 2006). According to the Ministry of Forestry, in 2006 the supply
shortage of about 40 million cubic meters was met with illegally harvested logs. Illegal logging is
defined as all forestry practices or activities connected to wood harvesting, processing, and
trade that do not conform to Indonesian Laws (GFW/FWI, 2002). Two classifications of illegal
logging include: 1) being carried out by legitimate operators who violate the terms of their
licenses, and 2) being carried out by timber theft or people who have no legal right to cut trees.
The country‟s annual economic loss due to illegal logging was recently estimated at US$ 3
billion a year (The World Bank, 2006).

The extent of conservation and protected forest has increased over time, however, the quality of
the forest is continuously under threat. The protection or conservation status does not always
stop the illegal practices that are encroaching on the forests. Protected lowland forests in
Kalimantan declined by more than 56% from 1985 to 2001, which was mostly due to

5
  Ministry of Forestry, 2006, Forestry Statistics of Indonesia 2006, Ministry of Forestry, Indonesia.
6
  World Bank, 2007, Public Expenditure Review: Spending for Development, Making the Most of Indonesia’s New Opportunities,
World Bank, Indonesia.
7
  Wakker, E, 2006, The Kalimantan border oil palm mega-project, Aidenvironment. Commissioned by Friends of the Earth
Netherlands and the Swedish Society for Nature Conservation.

                                                              4
concession-based timber extraction and plantation establishment (Curran et al, 2004).8
Moreover, the deforestation rate prior to and after the establishment of the Bukit Barisan
Selatan National Park (BBSNP) was 0.65% per year and 0.63% per year respectively (Gaveau
et al, 2007).9 BBSNP has performed better than its neighboring landscape. It has successfully
halted the large-scale logging development but failed to address the agriculture encroachments.

The government of Indonesia has acknowledged the need to refocus forest policies due to
considerable challenges in the sector over the past ten years. Over the past few years, the
government has implemented a program of the Forest Law Enforcement National Strategy
(FLENS) to curb illegal logging. A Presidential Instruction on illegal logging, which was issued in
2005, has resulted in the arrests of a number of high profile illegal operators. A law against
money laundering issued in 2003 has encouraged a number of cases related to illegal logging to
be investigated and prosecuted. Furthermore, the Ministry of Forestry has created four new
avenues for improved access to and rights over forest resources. However, some challenges
remain that are particularly related to governance issues, such as ambiguous and conflicting
laws and regulations, elite capture, poor performance of public institutions, and the high level of
corruption (which exists even in the justice system).

1.2.     Forest Governance in Indonesia
Law 41/1999 on Forestry grants the authority to manage 120 million hectares of state forests to
the national-level Department of Forestry.10 The Department has control over almost every
activity in state forests. The implementation of the Forestry Law was further operationalized by
the Government Regulation 06/2007, which stipulates that the management of forests in
Indonesia will be divided into Forest Management Units (FMUs). The Minister of Forestry has
the authority to designate a forest zone as a FMU with a specific function including protection,
conservation, or production forest.11 On the other hand, different governmental levels have the
authority to establish an organization to manage the FMU. If the forest boundaries fall under one
district only, the district government will have the responsibility to establish the FMU‟s
organization. When the forest unit stretches across districts, the provincial government will be
responsible for establishing, organizing, and managing the FMU. On the other hand, if the forest
area crosses the boundaries of one province, it will be under the authority of the Ministry of
Forestry.

The authority of local governments was narrowed following the issuance of Government
Regulation 03/2008, which revised the Government regulation 06/2007. The new regulation
deleted most clauses related to the authorities of local governments related to forest
management in the country. The establishment of FMU organization is now under the control of
the Ministry of Forestry. As a result, the local governments only have the authority to provide a

8
  Curran, LM , Trigg, SN et al. (2004). "Lowland Forest Loss in Protected Areas of Indonesian Borneo." Science 303(5660): 1000-
1003.
9
  Gaveau, DLA, Wandono, H, McDonald, AK, Astiani, D, Hardiono, YM, Siregar, P, Caniago, I & Kasischke, E 2007, „Three decades
of deforestation in southwest Sumatra: Have protected areas halted forest loss and logging, and promoted re-growth?‟ Biological
Conservation, vol 134, No 4, pp. 495-504.
10
   Some areas designated as forest zones however include grassland and settlement. This leaves approximately only 87 million
hectares of forests because almost 33 million hectares of the total 120 million hectares have no forest cover (Government of
Indonesia, 2002)
11
   Production forests are usually designated under timber concessions with the main function being to produce forest commodities. A
number of forest areas that can be legally converted to other land-use activities are also classified as production forests, but often
referred to as conversion forests. Protection forests aim to provide environmental services such as water resource regulation, flood
prevention, erosion control, avoidance of seawater intrusion, and soil fertility maintenance. Conservation forests are set aside for
wildlife or habitat protection including national parks, nature reserves, wild animals asylums and sanctuaries.

