Deforestation in Southeast Asia: The Future Is Being Decided in Indonesia
Published in Knowledge@Wharton
Economic development feeds on forests, or at least it always has. The United States gobbled up forests as it grew into a world power, sacrificing, says the U.S. Forestry Service, something like 200 million acres of forestland in the second half of the 19th century alone. By 1926 the nation's economy was booming, but the price the U.S. paid for its development was enormous: there were almost no forests left east of the Mississippi.
Today, notes Sarene Marshall, managing director of The Nature Conservancy (TNC's) Global Climate Change Team, the environmental cost of such forest clearing is so great that "we can no longer afford it as a planet." Already, "deforestation and forest degradation...account for nearly 20% of global greenhouse gas emissions, more than the entire global transportation sector and second only to the energy sector," reports The United Nations Collaborative Program on Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (the UN REDD Program).
And just two countries, Brazil and Indonesia, account for approximately 55% of the world's deforestation, not including the loss of peatlands, "which can account for half the greenhouse-gas emissions in Indonesia in some years," says the Washington Post. So now that industrialized countries like the United States no longer depend on unregulated deforestation for their economic well-being, the challenge is whether emerging powers like Brazil and Indonesia will be able to forge new greener paths to their own economic development.
Brazil has already made significant progress, decreasing deforestation by 78% in recent years and undertaking new initiatives that promise even more success in the years ahead. Indonesia, by contrast, is still in the early stages of the process. Its economy, the largest in Southeast Asia, is defying the economic malaise affecting much of the world and growing at an annual rate of about 6%.
But this growth is coming at a severe environmental cost. Indonesia is today the world's third-largest emitter of greenhouse gases, after the U.S. and China, largely because of the country's historically high rate of deforestation. According to Agus Purnomo, the special assistant to the President of Indonesia and head of secretariat for National Council on Climate Change, 85% of the nation's carbon footprint comes from "deforestation and uncontrolled land conversion."
Just how, and how successfully, Indonesia will manage to maintain the vitality of both its economy and its rainforests is not yet clear. But an understanding of the forces that have led to the current situation and the new forces that are helping to shape Indonesia's future suggests that Indonesia may someday, like Brazil, aspire to become a "green super power."
The panel on "Growing Greener: Indonesia and the World" at the 2012 Wharton Global Alumni Forum in Jakarta brought this point home. In his opening remarks, Eric Orts, a professor of legal studies and business ethics at Wharton, noted the many environmental challenges Indonesia faces, including large-scale deforestation. But said Orts, who is also director of Wharton's Initiative for Global Environmental Leadership (IGEL), if Indonesia succeeds in managing these challenges, "then it promises to become a leading example for other emerging economies in the second half of the 21st century."
Three Major Factors Have Driven the Deforestation of Indonesia.
According to the Rainforest Action Network, less than half of Indonesia's original forest cover still exists, and much of the rest has been badly degraded. The causes are numerous, but three forces account for much of the destruction: commercial pressures, regulatory mismanagement and international neglect.
Commercial pressures: The timber industry in Indonesia has prospered by harvesting ancient trees to feed the world's growing appetite for plywood and paper pulp. Palm oil companies, often closely allied with the timber concerns, have cleared huge swaths of primary forests to create plantations that today make Indonesia the world's leading supplier of palm oil (used in everything from candy bars to face creams, not to mention bio-fuels). Still more trees have been bulldozed to facilitate the mining of two other natural resources, coal and minerals.
These drivers of deforestation often feed on each other, creating a destructive synergy. Profits from thriving timber concessions pay for the creation of oil palm plantations. And even timber companies that fail to thrive leave behind roads and partially cleared land that others can more easily and illegally exploit.
Regulatory mismanagement: Speaking at the Jakarta panel, Paul Wolfowitz, a former ambassador to Indonesia, deputy Secretary of Defense and head of the World Bank, pointed out that, "In 1998 when the economy collapsed here, GDP declined by 14%, the province of East Timor seceded from Indonesia and there were ethnic conflicts all around the periphery of Indonesia, very few people would have bet on the future of this country." Many, in fact, predicted that the country would, in the words of Indonesian President Susilo Bambang Yudhoyono, "break apart into pieces." One important reason it did not, says the president, is that the central government pursued an ambitious process of decentralization.
