Will New Carbon Market Work? Indonesia Will Provide First Test

“Countries face no real repercussions if they fail to abide by the rules,” according to an initial analysis by the think tank Carbon Market Watch. Kate Dooley, an expert on carbon accounting at the University of Melbourne, Australia, says that “there are no timelines for compliance or for policing the rules” governing country-to-country trading, noting that nations can opt to keep much of the information about those deals confidential. She believes Indonesia is likely to engage in extensive bilateral deals between governments that avoid U.N. oversight as an “easy way to transact large volumes of credits.”

The southeast Asian giant is home to the third largest expanse of tropical rainforests and more than a third of another of the world’s great carbon stores, peatlands. And in September, a climate advisor to President Prabowo revealed plans to raise up to $65 billion by 2028 from selling carbon credits accrued from restoring and protecting its forests and peatlands — developing what the government terms a “restorative economy.”

Prabowo’s planned restorative economy has two main elements. The first is to capture more carbon in Indonesia’s ecosystems by building on the efforts of his predecessor, Joko Widodo, to restore lost peatlands.

Indonesian peatlands store an estimated 57 billion tons of carbon, which is equivalent to almost two years of global emissions from fossil fuels and industry. But that figure had been falling as farmers and foresters drained the peat to grow plantations of oil-palm and industrial forests. As the peat dries it oxidizes, releasing carbon into the air, while becoming increasingly vulnerable to fires, which in recent years have contributed more than a fifth of Indonesia’s carbon emissions. To reduce this risk, following major fires in 2015, Widodo established a program to rewet millions of acres of drained peatland. Prabowo is expected to extend this program.

The second element is holding on to carbon by protecting the country’s remaining natural forests. The current poster child for this is the Katingan Mentaya carbon offset project — reputedly the world’s largest — which conserves some 370,000 acres of swamp forest in Central Kalimantan on the island of Borneo that are home to an estimated 3,500 orangutans.

The project was developed by Indonesia start-up Rimba Makmur Utama with technical support from the Netherlands-based NGO Wetlands International. It has been in action for a decade and claims to sell on average 7.5 million tons of carbon credits annually to blue-chip corporations keen to offset the pollution they produce and improve their environmental reputations, including Shell, Volkswagen, EasyJet, and the Southeast Asian ride-hailing service Grab.

As well as paying for conservation work, the income from the sales of the credits supports economic development for the more than 40,000 Dayak people who live in the surrounding buffer zone. It has funded fisheries ponds and the cultivation of sustainable cash crops such as peanuts, coconuts, and cashews. Many of the products are sold online by local Datak entrepreneurs.

Wetlands International calls the Katingan Mentaya project “a showcase for private sector-led collaboration on sustainable development of peatland landscapes.” But whatever the social and ecological benefits, there are serious concerns about the probity of the carbon credits sold to sustain those benefits — particularly about “baseline scenarios” used to calculate the carbon gains, and hence how many carbon credits can be sold.

The Katingan Mentaya project presumes that, without its intervention, the forest within its boundaries would have been entirely logged and the peatland beneath drained to make room for industrial timber plantations. But would that actually have happened?

The scenario might have been justified when the project was first proposed almost two decades ago. Back then, the Indonesian government was still pushing agricultural development in forests. But independent analysts conclude that today such large-scale logging is extremely unlikely, especially in a peatland.

Greenpeace found that there have been no such major forest clearances in Central Kalimantan’s other swamp forests. And since 2011, before the project started selling credits, successive governments have maintained a moratorium on issuing new licences for clearing forest or draining peatland. So, the project area has long been legally off-limits to such development, which means that the project’s carbon credits do not reflect realistic carbon gains.

These doubts about carbon accounting highlight a global problem with the poorly regulated market in credits sold to companies looking to offset their emissions. Environmentalists have long said that carbon benefits — and the credit sales they enable — have been widely inflated by implausible baseline scenarios. And recent research backs up their skepticism. An international study published in Nature last month found that just 25 percent of carbon credits sold as representing avoided deforestation delivered “real” emissions reductions.

Some of the biggest criticisms center on claims certified by Washington, D.C.-based Verra, operator of the world’s largest verification standard, whose clients include Katingan Mentaya. One analysis found up to 90 percent of Verra’s verifications to be “worthless.” Responding to the scandal, Verra has been conducting a major reassessment of its methodologies.

A second concern is the potential for double counting of the carbon gains. Indonesia again provides a prime example of a global issue.

The Indonesian government says that the carbon “saved” by its restoration activities will be enough to meet most of its commitments, known as Nationally Determined Contributions (NDCs), under the Paris climate agreement. But these gains are often already being sold as carbon credits to international corporations, and under the new U.N. rules for carbon trading, they could in theory also turn up in bilateral trades with other governments to meet their NDCs — thus being counted twice or even three times. “Under this version of carbon markets, anything is possible,” says Dooley.

