Climate Change And Forest - Conceptual Framework For Implementing a Carbon Registry Linked To FMUs...

Climate Change and Forests: Conceptual Framework for Implementing a Carbon Registry Linked to FMUs in Indonesia

By

Andrea Tuttle

July 2008

Climate Change

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CLIMATE CHANGE AND FORESTS: CONCEPTUAL FRAMEWORK FOR IMPLEMENTING A CARBON REGISTRY

LINKED TO FMUs IN INDONESIA

Andrea Tuttle July 15, 2008

Prepared for GTZ SMCP PN 05.2206.0-001.00 Principal Advisor: Georg Buchholz Bldg, Bl. VII, Fl. 6 Jln. Jend. Gatot Subroto Jakarta 10270 Indonesia Tel: +62 (0)21 5720214

ACKNOWLEDGEMENTS

The author thanks all who assisted this consultancy and gave their time and insight in productive discussions. Special thanks are extended to HE H.M.S. Kaban, Minister of Forestry and his highly regarded colleagues Dr. Ir. Yetti Rusli, M.Sc., Ir. Wandoyo Siswanto, M.Sc., Ir. Wahjudi Wardojo, M.Sc., Dr. Nurmasripatin, Ir. Yuyu Rahayu, M.Sc., Dr. Hadi Daryanto, Dr. Agus Sarsito, Dr. Agus Justianto, Ir. Basoeki Karyaatmadja, M.Sc., Dr. Hermawan, Ir. Soetrisno, MM., Ir. Trijoko Mulyo MM., Ir. Chaerudin Mangkudisastra, M.Sc., Dr. Wardoyo, Ir. Listya Kusumawardhani, M.Sc., Dr. Tony Soehartono, Dr. Wilistra Dani. Warm thanks are also extended to my GTZ project counterpart, Ms. Yani Septiani for her excellent assistance in scheduling meetings and technical research, Mr. Dadah for his always friendly administrative support, and Mr. Georg Buchholz, Principal Advisor, for continuing the GTZ tradition of competence, project guidance and warm hospitality.

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TABLE OF CONTENTS

Page Acknowledgements 1 Abbreviations 3 Executive Summary and Key Recommendations 4

1. Introduction 6 2. Purpose and Methods of this Consultancy 7 3. Basic Forest Carbon Concepts 8

3.1 Forest Carbon Vocabulary 8 3.2 Potential Forest Carbon Projects in Indonesia: Matching Projects and Markets 10

3.2.1 REDD issues of "forest degradation" 18 3.2.2 The Voluntary Market 18

4. Administering forest carbon credits: Protocols and Registries 19

4.1 Protocols 20 4.1.1 Example: The California Forest Protocols 21 4.1.2 Example: The Van Eck and Garcia River Forest Projects 23

4.2 Registries 23

4.2.1 Example: The California Climate Action Registry (CCAR) 24 4.2.2 Registry Components 25 4.2.3 Expanding CCAR -- "The Climate Registry" 25

5. The Role of the Forest Management Unit (FMU) in Climate Activities 27 6. Putting the Pieces Together 29 7. Conclusions 33 RECOMMENDATIONS and INDONESIA'S CHALLENGES: Indonesia's Challenge #1: Matching Projects to Markets 19 Indonesia's Challenge #2: What Protocols to Accept for Forest Carbon Projects? 24 Indonesia's Challenge #3: Developing a Forest Carbon Registry 26 Indonesia's Challenge #4: Incorporate the FMU in Forest-Climate Activities 29 Indonesia's Challenge #5: Developing a Road Map for Implementation 32 ANNEX I Table of Contents, California Forest Protocols: Forest Projects 34 TABLES and FIGURES Table 1 Forest carbon additionality by Forest Type 11 Table 2 Potential Forest Carbon Options for Indonesia by Market Type 17 Figure 1 Role of the FMU in Forest Carbon Activities 28 Figure 2 Forest Carbon Program Components 30 REFERENCES and WEBPAGES 36

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ABBREVIATIONS AFOLU Agriculture, Forestry and Other Land Use BAU Business as Usual CARB California Air Resources Board CCAR California Climate Action Registry CCBS Climate, Community, Biodiversity Standard CDM Clean Development Mechanism CFS CarbonFix Standard COP Conference of the Parties CO2e Carbon Dioxide equivalent FMU Forest Management Unit GHG Greenhouse Gas GTZ German Agency for Technical Cooperation IPCC Intergovernmental Panel on Climate Change LULUCF Land Use, Land Use Change and Forestry MoF Ministry of Forestry, Indonesia REDD Reduced Emissions from Deforestation and Degradation SBSTA Subsidiary Body for Scientific and Technological Advice SCMP Strengthening the Management Capacities in the Ministry of Forestry SFM Sustainable Forest Management UNFCCC United Nations Framework Convention on Climate Change VCS Voluntary Carbon Standard WRI/WBCSD World Resources Institute/World Business Council for Sustainable

Development

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Executive Summary and Key Recommendations

The U.N. climate conference of 2007 turned a spotlight on tropical forests. Ten years after adoption of the Kyoto Protocol, the Bali Conference of the Parties (COP-13)

" ... affirmed the urgent need to take further meaningful action to reduce emissions from deforestation and forest degradation ...".

Indonesia lies at the heart of international attention. It has been identified as the world's third-largest emitter of greenhouse gases when deforestation and degradation of its rich and diverse tropical forests and peatland areas are included. Numerous government-to-government proposals are emerging under the context of REDD (Reduced Emissions from Deforestation and Degradation), a proposed UNFCCC mechanism to compensate tropical nations for avoiding forest loss. Donor nations are pledging substantial contributions to fund "top-down" readiness and implementation programs, and non-governmental and investor groups are proposing "bottom-up" forest projects for conservation purposes and investment in marketable carbon credits. A sense of urgency underlies efforts to develop REDD methods and stem forest loss, especially in light of negotiations towards a 2012 successor-agreement to the Kyoto Protocol. Indonesia has offered to serve as an early-action testing ground for development of REDD methodologies. However, Indonesia also correctly recognizes the need to protect its interests and decide wisely on the best course of action for its forests and forest governance in light of broader national development policies. During the current international uncertainty regarding future market structure and carbon prices, Indonesia is justified in not committing too much of its forest potential too soon. Indonesia should, however, use this period to establish the institutional capacity to manage, track and otherwise administer forest carbon activities. The market value of a forest carbon credit lies primarily in its credibility. Bogus tons undermine confidence in offsets generally and destroy market value. The accounting matters -- thus strong institutions should be established to instill market confidence in Indonesian forestry carbon credits. This report proposes some institutional decisions and administrative structure needed in Indonesia to manage the burgeoning number of forest-climate projects and programs which are already being proposed for the current voluntary market, and in anticipation of a post-Kyoto structure. Examples are provided from the State of California which has been a pioneer in developing a climate registry, adopting forest protocols, and approving projects that now successfully sell forest-carbon credits on the Voluntary market. Key Recommendations include:

1. Legal and Equity Aspects: Establish the legal rights and authorities to forest carbon credits generated from Indonesian forest lands, and establish an equitable system for allocating revenues that reflects proportional impact on the livelihoods of those affected by carbon projects.

2. Acceptable Protocols: Determine which Protocol standards will be acceptable for

forest-carbon projects. Select from existing international standards to the extent possible to ensure compatibility with existing carbon trading markets.

3. Recognized Registries: Initiate a basic Forest Carbon Registry now to capture

information on forest projects currently being submitted. Establish the Registry to

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record projects as they are proposed; the protocols applied; project sponsors and buyers of credits; forest carbon credits generated; and their vintage, sale and retirement. Indonesia may also wish to designate established, off-shore Registries for its forest credits, but should retain project tracking capacity.

4. Administrative structure: Accelerate implementation of an administrative structure

for forest-carbon activities, identifying responsibilities at the local, provincial and national level.

5. Incorporate the FMU: Build forest-climate activities into the Forest Management

Unit (FMU) from the outset. Establish pilot FMUs soon to begin developing and testing methods. Build capacity for the FMU to serve as the "point of contact" for identifying potential sites for carbon projects and providing consistent advice to project promoters. Ensure that carbon projects complement Sustainable Forest Management goals.

6. Consolidate forest carbon data and monitoring: Over time, link "bottom-up" forest

project data with "top-down" REDD carbon estimates for more comprehensive monitoring and calibration of total sinks and emissions.

7. Forest Management Protocol for Dipterocarps: Consider a project in cooperation

with other tropical forest countries or organizations to develop a protocol for additionality in managed (production), natural, mixed dipterocarp forests.

