26 27
Based on the data above, around 45 US699.7 million of the planned budget should be allocated for the land-based
mitigation window, primarily to support Indonesia’s efforts in reducing emissions from deforestation and land degradation,
and sustainable land-use planning. Currently, the ICCTF is supporting the implementation of several projects in Indonesia,
such as sustainable management of degraded peatland in ive provinces to mitigate GHG emissions and optimise crop
productivity Thamrin, 2014. These projects will support the achievement of Indonesia’s target for reducing emissions but are
not intended to generate emission reduction units that could be sold on the carbon market.
However, the fact that the ICCTF has, to date, secured less than 1 of its target budget for 2012-2020 raises questions about
its ability to achieve the desired scale and impact. Nevertheless, several ministerial representatives consulted for this study
cited ICCTF as needing support and proposed it as a serious candidate for managing REDD+ interim forest inance.
3.4.2 Joint Crediting Mechanism JCM
The Joint Crediting Mechanism JCM between Indonesia and Japan is a cooperation proposal from Japan to Indonesia and
other developing countries. This mechanism supports emission reduction targets in both countries and strengthens bilateral
investment cooperation Carbon Trade Mechanism Division, 2013. Japan and Indonesia mutually recognised that veriied
reductions or removals from the mitigation projects under the JCM could be used as a part of their own internationally
pledged greenhouse gases mitigation efforts. The two countries
work in close cooperation to facilitate inancial, technological and capacity building support necessary for the implementation
of the JCM JCM, 2013.
The JCM star ts its operation as a non-tradable credit type mechanism and both countries will continue consultation for
transition to a tradable credit type mechanism. Indonesia and Japan agreed that the JCM will be valid until a new international
framework under the United Nations Framework Convention on Climate Change UNFCCC becomes operational JCM, 2013.
The JCM scope of activities will include various sectors, namely energy, construction, transport, mining, waste and agriculture
Carbon, 2013. REDD+ is also within the potential scope of the JCM, and feasibility studies were conducted for over 19
REDD+ related projects in Indonesia. However, no REDD+ projects have been selected under this mechanism due to a lack
of demand for REDD+ credits and an unclear methodology. Furthermore, the JCM emphasises a focus on the creation and
transfer of new technology to tackle climate issues. Therefore, at the time of writing, the JCM does not serve to address the lack
of demand or inance for REDD+ emission reductions. system. Risk is reduced through this portfolio approach, because
if one project fails there are others through which to provide the credits. This risk reduction could also enable a higher price
to be sought for the carbon, which beneits the producers of carbon credits.
The aim is for the performance aggregation modality to result in a win-win-win situation: buyers get security of supply, sellers
receive a higher price and intermediaries get a steady margin. The Indonesian government is proposing this direct purchasing
of forest carbon offsets in part to address the lack of market demand for REDD+ emission reductions that is creating
inancial obstacles to development of new projects.
Agus Sari stated that this modality will only become active once the carbon market is more developed and is unlikely
to be active prior to 20152016. There are also a number of regulatory requirements and operational structures that need
to be in place before Modality 3 could launch.
The establishment of FREDDI is supported by the inance provided in the Norway-Indonesia LoI. Agus Sari projects that
up to US10 billion until 2020 will be required by FREDDI to inance the planned emission reductions from forests and
peatland. Of that, US1 billion will come from Norway, US2 billion is anticipated to come from further public sources and
the remaining US7 billion will come from the private sector.
In the medium term, it is intended that FREDDI will be capitalised by all sectors, including domestic and international, public and
private sector sources. FREDDI is expected to encourage domestic private investment to play a signiicant role.
The subsidiary funds under FREDDI provide an opportunity to establish a inancial collaboration structure that will support
the mobilisation of new funds. The subsidiary funds can be special purpose vehicle companies, fund managers or collective
investment agreements. The REDD+ Managing Agency is responsible for deining the
strategic direction of FREDDI, including outlining the thematic focus of its activities. However, since the REDD+ Managing
Agency was established as a non-departmental government institution, at present it does not have the legal right to manage
the fund. Revision to Presidential Regulation No.802011 is required to provide a legal basis for operational control of
FREDDI by the REDD+ Managing Agency. A key priority is for the REDD+ Managing Agency to work closely with
3.4.3 Fund for REDD+ Indonesia FREDDI
12
As part of Indonesia’s commitments under the Norway- Indonesia Letter of Intent LoI, and in line with the National
REDD+ Strategy, Indonesia is establishing the Fund for REDD+ in Indonesia FREDDI, a REDD+ inance instrument charged
with managing, channelling and mobilising REDD+ funding. The fund will be expected to channel both international and
domestic inancial support, including leveraging private sector investment through carbon trading instruments, commodities
markets, and inancial and capital markets REDD+ Task Force, 2012.
FREDDI will be established as a trust fund, with a ‘fund of funds’ structure, in line with Government Regulation No.102011 on
Procedures for Procurement of Foreign Loans and Grants and Presidential Regulation No.802011 on Trust Funds. A fund of
funds is a multi-level inancing structure where the main trust fund can invest in any of the subsidiary funds.