                                                                  5
recommendation on the organization of the FMU. Moreover, the authority to issue commercial
timber utilization permits within the production forest (which is the most lucrative activity) also
remains at the national level. Again, local governments only have the authority to provide
recommendations to the Ministry for the issuance of commercial timber utilization permits. Local
governments are authorized to issue other utilization permits including environmental services
permits and exploitation permits to collect a limited amount of timber and non-timber products.
The financial importance of these activities is less significant in relation to the commercial
activities.

Local governments consider the management of forest resources as very centralistic despite the
massive decentralization process in public administration in Indonesia. This arrangement limits
the capacity of local governments and the amount of financial resources allocated to support
forest protection and conservation at the local level. Whilst local governments should play an
important role in forest monitoring and law enforcement due to their close proximity to forests,
the amount of authority that remains with the central government hinders meaningful
participation of local governments in forest management. Box 1 summarizes the tug of war
between the central and district governments in forest management soon after the
decentralization process in Indonesia.

Box 1. A Tug of War between Central and District Governments following Decentralization in
Indonesia

Following the process of decentralization in the country, local governments were granted the authority to
allocate the large commercial timber concession for up to 50,000 hectares in a single district or province.
District governments were also allowed to issue small-scale forest product exploitation rights (Hak
Pemungutan Hasil Hutan – HPHH) and timber exploitation and utilization permits (Ijin Pemungutan dan
Pemanfaatan Kayu – IPPK) for areas up to 100 ha in conversion forests or in production forest areas.

After obtaining the authority to issue HPHH and IPPK in 2000-2002, local governments granted a
massive amount of permits without much consideration for the sustainability of forest resources. It was
suspected that local governments embarked on such activities for two main reasons. First, most of the
districts saw the timber extraction as a way to generate significant local revenues. Timber extraction is
preferable for generating quick revenue because forests are easily converted to cash without requiring
investment on capital and technological inputs. Secondly, there was political pressure from forest-
dependent communities to claim land and forest resources following decentralization. The people that
had been displaced or marginalized during the previous regime demanded their rightful share of the land
and benefits generated from forest resources. There was considerable political pressure from the local
stakeholders to make forests available for exploitation.

In 2002, the Ministry of Forestry revoked the rights of local governments to issue these permits. At first,
local governments refused to abide by the new regulations, which were seen as an effort to recentralize
the authorities in forest management in the country. However, in 2003 the local governments ceased
issuing these permits. Several explanations for why local governments finally agreed to stop issuing more
permits include: 1) the threat from the Ministry of Forestry to bring district officials who issue illicit timber
permits to trial for illegal activities. The Ministry and provincial authorities have instituted more stringent
enforcement of official transport documents on the legally harvesting permits. 2) Since transfer of revenue
sharing and reforestation funds were substantial in the fiscal balancing system, local authorities opted to
maximize district timber revenues by actively cooperating with provincial and central authorities and then
structure commercial timber extraction around a more limited number of medium and large scale logging
concessions.

                                                       6
The increased deforestation rate during the decentralization era has been used as the main argument for
the national government‟s reluctance to decentralize the function of forest management to the local level.
However, it is important to note a lack of evidence to prove that the permits of forest exploitation covering
some 69 million hectare of forests issued by the Ministry of Forestry have been managed more
sustainably than the areas allocated under district logging permits.

Source: Barr, C, Resosudarmo IAP, Dermawan A, McCarthy, JF, Moeliono, M, Setiono, B 2006, Decentralization of forest
administration in Indonesia: implications for forest sustainability, economic development and community livelihoods, Center for
International Forestry Research (CIFOR), Bogor, Indonesia.

Furthermore, overlapping claims for power over state forests are also pervasive between
national and sub-national levels and between the government and local communities. This
leads to confusion and further exacerbates the difficulty of managing these forests. The
confusion created by overlapping regulations situates rural communities, who are dependent on
the forest for their livelihoods, in the losing position. In the case of logging activities, many
concessions are often granted without considering community rights. The local community often
finds it difficult to provide any legal evidence of their existence. A group of people will only be
acknowledged as a customary community when they are able to provide required evidences.
However, there is still a lack of clarity about what is required to prove a community is a
“customary community”, therefore, many of the customary forests have not been granted legal
status. See Box 2 to understand the complexity of legal arrangements related to land tenure in
Indonesia‟s customary forests.