8. Promote Indonesian Priorities: During negotiations with project sponsors on REDD

and forest-carbon investment projects, make clear the interests of Indonesia pertaining to other national priorities for poverty alleviation, sustainability and governance in the forest sector.

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CLIMATE CHANGE AND FORESTS:

CONCEPTUAL FRAMEWORK FOR IMPLEMENTING A CARBON REGISTRY LINKED TO FMU'S IN INDONESIA

Andrea Tuttle GTZ-SMCP July 15, 2008

1. INTRODUCTION The U.N. climate conference of 2007 turned a spotlight on tropical forests. Ten years after adoption of the Kyoto Protocol, the Bali Conference of the Parties (COP-13) " ... affirmed the urgent need to take further meaningful action to reduce emissions from deforestation and forest degradation1 ...". Known as REDD (Reduced Emissions from Deforestation and Degradation), the program emerging from Bali brings developing and developed nations together to design methods and payment systems to avoid continued loss of tropical forests. A key outcome was launch of a $300 million fund2 by the World Bank to build capacity and test performance-based payments in countries willing to participate. A sense of urgency drives the effort so REDD mechanisms can be included in a post-2012 Kyoto successor agreement. As host to over 180 nations and 10,000 attendees, Indonesia received special attention. When deforestation and degradation from the 1990's are counted, Indonesia ranks as the world's third-largest greenhouse gas emitter. Prior to the conference, a consortium of forest researchers and interest groups examined options for Indonesia's participation in REDD3. A set of benefits was identified for optimizing the existing potential of Indonesia's forests, revitalizing its forest industries and building a national framework for implementation. Supported by this work, Indonesian President Susilo Bambang Yudhoyono came to Bali offering Indonesia as a testing ground for REDD pilot activities and early action. However, a sense of cautious realism also characterizes the Indonesian position. Emerging from a difficult history of forest exploitation, the nation's forest policy is now undergoing major structural reform and decentralization4. Top priority is given to improving governance throughout the forest organization, placing responsibility on local forest districts and bringing local communities into decision-making. Numerous proposals for forest-climate projects from donors, non-governmental organizations and brokers are scrutinized to ensure the project will not divert attention from governance building. Bad experience with unfilled promises in the past brings a healthy note of caution to the current "gold rush" of enthusiasm for REDD proposals and forest carbon credits. In the volatile market of emissions trading, officials are understandably hesitant to commit too much of Indonesia's forest potential too

1UN Breakthrough on climate change reached in Bali, Dec. 15, 2007 http://unfccc.int/files/press/news_room/press_releases_and_advisories/application/pdf/20071215_bali_final_press_release.pdf 2 The World Bank Carbon Finance Unit: Forest Carbon Partnership Facility (FCPF) http://carbonfinance.org/ 3 IFCA, 2007. REDDI: Summary for Policy Makers 4Ministry of Forestry, 2006. Strategic Plan of the Ministry of Forestry 2005-2009 (Revised). Jakarta, and MoF, 2007. A road map for the Revitalization of Indonesia's Forest Industry.

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soon, for too low a price and for too long a period -- even while recognizing the need to start somewhere and serve as an early-action testing ground for REDD methods. Within this backdrop the German Agency for Technical Cooperation (GTZ) and the Indonesian Ministry of Forestry (MoF) have embarked on a program to strengthen the process of forest sector reform. The project, "Strengthening the Management Capacities in the Ministry of Forestry" (SMCP), aims to improve sustainable management of forest resources in provinces and districts. A key component involves accelerated development of Forest Management Units (FMUs) throughout the country. FMUs are spatial units of forest landscape designed as the basic entity for attaining sustainable forest management (SFM) through effective administration of forest conservation, protection and production. Consultation with stakeholders over the last several years has identified a set of decisions and capacity building needed before FMUs can become fully implemented. A set of potential FMUs are now being evaluated to serve as pilot areas for developing methods and a workable organizational structure. 2. PURPOSE AND METHODS OF THIS CONSULTANCY This consultancy was designed to bring basic information on forest carbon accounting into the early stages of FMU formulation. The intent is to better inform possible climate-related functions of FMUs within a larger national climate program. The consultancy took place from 02 June to 15 July 2008, with 24 days based in the GTZ offices at the Ministry of Forestry, Jakarta. Methods consisted of document review and interviews with MoF officials. Discussions were held with individuals responsible for forest planning and production, FMU development, climate negotiations, policy development and research. Two presentations of findings were made at the end of the consultancy, one to the Minister of Forestry, HE H.M.S. Kaban and an inner group of Ministry officials, and a second to a larger group of governmental, non-governmental and donor country representatives. The basis for the work stemmed from experience of this consultant in California with the development of a statewide greenhouse gas Registry, the adoption of Forest Protocols, and the implementation of a verified forest carbon project selling credits to the Voluntary Market. The State of California has been a pioneer in driving climate policy and institutions within the United States, and many of the "lessons-learned" provide a useful framework for consideration by the Ministry of Forestry. Specific tasks of the consultancy were to address:

1. Institutional options for hosting a national (forest) carbon registry 2. Elements of a Forest Protocol 3. Structure of a Forest Carbon Registry 4. Role of Forest Management Units for tracking and reporting REDD activities 5. Road Map for Implementation 6. Donor participation in activities connected to a national registry and tracking system

for carbon credits 7. Presentation and Report.

The products of the consultancy consist of this report and Annexes, including the power point presentation addressing the core elements of each task.

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3. BASIC FOREST CARBON CONCEPTS 3.1 Forest Carbon Vocabulary The signing of the UN Framework Convention on Climate Change (UNFCCC) in 1992 launched a series of scientific and technical committees to advise decision makers on options for mitigation and adaptation to climate change. The forest sector was addressed through the "Land Use, Land Use Change and Forestry" (LULUCF) process which developed many of the basic concepts and vocabulary of forest carbon accounting. Greenhouse gas accounting methods, including forest sinks, have been refined over the 15 years of annual national emissions reporting required of Parties to UNFCCC, and through design of forest project criteria under the Clean Development Mechanism. Further information on the LULUCF can be found in UNFCCC web pages5. At its simplest, a forest carbon credit represents removal of carbon from the atmosphere and storage in the form of biomass (e.g. wood and long-lived wood products) in quantities larger than would otherwise occur under "business as usual" (BAU) practices. The fundamental concept of "...doing something different for the benefit of the climate" underlies the creation of the credit. Also known as "additionality", the credit represents an affirmative action to store more carbon from the atmosphere than the baseline carbon cycle through such practices as:

• Reforestation: Planting trees on areas that formerly supported forests but have been deforested for some period of time (i.e., not just replanting following normal harvest);

• Afforestation: Planting trees in areas where forests are not the natural vegetative

cover;

5 UNFCCC LULUCF: http://unfccc.int/methods_and_science/lulucf/items/1084.php

Forest-Carbon Basics

1. Forests play a dual role in capturing atmospheric CO2 through photosynthesis, and emitting CO2 through loss of forests to other uses, respiration, wildfire, and decay of biomass and wood products.

2. As a commodity in a trading market, forest carbon is measured as stock change (tonsCO2e), not rate of sequestration.

3. Elements of a marketable Forest Carbon Credit: What is the Commodity? a Ton of Carbon (CO2e) How is the Ton Created? Additional carbon storage above a "Business as Usual" Baseline (or, avoided forest loss that would otherwise have occurred)

How is the Ton Defined? Formal Protocols How is the Ton Tracked? A greenhouse gas Registry How is the Ton Sold? Through Compliance Markets and Voluntary Markets

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• Forest Management: Adding carbon storage within existing forest stands where current stocks are below the potential carbon storage capacity for the site6.

o Reduced carbon stock is a common condition in many industrially-managed lands where rotation length is designed to move wood efficiently to the wood product pool. Additionality can be achieved through activities that build carbon stock within the forest such as reducing harvest rate below growth rate, increasing rotation length, substituting tree species of higher carbon density, and managing for larger reserve areas, e.g. wildlife habitat, watercourse buffers and late seral conditions (bigger, older trees).7

o Degraded natural stands are usually below site capacity. Carbon credits may

be generated from activities that store additional carbon through affirmative rehabilitation and restoration of forest conditions.

• Avoiding Deforestation: Credits may also be generated by avoiding loss of forests

that would otherwise be converted to other uses, thereby retaining existing stored forest carbon stock and ongoing photosynthesis. This concept underlies REDD.

• Improved Utilization of Wood Residues and Waste from harvest and milling

operations: Substandard or damaged logs left in the forest during harvest operations can be more fully utilized for short-term carbon storage in small-log wood products or conversion to fuels (e.g. pellets, charcoal), providing local employment and some carbon value as substitutes for fossil fuel use8.