FREDDI is designed to channel funds through four funding windows: national programs, subnational programs, competitive
call programs, and small grants. With regards to boosting demand for REDD+ emission reductions, the competitive
call programme will promote sustainable forest and land use management that results in emission reductions.
FREDDI is expected to apply three modalities for deploying inance Sari, 2014:
Modality 1: Grants
Ex-ante grants will follow the traditional grant model, with funds provided prior to the implementation of activities. However, ex-
post payments are expected to constitute the majority of grant inance. These will be performance-based grant payments,
with results measured in various ways such as emission reductions delivered and inance will low once the results
have been achieved. Modality 2: Investment
Investments will be made in activities that will lead to the generation of emission reductions. Investment inance will be
provided in a variety of forms, such as loans and equity. Modality 3: Performance aggregation
Under Modality 3, carbon credits from a range of REDD+ projects will be aggregated into a large-scale portfolio under
FREDDI, with the results veriied through the national MRV
NO. ITEM
2012 2013
2014 2015
2016-2020 TOTAL
US million 1
Operation of ICCTF Secretariat 7.5
14.9 19.1
17.3 49.3
108.1 2
Land-based mitigation window 19.5
81.9 118.5
135.7 344.1
699.7 3
Energy window 46.4
79.8 92.6
75.3 163.4
457.5 4
Adaptation and resilience window 41
51.9 61.7
35.9 196.8
387.3
Total budget 114.4
228.5 291.9
264.2 753.6
1652.6 Table 5: ICCTF Budget Plan 2012 – 2020
Source: BAPPENAS, 2011 2.
12 The information provided in this section is based on the Executive Summary of Fund for REDD+ Indonesia FREDDI, produced by the President’s Delivery Unit for Development Monitoring and Oversight UKP4.
28 29
other ministries, but in particular the Ministry of Finance, to progress the establishment of FREDDI and the wider enabling
environment for it to operate, beyond the current focus on grants under Modality 1.
In practice there are a number of outstanding enabling requirements that must be in place before Modalities 2 and
3 could be launched. Mobilisation and deployment of funding through investment or performance-based payments will be
implemented when the required infrastructure needed, such
as the legal foundations, operational structures and capacity, and MRV system, are established.
The implementation of REDD+ in Indonesia, including the disbursement of the funds discussed above, will be conducted
in several phases as shown in the Figure 2 below. At the time of writing Indonesia is in transition from Phase 2B.2 to Phase 2B.3.
Indonesia is institutionally and operationally ready to enter into REDD+ phase 3, which will mean full REDD+ implementation
and the beginning of payments for performance
13
.
We intend to fulill part of our domestic
targets through purchasing of
emission-reduction performances from
projects, because that not only helps
us achieve our goals, but catalyses the
domestic market.
Agus Sari
in Zwick, 2014
“
”
13 Heru Prasetyo Head of REDD+ Managing Agency Statement in the REDD+ Stakeholder Meeting in Jakarta, 23 April 2014.
Figure 2: REDD+ Phases in Indonesia
Source: Prasetyo H., 2014 1 BP REDD has identiied 5 pre-requisites and 10 imperatives for all 11 provinces and subnational governments that will
enable these to access REDD+ inance from the central government.
• REDD+ Agency
• Extension Moratorium
• National and Subnational
REDD+ Strategy •
Digital Mapping of Forest, Peatland
and Concessions •
License Review •
Large-Scale Programmes •
Long-term •
Transformational •
Expansion Replications •
Initial Payment for Performance
• Preparation for Phase 3
• Small grants
• Quick, impacting, sustainable Programmes
• Preparation for Phase 2
• Development of REDD+ Agency
• Time sensitive Portfolio
• 5 Pre-requisites
• 10 Imperatives
• Payment for Performance
• REDD+ Full implementation
PHASE 1 | 30
2013 2014
2015 2016
2017 PHASE 3
PHASE 2A | 10 PHASE 2B.1
PHASE 2B.2 PHASE 2B.3
PHASE 2B.4
30 31
3.5. Emission reductions
Stakeholders in Indonesia have different opinions regarding carbon markets and offsetting. Some believe that Indonesia
should focus on efforts to fulil the 26 domestic commitment before selling carbon credits on the carbon market. However,
some stakeholders believe Indonesia could sell carbon credits on the carbon market, if the price is suficient, prior to fulilling
their emission reduction targets. Indonesian stakeholders are aware that carbon markets exist but they believe both volume
and price are not currently signiicant. A policy brief issued by the Center of Standardization and
Environment of the Ministry of Forestry stated that REDD+ is not synonymous with carbon trading. Up to now, the full
implementation phase is still under discussion, including the extent to which market and non-market based mechanisms
will be utilised Ministry of Forestry, 2012.
In a submission to the UNFCCC in 2013 regarding the ‘New Market Mechanism’ NMM under a post-Kyoto agreement,
Indonesia conirmed its support for the NMM in principle. It was stated that it should operate under the guidance and
authority of the Conference of the Parties COP, comprising a market-based scheme of emission reductions initiatives,
governed by a transparent and accountable entity with robust and internationally agreed standard and transaction logs.