Box 2. Complication of Land Tenure in Indonesia’s Customary Forests

The 1960 Agrarian Law regulates that “an indigenous law shall be recognized, providing this does not
contradict national and state interests.” The latter part of the clause was frequently used to undermine
adat law. Forestry Law 5 of 1967 recognized adat rights but treated them as weak usufruct rights and
                                           12
subordinated them to the national interest. Furthermore, the Law on Village Government No. 5 of 1979
dismantled adat institutions and the functions of indigenous leaders. The 1999 Forestry Law did not
change the concept of customary community tenure rights but added more confusion. It states that
certain forest areas can be recognized as “Adat Forests” but the areas must be classified as “State
Forests”. This is an apparent legal contradiction since “State Forest” areas are forests with no rights
attached to the lands while “Adat Forests” can only exist when Adat rights are exercised on the lands.

While the Agrarian Law and numerous subsequent natural resource management regulations give much
attention to the recognition of Hak Ulayat (customary rights), there is in fact little de facto recognition
and, thus far, little political will. One prominent exception is the procedures for the recognition of private
communal land title for Adat communities discussed in a 1999 Department of Agraria Ministerial
decision, providing guidelines for the registration of Adat lands (Ministerial Decision 5).
Quoted from Page 7 of Contreras-Hermosilla, A and Fay C, 2005, Strengthening Forest Management in Indonesia through Land
Tenure Reform: Issues and Framework for Action, Forest Trends.

Finally, benefits generated from forestry activities such as non-tax revenues have not been
returned or earmarked to local communities living within or around forests. District governments,
who have the authority to provide public services for local communities are restricted in
spending funds generated from forestry activities. For instance, the reforestation levy (dana
reboisasi) transferred to the district level can only be used for forest rehabilitation activities and

12
  Adat refers to the cultural beliefs, rights and responsibilities, customary laws and courts, customary practice and self-governance
institutions shared by an indigenous group prior to incorporation into a colonial or post-colonial state. Adat is location-specific and
changes over time, where the communities have maintained systems of local governance according to customary law as opposed to
uniform and formal structures imposed by the central government.

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not for community-based development. Logging companies, who are supposed to pursue
corporate social responsibility, have made relatively insignificant improvements for the benefit of
local communities. Local people therefore tend to pursue activities that generate quick cash,
such as converting forests to oil palm plantation for survival.

2. Indonesia’s readiness: progress on key elements of the REDD design

REDD is expected to create optimism and hope for better forest management in Indonesia. The
financial benefits of REDD are estimated to be US$ 15-50 billion, which is 10 to 30 times higher
than the amount of international aids for developing countries in the forestry sector.13 The
financial benefits, if utilized properly, could offset the opportunity costs of forest protection and
address the drivers of deforestation. An initial positive response has been demonstrated by
many stakeholders in Indonesia, which have quickly equipped themselves to partake in the
REDD scheme.

In order to ensure a smooth start, the Indonesia Forest Climate Alliance (IFCA) was formed in
2007 as a forum for REDD stakeholders to share information on REDD methodologies, strategy,
financing, and revenue distribution. The IFCA, which is coordinated by the Ministry of Forestry,
involves both national and international experts, supported by a number of multilateral and
bilateral donors. As a result of the IFCA‟s recommendation, the Government of Indonesia has
developed the REDD-Indonesia framework. Figure 1 summarizes Indonesia‟s REDD
framework, including the reference emission level (REL), the overall REDD strategy, monitoring,
reporting and verification (MRV), funding preference, and payment distribution. The progress
achieved thus far in each of the components of the REDD framework will be discussed in detail
in the next subsections.

                                         Figure 1. REDD Indonesia Framework

                                        Source: Ministry of Forestry (2009) National Strategy
                    Reducing Emissions from Deforestation and Forest Degradation in Indonesia: Readiness Phase

13
     Assuming that carbon price is at US$ 7-20/ton CO2

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2.1.      Overall REDD strategy: paving the way for REDD implementation in Indonesia

In terms of the overall strategy of REDD implementation, Indonesia aims to adopt the “national
accounting with sub-national implementation” approach. This approach will require a national
system of Monitoring, Reporting and Verification (MRV). The sub-national level is encouraged to
participate in the implementation of sub-national REDD projects but carbon credits generated at
the local level would be standardized within the national MRV system. This approach is deemed
appropriate considering that forest conditions vary from very low to very high rates of
deforestation historically. Moreover, this approach is expected to work well under the existing
decentralization setting as it allows the involvement of local stakeholders and at the same time
prevents national leakage as all sub-national activities are accounted in the national MRV.14

An overall strategy has also been developed at the national, provincial and district levels. See
Annex 1 for details on Indonesia‟s overall REDD strategy. At the national level, the Government
aims to issue appropriate regulations on REDD and tackle the drivers of deforestation occurring
at all forest classifications in Indonesia, including protected and production forests as well as
providing specific attentions to oil palm plantation and peat land. Strengthening the methodology
of REL and MRV as well as building institutions will be carried out at all levels. Finally,
demonstration activities are expected to take place at selected provinces and districts in
Indonesia.