International forest accounting conventions are clear that "the mere presence of carbon stocks" does not qualify for credits or additionality.9 The creation of a forest carbon credit for use in a trading market must address at least five elements: 6 An upper limit of carbon storage on a site is set by climatic, biotic, topographic and soil variables, but many managed forests are maintained below inherent limits. Above-ground carbon storage can be increased by various forest management techniques (e.g. Bunker et al (2005)). 7 The opposite situation of overstocked stands due to fire suppression -- resulting in too many stems per acre that would have burned under more natural fire regimes -- presents a different strategy for carbon management. Carbon accounting here attains gains via reduction of wildfire risk and utilization of cellulosic fuels as offsets for fossil fuels. 8 E.g. ITTO, 2007 9 E.g., Marrakesh Accords and Declaration (2001) COP-7. http://unfccc.int/cop7/documents/accords_draft.pdf

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3.2 Potential Forest Carbon Projects in Indonesia: Matching Projects and Markets The initial phase of this consultancy developed a list of potential forest carbon projects that might be relevant to Indonesia. Table 1 lists projects according to forest type, condition and target market. Options are divided into "forest protection" and "forest management" categories, with plantations as a subgroup. Opinions expressed during MoF interviews are noted regarding the acceptability of various projects in light of other national priorities for the forest sector. Table 2 selects the projects of highest interest from Table 1 and examines them according to their relative attractiveness to 1) a Voluntary Carbon Market and 2) a future REDD compliance market. The analysis is not definitive since REDD definitions of "deforestation" and "degradation" are not yet finalized, pending the result of pilot studies and negotiations. The definitions will, however, be important to Indonesia's participation in REDD.

KEY CONCEPTS IN FOREST CARBON ACCOUNTING: "What will we do differently for the benefit of the climate?"

Baseline What the atmosphere sees now: The carbon cycle now and projected into the future

under "Business as Usual" forest management activities (or, in the case of avoided deforestation, the expected trend line of forestland conversion to other uses).

Additionality What the atmosphere will see as a result of a climate project: The additional carbon storage resulting from forest management activities additional to "Business as Usual". In the case of avoided deforestation, less forest loss than expected.

Leakage Offsite impacts leading to increased emissions; e.g. shifting of harvest or deforestation to another place that cancels out the gains of the sequestration project.

Permanence Ensuring that the net stored forest carbon remains stored over time. The stored forest ton offsets a ton of fossil fuel GHG emitted to the atmosphere. A 100 year standard has been commonly applied for offsetting an emitted ton.

Verification Independent, 3rd party certification of methods, measurements and reporting

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Table 1 POTENTIAL for FOREST CARBON PROJECTS in INDONESIA by FOREST TYPE

Key: Kyoto Protocol Mechanisms: CDM/A = CDM Afforestation CDM/R = CDM Reforestation Under Negotiation: RED = Avoided Deforestation REDD = Avoided Degradation Voluntary Market: IFM = Improved Forest Management per VCS10; includes SFM, RIL, extended rotations et al I. PROTECTION OPTIONS FOR CARBON PURPOSES

BASELINE FOREST TYPE

BASELINE FOREST CONDITION

FOREST ACTIVITY for CARBON PURPOSE

MARKET ACCEPTANCE and OPPORTUNITY11

VIEWS and OPEN QUESTIONS12

PRODUCTION ( HP) and PLANNED CONVERSION (HK) NATURAL FOREST (Peat soils receive special attention13)

Production Forests and Planned Conversion forests in any condition

Re-designate HP and HK to “Conservation/Protection” (KK, HL) status and avoid deforestation

High market interest in rainforest protection • RED (pending negotiations

and definitions)

• Voluntary Market

Low Country interest per MoF interviews: Re-designation conflicts with state goals: • "Planned Conversion" forests already

designated for economic development and population growth

• "Production Forests" already planned for plantation and natural forest production

• Carbon gain in "Conservation" areas depends upon enforcement against illegal logging.

Planned Conversion

Delay Conversion date of planned conversion

Low: Difficult to demonstrate additionality and permanence in carbon accounting.

Low market acceptance because area will still convert. Temporary credits, (e.g. tCERs) have low market value.

10 Voluntary Carbon Standard Program Guidelines (2007) Vol. 2: VCS Secretariat. Available at www.v-c-s.org. 11 Assumes VCS standard or above for projects targeting the voluntary market. 12 Views collected from discussions during consultancy. The MoF position on REDD awaits outcome of Pilot Project and international negotiations on REDD definitions 13 Peat Soil Forests of all conditions should be flagged as a key target due to high GHG emissions from soil disturbance and drainage. Soil carbon pools must be included in emission and sink calculations. Voluntary Market interest in peat soil projects.

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II. MANAGEMENT OPTIONS FOR CARBON PURPOSES

BASELINE FOREST TYPE



MARKET ACCEPTANCE and OPPORTUNITY

VIEWS and OPEN QUESTIONS

PRODUCTION ( HP) NATURAL FOREST NATURAL FOREST

General

Convert from conventional logging to SFM and RIL (IFM Activity 1) • RIL= Improved timber

harvesting practices; reduce damage to standing forest (e.g. directional felling; protect young crop trees; vine cutting; reduce soil compaction, reduce skid trails and logging roads)

• SFM= Improvements in

forest planning, inventory control, harvest timing etc.

• Utilize Forest Certification (e.g. FSC) or other performance approaches to improve concession management

• Utilize IUPJL license14

• REDD: Eligibility for REDD

still under discussion

• Voluntary Market: Good interest in FSC Certification and performance improvement under SFM and RIL

Ongoing improvement now per MoF: - Mandatory RPI certification of concessionaires with independent certifiers is steadily improving practices on the ground.

- Requirements for SFM and RIL are already included in existing MoF business licenses and are enforceable

- A carbon market could incentivize compliance

Issue – pending REDD definitions: Does enforcement of existing license qualify as avoided degradation (or is this domestic responsibility)?

14 IUPJL License: Business License for Environmental Services Utilization.

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BASELINE

FOREST TYPE





NATURAL FOREST (cont'd)

Degraded, General Ecosystem Restoration Restore and Rehabilitate degraded forests Utilize: IUPHHK Ecosystem Restoration License 15

Good C market interest: especially if bundled with ecosystem and community co-benefits • Voluntary Market: Good

interest

• REDD: "Avoided Degradation" (pending definitions)

High Potential for C Project: Forest Ecosystem Restoration offers clear case for carbon project Good market interest in restoration projects Existing IUPJL offers mechanism for carbon projects

Natural forest, general Enrichment planting with good quality seedlings, interplanted within degraded natural forest to enhance future forest stocking SILIN: some debate on net C stock increase due to clearing of strips of natural forest for seedbed.

Enrichment planting in natural forests may have good market acceptance Unclear if SILIN will be accepted by Voluntary Market

Enrichment planting generally has good potential MoF supports SILIN for potential C projects Research needed to demonstrate net C additionality of the technique

Stand below natural carbon capacity; SFM and RIL practices already in place

Lengthen Rotations to build carbon stock, e.g. • Extend 25yr. to 35 yr rotation for certain species; Cut ½ growth. Manage above TPTI baseline.

• Voluntary Market: Good

interest

(see: California Forest Protocol)

Low interest by MoF per interviews: • Increased rotation conflicts with wood

production goals and supply to mills

Concern re: illegal logging of large trees in carbon project area

15 IUPHHK: Business License for Ecosystem Restoration.

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BASELINE

FOREST TYPE





All forest types, degraded before 31 Dec., 1989

Reforest and tend • CDM/R Low support in MoF for CDM/AR: CDM costs discourage projects Many lands do not meet CDM/R definition

PLANTATION CONVERSION and MANAGEMENT Natural Forest or Critical Lands

Degraded Non-forest grass and shrub. Little potential for natural forest re-growth

Establish new plantation with best practices: • Protect HCVF High

Conservation Value Forests • Watercourse buffers above

legal requirements • Avoid deep peat soils, etc

C gain? Needs life-cycle carbon accounting to demonstrate additionality. • Compare plantation vs. equal investment in restoration of natural forest • Include C emissions from site prep, fertilizer, plantation tending, transport etc.

REDD: Possible REDD eligibility; awaits definitions Voluntary Market: generally prefers natural forest projects - Possible interest if plantation project is bundled with natural forest component, ecosystem and community co-benefits.

MoF interested in the potential, especially for pulp and paper plantations.

Natural Forest, any condition

Entire concession area cleared in anticipation of phased plantation development

Delay clearing of blocks until phase ready for planting

Delay provides some conservation co-benefits for plantation project. Market interest low: Temporary C credits (eg. tCERs). have low market interest. Additionality and permanence issues

Query from MoF whether this would be an option. Low potential as a stand-alone carbon project, but a good component in a bundled project.