Indonesia sees the difference between the NMM and existing market-based mechanisms as being its openness to parties’
involvement, regardless of their category under the Kyoto Protocol. Furthermore, it should be able to accommodate more
types of projects and activities that reduce greenhouse gases, in particular very small-scale projects, with limited units of emission
reduction. It should have simple approaches with a streamlined methodology, but with more rigid standards.
14
In July 2014, Indonesia’s Ministry of Forestry issued regulation No. P. 50Menhut-II2014 on the trading of Indonesia’s Certiied
Forest Emission Reductions. The regulation stipulates that REDD+ project developers in Indonesia are permitted to sell
emission reduction units generated from their projects using Emission Reduction Purchase Agreements. The regulation also
states that the in-country purchase of Indonesia’s Certiied Forest Emission Reduction will be counted as Indonesia’s
emission reduction, and the purchase of Indonesia’s Certiied Forest Emission Reductions from outside of the country will not
be counted as the fulilment of an emission reduction from the buyer’s country and should also not be used for transfer pricing.
According to Agus Sari, Indonesia intends to fulil part of its domestic targets through the purchase of emission reductions
from projects as this not only helps Indonesia achieve its goals, but also catalyses the domestic market. The REDD+ Managing
Agency can act as an intermediary between domestic and international carbon markets Zwick, 2014. This is a key focus
of Modality 3 of FREDDI, or the performance aggregator approach, as described in Section 3.4.3.
3.6. Analysis: Interim forest inance in the context of current REDD+ inancing strategies in Indonesia
It is clear that there is currently a signiicant gap between
inance available and inance needed to achieve Indonesia’s
emission reductions commitments from forests and peatland. Existing committed inance is primarily focused on readiness.
Readiness work is essential and must be prioritised to create the appropriate enabling conditions for REDD+ and build
the necessary national and subnational capacity to implement REDD+. However, failure to address the demand gap is already
damaging conidence in REDD+ and storing up signiicant challenges for when the readiness work has been completed.
In addition, the majority of committed international inance is due to end between 2015 and 2017, indicating an even
greater shortfall in performance-based inance for REDD+ implementation between 2015 and 2020, and beyond.
In light of the points above, we can conclude that current inancing strategies do not fully meet the needs for REDD+
inancing in Indonesia. Indonesia expects to achieve REDD+ emission reductions in a variety of ways and there remains
some debate about the use of market based approaches, and
the timeframe for their adoption. However, there is widespread acknowledgement of the need to attract additional public and
private sector inance, including from carbon markets.
According to the National Council of Climate Change, Indonesia supports the utilisation of markets to effectively incentivise
mitigation actions in harmony with national circumstances. However, there needs to be enough demand and a suficient
carbon price to make the carbon market effective in incentivising mitigation actions. Domestic carbon markets may
provide a catalyst, but without links to other markets and strong international demand, it will be hard for individual economies
to develop a strong domestic market Carbon Trade Mechanism Division, 2013. Due to uncertainties in the UNFCCC-led
market mechanisms, bilateral and regional market mechanisms are becoming more important in scaling up mitigation actions
in developing countries, including Indonesia Carbon Trade Mechanism Division, 2013.
The inancing gap identiied above, coupled with recognition of the role of market-based approaches and private sector
inance in addressing this gap in Indonesia, strongly support the rationale for interim forest inance
as outlined in Section 1. The potential mechanisms that could be used to deploy and manage
interim forest inance in the Indonesian context are explored in detail in Section 5.
There are outstanding regulatory reforms required before a domestic market-based system can operate, as is planned
under FREDDI. These would need to be addressed in a timely fashion, to avoid acting as a barrier to rapid utilisation of interim
forest inance commitments. The ability to do this will depend on the political economy of REDD+ in Indonesia and the
extent to which coordination between the REDD+ Managing Agency and relevant ministries can be enhanced. Our research
also highlights the urgent need for a systematic approach to monitoring REDD+ inance, to ensure that needs are better
understood and impact of existing resources is maximised.
14 From submissions by Indonesia on the new market-based mechanism to the UNFCCC, available from http:unfccc.intcooperation_supportmarket_and_non-market_mechanismsitems7710.php
Source: Sari A., 2014 igure modiied to incorporate Phase 2A, Phase 2B and Phase 3 disbursement amounts
Institutional building Implementation of Design
• Large projects and programmes
• Initial payment for
performance projects •
Longer term •
Transformational •
ExpansionReplications •
Foundation to phase three Institutional building
Implementation of Design •
REDD+ Agency •
Extended Moratorium •
National and subnational REDD+ Strategy
• Digital map of all forests,
and peatlands and concessions
• License Review
Transitioning Design to REDD+ Agency Testing Design elements
• Small grants
• Quick, impacting, sustainable pilots
• Preparatory
• Foundation to phase two
operational
PHASE 1 funding 30 Mio USD
UNDP Interim Mechanism
FREDDI 1.0 FREDDI 2.0
PHASE 3 funding 800 Mio USD
Payment for Performance
Interim funding 10
Mio USD PHASE 2a
PHASE 2b 160 Mio USD
Figure 2 continued: Funding Strategy: A Phased Approach
32 33
Section 4: Stimulating private sector investment in REDD+ in Indonesia
Many of the stakeholders consulted for this case study, including representatives from ministries and government agencies,
acknowledge the importance of the private sector in addressing the inancing gap for REDD+ in Indonesia. The private sector
has the potential to play a variety of roles in the production of veriied emission reductions from REDD+
15
, namely as a project developer, investor in these activities, or broker or end-buyer of
REDD+ emission reductions. It is fair to say that to date the private sector has not been
suficiently involved in the formulation of policy and the establishment of the necessary infrastructure required for
REDD+ implementation in Indonesia. Indonesia is not alone in
this regard, and the importance of increasing engagement with the private sector in the context of REDD+ is highlighted on
a global level by a recent UN-REDD policy brief Henderson et al, 2014.
