As UN climate talks inch towards creating a government-backed market for forest carbon credits, some private investors say it can’t happen soon enough, as they seek companies and other buyers to suck up their offsets.
“Lack of a (global) market is the problem. We rely on the voluntary market. We don’t need the price to be high, but right now there aren’t enough buyers,” said Jim Procanik, managing director of InfiniteEARTH, the company that started Indonesia’s Rimba Raya Biodiversity Reserve. So far, it is the only forest conservation project in the Southeast Asian nation to sell carbon credits.
The reserve, covering nearly 65,000 hectares of tropical peat swamp forests in the south of Borneo Island, is known as the largest initiative to protect endangered Indonesian species, including orangutans, sun bears, gibbons, clouded leopards and proboscis monkeys. It also aims to curb greenhouse gas emissions by safeguarding forests that store carbon dioxide, generating credits as a result.
After obtaining its license in 2010, Rimba Raya sold 5 million tonnes of Verified Emission Reductions (VERs) on the voluntary carbon market in a first tranche (1 tonne of avoided carbon emissions earns one credit). It offered a further 5 million VERs in 2013, of which less than a fifth has been sold so far.
Procanik said more “speculators” are needed, but they will only be tempted by the prospect of a “compliance” market in which forest carbon credits are traded to help governments meet emissions reduction obligations, like those under the Kyoto Protocol, the international treaty to mitigate climate change.
A few years ago, investors believed a compliance market would emerge that traded credits from projects under a UN initiative for Reducing Emissions from Deforestation and Forest Degradation (REDD) in developing countries - and they supported REDD projects based on that belief, Procanik said.
“The fact that there are few, if any, speculators in the market today shows that we may not be close enough to inclusion (of REDD credits) in a compliance market,” he added.
Signals from governments about the establishment of such a market are still too weak, he noted. “Once speculators believe that government is committed to doing this, they will rush in - it will happen overnight. But it has yet to be seen,” he said.
Government unconvinced
For now, Procanik called for a “bridge to compliance” that would lift prices and trading volumes. “It could be bonds, it could be government guaranteeing them, but somebody has to create the market. Not only voluntary - it’s just not enough buyers,” he said. Carbon prices for forest credits in the voluntary market currently range from less than $2 to $10 depending on volume, he added.
Indonesian officials, however, aren’t convinced a compliance market for forest carbon credits would meet the needs of private investors. Hadi Daryanto, secretary general at the Ministry of Forestry, said the voluntary market offers a more flexible mechanism for them.
“(Private investment) is suitable for the voluntary carbon market. If they enter the compliance market, they will have to deal with the government. It means the funding will be treated as the country’s income, and there will be audits by the BPK (the Audit Board of the Republic of Indonesia),” he told Thomson Reuters in a recent interview in Jakarta.
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It is a very long shot to expect a compliance market…because I know that some (developed) countries are still in crisis, and it’s hard for them to buy (carbon credits)
Hadi Daryanto, secretary general at the Ministry of Forestry, Indonesia
Daryanto said a compliance market for credits from REDD projects likely remains far off. “It is a very long shot to expect a compliance market…because I know that some (developed) countries are still in crisis, and it’s hard for them to buy (carbon credits),” he explained.
The latest round of UN climate talks in June continued to work on the details of setting up new market-based mechanisms for reducing emissions, including REDD. But progress is slow.
Added value
Meanwhile, some private buyers are actively seeking out offsets from forest and wildlife conservation schemes like Rimba Raya. Hikaru Akamatsu, a Japanese investor who recently visited the reserve, said he is looking for three key benefits: protecting forests and biodiversity, reducing emissions and supporting local communities.
“(REDD) is a new scheme for private investment. Regulation can follow suit,” said Akamatsu, who is president of Co-op Net Federation, a large consumer union covering the retail, insurance and housing businesses in Japan. As the union is only buying offsets and not investing in projects, it is not putting money at risk, he added.
Akamatsu has agreed to buy 10,000 VERs from Rimba Raya annually from 2014 to 2020. Co-op Net Federation previously bought carbon credits from a European company, totaling 50,000 tonnes between 2008 and 2012, but those offered emissions cuts only.
“We’re buying credits from Rimba Raya because of the added value,” Akamatsu told Thomson Reuters Foundation during his trip to Seruyan in Central Kalimantan to see the environmental and social benefits of the Rimba Raya project.
Consultant Toshikazu Otsaka, who also joined the visit, said few Japanese investors are interested in buying carbon credits from other countries such as Indonesia.
As Japan refused to sign up to an extension of the Kyoto Protocol, under which developed countries were required to reduce their emissions by 5 percent from 1990 levels by 2012, it is no longer obliged to offset its emissions by buying credits, said Otsaka.
Japan bought more than 100 million tonnes of offsets using “a very huge amount” of taxpayers’ money, he noted. But the government has no more appetite for this, and has turned its attention to creating a domestic carbon market, he said.
Biding time
According to a May report from Forest Trends’ Ecosystem Marketplace, the voluntary carbon market accounted for greenhouse gas emission reductions of 76 million tonnes of carbon dioxide equivalent (MtCO2e) in 2013, worth $379 million.
Credits from REDD projects doubled transaction volume to 22.6 MtCO2e last year, but the market value increased by only 35 percent to $94 million because offset prices fell from $7.4/tCO2e in 2012 to $4.2/tCO2e in 2013.
Hadi Prasetyo, the head of Indonesia’s recently established REDD+ Agency, said his body is focused on publicly funded projects to reduce emissions by stopping deforestation.
“Private funding works the other way around - they invest and get benefits that are hopefully higher than investing in coal or oil palm,” he said.
He urged private-backed schemes like Rimba Raya to concentrate on generating positive cash flow in their first 30 years by supporting local people to produce non-carbon commodities through sustainable methods, such as rubber, corn, paddy or pineapples.
“While they do that, they will also have to preserve the forest and avoid emissions - then they’ll have many more carbon credits to sell in the following 30 years. By that time, it’s possible the world’s carbon market will be up and running,” Prasetyo said.