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BASELINE

FOREST TYPE





Existing Plantation

Short Rotation class: 5-7 yrs (Pulp & Paper Plantations)

Medium Rotation 15-20 yrs Long Rotation: 25-35 yrs

Extend rotation age of evenly-aged managed forests (IFM Activity 3) Move plantation up one or two rotation classes: Manage for larger standing C stock and longer-lived wood products, e.g.: • Increase rotation age • Manage for bigger trees and

structural timber • Convert to Multi-Story

Canopy

• REDD: Uncertain eligibility

• Voluntary Market: Possible interest if plantation project is bundled with natural forest element, ecosystem and community co-benefits

MoF: Could consider.

Critical Lands

Out of forest cover 50+ year

Afforest and tend

• CDM/A

MoF Low interest: Project costs a deterrent

CONSERVATION KK PROTECTED PARKS

Forest subject to illegal logging

Enforcement, Surveillance, Prosecution

REDD: Uncertain eligibility

Unclear: Already in "Protected" status. Issue: should actions against illegal logging be REDD eligible, or is that domestic obligation?

Degraded, Low stocking, Invasive species due to illegal practices

Park Restoration: Carbon stock increase through enrichment planting, thinning, removal of invasives, restoration of natural species mix, enhance tree size

Voluntary Market: Potential interest

Unclear: Already in "Protected" status. Issue: : "But for" carbon incentives, rehabilitation would not be undertaken , vs. Why offer credit for poor park protection?

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BASELINE

FOREST TYPE





PROTECTION HL WATERSHED PROTECTION

No harvest activity

As per KK: Carbon potential same as Protected Parks

• Possible for future

Environmental Services Market (PES) for water, biodiversity values possible, but market not yet well developed

• Utilize IUPJL license

As per KK: Already Protected status

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Table 2 POTENTIAL FOREST CARBON OPTIONS for INDONESIA by MARKET TYPE VOLUNTARY MARKET INTEREST POTENTIAL REDD FINANCING

HIGH LOW Possible REDD projects pending negotiations and definitions: MoF INTEREST

per interviews

HIGH IUPJL License and IUPHHK Ecosystem Restoration within Production Forests -Designated Carbon purpose

New Plantation development - Low interest in plantations by Voluntary Market buyers17 -Unclear carbon additionality of plantations on a life-cycle basis

UNCLEAR Voluntary C Projects on Existing Concessions - Proposals by private project developers directly to local governments to reduce or modify harvest; - Issues of Carbon credit rights, licenses, revenue sharing

MODERATE

or LOW

Re-designate "Conversion" and "Production" forests to "Conservation" or "Protection"

CDM/A; CDM/R High project costs and eligible land a deterrent

Lengthen Rotations in natural production forests to build C stocks

Still to be determined are definitions for the forest management activities that will be eligible as "Avoided Degradation". See options, e.g., in IFCA, 200816 - Improvements in SFM and RIL implementation, and in

Concession Management Apply Performance measures and/or forest certification - Plantation relocation: Oil Palm, Paper and Pulp Relocate plantations planned for forest and peatlands to lands

already degraded. Require Plantation Accountability for carbon emissions - Lengthen Rotations in Plantations and Natural Forests to build C stocks Increase forest carbon stocking towards natural capacity; produce larger logs and longer-lived wood products - Ecosystem restoration within Conservation/Protection Forests High C gain potential. Q: will repairing illegal activity and enforcement within protection areas be eligible for REDD? - Enrichment Planting in Natural Forests: Good interest in concept;

Uncertain if clearing required for SILIN technique will provide net carbon gain.

- Support "Zero Burning" programs (e.g. IFCA)

16 IFCA, 2008. REDDI: Reduced Emissions from Deforestation and Degradation in Indonesia. Indonesia Forest Climate Alliance. Summary for Policy Makers

17 See K.Hamilton et al. (2008) State of the Voluntary Carbon Markets 2008 . VERs for Afforestation/reforestation - native restoration=42%; Avoided deforestation=28% ; Afforestation/reforestation - plantation/monoculture=13%

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3.2.1 REDD issues of "forest degradation": The ultimate goal of forest carbon projects is to grow and retain stored carbon as a climate benefit. Therefore, efforts should be rewarded that move forest management from practices that cause "degradation" to practices that promote "sustainability". However, the definition of "avoided degradation" is a matter of judgment when issues of enforcement and timing (i.e. pre- and post- some baseline year) are considered. Many tropical countries – including Indonesia – already have statutes and regulations included in concession licenses that require sustainable forest management. But, for a host of reasons, the standards have not been well enforced. The question arises whether REDD should reward enforcement of existing law or whether this is simply a domestic obligation that should be occurring anyway. Similarly, should improved implementation of SFM and Reduced Impact Logging practices by loggers on the ground be eligible for REDD when training and certification programs have already been initiated, or are those efforts now "business as usual" and not creditable? REDD has been pejoratively labeled by some as "paying the bad guys", and the issue of denying rewards to countries that were already starting to reduce degradation is one of the difficult questions now on the REDD table. Tables 1 and 2 indicate that these dilemmas affect some project determinations in Indonesia. 3.2.2 The Voluntary Market: Although REDD may not yet be ready for a regulatory market, the Voluntary Market for forest projects is well underway. Throughout the tropics non-governmental organizations and project developers are exploring opportunities to bundle "good forestry" activities into projects that appeal to the rapidly expanding market of green minded voluntary purchasers who are interested in "saving rainforests" and promoting their business or personal lifestyle as carbon neutral18. Since 2005 the Voluntary market for forest projects has blossomed, filling a vacuum left by a dearth of forest projects on the Compliance market. The Compliance market has been notably resistant to forest projects with only one successful CDM Afforestation/Reforestation project approved to date19 and the European Union Emissions Trading System (EU ETS) excluding forest projects entirely. On the Voluntary side, at least 65 million tonnes of carbon credits were transacted in 2007 with a value of $331 million, and a $4 billion voluntary offset market is projected by 2012.20,21 The charismatic quality of "green" forest projects that portray environmental benefits of preserving tropical forest ecosystems, protection of wildlife, restoration of watersheds and support of indigenous livelihoods adds to the special appeal of forest projects to a voluntary buyer. However, the emergence of a hodge-podge of offset products being offered to an unregulated, "wild west" voluntary market has caused alarm among market traders and environmental interests. Forests are complicated and accounting principles are not well understood by non-specialists. Concern that phony tons would destroy market value and confidence in offset products (and lead to total exclusion of forest offsets in cap and trade schemes) has led to several independent efforts to develop standards for evaluating voluntary projects. The most prominent voluntary forest standards are the AFOLU Voluntary Carbon Standard (VCS), the Climate, Community & Biodiversity Standard (CCBS), the CarbonFix Standard 18 Hamilton et al (2007) note that "...contrary to expectations, anticipation of future regulation did not appear to be the main motivation for (voluntary) purchases..." p. 6. 19 Only one CDM A/R project in Guangxi, China has to date received registration through the CDM review process. See: http://www.climate-standards.org/projects/files/Guangxi_PDD.pdf 20 See VCS July, 2008 announcement regarding selection of carbon registries and projected value of voluntary carbon market http://www.katoombagroup.org/documents/files/VCS%20Approves%20Registries.pdf 21 Ecosystem Marketplace, 2007, 2008 State of the Voluntary Carbon Markets Vol 3, No. 4. April

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(CFS) and the Plan Vivo System. The State of California has also adopted voluntary rigorous Forest Protocols through a regulatory process, and the first forest projects are now successfully offering credits to the Voluntary market. These standards vary in their treatment of additionality, co-benefits, permanence, risk and frequency of verification22, but in general serve their intended purpose of increasing transparency and setting a minimum bar against which forest projects can be evaluated. 4. ADMINISTERING FOREST CARBON CREDITS: Protocols and Registries Although the concept of a "forest carbon credit" may seem novel, in fact it can be viewed as simply a new type of forest product which landowners can add to their product line if it meets their management objectives. In essence, forest carbon is a "product that leaves more trees vertical than horizontal", since stock change above "business as usual" usually involves rebuilding depleted carbon stocks in forests to a level closer to site capacity. Familiar types of regulatory standards apply to forest carbon comparable to any other forest product, including systems for licensing and taxation. Once the commodity of "forest carbon" is defined and legal rights established, then familiar financial, insurance and market mechanisms can be applied. Two functions necessary to administer forest carbon credits involve the definition and the tracking of the credit.

• "Protocol" is a generic term used to describe a body of rules and procedures for defining a ton of forest carbon which can be offered to an emissions trading market.