In this section we refer to the responses gathered from interviews undertaken with a number of private sector actors
active in REDD+ to assess what the Indonesian government is doing to stimulate private sector investment, explore current
barriers to market growth and understand how the proposed options of the Interim Forest Finance IFF project could
stimulate further private sector investment in REDD+. The statuses of the projects listed in the table above vary; some
projects are still at the preparation stage while some have successfully generated emission reductions and sold carbon
credits on the international voluntary carbon market. There is a lack of up-to-date information on the current status of
individual projects, but one landmark of note is the successful sale of carbon credits by both PT Rimba Raya Conservation and
by PT Restorasi Habitat Orangutan Indonesia. Private sector REDD+ project developers have adopted a range of tenure
frameworks in the design of their projects, including ecosystem
restoration concession ERC, village forest, community forest or collaboration with existing forest concessionaires.
Regardless of project design or status, private sector project developers are facing similar challenges in developing REDD+
projects in Indonesia. Some of the key challenges highlighted by the private sector stakeholders interviewed include poor
governance, unclear land tenure, policypolitical uncertainty and
the lack of demand for REDD+ emission reductions. In this report we focus on why a lack of demand for REDD+ emission
reductions is a challenge for private sector actors in Indonesia, and the implications of current policy uncer tainty for the
business case for REDD+ investors. One of the widespread views expressed by the private sector
actors interviewed was that lack of demand for REDD+ emission reductions is a signiicant challenge for REDD+
projects in Indonesia. Without signiicant demand, there will be limited access to investment and no incentive for REDD+
project developers to undertake further emission reducing activities and to do so at the scale needed. REDD+ is also
increasingly perceived as becoming more complex and expensive and the lack of demand further increases the risk
proile of REDD+ project investments.
The fact that REDD+ is not competitive with other land-based activities due to the short-term inancial horizons of most
investors makes it more dificult to attract signiicant investment. The lack of demand also discourages the government from
establishing iscal incentives, which are typically important for an emerging sector such as REDD+.
No PROJECT TITLE
LOCATION PRIVATE SECTOR ACTOR INVOLVED
1 Giam Siak Kecil
Riau Province Sinar Mas
2 Katingan Peatland Restoration and Conservation
Project Central Kalimantan
PT. Rimba Makmur Utama 3
The Rimba Raya Biodiversity Reserve Central Kalimantan
PT. Rimba Raya Conservation 4
Global Green Project East Kalimantan
Global Green 5
Sustainable Forest for Orangutan East Kalimantan
PT. Restorasi Habitat Orangutan Indonesia 6
Kampar Ring – a sustainable development model based on responsible peatland management
Riau Province APRIL
7 Carbon sequestration and carbon stock in Merang
South Sumatra Province Agrienergy Pte. Ltd.
Table 6. Examples of Demonstration Activities with Private Sector Involvement in Indonesia
Source: Koran Tempo, 2014
15 Note: The authors acknowledge that private sector actors involved in the supply chains of forest-risk commodities are another highly relevant private sector group in the context of REDD+. However, given the focus of this report on supply and demand for purchase of REDD+ emission
reductions, the role of this group is not included within the current scope of this research.
4.1 Private sector players in Indonesia relevant to REDD+
Based on data from the Ministry of Forestry, between 2010 and 2013 there were 70 registered REDD+ demonstration
activities throughout Indonesia, and approximately 50 of those demonstration activities were being developed by,
or in collaboration with, private sector actors. In July 2014, a workshop organised by the REDD+ Managing Agency to
get up-to-date information regarding the status of Indonesia’s REDD+ demonstration activities found that of the 70 registered,
only 30 were still active Koran Tempo, 2014. Table 6 shows a selection of private sector actors involved in
REDD+ activities in Indonesia.
34 35
4.2 Indonesian government objectives for growth in the REDD+ market and stimulating private sector
investment in REDD+
Indonesia has some experience in utilising carbon markets, such as the Clean Development Mechanism CDM, to inance
climate change mitigation actions, but very limited experience to date using market-based mechanisms in the REDD+ sector.
The Government of Indonesia has acknowledged the importance of developing and utilising market-based mechanisms to inance
REDD+ activities and intends to incentivise increased private sector involvement in those mechanisms Hindarto, 2012.