While this process may have helped save the nation, it also complicated efforts to combat deforestation. "The centralized exploitation of resources was one thing," says Jack Hurd, Asia Pacific deputy director for TNC, "but decentralized exploitation of resources was even more chaotic."
For years, Hurd explains, the Indonesian government has lacked the resources and staff to manage even the nation's national parks, which it directly controls. Not surprisingly, the national government has had even more trouble overseeing the land it allows others to manage. While the government, says Hurd, is more concerned than it used to be about "a more planned approach to land use management, and is probably in a better position to implement its plan than it used to be," it still does not have the manpower to properly police its own regulations. As a result, the World Resources Institute estimates that illegal logging accounted for 80% of Indonesia's timber exports in 2008, depriving the government of more than $100 million in tax revenue annually and often depriving local communities of their livelihood.
Finally, concludes Hurd, at the local level where much of the power resides, the district governor generally issues local land permits without the benefit of a national planning perspective. Like most local officials, the governor is far less focused on national policy than on attracting industry that will generate jobs and tax revenue.
Adding to this regulatory confusion are often acrimonious conflicts about land tenure. According to a recent study of by the Center for International Forestry Research (CIFOR), "Tenure insecurity is at the crux of forest controversies." The dispute at the heart of its study, says CIFOR, "illustrates a quandary faced by local governments and forest communities across Indonesia ... an unclear boundary between a state forest and a communal forest claimed by villagers who have lived there for generations." In such cases, the conflict is often between government sanctioned harvesting of timber by a private company and the traditional agricultural practice of "shifting cultivation" (often termed "slash and burn") by the local community.
Lack of international assistance: Despite the now-obvious relationship between tropical rainforests and climate change, the 1997 Kyoto protocol did not address the carbon dioxide emissions from deforestation in the developing world. Only Annex 1 nations were bound by the protocol's emission reduction commitments, and these 37 industrialized countries were not allowed to use any emission offsets from forests in developing countries. So while the decentralized Indonesian government struggled to contend with mounting commercial pressures, the rest of the world failed to even recognize the importance of deforestation, let alone provide badly needed assistance.
But a lot has changed since Kyoto, both on the ground in Indonesia and throughout the world. In recent years, global corporations, local companies, international NGOs and the Indonesian government have begun working individually and collaboratively to find new ways forward. And while much remains to be done, significant progress is being made.
New Forces Are at Work in Indonesia's Forests
A report published by the United Nations Environment Program (UNEP) in 2007 says that palm oil plantations are the leading cause of rainforest destruction in Malaysia and Indonesia. And a report by Greenpeace that same year, "How the Palm Oil Industry Is Cooking the Climate," explains, "Much of the current and predicted expansion of oil palm plantations is taking place on peatlands which are among the world's most concentrated carbon stores." The destruction of peat is already unprecedented, and according to a 2011 article in Science, "If people continue to chop, drain, and burn [peatlands] at current rates, researchers report, by 2030 no native swamps will remain and billions of metric tons of carbon will be lofted into the atmosphere."
But the palm oil industry has begun to follow a new trajectory: Much has been made of the work being done by the Roundtable on Sustainable Palm Oil (RSPO), a collaboration of all the major stakeholders dedicated to "the growth and use of sustainable oil palm products through credible global standards." But the 2007 Greenpeace report -- which focused attention on specific plantations and major consumer goods companies -- stated, "On-the-ground investigations by Greenpeace reveal that RSPO members are dependent on suppliers that are actively engaged in deforestation and the conversion of peatlands."
Quoting what it said was a "major food retailer" and member of RSPO, Greenpeace said the key issue was the inability of companies to trace the palm oil they used up the supply chain. "Consequently," said the report, "consumer companies who manufacture products using palm oil have virtually no way of knowing whether or not the palm oil they are using is from rainforest destruction and conversion of peatlands."