• "Registry" is the term used to describe a formal repository for recording the creation and retirement of forest carbon credits so they can be independently verified and tracked, and are not double counted or double sold.

22 Merger and Williams (2008) provide a comparison of voluntary forest project offset standards.

Indonesia's Challenge #1: MATCHING PROJECTS TO MARKETS Carbon prices are caught in a swirl of uncertainty in the lead-up to a post-2012 climate agreement. Undecided definitions of REDD, the potential for U.S. participation in a cap and trade market, questions about the fate of voluntary markets when compliance markets change after 2012, and concern how large quantities of forest credits from tropical nations might affect market price -- all raise questions whether to sell carbon now or wait. Indonesia is wise to carefully consider its own interests during this period of transition. Indonesia's entry into early-action projects should carefully weigh risk and benefit. Projects should

• have a clear purpose of furthering method development • strengthen Indonesia's competence in project design and oversight • not commit too much too soon.

Both REDD and Voluntary target markets offer opportunities and different learning possibilities. As a general principle, credits best hold their value when the accounting standards for the ton are rigorous and transparent, and when the projects also provide strong social and environmental co-benefits.

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4.1 PROTOCOLS Protocols for forest carbon received their early impetus in the development of LULUCF conventions adopted for use in UNFCCC and CDM procedures. For example:

• The quantitative methods for reporting forest sinks in national GHG emission inventories are published in IPCC guidelines and "Good Practice Guidance for LULUCF"23

• The methods for generating "Certified Emission Reduction" credits under the CDM mechanism for Afforestation and Reforestation projects are published by the CDM Executive Board24;

• REDD standards to address deforestation and forest degradation are currently under development25.

As noted, independent standards to evaluate forest projects for the Voluntary Market have also been developed outside the UNFCCC process, (e.g. VCS, CCBS, California). Similarly, the Offset Quality Initiative has recently released comprehensive guidance for the quality and effectiveness of offsets to be used in regulatory cap-and-trade systems.26 As a group these can be loosely categorized as different types of "forest carbon protocols" that prescribe the standards for defining and reporting a ton of forest carbon.

23 See Good Practice Guidance LULUCF: www.ipcc-nggip.iges.or.jp/public/gpglulucf/gpglulucf.html 24 E.g. http://cdm.unfccc.int/methodologies/ARmethodologies/index.html 25 E.g. SBSTA agenda, June 2008 http://unfccc.int/methods_and_science/lulucf/items/4123.php 26 Offset Quality Initiative, 2008.

KEY COMPONENTS OF A FOREST PROTOCOL

1. Define the Reporting Entity: Geographic Boundaries, scope of reported emissions . 2. Establish a "Business as Usual" Baseline based on modeled projection of BAU

management practices 3. Define Acceptable Methods: - Quantifying Biological Carbon Stock, Emissions - Required and Optional Carbon Pools;

- Inventory Methods: Sample plots, live trees, standing dead biomass, lying dead wood, wood products

- Minimum confidence in Estimates - Accepted Models to establish baseline 4. Additionality: Additional stored carbon stock resulting from changes in forest

management for purpose of climate mitigation 5. Permanence: Ensuring the carbon stock remains stored to offset the ton of emitted GHG. 6. Leakage: Whole entity reporting; Estimates and Discount factors for Market leakage 7. Verification: Define process for certification of Verifiers and Reporting Process

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4.1.1 Example: The California Forest Protocols The State of California has adopted a set of Forest Protocols to fill a gap not included in the UNFCCC and Kyoto conventions. Increasing loss of privately-owned forest land, coupled with "under-filled carbon banks" in many managed forests presented an opportunity to develop protocols for managed, natural forests. The emerging value of forest carbon offered a potential new revenue stream to assist forest landowners in staying on their lands. At the direction of state legislation27, the California Climate Action Registry (CCAR) embarked on a 4 year process of stakeholder meetings and hearings to develop the California Forest Protocols. The Protocols were adopted by the CCAR Board of Directors in 2006, and again by the California Air Resources Board (CARB) in 2007 as a 'Voluntary, Discrete Early Action' pursuant to the broad mandate of the "California Global Warming Solutions Act of 2006" (AB 32) 28. The California Protocols set a high standard of forest carbon accounting. The key elements address Baseline, Additionality, Permanence, Leakage and Verification, and are coupled with rigorous sampling requirements for prescribed carbon pools29. Each has stringent definitions that give high credibility to the forest ton. The Forest Protocols consist of three components covering different aspects of reporting: Forest Sector (Entity-wide reporting), Forest Projects, and Forest Certifiers (i.e. verification procedures). Three types of Forest Projects are currently recognized: Additionality from 1) Changes in Forest Management; 2) Reforestation; and 3) Avoided Deforestation30. The structure of CCAR reporting is derived from model standards developed by the World Resources Institute and the World Business Council for Sustainable Development (WRI/WBCSD)31. These standards were prepared in response to an early call from business and environmental interests for a common reporting framework that would standardize the "ton" across international reporting and trading systems. Stakeholder process: The process for developing the California protocols was conducted by CCAR as required by the protocol legislation32. Representatives from academic and technical fields, forest consultants, industrial and non-industrial landowners, the California Department of Forestry and Fire Protection, State Resources Agency, and environmental, land trust and other stakeholder groups were invited to participate in meetings to develop technical standards for the protocol. Because the concept of additionality in managed natural forests represented "new thinking" outside of Kyoto and CDM, new measures had to be adopted utilizing mechanisms familiar in California. Public hearings before the CCAR Board of Directors were held to obtain public comment on the draft protocols, and a final vote to adopt was held in 2006.

27 Senate Bill 812 (2002) Sher. www.leginfo.ca.gov 28 AB 32 (2006) Nunez, Pavley. www.leginfo.ca.gov 29 See Forest Protocols at: www.climateregistry.org >Tools > Forest Protocols 30 The "Avoided Deforestation" protocol pre-dates the REDD concept and applies a method based on avoidance of development (i.e. forest land conversion) that would otherwise be permitted under local zoning and land use law. 31 ‘A Corporate Accounting and Reporting Standard’ (2004), ‘The GHG Protocol for Project Accounting’ (2005), 'The Land Use, Land-Use Change, and Forestry Guidance for GHG Project Accounting' (2006) are available at: http://www.ghgprotocol.org/ 32 SB 812, op.cit.

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California forest protocol mechanisms33: • Baseline: "Business as usual" is defined as legal but aggressive harvest compliant with the

California Forest Practice Act and Forest Practice Rules34. Growth and yield models allow a projection of forest carbon stock over a 100-year period under a BAU scenario, assuming adherence to prescriptive rules addressing wood sustainability, clearcut size and adjacency, fish and wildlife protection, erosion controls etc.

• Additionality:

a) Forest management: Stock change resulting from practices that store more forest carbon than the BAU projection, modeled over a 100-year projection starting from current inventory; b) Reforestation: Stock change resulting from tree planting on areas capable of supporting forests, but out of forest production for 10 years or more; c) Avoided deforestation: Defined as "avoided carbon loss" from foregone development otherwise authorized under current General Plan and Zoning ordinances (i.e. pursuant to state and county land use law). A project testing these methods is now being designed.

• Leakage: Within-entity leakage is eliminated by requiring entity-wide emission reporting (per Forest Sector protocol). Market leakage is addressed by applying a discount factor and justification.

• Permanence: Permanence of net stored carbon stock was defined by the legislative

requirement for a "Working Forest Conservation Easement" (WFCE) to be placed on the land supporting the forest project. Easements are legal contracts between willing buyers and sellers that legally remove development (conversion) rights from the site. Continuance of forest management is encouraged according to the terms of a WFCE easement. Lowered property taxes are a result of the easement, reflecting the lower appraised value of the parcel. Sellers are typically land owners wishing to keep their land in resource use to pass on to their heirs, without escalating pressure to subdivide caused by rising tax appraisal based on "highest and best use" (i.e. development value). Buyers are typically non-profit land trust organizations or state agencies that hold and administer the easement for conservation purposes, pursuant to state and federal tax laws35. This approach to permanence is now challenged as too restrictive, appealing only to a narrow class of landowners. The restrictive standards were politically required at the time of protocol development in order to provide tight environmental control and ensure avoided deforestation was as permanent as possible. Now with experience, and in light of new permanence approaches proposed in other voluntary schemes (e.g. risk based insurance, reserve pools, buffer accounts), CCAR has convened a new stakeholder process to examine other alternatives. Less certain standards for permanence, however, will be reflected in discounted carbon prices, relative to the risk to the offset purchaser.