Over the past two years, a number of regulations have been developed to provide an umbrella
for REDD implementation in Indonesia. The regulatory framework established related to REDD
is summarized in Table 1.

                        Table 1. Regulatory Framework related to REDD in Indonesia
Regulation                                                           Description
Permenhut                         Allow for REDD demonstration pilot projects
P.68/Menhut-II/2008               List possible objectives, locations and proponents of REDD demonstration
(December 2008)                   activities
                                  Regulate that REDD demonstration activities can be implemented in state and
                                  private forests
Permenhut                         Provide mechanisms for REDD Implementation
P. 30/Menhut-II/2009              List the possible locations (in all types of forests) and proponents (national and
(May 1, 2009)                     international; government, corporation and international entity) of REDD activities
                                  Regulate the procedure and process of application, assessment and approval
                                  (including REL and MRV). See Annex 2 for the flow of process from application to
                                  approval.
Permenhut                         Provide mechanisms for REDD voluntary carbon market
P. 36/Menhut-II/2009              Revenue sharing between developer, community and government (See Annex 3)
(May 22, 2009).                   Transition to carbon market

These regulations should be seen as an immediate and positive response of the Government to
provide a platform for REDD implementation in Indonesia. However, there are a number of
issues that are worth highlighting related to these regulations. This is the case because
refinement can be more thoughtfully considered to improve the proposed design of REDD
implementation under the compliance market. The issues include:

14
  Leakage is a potential problem related to terrestrial carbon sequestration where protection of forest in one particular area causes
deforestation or adds more pressure to forests in other locations

                                                                  9
1. Involvement/participation of local stakeholders including local governments and local
      communities are limited in the existing regulations. Although it is stated that local
      stakeholders can be the proponents of REDD activities, the involvement of local
      governments and communities should also be guaranteed in the decision making
      process from the designing process through the implementation phase. In the
      regulations, local governments are only allowed to provide recommendations for project
      proposals. Furthermore, under the existing regulations, local people are also ruled out
      throughout the decision making process of REDD implementation. This poses a threat to
      the rights of local communities that currently live surrounding and/or inside of forests due
      to the land tenure issues. Several possible suggestions to improve access for local
      stakeholders are provided in the next section of this report.

   2. The distribution of revenue amongst stakeholders as listed in Permenhut 36/Menhut-
      II/2009 is not supported by a robust analysis related to the costs of REDD
      implementation. In order to determine the right portion of REDD revenue distribution to
      different stakeholders, it is important to calculate the actual costs of avoiding
      deforestation borne by all actors at different levels. It is also crucial to allocate funds to
      where they are most needed to address the causes of deforestation at all levels.
      Furthermore, as REDD requires a cross-sectoral coordination amongst relevant
      government institutions, the distribution of REDD benefits is proposed to be regulated by
      a government regulation (a higher regulation in hierarchy than a ministerial decree).

Following the issuance of the Ministerial Decree 30/2009, a national working group on REDD
will be established to oversee REDD implementation. The National REDD Working Group
(NRWG) will consist of representatives from relevant sectors and stakeholders. The members of
the working group will be high-level officials at the Directorate General level (which is one level
below a Minister). They will mostly handle strategic issues supported by the Technical Team (at
the Director level) and the REDD Secretariat. Several main institutions dealing with the REDD
scheme in Indonesia presently are:

   1. Ministry of Forestry, which has the responsibility to manage state forests. Within the
      Ministry, Directorate General of Forest Planning (DGPLAN) and Research and
      Development Agency (FORDA) are key-players in the process of REDD implementation.
      In collaboration with the Australian Government, DGPLAN is responsible for the Forest
      Resource Inventory System (FRIS), which is integrated into the National Carbon
      Accounting System (NCAS). This collaboration also aims to develop a satellite-based
      system that will enable Indonesia to monitor forest and agricultural fires on a daily basis.
      In addition, FORDA is providing support by conducting research activities on
      FRIS/INCAS.

   2. The Ministry of Environment served as Indonesia‟s focal point for UNFCCC until the
      establishment of the National Council on Climate Change (Dewan Nasional Perubahan
      Iklim or DNPI). DNPI is a body established by a Presidential Decree with a mandate to
      advise and oversee implementation of both climate change adaptation and mitigation
      policies. DNPI has recently become Indonesia‟s focal point for UNFCCC.

