Creation of Incentives Emission reduction purchase agreements ERPAs

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5.3.1 Grants

REDD+ projects require signiicant funding, particularly in the early stages of project development. All stakeholders consulted agreed that grants are impor tant to suppor t star t-up costs and could be ex-ante and ex-post results-based Sari, 2014. As an emerging market country, Indonesia is likely to have more upfront grant inance, but is ready to have more projects supported by results-based grants Sitorus, 2014. Indonesia has extensive experience in managing grant funding for climate change activities, particularly through the Indonesia Climate Change Trust Fund ICCTF. 19 Although all stakeholders were very receptive to the concept of grant inance, it does not directly address the issue of lack of demand for REDD+ emission reductions generated by REDD+ activities. Interim forest inance needs to focus more on inance instruments that will help leverage additional investment in the REDD+ activities and stimulate increased transactions of emission reductions from REDD+.

5.3.2 Loans

Indonesia also has extensive experience in managing loans. As explained in Section 3, most of the funding received by Indonesia for climate change activities to date is in the form of loans. The government has acknowledged that acquiring foreign loans is easier if the money is to be put toward environmental policies. According to the Director of Forestry and Water Resource Conservation of National Planning Agency, Basah Hernowo, loans for climate change issues have cheaper interest rates compared to other foreign loans Siry, 2009. However, based on the experience on the ground, the Ministry of Forestry will not receive or provide any loans for readiness activity within the REDD+ framework Nurfatriani, 2014. 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 Sari, 2014. In this context there is a strong case for public sector inance to be used to intervene with the provision of loans that could both accelerate the development of REDD+ activities, while also building a track record of investments in REDD+ that could increase banks’ conidence in the sector. This suppor ts the IFF project proposition that advisory and technical assistance is needed by project developers to access REDD+ inance. It is important to improve the capacity of project developers to produce viable business plans or loan applications and other technical documentation that are needed. Equally, it is important to improve the capacity of inancial institutions in assessing loan applications related to REDD+. For example, Bank Indonesia, the country’s central bank, provides funding for the development of green products, but few good loan applications have been received so far 20 . Bank Indonesia has also issued regulation on ‘green banking’ that will introduce sustainability criteria into the assessment of loan applications. The basic principle of green banking is to strengthen the bank’s risk management capabilities, particularly related to the environment, and to encourage banks to increase their eco-friendly inancing portfolio Bank, 2013. This initiative is expected to send a positive signal to banks and increase their interest and participation in the climate inance industry Tanzler and Maulida, 2013, including in REDD+. The scheme is voluntary, particularly for small and medium enterprises, and banks need assistance in deining sustainability criteria and indicators for small businesses that enable them to properly assess loan applications, including for REDD+ projects. 21 Following this regulation, some national banks have started putting money into low carbon projects, such as geothermal power plants inanced by Bank Negara Indonesia, some Clean Development Mechanism CDM projects inanced by Bank Mandiri, and some renewable energy projects inanced by Bank Bukopin. These banks are supported by international inancial institutions through a bilateral loan cooperation; for example Bank Mandiri and Bank Bukopin are supported by the Agence Francaise de Development AFD. However, at the time of writing, there is no information on any REDD+ projects inanced by a national bank.

5.3.3 Creation of Incentives

The main purpose of the IFF project’s strategic intervention is to stimulate demand for REDD+ emission reductions. It proposes the use of donor country funds to create an advance market commitment AMC for forest- and land- based emission reductions, primarily by offering greater certainty over the price andor volume of these reductions. This would scale up demand for REDD+ emission reductions from forest and land-use activities, and create investment-grade conditions and a track record for REDD+ activities. Importantly, it would also stimulate additional private sector investment in REDD+. Potential tools to create incentives include ERPAs, emission reduction put options, and price loors. Overall it was notable that most stakeholders placed more emphasis on grant and loan options, and that less feedback was available on the proposed options for incentive creation. This relects trends and experience to date in terms of the types of inance currently available for REDD+, and a logical focus on readiness, prior to full implementation and development of a market-based approach.

5.3.4 Emission reduction purchase agreements ERPAs

REDD+ project developers in Indonesia conirmed that ERPAs or ‘off-take agreements’ provide a higher degree of certainty over the cash low associated with REDD+ projects and can help attract other investors to invest in a project. Common practice is that a portion of the payment for emission reductions is made upfront to increase project development capital 22 . Some REDD+ projects in Indonesia have sold emission reduction credits generated by the project into the international voluntary market and there are also examples of projects that have signed ERPAs with potential buyers. However, several stakeholders also noted that in Indonesia, ERPAs are not considered suficiently secure to be used as collateral for a loan 23 . This is understood to be due to the fact that REDD+ emission reductions are not recognized as an asset class in Indonesia, exacerbated by risk associated with REDD+ investments. It would be useful to investigate whether ERPAs backed by committed public inance would be considered more secure than business-to-business ERPAs agreed between project developers and offset buyers, and could therefore be recognised as collateral for loans in order to catalyse increased investment.

5.3.5 Emission reduction put options