• Verification: Credentialing of third-party verifiers, and procedures for verifying methods, forest inventory plots and additionality calculations are largely patterned after standards for verifiers of "green labeling" forest certification schemes.

33 For further details refer to the Forest Protocols, op.cit. http://www.climateregistry.org 34 The California Forest Practice Act and Rules are available at: http://www.fire.ca.gov/resource_mgt/resource_mgt_forestpractice.php 35 See, e.g. "The Pacific Forest Trust ", www. pacificforest.org, and "The Land Trust Alliance", http://www.lta.org/.

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Annex I provides the "Table of Contents" for the California Forest Project protocols to illustrate the range of topics that should be addressed within a Protocol. 4.1.2 Examples: The Van Eck and Garcia River Forest Projects Two forest projects have been CCAR-certified to date and are currently selling forest carbon credits to the Voluntary Market. The Van Eck project, managed by the Pacific Forest Trust on behalf of an institutional land owner, has served as a demonstration project to illustrate all phases of project development including testing of protocol methods, project design, verification, project approval by CCAR and targeting of sales to different market sectors. Details of both projects are found in websites of CCAR and the project developers36. The key points to note are:

• The Additionality standards for natural, managed forests have been accepted by the voluntary market, as reflected by the willingness of a range of buyer classes to purchase the credits at asking prices considered high at the time ($10-15 USD/ton CO2e);

• A full range of buyer classes is represented by the two projects, including an

international carbon asset broker, a major public gas and electric utility, retail businesses, prominent individuals, and website sale to individuals.

• Additional forest projects are currently in the design phase, including one that will

pioneer testing of the "avoided deforestation" component of the protocols.

• As noted, some components of the California protocols are state-specific, e.g. o reference to state forest practice regulation for modeling the baseline

'business as usual' management o use of a "Working Forest Conservation Easement" to address Permanence,

Other approaches are offered by other voluntary and compliance protocols.

4.2 REGISTRIES A Greenhouse Gas Registry is a formal repository for recording GHG emissions and emissions reductions. A Registry serves the purposes of:

• recording a baseline level of emissions from which emissions reductions can be measured over time;

• developing consistent GHG reporting standards and tools for measuring, monitoring and third-party verification of GHG emissions;

• tracking the certification of emission reduction credits, maturing of their vintage (i.e year in which the reduction actually takes place), and their sale and retirement when applied as an offset.

A key function of a Registry is to instill confidence in the credibility of the carbon credit. Registries must maintain high internal standards and establish a reputation of independence from political influence. Establishing a registry outside of a governmental structure would bolster market confidence, for example if incorporated as a non-profit, non-governmental organization.

36 The Van Eck Project: www. pacificforest.org; The Garcia River Forest: www.conservationfund.org. See especially the Reference documents at the end of the Public Reports for "Van Eck Foundation" and "The Conservation Fund" found at: www.climateregistry.org .

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4.2.1 Example: The California Climate Action Registry (CCAR) The California Climate Action Registry was formed in 2001 through legislation37 requested by corporate officials from major utility and business interests who were investing in energy efficiency projects and wished to establish their GHG emissions baseline in anticipation of possible future regulation. The Registry was initiated as a public-private corporation with state funding for start-up costs, and now has transitioned to a non-governmental, non-profit corporation supported by membership and service fees. Members of the Board of Directors are drawn from a mix of business, advocacy group and public sector representatives. CCAR currently has over 300 members representing international corporations, government agencies, cities and counties, universities and environmental organizations who publicly report their GHG emissions according to Registry protocols. Although legislation cannot bind future Legislatures, provisions in the CCAR statute and AB 3238 offer strong intent language that Registry members will receive appropriate consideration for their voluntary early emission reductions in the event of future state, federal or international GHG regulation.

37 SB1771 (Sher, 2000); SB527 (Sher, 2001). 38 AB 32 "California Global Warming Solutions Act" op.cit.

Indonesia's Challenge #2: WHAT PROTOCOLS TO ACCEPT FOR FOREST CARBON PROJECTS? Standards for defining a ton of carbon are coalescing after 15 years of technical development and field application. LULUCF standards already establish core concepts for baseline, additionality, permanence, leakage and verification. Voluntary standards are maturing around similar principles. Recommendations:

• Apply existing conventions: To ensure forest carbon credits generated by Indonesian projects are readily acceptable in international trading markets, it is recommended that Indonesia not re-invent the wheel. To some degree Indonesia can adapt existing standards to the Indonesian context, but should be cautious in creating entirely new standards for project types that already have developed protocols.

• Consider a dipterocarp protocol: To fill the gap in Kyoto for additionality in managed,

natural forests (i.e. production forests of native species), Indonesia may wish to consider a pilot project that develops methods for managed, dipterocarp forests, to be offered to the Voluntary market. These could be developed in cooperation with tropical forest organizations or countries that might share interest in such a protocol.

• Be rigorous: As a general principle, protocol standards that provide the most rigorous

accounting legitimacy to the forest carbon ton, and that offer a robust set of social and environmental co-benefits will best serve both sellers and buyers in the long run.

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4.2.2 Registry Components CCAR provides 4 core services:

• "CARROT" (Climate Action Registry Reporting Online Tool) - an on-line reporting system for members to annually report GHG emissions and reductions.

• A "Public Report" system for public access to emission reports and supporting documents on voluntary projects;

• A "Climate Action Reserve" to track generation and retirement of credits from Voluntary projects. Forest carbon credits are tracked by reporting year, vintage (i.e. calendar year in which the reduction actually took place) and serial number for each ton.

• Protocol development, standardization of methods and "think-tank" activities on emission reporting and regulation.

The reader is referred to the webpages of CCAR39 for further information. 4.2.3 Expanding CCAR -- "The Climate Registry" The high reputation established by CCAR for developing credible, accurate, and consistent GHG reporting standards has led to the creation of a new multi-state registry (including Canadian and Mexican members) based on the California model. "The Climate Registry" (TCR)40 is structured to accept both mandatory and voluntary emissions reporting and has just launched its on-line reporting tool, "CRIS" (Climate Registry Information System). As TCR takes an expanded role in anticipation of mandatory GHG reporting, CCAR is solidifying its role for the Voluntary market, tracking projects and developing protocols for new project types.

39 California Climate Action Registry (CCAR): http://www.climateregistry.org/ 40 "The Climate Registry" http://www.theclimateregistry.org/

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Indonesia's Challenge #3: DEVELOPING A FOREST CARBON REGISTRY The international attention to deforestation and degradation in Indonesia means the country will be the target of forest carbon proposals from many types of promoters. As proposed by REDD, the "top-down" tracking of national deforestation through GIS and remote sensing monitoring systems, such as the proposed FRIS, will produce a set of data on national land-use change. At the other end of the scale, on-the-ground forest carbon projects are already being proposed in forested provinces -- each with different sponsors, methods for establishing additionality, verification standards, commitments by buyers for the credits and so on. The potential for confusion in keeping track of numerous, and perhaps competing, forest projects and credits from different developers is high. It will also be difficult to mesh a top-down national estimate of forest carbon derived from satellite and GIS data with a cumulative estimate of carbon tons generated from individual projects on the ground. Theoretically the estimates should line up, but sampling methods, carbon conversion values, forest regrowth not associated with carbon projects and confidence limits will lead to inherent discrepancies. Recommendation: Establish (or designate) a centralized GHG Registry for forest-carbon projects It is recommended that Indonesia 1) Establish a centralized GHG Registry for forest projects occurring within the country, at least at a basic level for keeping track of projects and credits as they are proposed and as they mature; 2) Optionally, also designate one or more specific, already-established registries for recording credits generated from Indonesian forests. Credits should be numbered and tracked as they are generated and retired. Lack of such control opens the potential for error, abuse, double counting and possible double sales. Institutional options for housing a Registry within Indonesia should be considered – e.g. within

• A governmental agency such as the Ministry of Forestry, Ministry of Environment or other national climate agency, or

• A newly-created, independent non-governmental entity to provide additional independence and transparency. As noted, independent institutions provide higher investor confidence in the credit.

Alternatively, Indonesia could require that projects be registered in an off-shore registry. This raises several issues that should be considered:

• Does the outside registry have competence to review projects that were developed to meet Indonesian and international standards and norms?

• Will Indonesia have the opportunity for comment regarding decision-making of a foreign registry to ensure that country concerns are considered?

In any case, the Ministry of Forestry should develop internal staff capacity to:

• Process, evaluate and track projects as they are proposed and developed. • Provide consistent advice to Project Proponents. • Conform regulations for forest carbon with other forest administration systems ( e.g.

license, legal rights, taxation) etc.