   3. The National Development Planning Agency (BAPPENAS) is the coordinator of national
      development and manages assistance from development partners. A climate change
      multi-donor trust fund has been established within BAPPENAS, which aims to support

                                                10
climate change related initiatives and can potentially include work related to REDD
         activities.

     4. The Ministry of Finance is responsible for designing REDD payment distribution
        mechanisms. A task force for developing fiscal policies relevant to climate change has
        been established within the Ministry.

2.2.     Reference Emission Level (REL)
REL is the level against which the impacts of REDD policies and measures are assessed in
order to determine whether participating countries have reduced emissions and should receive
financial rewards for their efforts. The government aims to apply a mixed approach to
developing REL, where emissions from planned and unplanned drivers of deforestation are
treated separately. Emissions from unplanned deforestation are measured against a REL based
on historical unplanned emissions or on an average of historical emissions. Emissions from
planned deforestation would be developed on the basis of the area of forest to be converted for
the purpose of other land uses. In the case of oil palm development the complexities of land
conversion are managed within different authorities not only under the authority of the Ministry
of Agriculture but also the Ministry of Forestry; this type of coordination is challenging for
integrated emission planning. The recently published report of Indonesia‟s Second National
Communication (SNC) to UNFCCC has projected carbon stock changes in the living biomass
from 1990 to 2030 using a historical trend of deforestation and land rehabilitation data.15 Under
the business as usual (BAU) scenario, carbon stocks in the living biomass will continue to
decrease until 2030.

In late 2009, Indonesia‟s President made a public announcement and set the target of GHG
emission reductions at 26 percent by 2020 against the 2005 baseline, with approximately 14
percent or reductions planned to come from the forestry sector. The SNC report has also
ambitiously stated Indonesia‟s target to be a net GHG sink country in the next 10 years. This
target is expected to be achieved under the following mitigation scenario:
    1. Afforestation and reforestation programs on approximately 0.7 million hectares per year
    2. Forest plantations will be developed to match the demand of 2010 (based on FAO
        estimates ~ this rate resides somewhere between 0.3 and 0.4 million hectares per year)
    3. Enrichment planting of between 0.2 and 0.6 million hectares, which is 45 percent higher
        than the BAU scenario
    4. Illegal logging to decrease rapidly from 0.5 million hectares per year in 2000 to
        nonexistent after 2020
    5. Deforestation is assumed to be 75 percent of the historical rate (0.45~0.65 million
        hectares per year)
    6. 50,000 hectares per year will be used as plantations for energy

2.3.     Monitoring, Reporting and Verification (MRV)
MRV is an important activity under a REDD mechanism as it will determine whether a country
has achieved significant and credible reductions in emissions from deforestation and
degradation. Monitoring involves data collection and the necessary calculations for estimating
emission reductions or enhancement of carbon stocks, while verification aims to assess whether

15
 The Ministry of Environment, 2009, Summary for Policy Makers: Indonesia Second National Communication Under the United
Nation Framework Convention on Climate Change (UNFCCC)

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the information is well documented based on IPCC methodologies and is in compliance to
UNFCCC guidelines. Following such processes, the financial benefits can be granted to
participating countries based on performance.

The SNC report has estimated national greenhouse gases inventory in the forestry sector using
Tier 1 and Tier 2 of the 2006 IPCC reporting guidelines.16 In order to assess the change of areas
within different land categories, Indonesia has decided to apply Approach 2 using spatially
explicit land conversion information.17 This approach allows for the estimation of both “gross”
and “net” changes in land categories. However, no experience presently exists in monitoring
and measuring areas of degraded forests on a regular basis and very little data exists on the
impacts of timber harvesting on carbon stocks.

The Ministry of Forestry has recently initiated a systematic forest-monitoring program using
MODIS/TM satellite imagery to assess deforestation from the period of 2000 to 2006. However,
the MODIS/TM data cannot accurately identify forest degradation in an optimal manner. More
detailed remote sensing data sources and methods will be required to detect degradation,
potentially including high-resolution satellite systems and other advanced forms of technology.
Moreover, in the mid-1990s, a national forest inventory (NFI) was carried out in Indonesia
generating stock tables for all forest functional classes and for all provinces (IFCA, 2008). The
National Forest Inventory (NFI) should be revived and improved with more plots of forest types
that are currently under the highest threat. Developing a robust monitoring system for forest
degradation requires training and methodology testing, as well as the acquisition of more
detailed satellite data and air photos.