Indonesia’s commitment to market-based mechanisms is well articulated in the National REDD+ Strategy which also outlines
the need for private sector involvement; both in development of Indonesia’s REDD+ mechanism and in investment to inance
REDD+ activities in Indonesia. The National REDD+ Strategy stipulates that the Fund for REDD+ in Indonesia FREDDI is to
mobilise funds from public and private sector sources through systematic, programmed and professional fundraising. Funding
may also be sought through various carbon trading instruments, commodities markets, and through inancial and capital markets.
Fund mobilisation planning in support of REDD+ may also be done through the expansion of access to the carbon market
and other funding sources REDD+ Task Force, 2012.
Government oficials consulted for this study conirmed that development of market-based mechanisms for REDD+ is
important for Indonesia. However, the common opinion was that the price and volume in the existing carbon markets
is currently not suficient. Therefore they did not see an urgent need to establish a REDD+ market-based approach
in Indonesia or signiicant potential for Indonesia to sell its
emission reduction units into existing voluntary carbon markets. They highlighted the lack of compliance markets as a concern,
while expressing doubt that one will be established by 2020. In the absence of signiicant carbon markets for REDD+, the
Ministry of Forestry in July 2014 issued a new regulation on the trading of Indonesian Certiied Forest Emission Reductions
that states that the Ministry of Forestry will facilitate project developers and potential buyers to establish the Indonesia
Certiied Emission Reduction Market. REDD+, and the slow progress of the international negotiation
process, was hindering market growth. One interviewee noted that while increased private sector investment is required to
scale up REDD+, inance will not low at the scale needed without clear indications that there will be an internationally-
agreed mechanism for REDD+. In the meantime, public sector
commitments would be needed to stimulate the REDD+ market. Perceived risks associated with market growth: It was felt that
while demand from the voluntary market is not at a scale that can resolve global deforestation, the market has the potential to
grow. Additionally, due to its business-to-business nature, market growth would not be constrained by stalled international
processes. However, one stakeholder noted that growth could potentially be associated with a perception of increased
reputational risk – as projects scale up and are required to shift from smaller-scale project partners such as smallholders or
individual communities to operate at a larger scale.
Lack of enabling regulation: Several of the stakeholders interviewed stated that the current regulatory environment in
Indonesia is not conducive to further private sector investment and market growth. It was stated by one stakeholder that
the lack of clarity over vertical beneit sharing was a “massive barrier” for the private sector. Other regulatory barriers include
the lack of regulation regarding carbon rights and the lack of a legal basis for a domestic carbon market to operate. The newly
issued Regulation No P.50Menhut-II2014 could provide the legal basis required for the sale of REDD+ certiied emission
reductions. However, at present no legal framework exists for beneit sharing mechanisms, making it dificult for private sector
REDD+ actors to deine their beneit sharing structures. Other barriers to market growth:
Stakeholders also speciied the following barriers to market growth: the lack of harmonised
technical requirements for projects or processes; the terms of the Norway-Indonesia Letter of Intent LoI being unclear and
failing to provide a clear signal regarding participation of the private sector; and other methodological issues.
4.3 Barriers to market growth
A number of potential barriers to market growth were raised by private sector REDD+ stakeholders during the interview
process for the IFF project.
Lack of demand for REDD+ emission reductions: As noted
above, a widespread opinion amongst the stakeholders interviewed was that lack of existing demand for REDD+ and
uncertainty over potential future demand are both barriers to REDD+ market growth. One private sector stakeholder
noted that lack of demand reduces project security moving forward and negatively impacts any potential investment into a
REDD+ project. The same stakeholder also noted that, in the
context of existing demand for REDD+, uncertainty over both the eligibility requirements needed to access that inance and
over compatibility of current standards and methodologies with existing demand mechanisms could be considered barriers.
One project developer stressed that the current lack of demand for REDD+ is a barrier to the potential low of beneits to the
private sector, suggesting that REDD+ does not provide a viable business case at present. They added that even if donors aren’t
ready to fund transactions of emission reductions immediately, they should at least provide a market signal by conirming that
they will pay in the future. Another project developer noted that few private sector
actors would be willing to commit capital to REDD+ at this point given its insecurity. Unfortunately, carbon has a very
inconsistent past, and a signiicant number of actors have been negatively impacted by that. Several stakeholders felt that the
poor condition of the carbon market and the associated lack of demand meant that there was no viable business case for
REDD+ at present. As such, REDD+ is struggling to compete
with other forest and land-based commodities, thus limiting its potential to scale up.
International Policy: Fundamentally, addressing the lack of
large-scale demand for REDD+ is largely beyond the control of Indonesia since it relates to the UNFCCC negotiations
and the willingness of developed countries to make stronger commitments to reduce emissions. Several stakeholders felt that
the lack of clear signals and commitments from governments to
4.4 Possible solutions, links and rationale for interim forest inance
The private sector actors interviewed suggested a number of ways in which interim forest inance could support Indonesia’s
REDD+ market growth and stimulate private sector investment in REDD+, while also noting hurdles that the IFF project’s
proposed options would need to overcome in order to be implemented effectively.