Greenpeace also conducted a number of high-profile media campaigns aimed at specific companies, many of which responded positively. But its agreement with Nestlé was the most far-reaching. With the help of The Forest Trust (TFT), Nestlé developed a plan, just two months after it began talks with Greenpeace, to identify and remove any companies in its supply chain with links to deforestation, including Sinar Mas Agro Resources and Technology (SMART), one of the largest palm-oil companies in Indonesia. The agreement was so complete and reached with such speed that Greenpeace was caught off guard, confessing online that it "didn't expect Nestlé to come up with such a comprehensive 'zero deforestation' policy so quickly." It was, Nestlé announced, "the first time that any company has made such a commitment."
The speed with which the agreement was reached is a tribute to all involved: Nestlé, Greenpeace and TFT, which played the role of "intermediary/'interpreter,'" says TFT executive director, Scott Poynton. "Without that role," adds Poynton, "the agreement would either have taken much longer to gestate or possibly never have emerged at all. And without strong implementation in the field, the Greenpeace campaign would likely have started again very quickly."
This June, Greenpeace once more announced its astonishment that Golden Agri-Resources (GAR), the owner of SMART, "is leading the way in what could be the starting point for the palm oil industry to phase out deforestation," a result, Greenpeace said, that was "unthinkable" just two years earlier.
The new program is an outgrowth of the Forest Conservation Policy (FCP) GAR introduced in 2011. Working with both Greenpeace and The Forest Trust (TFT) GAR has launched what TFT calls "the first practical, scientifically robust and cost-effective methodology for defining and identifying areas of high conservation value." In consultation with the government, local communities, industry experts and other relevant stakeholders, GAR is now working to avoid any development of High Carbon Stock (HCS) or High Conservation Value (HCV) forests or peatlands.
Forest certification is advancing sustainability on two fronts: The Forest Stewardship Council (FSC) offers a globally accepted certification program based on a set of principles and criteria related to forest management. For Indonesian timber companies, acquiring FSC certification serves two critical functions. It provides objective proof of a company's sustainable forest management both to the government and to high-value customers; and it provides a mechanism for working out the often-complicated relationship between the company and the local community.
The importance of this second function, explains TNC's Hurd, is that it ensures a company's ability to operate. The timber companies, says Hurd, "can handle a bunch of activists in Jakarta screaming and yelling about the forestry. What they can't handle is a bunch of communities that protest in strong and potentially violent ways." Over the years, for instance, communities enraged by logging on disputed land have blockaded logging roads, vandalized company machinery or otherwise interfered with company operations.
As part of the FSC certification process, timber companies have to identify High Conservation Value Forests (HCVF), and since a forest can earn HCVF status for cultural as well as strictly environmental reasons, the FSC process offers the companies a tool for negotiating agreements with local communities about where the company will and will not harvest timber. In this way, a commercial pressure -- the demand for certified sustainable wood -- helps companies resolve the daunting problems of land tenure.
Working to improve the regulatory environment: In a recent survey by the Soegeng Sarjadi Syndicate, 80% of Indonesians believe that their nation can become a superpower. This national sentiment reflects "Indonesia's long-held intention to play an active role in international diplomacy," says Endy Bayuni, senior editor of the Jakarta Post.
To realize its global aspirations, Indonesia has, says the East Asia Forum, "taken consistent steps to rebuild its international image since emerging from the political turmoil of 1998--1999. The country has focused on re-establishing its leadership role within ASEAN, and has demonstrated a desire to assume a global role by promoting itself as the world's third-largest democracy, largest moderate Muslim-majority country, and as a 'bridge-builder' and a 'problem-solver' in the wider global community."
Keenly aware that its reputation for deforestation tarnishes its image as a problem-solver, not to mention the negative effect deforestation has on the country's long-term economic development, the Indonesian government has begun to tackle the tangle of often conflicting regulations that has hobbled its efforts at land use management. One notable accomplishment was the enactment in 2009 of a national Timber Legality Verification System (SVLK). SVLK assures other countries that Indonesia's own laws are being followed, and that timber and other forestry products leaving the country are certified as legal and traceable to their points of origin.