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5. THE ROLE OF THE FOREST MANAGEMENT UNIT (FMU) IN CLIMATE ACTIVITIES Indonesian forest policy calls for the accelerated development of Forest Management Units throughout the country to help achieve sustainable forest management. When implemented, FMUs will serve as a geographical unit for organizing forest resource management across the complexity of governmental levels, forest enterprises and local communities. The Indonesian-German SMCP project has been engaged with MoF and stakeholders to identify institutional hurdles that slow the development of FMUs and the capacities needed to move them forward, especially at the district level. Several consultancies have supported the Ministry of Forestry pilot FMU sites process, and numerous SMCP references are available regarding Forest Management Units41. Among the several potential purposes of FMUs foreseen by the Ministry are "...management of forests to mitigate global climate change" and "...to attract investments and promote employment activities"42,43. This places the FMU in a prime position as an administrative unit for coordinating local forest carbon projects and linking projects with national REDD accounting. Figure 1 indicates proposed roles for FMUs in forest carbon projects.

41 E.g. Albrecht (2005); Albrecht and Schaefer (2007). 42 "Question & Answer: Forest Management Units (FMU)". FMU Document Series No. 03 Forestry Planning Agency. 43 “KPH shall have the duties and functions ..e)…to open investment opportunity to support the achievement of forest management objectives…” (PP6 , Ch. II, Art.9 )

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Figure 1

PROPOSED ROLE for the FMU in FOREST CARBON PROJECTS

The FMU (KPH) should serve as the point-of-contact for forest carbon activities within the spatial boundary of the unit. The FMU would serve several important roles:

• Linkage between the national REDD program and local forest carbon activities on-the-ground

• Identify Forest Carbon Opportunities within the FMU: e.g. “KPH shall have the duties and functions

e)…to open investment opportunity to support the achievement of forest management objectives…” (per PP6 , Ch. II, Art.9)

• Provide technical guidance to Project Developers regarding project standards, requirements and reporting procedures

• Assist in data-input to the on-line 'National Forest Carbon Registry'

• Monitor forest carbon projects within the FMU

• Assist in coordinating donor activities to avoid duplication and overlap

• Future potential: In conjunction with SFM Management activities and expanding national REDD program:

- Improve spatial data on concession boundaries, community lands, forest cover, peat lands, rainfall, soils etc.

- Improve Carbon estimates by forest type, land-use activity Data sources: - Improved national REDD GIS coverage - Carbon reporting by Concessionaires in Compartment Registers and Annual Plan reports, in conjunction with inventory and harvest

activities - Annual carbon reporting by Project Developers to National

Registry

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In the case that the FMU is implemented as a district-based management unit, it also could deliver services to the non-forest area (APL), thereby the FMU is fully in line with district-based approaches to REDD. 6. PUTTING THE PIECES TOGETHER The focus on tropical nations to curb forest loss means Indonesia has an opportunity to take advantage of programs that will serve the country's interest in strengthening its forest institutions. Climate goals and incentive systems – whether for REDD or a Voluntary Market -- will in many cases reinforce the Ministry of Forestry's mission to vest larger responsibility in local districts, build power-sharing institutions and develop technical capacity throughout the forest organization. It is emphasized that credibility and transparency must be a core value of forest carbon activities. Skepticism and international resistance to forest offsets will only be reinforced if 'empty' forest credits enter the system, and will jeopardize the eligibility of offsets in all international markets. Figure 2 outlines the primary administrative components needed to underpin high-value Indonesian forest carbon credits. These include 1) an overarching administrative structure incorporating elements from the local to national level, 2) decisions on acceptable protocol standards; 3) designation of an acceptable carbon registry or registries44, 4) decisions regarding legal rights to carbon generated from forest lands and equitable payment distribution among vested parties, and 5) consistent technical assistance and coordination.

44 E.g., see rationale by Voluntary Carbon Standard in selecting acceptable registries for VCS credits, based on security, verifiability, traceability and custody to provide long-term certainty for the market . http://www.katoombagroup.org/documents/files/VCS%20Approves%20Registries.pdf

Indonesia's Challenge #4: INCORPORATE THE FMU IN FOREST-CLIMATE ACTIVITIES As an administrative unit with strong knowledge of local conditions, stakeholders, forest status, concession operations and regulatory standards, the Forest Management Unit has the potential to play a critical role in ensuring the legitimacy and effectiveness of forest carbon projects. Recommendation:

• Build climate functions into the basic tasks of the FMU from the outset • Ensure that Carbon projects complement SFM goals

• Provide Forestry and Carbon Technical Assistance to Project Developers

- Assist in pre-identifying opportunities for forest carbon projects - Provide consistent information on project standards and requirements - Assist in and confirm that projects are entered into the project Registry

• Utilize FMU local knowledge and administrative structure to strengthen REDD ground-

truthing, and feed information upward for REDD aggregation

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Figure 2 ELEMENTS NEEDED for ADMINISTERING FOREST CARBON PROJECTS in INDONESIA

A. Primary program responsibilities:

NATIONAL REDD PROGRAM

LOCAL CARBON PROJECTS

NATIONAL G-G LEVEL: "Top-down" function 1. Establish national deforestation baseline 2. Track and report national REDD ‘Avoided

Emissions’ via GIS and other monitoring 3. Receive REDD payments for performance 4. Participate in distribution of REDD

payments to local level

FMU LEVEL: "Bottom-up" function. Focal point for tracking forest carbon activities within the spatial unit of the FMU

• Link national REDD program and local forest carbon activities

• Identify Forest Carbon Opportunities

• Provide technical guidance to Project Developers

• Assist in data input to National Forest Carbon Registry

• Monitor projects B. Needed components of a Forest Carbon program:

COMPONENT National Level

Forest Management Unit45

(FMU = KPH) ADMINISTRATIVE STRUCTURE

The structure of a National Climate Program is now under development in collaboration with stakeholders and government entities. For forest carbon purposes it should incorporate: • Ministry of Forestry • National level coordination • Integrate with Province, District,

Village and Company activities

The FMU administrative structure is to be divided into national, provincial and district/city responsibilities, as determined in collaboration with stakeholders and government entities.

PROTOCOLS = Rules for Measuring and Reporting GHG Emissions and Reductions "..what defines the ton?"

1. Eligible REDD activities and accounting methods are still to be determined in international negotiations 2. National protocols for forest carbon projects, if adopted, should be based on international GHG reporting standards to ensure compatibility with established trading markets Key components: Criteria for Project Boundary and Entity, Baseline, Additionality, Permanence, Leakage, Verification, Emissions and sinks.

FMU: Will provide technical assistance to Project developers regarding accepted protocol standards and procedures

45 FMU = the smallest management unit on a certain forest area for conducting forest management activities, looking at efficiency and effectiveness of forest management within one watershed or one ecosystem unit. It is based on main functions and is to be managed sustainably.

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COMPONENT National Level

Forest Management Unit45 (FMU = KPH)

REGISTRY = Repository for Recording and Tracking GHG Emissions and Sinks over time "...who keeps track of the ton?" Provides accountability, transparency and credibility. Prevents: Double counting Double sales

1. Establish a "National Forest Carbon Registry" under the authority of either a governmental entity or independent, non-profit corporation Administer the process for tracking REDD and Voluntary Market Forest Carbon projects: • Accept applications for projects

proposed by developers • Record C Tons when Verified and

Registered • Display Public Reports of Registered

Tons • Record Sale and Retirement of C

credits To the extent feasible, correlate project tracking with national level, top-down GIS REDD tracking of land use change.

Assist Project developers in data preparation and input to the National Forest Carbon Registry

LEGAL RIGHTS and AUTHORITIES over the CARBON CREDIT

National regulations required to define rights to carbon credits on lands subject to governmental jurisdiction. Define, e.g., rights of sellers, rights of buyers; matters of licenses, fees and taxes

Rights to carbon are a legal matter that should be addressed at the national, not local level.

TECHNICAL ASSISTANCE and COORDINATION

Capacity building needed within Ministry of Forestry and all levels of forest administration to respond to growing attention to forest carbon activities.

The FMU will act in an advisory capacity to • Identify potential forest carbon

project sites within the FMU • Offer technical assistance • Respond to project consultants,

verifiers and donor groups to avoid duplication and fill gaps.

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Indonesia's Challenge #5: DEVELOPING A ROAD MAP FOR IMPLEMENTATION REDD is accelerating the pace of forest carbon activities in tropical countries. Indonesia should put administrative systems in place quickly, even in a basic form, to keep track of forest-carbon projects as they are proposed, approved and implemented. Recommendation: The Ministry of Forestry should develop an implementation plan -- either as an internal task or in coordination with other national climate entities – to address: 1. Legal and Equity Aspects: Make legal determinations establishing the rights and

authorities to forest carbon credits generated from Indonesian forest land. Determinations should address legal and equity aspects of: - The entitlement to, and distribution of carbon rights among local communities,

concession holders and the national government; - Benefit sharing of revenues from forest carbon credits through a payment system

that recognizes the proportional burdens of those whose livelihoods are affected by implementation of the forest carbon projects.