One widespread response provided validation of one of the IFF project’s key assumptions - that current lack of demand for
REDD+ emission reductions could potentially be addressed by clear signals and commitments from donor country
governments to REDD+. Another was that the advance
market commitments AMCs that are proposed by the IFF project
16
would be effective in stimulating greater private sector investment in REDD+ in Indonesia. One stakeholder even said
that such tools would be “vital” during the interim period. The private sector stakeholders felt that the provision of AMCs
would allow project developers to undertake REDD+ activities with increased certainty over access to inance and provide
suficient security to move forward. AMCs, it was said, would provide investors with a degree of security regarding inancial
return, thus reducing the risk of initial investment. Effects such as these would provide signiicant beneits to REDD+ activities
on the ground and help to develop the market for REDD+, catalysing further investment and instigation of REDD+ activities
at a much greater scale.
There were, however, reservations from respondents that numerous external factors would need to be considered before
the AMCs could be effective.
There was already positive experience with the use of emission reduction purchase agreements ERPAs or ‘off-take
agreements’, on a business-to-business basis, amongst the stakeholders consulted. Regarding the use of ERPAs at scale, one
respondent noted that the source of funding would need to be absolutely secure if they were to “provide developers adequate
security to move forward.”
16 Advance market commitments proposed by the IFF project are: Emission Reduction Purchase Agreements ERPAs, carbon price loors and options contracts.
36 37
One stakeholder stated that carbon price loors were “a good idea,” while another added that carbon price loors
“could certainly provide some security.” Concerns were raised, however, that in the absence of a market, price loors might
easily become simply the price as there would be no reason for the purchase price to move higher unless there was a shortage
in supply, which was considered unlikely at this time.
It was suggested by another respondent that carbon price loors will only provide security relative to traditional market
forces - considering there will not be an ininite supply of capital to substantiate a price loor if the market is over-supplied. They
added that a price loor is a temporary solution to establish a market foundation that will eventually need to support itself.
Options contracts put options, it was said by one stakeholder, would require more certainty than currently exists in order to
function effectively. Few private sector actors “would be willing to wager on something with so much insecurity.”
5.1 The Interim Forest Finance project’s proposed strategic intervention
Currently, there is an order of magnitude difference between the demand for global REDD+ emission reductions between
2015 and 2020, and the anticipated supply, if tropical forest countries are to be able to meet emissions reduction targets.
In Indonesia, as highlighted in Section 3, conservative estimates from Indonesia’s REDD+ Managing Agency indicate that
while US800 million of performance-based inance has been pledged for the Fund for REDD+ in Indonesia FREDDI,
the total needed is expected to be up to US10 billion as a conservative estimate.
Capital must be raised to create the incentives needed to attract private sector inance and catalyse further action by forest
country governments. Otherwise, the successful operation and longevity of the REDD+ mechanism is under threat.
This section of the report evaluates Indonesian perspectives regarding the current lack of demand for REDD+ emission
reductions and the applicability of the potential solutions highlighted in the Interim Forest Finance IFF project scoping
study to the Indonesian context, with a particular focus on feedback from government stakeholders.
5.2 Generation of capital
The Fast Start Finance FSF period has been central to the successful evolution of REDD+. Eight donor country
governments
17
pledged between US3-4 billion in this period. Most funding has, rightly, been directed towards REDD+
readiness and almost US3 billion has been disbursed to developing countries. In addition, partnerships at the scale of
billions of dollars have been established for the post-2012 period.
Donor governments have started to move past REDD+ readiness. Some money is starting to low towards results-based
payments for emission reductions from forest and land-use activities generating REDD+ emission reductions. However, the
current inancial commitments by donor country governments are not providing large enough incentives for tropical forest
countries to continue to signiicantly reduce emissions from deforestation and forest degradation and make the necessary
adjustments to transition to low carbon development pathways.
During the United Nations Framework Convention on Climate Change Eighteenth Conference of the Parties COP18 in 2013,
Germany, Norway, Australia, the UK and USA made a joint statement emphasising the signiicant potential of REDD+ in
combating climate change. The ive countries agreed to ensure more eficient implementation of REDD+, including a speciic
focus on exploring options to scale up demand for veriied emission reductions from REDD+ up to 2020.
18
Providing capital for a strategic intervention that could be deployed in
ways that would stimulate transactions of REDD+ emission reductions at a scale similar to the pledges for the FSF period,
as proposed by the IFF project, would be one means of achieving this goal.
Another potential source of capital for REDD+ emission reductions is the Green Climate Fund GCF. The GCF is a
fund within the framework of the UNFCCC that will act as a mechanism to transfer money from the developed to the
developing world, to support adaptation and mitigation efforts
to counter climate change. It is intended to be the centrepiece of global efforts to raise climate inance of US100 billion
a year by 2020. Indonesia became the second developing country, after South
Korea, to make a commitment to the GCF when in early 2014 Indonesia’s Deputy Minister of Finance, Bambang Brodjonegoro,
announced a commitment of US250,000 that would be used as seed inance Yeo, 2014.
At the GCF’s 7th meeting of the Board in Songdo, South Korea in May 2014, decisions were made regarding the essential
requirements for the Fund to receive, manage and disburse inancial resources as well as reaching an agreement on the
commencement of the resource mobilisation process. The irst major commitment made to the capitalisation of the fund
4.5 Analysis: How could interim forest inance support growth objectives, and address potential
market barriers for REDD+ in Indonesia?