2.4.      Funding preference

In terms of financing options, REDD can be implemented as either a market or non-market
approach. Market approaches enable developing countries to generate credits from REDD
measures and sell them to developed countries, who may purchase and use the credits to meet
their emission reduction commitments. Non-market or fund-based approaches propose a fund
created by developed countries to reward developing countries for their efforts to reduce
emissions from deforestation and forest degradation.

Indonesia‟s submission to the FCPF and the UN-REDD Program is intended to support the
country in designing and creating high quality projects (of which Indonesia already has several),
to enable them to be ready to tap substantial resources from carbon markets by protecting
Indonesian forests. Regarding forest carbon credits, Indonesia's submission explains that such
an investment could result in alternative and sustainable livelihoods for many of Indonesia's 10
million lowest income families who currently survive on uncontrolled harvesting of forest and the
expansion of slash and burn agriculture. Clearly, Indonesia believes that the market will provide
strong incentives to enable behaviors to change, and those changes would support real
emissions reductions and act to reduce man-made activities that cause "reversals”. This market

16
   According to IPCC, several tiers can be used for the assessment of emission factors (changes in carbon stocks), including: 1) Tier
1 assesses the mean annual increment for degradation and/or forest biomass stock (for deforestation) values forest classes for
each continental area; 2) Tier 2 assesses mean annual increment and/or forest biomass values from existing forest inventories
and/or ecological studies. Default values provided for all non-tree pools; 3) Tiers 3 measures trees repeatedly from permanent plots
and/or calibrated process models. (Source: IFCA, Consolidation Report, 2009)
17
   Approach 1 identifies the total net area change for each land category but does not provide information on the nature area of
conversions between land uses, while Approach 3 extends Approach 2 by using spatially explicit land conversion information; thus
allowing for an estimation of both gross and net changes in land categories. (Source: IFCA, Consolidation Report, 2009)

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approach is expected to provide a robust REDD framework because it adheres to a national
carbon accounting scheme and has the strength of financial incentives which creates a stronger
underpinning of integrity to the process. However, the Government is currently waiting for the
result of the negotiations that will dictate the type of REDD funding that will be pursued and
implemented.

2.5.      Readiness and Voluntary REDD Activities

The Ministry of Forestry aims to advance the progress in building REDD infrastructure both in
sorting out the methodological issues and strengthening institutions to implement REDD in
Indonesia. The estimated cost is US$ 18.86 million. This figure excludes support for
demonstration activities and policy interventions to tackle drivers of deforestation and forest
degradation. The breakdown of the budget required for readiness activities is included in Table
2 below.

                            Table 2. Required budget for readiness activities
                             Strategy Category                 Estimated costs (US $ Million)
           Methodology (REL and MRV system)                               12.628
           Regulations, institutions and analytical works                  6.236
           Total                                                          18.864

A number of demonstration activities have also been implemented to test and develop
methodologies, technologies and institutional designs of REDD. Several selected demonstration
activities have been implemented as collaborations between the government of Indonesia and
several agencies including:

       1. Germany (BMZ, implemented by KfW/GTZ). The project will be working in a number of
          districts in the provinces of East and West Kalimantan. The project focuses on a district
          implementation model.

       2. AusAID. AusAID has initiated the “International Forest and Climate Partnership”. The
          partnership supports the development of large-scale project based demonstration
          activities in Central Kalimantan, particularly in the Kapuas district. A second
          demonstration project is currently being prepared in another district in Indonesia.

       3. UN-REDD. The project was signed in late November 2009. The project, which involves
          FAO, UNDP and UNEP, aims to help the Government of Indonesia to develop a REDD
          architecture that will allow fair, equitable and transparent REDD implementation.

       4. The World Bank. Indonesia participates in the Forest and Carbon Partnership Facility
          (FCPF) and therefore is eligible for readiness support. The Ministry of Forestry has
          requested a total of USD 3.09 million for building readiness in the implementation of
          REDD in Indonesia through FCPF. See Table 3 below for the breakdown of funding
          requested to FCPF.

                                                        13
Table 3. Requested Budget to FCPF
          Activities                                                                                Requested budget
                                                                                                      (US $ 1000)
          Background studies (follow up IFCA studies) including further studies on                        138
          rivers of DD and ways to address them
          Management of REDD, consultation, communication and participation                                 491
          REDD implementation framework: assist institutional setting including                             652
          national registry, institutional capacity building etc.
          REDD implementation framework: assist institutional setting including                             469
          national registry, institutional capacity building etc.
          Assessment of environmental and social benefits and other co-benefits                             342
          Assist in developing RED/RL, data acquisition, background studies                                 719
          (coordinated activities: Australia – UNREDD – FCPF – others)
          Design MRV system (coordinated activities: Australia – UNREDD – FCPF –                            285
          Others)
          Total                                                                                            3096

Furthermore, in the province of Nanggroe Aceh Darussalam (Aceh), a voluntary REDD project
in the Ulu Masen Ecosystem (750,000 hectare forest) has been launched. The project aims to
reduce deforestation in the area by 85% and avoid 3.4 MtCO 2 per year in emissions (Aceh
Province, 2007).18 This was the first REDD project in Indonesia to be approved as conforming to
the Climate, Community and Biodiversity standards. The project is supported by a tri-
partnership of government, non-governmental organizations and the private sector, which are
represented by the Provincial Government, Fauna and Flora International (FFI), and Carbon
Conservation Ltd, PTY.