What makes SVLK especially impressive is that in order to enact it, the government had to streamline an incredibly cumbersome process (TNC and other groups had identified some 900 conflicting rules and regulations governing the legal operation of forestland in Indonesia). And SVLK has been so successful that, as part of a large program sponsored by the United States Agency for International Development (USAID), TNC is now working with ASEAN to turn SVLK into guidelines other nations can use.
Ultimately, the success of SVLK and other similar programs depends on the willingness of other countries to outlaw illegally logged timber. The EU, among others, has put restrictions in place, but more needs to be done. Caroline D'Angelo, IGEL communications coordinator and lead author of the recent IGEL report, Forest Product Eco-Labeling and Certification: Efficacy and Market Drivers, notes, "Certified forestry products may only account for as little as 4% of the international forestry trade."
That is why the Multi-stakeholder Forestry Program, a collaboration between the Indonesian and British governments, has been pushing for the 27 countries in the EU to close down the illegal market for timber products. "It would be useless if we have these products certified," says Diah Raharjo, director of the program, "but [the EU countries] still keep on buying cheap [uncertified] wood and timber products."
Copenhagen Accord focuses world attention on deforestation: At the 2009 UN conference in Denmark, 12 years after Kyoto, an international agreement was finally reached concerning deforestation in developing nations. As part of the Copenhagen Accord, the participating nations officially recognized for the first time "the crucial role of reducing emissions from deforestation and forest degradation" (known as REDD and later as REDD+).
As defined by the UN REDD program, "REDD is a cutting-edge forestry initiative that aims at tipping the economic balance in favor of sustainable management of forests so that their formidable economic, environmental, and social goods and services benefit countries, communities, biodiversity and forest users while also contributing to important reductions in greenhouse gas emissions." REDD+ goes beyond deforestation and forest degradation to include the role of conservation, sustainable management of forests and enhancement of forest carbon stocks in reducing emissions.
The Copenhagen Accord also recognized that accomplishing this reduction would require innovative and potentially costly efforts on the part of developing nations. In many cases, what was required would be profitable in its own right: increased agricultural efficiency, for instance, or growing demand for green products. In addition, however, the Copenhagen Accord envisioned the need for developed nations to provide financial incentives to developing nations.
As a start, developed nations at Copenhagen established a Green Climate Fund (GCF) to make effective use of the $100 billion they pledged to raise by 2020. Beyond this, they said, incentives might take a variety of forms, including the use of markets that would establish a financial value for the carbon stored in a country's forests.
None of this was legally binding, but the impact on countries like Indonesia was significant. By establishing the international importance of deforestation to global climate change, committing funds to support the efforts of developing countries and looking forward to a day when these countries could realize the financial value of the carbon stored by their forests, the Copenhagen Accord motivated Indonesia and other countries to get serious about deforestation to an extent they had not before.
An ambitious demonstration project is helping chart the path forward: Now in its third year, the Berau Forest Carbon Program (BFCP) is well on its way to figuring out at the district level what it will take at the national level to achieve REDD+ goals. Led by the local government in partnership with TNC and funded in large part by a debt-for-nature swap between the U.S. and Indonesia, BFCP is bringing together stakeholders to develop pilot projects that include both "emission-reduction strategies" and "enabling strategies." The latter involve land-use planning, regulatory policies and other initiatives that will help ensure enduring results. According to Marshall, BFCP "has most of the components of the answer to Indonesia's deforestation."
Involving the Financial Industry
Much more needs to be accomplished when it comes to deforestation if the average global temperature is to be stabilized within two degrees Celsius, which is all "society will reasonably be able to tolerate," according to the UN REDD Program. And making the needed progress will require huge amounts of capital, as much as $30 billion a year."