Unclear market signals and a lack of international consensus are currently disincentives to private sector investment in
REDD+ . They also deter the Indonesian government from
prioritising the establishment of the necessary regulatory environment for a functioning market-based approach to REDD+.
Findings from the consultation with the private sector stakeholders strongly support the assertion that interim
forest inance would both support the growth objectives, and address the potential market barriers, for REDD+ in
Indonesia. The stakeholders consulted agreed that although the IFF project incentive options AMCs proposed are not
the panacea to stimulate the halving of deforestation by 2020, they could certainly provide an important stimulus to REDD+
on many levels, and at a critical time. Project developers would be provided security to undertake further REDD+ activities,
investors would be provided a greater degree of certainty of a return on their investment, and the government would be
incentivised to intensify the implementation of an enabling environment and regulatory reform that would facilitate
a functioning REDD+ market-based mechanism in Indonesia.
Section 5:
Scaling up inancing for REDD+ in Indonesia with interim forest inance
17 The eight donor countries are: Australia, Germany, Japan, Norway, Spain, Switzerland, the United Kingdom, and the United States of America. 18 The full statement is available from https:www.gov.ukgovernmentuploadssystemuploadsattachment_dataile700947126-joint-statement-tackling-deforestation.pdf.
38 39
was by Germany when, in July 2014, a pledge of US1 billion €750 million was made. The GCF’s Executive Director Hela
Cheikhrouhou announced that by the end of 2014 the GCF is seeking to raise as much as US15 billion, which would be used
to inance activities prior to 2020 Rowling, 2014. REDD+ has been identiied as a potential area for funding
through the GCF and discussions are on-going as to how REDD+ might it into the ‘Results Management Framework’
window. While ‘REDD+ Implementation’ may be an area of focus within the land use and forests sector a number of
decisions need to be inalised prior to inance lowing Leonard, 2014.
Despite positive signals from the GCF and a number of donor country governments, most of the stakeholders interviewed for
this study in Indonesia were pessimistic about donor countries making pledges of substantial interim forest inance, particularly
into large multilateral funds. There was more optimism about the potential for signiicant support through bilateral
relationships. Various reasons are cited for this perspective, including the fact
that most donor countries are in the process of recovering from the inancial crisis. In some cases, changes in the political
economy of countries, such as Australia, have resulted in a shift towards more conservative policies and reduced support for
climate change mitigation.
Moreover, the complexity and expense of REDD+ has become clearer over time, requiring a range of challenging issues to be
addressed. There is a perception amongst some stakeholders that developed countries would be more likely to invest
in sectors with clearer methodologies and lower risk, and therefore also lower costs, such as energy and technology.
Despite some pessimistic opinions regarding the commitment of developed countries, all stakeholders consulted acknowledge
that Indonesia needs international support to achieve emission reductions above the 26 domestic target. Furthermore, they
also stated that the international and domestic public funding is not enough to inance the emission reduction efforts either
domestically or with international support, therefore it is important to increase the involvement and investment of the
private sector.
5.3 Providing incentives, inance and assistance
A key aim of the strategic intervention proposed by the IFF project is to improve the risk-return proile of investment in
forest and land-use activities with emission reduction potential, up to a point where they are competitive with other alternative
land use options over longer time horizons. To achieve this, it is essential that risk associated with the lack of demand for
REDD+ emission reductions is addressed.
This can be achieved by improving the incentives to invest in activities that produce REDD+ emission reductions, including
through the use of emission reduction purchase agreements ERPAs, creating options contracts or setting price loors.
By doing so, the intervention would be directly purchasing, or incentivising the purchase of, veriied REDD+ emission
reductions – guaranteeing the future revenue stream from successful implementation of REDD+ activities. This would
lower a key barrier for REDD+ projects to raise upfront development capital.
The strategic intervention could also offer inance e.g. grants, equity or concessional loans for the development of relevant
programmes and projects, to support the need for a balance between the increased demand of emission reductions and the
investment in activities that will generate emission reductions i.e. the supply. Risk mitigation instruments, such as commercial
and political risk insurance, can also be used in parallel, as well as technical assistance and advisory services. The summary of the
proposed options for deployment of capital under the strategic intervention, and their relevance for Indonesia, are presented in
Table 7. Most of the stakeholders interviewed for this study stated that these proposed options for deployment of capital are
appropriate to the Indonesian context. The stakeholders emphasised that a blended approach would be required – no one deployment option should be implemented independently - but that the appropriate options will depend on the
stage of development and type of REDD+ activity targeted.
ANALYSIS OF OPTIONS FOR DEPLOYING INTERIM FOREST FINANCE TO CREATE INCENTIVES FOR REDD+
Option Proposed Description of Option
Proposed options in Indonesian context
Emission reduction purchase agreements
ERPAs An ERPA is a type of contract where the buyer
agrees to pay for veriied emission reductions from the seller a more general term often used
is an “off-take agreement”. The price andor volume of emission reductions is normally ixed
at the date of the contract signing. ERPAs or ‘off-take agreements’ have been used by Indonesian
REDD+ project developers and have been proven to attract further investment into REDD+ projects. There is
signiicant potential to scale up the use of ERPAs and purchase commitments have been identiied as a future performance-
based mechanism by BP REDD+. Current constraints include that ERPAs are not considered suficiently secure to be used as
collateral for a loan, as REDD+ emission reductions are not yet recognised as an asset class in Indonesia. Regulation No. P50
Menhut-II2014 provides the legal basis for the trade of emission reductions achieved in Indonesia in the form of ERPAs.