3. The National Institutional Design of REDD: Some Possible Options

This report has thus far summarized Indonesia‟s main achievements in a number of readiness
activities mostly related to technical functions such as developing REL and MRV. However, a
number of challenges still exist, including addressing the overlapping claims and regulations in
the forestry sector, ensuring greater access of local stakeholders (i.e. local governments and
indigenous communities in the implementation of REDD), and designing a fair and transparent
distribution mechanism of REDD payments. (See Annex 4 for a summary of current national
institutional functions for REDD). This section aims to provide suggestions of possible
institutional designs for REDD implementation in Indonesia.

3.1.     Options for the Implementation Framework of REDD

Effective forest governance at all levels is considered a prerequisite for managing forests
sustainably. Moreover, the national government needs to develop sub-national reference levels
due to the wide-variation of regional situations across a country. The adoption of a “national
approach with sub-national implementation” is a good start however it needs to be further

18 The Government of Aceh Province, 2007, Reducing Carbon Emissions from Deforestation in the Ulu Masen Ecosystem, Aceh,
Indonesia: A Triple-Benefit Project Design Note for CCBA Audit

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detailed down particularly related to who will be doing what at different levels. Several options
for the implementation of REDD within Indonesia context are below:

   1. A centralistic model – The existing forest governance in Indonesia can be considered as
      centralistic, where most functions are in the hand of the Ministry of Forestry at the
      national level. Under this model, the national government would decide on REL and
      instruct local governments to implement REDD at the local level to support the national
      priority. Relying on the existing forest governance to implement REDD would provide
      more advantages in terms of reducing transaction costs from creating new institutions or
      delegating new mandates. However, in the case of Indonesia, the existing forest
      governance is far from ideal with many overlapping regulations, claims and authority
      over forest resources. Local governments have a restricted authority over forests whilst
      their involvement in the protection and conservation of forests is deemed to be crucial in
      order for REDD to be successful. Local communities, who have de-facto control over
      many forest areas, need to be provided a greater role in the management of resources.

       Several issues that will hinder the successful implementation of REDD under the existing
       centralistic model include:
          Monitoring difficulties due to the wide extent of Indonesia‟s forest resources
          especially without full supports from local stakeholders;
          Reduced likelihood of taking local situations and circumstances into account in the
          development of REL as well as REDD policies and measures to address the drivers
          of deforestation;
          Limited participation of local communities because the decision making process
          takes place at the central level that is very distant from where local communities, that
          are impacted directly by REDD implementation, reside.

   2. A functional model - IFCA suggested some sort of a „functional‟ approach where
      functions are apportioned to different institutions. The functions include oversight,
      financing, technical REDD implementing institutions and accountability. Potential
      institutional roles and responsibilities for REDD in Indonesia suggested by IFCA are
      listed below in Table 4. One issue that might be persistent under this model is the
      difficulty in horizontal coordination between sectors (actors/players). Cross-sectoral
      coordination seems to be a very problematic issue in Indonesia. It also has an
      implication of high transaction costs as many parties involved and complicated
      bureaucracy can frequently slow down the process. In addition, to increase capacity
      within so many institutions due to a new mandate would require more resources.
      However, the involvement of the existing institutions based on their routine mandate is
      crucial. For instance, the Audit Supreme Body (BPK) and the Independent Anti-
      Corruption Agency (KPK) need to be involved in the auditing process of all REDD
      activities. However, their involvement should be seen as part of their regular function
      without adding a new assignment to their existing roles and responsibilities.