The $100 billion promised by GCF is a good beginning, but government funding will not be able to meet the ongoing need. "The transition to a sustainable economy will require a significant investment from both government and the private sector," said Mira Arifin, president and managing director of Bank of America Merrill Lynch (BAML) in Indonesia. The example of Greenpeace, TFT, GAR and Nestlé demonstrates the important role major consumer product companies can play in this process, but as Arifin noted at the IGEL panel in Jakarta, "the financial services industry will be at the heart of this transition."
Green bonds: Abyd Karmali, global head of Carbon Markets at BAML, notes that multi-lateral development banks, such as the World Bank, the Asian Development Bank and the European Investment Bank, are already issuing green bonds. The Euromoney Environmental Finance Handbook notes, "The appeal of the product lies in its simplicity: the credit quality of the bonds is the same as that of other World Bank triple-A rated bonds; ... it can be traded as easily as other 'plain vanilla' bonds issued by the World Bank and it offers a competitive return."
While green bonds require the same sort of due diligence as other bonds, they may in some cases include regulatory risk, since government actions can affect the underlying economics. Some forms of insurance can help mitigate some of these risks. TNC's Marshall points out that the U.S. government's Overseas Private Investment Corporation (OPIC) offers insurance against political risk, and Karmali notes that, "there are private insurance companies that are looking to issue insurance for certain scenarios that might occur in the carbon market." But, he adds, such policies are very case-specific.
Carbon markets: Looking beyond these project-specific bonds, many in the financial community expect that functioning emission markets will be needed to provide the level of financing it will take to sufficiently reduce emissions from deforestation and degradation. This begs a pair of critical questions: will such markets materialize in time and will the price of credits on those markets be competitive with the opportunity cost in the industries affected?
In Indonesia, for example, Karmali points out that the government must be able to earn more from emission credits than it can from granting concessions to very profitable oil palm plantations. The challenge is illustrated by the apparent failure of the two-year deforestation moratorium, which was implemented as part of a $1 billion REDD deal between Indonesia and Norway. It seems that even that amount of money has not been enough to compete with the income promised by two years worth of plantation permits.
Whether or not the price of emission credits is ultimately high enough to compete with opportunity costs will be determined primarily by how tough emission targets get. The tougher the targets are, the greater the demand will be for credits. No one can say, of course, whether or not the demand will be high enough to yield prices at the necessary levels, but Karmali is guardedly optimistic. "Our base expectation from here is that the emission reduction targets are going to get tougher... and that with a much tougher emission target regime, we should see REDD+ as being very competitive."
Marshall adds that, "Carbon finance alone will not solve deforestation. We need to harness the financial flows in underlying commodities towards greener practices, as well."
Whether higher-priced credits provide some or all of the necessary financing, the other question -- whether regulatory markets materialize in time -- also remains open. At this point, the best hope lies in national and/or regional markets like those being organized in California and Australia. Unlike the European Union Emissions Trading System (EU ETS), today's largest carbon market, the California and Australian markets have indicated that as long as they can develop appropriate standards, they will accept REDD+ credits. And emission markets like these "seem to be gaining momentum," observes Karmali.
But given the challenging transition period we are now in -- between the end of the first Kyoto compliance period and whatever comes next -- these new markets are unlikely to develop quickly. Even the $100 billion GCF is not scheduled to be in place until 2020. So the challenge seems to be less about whether or not markets will emerge and more about whether they will emerge in time.
A 10-year rainforest bond that BAML has in the works would help by attracting investors before the markets fully develop. With their principal guaranteed, investors in these bonds would provide capital sooner rather than later, and derive annual income from the markets as they develop over the 10 years of the bond.
Another possibility, suggests Karmali, is an Advanced Market Commitment (AMC) like the one the Bill and Melinda Gates Foundation funded together with five national governments -- Italy, Canada, Norway, Russia and the United Kingdom -- to guarantee a market for vaccines in developing countries. The same kind of mechanism, says Karmali, is possible in the case of REDD+, with funding from the GCF being used to guarantee a REDD+ market in order to attract investors before the necessary emission markets themselves are fully operational, presumably by 2020.