2. Acceptable Protocols: Develop criteria to specify the types of forest carbon proposals

that Indonesia will accept, including Protocol standards that will be recognized. Take advantage of recommendations from work already performed (e.g. REDDI (IFCA, 2007)).

3. Recognized Registries: Establish a basic Registry to record projects as they are

proposed, the standards applied, the sponsors and buyers of credits, and forest carbon credits as they are generated, and their disposition.

Optionally, designate off-shore, established Registries eligible for Indonesian forest projects.

4. Administrative structure: Begin developing an overarching administrative structure

for managing all forest-carbon activities, and identify responsibilities at the local, provincial and national level. This should include capacity to link national-scale REDD programs with local projects.

5. Incorporate the FMU: Build forest-climate activities into the FMU from the outset.

Establish pilot FMUs soon to develop and test methods. 6. Consolidate forest carbon data and monitoring: Over time, link "bottom-up" forest

project data with "top-down" REDD carbon estimates for more comprehensive monitoring and calibration of total sinks and emissions.

7. Forest Management Protocol for dipterocarps: Consider a project in cooperation

with other tropical forest countries or organizations to develop a protocol for additionality in managed (production), natural, mixed dipterocarp forests.

8. Promote Indonesian Priorities: During negotiations with project sponsors on REDD

and forest-carbon investment projects, make clear the interests of Indonesia pertaining to national priorities for poverty alleviation, sustainability and governance in the forest sector.

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VII. CONCLUSIONS The world is evaluating all possible tools for addressing global climate change. While focus must remain on reducing emissions from fossil fuels, forests also offer substantial contributions – assuming their complexity is recognized and addressed legitimately. The past 15 years of international and sub-national work has developed conventions for measuring the dual role of forests as sinks and sources of emissions. Indonesia can now join as a contributor of ideas and forest capacity. Financial and technical opportunities are being offered that can concurrently strengthen governance of the forest sector, provide a new management focus, and potentially new sources of revenue. Of key importance is maintaining a high standard of credibility and transparency of the forest-carbon credit. Developing an administrative structure to support credibility will ensure that credits from Indonesia's forests are respected on the international stage and retain high value on trading markets.

ANNEX I: Example Table of Contents for the California Forest Project Protocol

Version 2.1, September 2007

California Climate Action Registry www.climateaction.org >Tools > Forest Protocols

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REFERENCES and WEBPAGES (current as of July 10, 2008)

Albrecht, Jorg. 2005. Advisory Services for Support of the FMU Establishment Process in Indonesia: Fact Finding Mission. Complementary Project. GTZ SMCP PN 2005.2206.0-001.00 Albrecht, J. 2006. Project Interventions and impact analysis in the light of changing framework conditions (1997-2006). Volume I. GTZ SMCP PN 2005.2206.0-001.00 Albrecht, Jorg and C. Schaefer. 2007. Advisory Services for Support of the FMU Establishment Process in Indonesia: Report of Field Mission to Kalimantan Nov. 2007 and Recommendations. Climate Change. GTZ SMCP PN 2005.2206.0-001.00 Albrecht, J. 2008. Advisory Services for Support of the FMU System Establishment Process in Indonesia. April '08 – Mission. GTZ SMCP PN 2005.2206.0-001.00 Bunker, D., F. DeClerck, J. Bradford, R.Colwell, I. Perfecto, O. Phillips, M. Sankaran, S. Naeeml. 2005. Species loss and aboveground carbon storage in a tropical forest. Science 310: 5750, pp. 1029 – 1031. California Air Resources Board (CARB). www.arb.ca.gov California Climate Action Registry (CCAR). www.climateregistry.org California Forest Protocols (CCAR). www.climateregistry.org Tools, Protocols CarbonFix Standard. http://www.carbonfix.info/ Climate, Community and Biodiversity Alliance. http://www.climate-standards.org/projects/ Ecosystem Marketplace. 2008. "VCS selects 4 registries". July 14. www.ecosystemmarketplace.com Forest Planning Agency, 2007. Question & Answer: Forest Management Units (FMU). FMU Document Series No. 03. Hamilton, K. R. Bayon, G.Turner, D. Higgins. 2007. State of the Voluntary Carbon Market 2007: Picking Up Steam. New Carbon Finance and Ecosystem Marketplace. Available at: http://ecosystemmarketplace.com/documents/acrobat/StateoftheVoluntaryCarbonMarket18July_Final.pdf Hamilton, K, M. Sjardin, T. Marcello, G. Xu. 2008. Forging a Frontier: State of the Voluntary Carbon Market 2008. A report by Ecosystem Marketplace & New Carbon Finance. May. Available at: http://www.ecosystemmarketplace.com/documents/cms_documents/2008_StateofVoluntaryCarbonMarket2.pdf IFCA. 2008. REDDI: Reduced Emissions from Deforestation and Degradation in Indonesia. Indonesia Forest Climate Alliance. Summary for Policy Makers http://www.dephut.go.id/INFORMASI/LITBANG/IFCA/Summary%204%20policy%20makers_final.pdf _______. 2008. Indonesian submission on reducing emissions from deforestation in developing countries. Paper No. 6. Indonesia. Submittal to UNFCCC SBSTA, Bonn. June. _______. 2007. Government Regulation of the Republic of Indonesia No.6 Yr.2007 on Forest Arrangement and Preparation of Forest Management Plan, and forest utilization. Paragraph 12, Article 49-58 Term of Forest Utilization at Production Forest License. IUPJL license

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ITTO. 2007. Challenges for sustainable tropical timber industry: utilization of wood residues and waste. International Conference on Wood-based Bioenergy. Hannover, Germany. Hwan Ok Ma, Projects Manager. http://www.itto.or.jp/live/Live_Server/3292/meetings20070517_Ma.pdf Listya Kusumawardhani, 2007. Policy on ecosystem restoration in Indonesia's natural production forest. Presentation at COP-13, Bali. http://www.unfcccbali.org/unfccc/images/document/Policyecosystem.pdf Merger, E. and A. Williams. 2008. Comparison of Carbon Offset Standards for Climate Forestation Projects participating in the Voluntary Carbon Market. University of Canterbury, New Zealand. May. Available at: http://www.fore.canterbury.ac.nz/research/ Ministry of Forestry. 2007. A Road Map for the Revitalization of Indonesia's Forest Industry. The Forest Industry Revitalization In-House Experts Working Group. Ministry of Forestry. xxxx. FMU System and Climate Change in Indonesia. Pamphlet. Ministry of Forestry. 1997. Selective Cutting and Replanting (TPTI). Appendix 11. Handbook of Indonesia Forestry. Patlis, J.M. 2002. Ministry of Forestry moves forward on new regulation. Forest Initiatives Newsletter No. 11. Piris-Cabezas, P. and N. Keohane. 2008. Reducing Emissions from Deforestation and Degradation in Developing Countries (REDD): Implications for the Carbon Market. Environmental Defense Fund White paper, 28 May. New York. http://www.edf.org/documents/7975_REDDandCarbonMarketAnalysisReport_EDF_0508.pdf Rich, David. 2008. Designing a U.S. Greenhouse Gas Emissions Registry. World Resources Institute, Climate and Energy Policy Series. February. http://pdf.wri.org/designing_a_us_ghg_emissions_registry.pdf Sardjono M. A. 2007. Scoping Study on SMCP Activities in East Kalimantan. Final Report. Samarinda. GTZ SMCP PN 2005.2206.0-001.00. Subekti, Alfan 2008. Scoping Study REDD activities in Kalimantan. GTZ Indonsesia Contract No: 83-17246. The Conservation Fund (Garcia Forest Project) www. conservationfund.org The Pacific Forest Trust (Van Eck project). www.pacificforest.org Voluntary Carbon Standard. http://www.v-c-s.org/ World Resources Institute/World Business Council for Sustainable Development (WRI/WBCSD). 2006. The Land Use, Land-Use Change, and Forestry Guidance for GHG Project Accounting. Available at: http://www.ghgprotocol.org/standards/project-protocol

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Strengthening the Management Capacties in the Ministry of Forestry (GTZ-SMCP) Manggala Wanabakti Building Block VII 6th Floor Jl. Gatot Subroto, Senayan JAKARTA 10270 T: +62 - (0)21— 572 0214 / 572 0212 F: +62- (0)21– 5720193 E: [email protected]

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