                                               15
Table 4. Possible distribution of functions amongst relevant institutions
                        Function                                                Possible Entity
    National/regional/local fund managers                 e.g. BLU (Fund Manager for Afforestation/Forest
                                                          rehabilitation activities at the local level)
    National/regional/local registries                    e.g. BPN (Land Agency), BAPLAN (Planning
                                                          Agency within the Ministry of Forestry)
    Monitoring entities, linking local to national        e.g. BPS (Statistic Bureau), civil society, contracted
    scale                                                 service providers
    National/regional/ local legal institutions           Legislative, Ministry of Forestry, BPN
    Emission reduction agents and providers of            Local communities and corporations
    alternative livelihoods
    Auditing                                              e.g. BPK and KPK and verification entities, with
                                                          international support

3. A decentralized model - In the implementation of REDD, several activities are best
   handled by the national government, while others would be best devolved to the local
   level. Based on the ongoing REDD negotiations, national governments need to develop
   national carbon accounting, monitor the implementation of REDD policies and measures,
   receive and distribute REDD credits, and assume liability after payment has been
   received. Local governments are in a better position to develop local policies and
   measures at the local level. Local authorities are considered to have better specific
   information related to local resources, which results in better-targeted policies and lower
   transaction costs.

   In Indonesia‟s context, local stakeholders need to be provided with a greater amount of
   authority in forest management to ensure the successful implementation of REDD. The
   national level needs to ensure a robust monitoring and evaluation system to avoid
   leakage and to hold any local project liable if it fails. In order to encourage local
   governments‟ participation, the central government could decide on a national reference
   level and seeks expressions of interest from local governments to implement REDD in
   their administrative areas. Alternatively, the central and local governments could decide
   on a national reference level jointly and the local governments could implement REDD
   measures at the local level.

   Under a decentralized model, a robust monitoring system is also imperative in order to
   reduce national leakage. This issue would become evident when a local government
   refuses to partake in REDD and allows land use change to take place in the locality
   while other localities tighten up their policies to reduce deforestation. Furthermore, the
   capacity of local governments needs to be urgently developed under a decentralized
   model. The capacity of local governments in REDD implementation is generally low.
   With a total of 451 districts in 33 provinces, the capacity of local government varies
   widely between one locality and others. Support provided by ongoing demonstration
   activities only covers a small number of regions. It is time to escalate and extrapolate the
   experiences to cover more regions in the country. National socialization and public
   education, particularly to all districts, is an important start to build the capacity of local
   stakeholders.

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3.2.      Options for a revenue distribution mechanism
REDD funding would be granted based on performance to participating countries. However,
upfront investments to set up a REDD project can be costly for developing countries.
Intermediate payments are deemed necessary to reward the achievement of critical milestones
towards full implementation of plans and facilitate progress towards successive milestones.

Indonesia considers the importance of implementing REDD using a phased-based approach. If
REDD payments are disbursed only after emission reductions from deforestation and forest
degradation are achieved, then intermediate financing to reward and facilitate strategic
milestones need to be provided. Several venues are also considered for intermediate financing,
such as the government budget, donor funding and private investment from oil palm, pulp and
timber companies, and private sector financial institutions.19 The World Bank, for instance,
considers providing concessional funding of $500 million through the Forest Investment
Program (FIP) to supplement national government financed components.

Following the achievement of REDD targets, compensation would be received and would need
to be distributed among all stakeholders, including indigenous peoples and local communities in
a fair, efficient, transparent, and equitable manner. Related to the payment distribution
mechanism, two possible options suggested by IFCA (2008) are based on where primary
transactions take place between international buyers or fund providers. These include:

     1.   Transaction with the central government, who will be responsible for distributing the
          funds to local stakeholders. This approach has the advantage of reducing transaction
          costs because interacting with one single party will be less costly as compared to dealing
          with multiple parties. The distribution of REDD revenue from the national to the local
          level could utilize the existing mechanisms such as fiscal transfers from national to local
          governments (BLU and forestation levy or Dana Reboisasi). However, the
          implementation of REDD using the existing mechanism requires several adjustments
          otherwise it would compromise the success of REDD implementation. The experience of
          the existing implementation of Reforestation Levy (Dana Reboisasi) shows that local
          governments have difficulty spending the funds for forest rehabilitation due to the strict
          guidelines regulating how the funds should be spent. The guidelines provided by the
          national governments fail to take into account local conditions.

     2.   Transaction with lower government levels or directly with projects in accordance with the
          relative share of the location in the national baseline. The national or higher
          governmental level will collect some sort of „tax‟ from the transaction to finance
          monitoring and accounting. This approach will empower sub-national stakeholders to
          have sufficient authority to implement REDD according to local circumstances. However,
          a number of issues remain such as: a) high transaction costs from dealing directly with
          many entities; and b) difficulty in monitoring and control without a robust monitoring
          system leakage could be prevalent.

Within the proposed “national approach with sub-national implementation” system, it is obvious
that the national government would hold the authority to receive funds and further distribute to
local stakeholders. This arrangement offers a number of advantages such as a more

19
 Ministry of Forestry, 2009, National Strategy Reducing Emissions from Deforestation and Forest Degradation in Indonesia:
Readiness Phase

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