The founder and CEO of Rimba Makmur Utama, Dharsono Hartono, recognized the problem in an interview published last year. “There’s an open issue to be resolved around double counting, whereby the same activities are accounted for by carbon credits and NDC requirements,” he said. If left unresolved, double counting could make a sham of global initiatives to achieve net-zero emissions.

A third concern about Indonesia’s carbon ambition relates to its globally groundbreaking program of rewetting previously drained peatland. The government says some 9 million acres have been restored so far, an area larger than Maryland, mostly by blocking drainage canals to raise water levels within the peat. In theory, this should staunch the carbon emissions. But there are serious questions over how effective the rewetting has been in practice.

The Indonesian Peatland Restoration Agency’s criteria for successful rewetting require the water table to be raised to within 40 centimeters (16 inches) of the surface. But this partial rewetting will not be enough to halt emissions, because the top layer of the peat remains dry and continues to release carbon, according to Hans Joosten, a peatlands expert at Greifswald University, Germany. In a study for the Ramsar Convention on Wetlands, he called the 40-centimeter target a “compromise,” intended to allow continued cultivation of crops such as coffee, coconuts, bananas, rubber, and even oil palms.

But even this limited rewetting ambition has not been reliably achieved. An analysis of Indonesian government data by the Gecko Project, a nonprofit environmental investigation service based in London, discovered that at times, only 1.2 million acres (13 percent of the total “reclaimed” area) met the threshold, with the lowest success rates during dry spells, when fire risks are greatest.

A study published last August by Nisa Novita, an Indonesian forest researcher now at The Nature Conservancy, found that rewetting within oil-palm plantations, where natural peatland vegetation is not able to return, only reduced emissions by about one-third.

Current Indonesian government methods of estimating continued emissions from rewetted peatlands are poor and do not comply with guidelines set by the Intergovernmental Panel on Climate Change, concluded Daniel Murdiyarso and colleagues at the Center for International Forestry Research in Bogor, Indonesia, in a study published earlier this year. The default assumption that there are no emissions after rewetting is not true, they wrote, with “significant implications for greenhouse gas accounting.”

These findings, while specific to Indonesia, have important global ramifications, since many countries plan to restore peatland as part of their efforts to reduce carbon emissions. Joosten estimates that 120 million acres of drained peatlands need to be restored globally to help meet climate targets under the Paris Agreement, half of them by 2030. But clearly more research and much better data will be needed to give confidence that governments can meet their carbon promises from future peatland restoration.

Optimists warn against making the perfect the enemy of the good. British forest researcher Dominick Spracklen of Leeds University, who has studied the economic costs and benefits of forest protection in Indonesia, is impressed by its restorative initiatives to date. Yes, he agrees, there may be problems with carbon accounting and setting the right baselines. “But sometimes I think we set the bar too high: If policies and actions don’t stop all fires or stop all deforestation, they are regarded as a failure. But policies can work to reduce deforestation and emissions.” Indonesia’s deforestation rates have fallen by more than 60 percent since 2011.

Others are skeptical about the new Prabowo government’s commitment to a restoration agenda, however. “I am not optimistic,” said one Jakarta-based international expert on condition of anonymity. “Prabowo’s election campaign was financed by extractive industries, and their people are prominent in his cabinet. There are, it is true, a lot of players in Indonesia trying to get into the carbon market, but not all are committed to environmental and social goals.”

For many of these players, critics say, developing a restorative economy — also termed a “bioeconomy,” which respects the rights of Indigenous inhabitants — is primarily about exploiting the country’s forests more intensively, rather than protecting them. One of Indonesia’s fastest-growing bioeconomic activities is replacing natural forests with tree monocultures to supply a booming market at home and abroad for wood pellets for burning in former coal-fired power stations. The ecological impacts of this business are potentially huge, and its carbon footprint can be greater than burning coal if the trees are not replaced by new forest.

Indonesia’s flawed carbon-offset calculations could just be teething troubles. But they could escalate into wholesale carbon fraud. And if the mistakes are replicated in other countries, they could seriously undermine the world’s efforts to fight climate change.

The danger now is that the loose rules for carbon trading adopted in Baku — with their potential for secrecy and lack of oversight or enforcement — increase this risk. Says Khaled Diab at Carbon Market Watch, the rules “risk facilitating cowboy carbon markets at a time when the world needs a sheriff.”

This article is the second in a series on global efforts to promote green economies that protect biodiversity and the rights of traditional rural communities.