Emission reduction put options
A put option would give investors or forest countries the right but not the obligation to
sell a speciied volume of veriied emission reductions at a certain price known as the
strike price at a certain date in the future. There is generally a fee or premium associated with
these instruments, but this could be waived. Put options have yet to be applied in the REDD+ sector in
Indonesia. However Indonesia has applied put options for various commodities, including forestry commodities and could, in
theory, apply them in the context of REDD+. As stipulated under Regulation No.P.50Menhut-II2014, transactions of emission
reductions. from REDD+ will be monitored by the Commodities Futures Trading Agency, presenting an opportunity for REDD+
emission reductions. to be included in the commodity exchange.
Price loor A price loor is a government or group-imposed
price control or limit on the minimum price that can be charged for a product, in this case an
emission reduction. Price loors also have yet to be applied in the context of REDD+
in Indonesia. They have been used for other products in Indonesia and theoretically could be applied to REDD+. There exists strong
appetite amongst private sector REDD+ actors to see price loors implemented.
Table 7. Proposed options for deployment of capital under the strategic intervention
40
FINANCE AND RISK MANAGEMENT
Grants Early stage grant funding is commonly used by
the public sector for strategic interventions. Grants are often required in situations where
activities do not yet generate returns for private investors. They are often used to create
the ‘enabling conditions’ – technical capacity, technology, systems and processes, etc. – that
are ultimately needed to attract private sector capital.
Grant inance is important to cover REDD+ start-up costs and further grant inance, in traditional ex-ante or in performance-
based form, would be welcomed in Indonesia. Despite its importance, however, grant inance does not directly address the
lack of demand for REDD+ emission reductions and is therefore not a priority strategy for boosting interim inance and demand
for REDD+.
Concessional loans Loans can be extended to sectors which are
important to scaling up demand for REDD+ emission reductions, but have little access to the
formal inancial system. These loans would likely have concessional interest rates, be available for
longer time horizons and have greater lexibility on the terms of repayment.
The majority of climate inance received by Indonesia has been in the form of loans, though the majority has been channeled
to non-forestry sectors, such as energy. One of the challenges regarding loans for REDD+ is that it is an emerging sector that
is considered high risk, and forest carbon has not yet been recognised by banks as an asset class. Consequently, it is not easy
for REDD+ project developers to access loans. Furthermore, a lack of capacity within inancial institutions in assessing REDD+
loan proposals creates a further barrier to project developers successfully accessing loans.
Loan guarantees Loan guarantees ensure that a percentage of
loan and interest payments will be repaid if the borrower e.g. project developers defaults.
This either allows inancial institutions to extend credit to borrowers e.g. project developers
that they would otherwise not lend to, or to offer a lower rate of interest. There is typically a
charge associated for this product but this can often be set at a concessional rate.
Loan guarantees could be considered in Indonesia. A loan guarantee has been applied by an Indonesian commercial bank
in collaboration with USAID with positive results. The guarantee resulted in the increased provision of loans, while the inancial
institution was able to expand loans to sectors previously not provided for USAID, 2009. Furthermore, agreements such
as the USAID risk-sharing loan guarantee to the Althelia Fund USAID, 2014, announced in May 2014, are likely to attract
signiicant interest.
Commercial and political risk
insurance Commercial risk insurance can be used to
protect investors against risks which affect the cash low of a REDD+ programme or project,
such as inancial losses arising from forest ires, diseases or droughts. Political insurance would
cover inancial losses due to political decisions, such as regulatory andor policy changes. There
is typically a fee charged for insurance, but this can be waived or set at a concessional rate.
Commercial and political risk insurance has been used widely in the business sector in Indonesia, and is a possibility for adoption
in the context of REDD+. One example is Indonesia Eximbank, an independent inancial institution that also operates as an
extension of the Government of Indonesia. Indonesia Eximbank is expected to help provide funding in markets not served by
commercial banks or inancial institutions in order to ill the market gap. Indonesia Eximbank also provides insurance against
the risk of export failure, the risk of failure to pay, the investment made by Indonesian companies abroad, andor political risk in a
country’s export destination Indonesia Eximbank.
ADVICE AND ASSISTANCE
Advisory and technical assistance
services Given that many forest and land-use projects
with emission reduction potential have unproven business models and uncertain revenue streams,
the incentives or inance provided could be accompanied by technical assistance or advisory
services. There is evidence that advisory and technical assistance would
lower barriers for project developers to access REDD+ inance in Indonesia. This includes improving the capacity of project
developers to produce viable business plans or loan applications; and improving the capacity of inancial institutions in assessing
loan applications related to REDD+.
Table 7. Cont.
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5.3.1 Grants
