Towards Indonesian carbon market Input from REDD+ projects

• REDD+ projects in Indonesia are commercial ‘heavyweights’ in global voluntary carbon markets and among the largest suppliers of carbon offset credits in the world despite only a few of them operating in such markets. • REDD+ projects employ diverse approaches to secure financing (ranging from direct carbon offset sales to donor aid and donations). They offer a range of activities to achieve their conservation and rural development objectives, mostly tailored to local contexts. • Legislation to support a domestic carbon market already exists (and continues to emerge). It will be crucial to ensure the market is designed in a way that maximizes benefits for all stakeholders, and ensures REDD+ projects continue to play a key role in mitigating climate change.


REDD+ (Reducing Emissions from Deforestation and Forest
Degradation) was created to tackle the complex challenges of climate and forest governance, and aims to bring about transformational change in the forestry sector by departing from the traditional business-as-usual practices that have led to deforestation (Brockhaus and Angelsen 2012; Moeliono et al. 2014). There were two parallel pathways in the early stage of REDD+ development more than a decade ago; one focused on preparing the nuts and bolts of REDD+ at the national level under government oversight, while the other involved numerous smaller-scale projects across the tropics, often led by non-governmental organizations. There has been a surge of interest in nature-based solutions, and REDD+ projects are now successfully attracting international financing through voluntary carbon markets (VCMs) backed by certification from carbon standards (e.g., Verra, Plan Vivo). At the same time, national governments in major REDD+ countries such as Colombia, Indonesia and Brazil are developing domestic carbon pricing legislation to 'put a price on carbon'. They are developing emissions trading schemes in which REDD+ projects are expected to supply carbon credits (ICAP 2022). These changes are expected to have significant impacts on the financing of REDD+ projects and their contribution to the global supply chain of carbon credits. Private forprofit What: this project is intended to become the model for for-profit national park conservation against rapid forest conversion (to plantations), benefiting rural communities and orangutan habitat conservation.
How: by acquiring land-use rights for forests bordering protected areas, project proponents can create a self-sustaining park system that benefits both the park and communities. Offset revenue is used to fund alternative livelihoods both within and beyond the project boundaries, community-based patrols, floating healthcare facilities, drinking water provision, and various educational opportunities for locals.

Katingan, Central Kalimantan
Private forprofit What: this project seeks to reduce GHG emissions by avoiding planned deforestation and restoring and conserving peat swamp forests. Major threats to forest and peatland are illegal logging, fires, forest conversion to agriculture and small-scale mining.
How: there are numerous activities centred on carbon (e.g., ecosystem restoration, enrichment planting, fire prevention) and alternative livelihoods (e.g., agroforestry, ecotourism, microfinance, aquaculture). Offset revenue is used to fund various initiatives at the village level, including but not limited to community development, fire response teams, and local business incubation.
Bungo, Jambi Non-profit What: The project aims to support five forest-dependent communities to protect their conservation forest against rapid land-use change driven by oil palm and rubber plantation expansion.
How: by generating alternative livelihood sources through developing trade in nontimber forest products (NTFPs); and helping build the capacity of the forest management council. Offset revenue is used for, but not limited to, funding village forest (Hutan Desa) operational costs, providing various village programmes and infrastructure, and procuring staple foods.

Merangin, Jambi
Non-profit What: this project took shape as a payment for environmental services from avoided deforestation and degradation (ADD) project. Village forests in the area are under threat from land-use change due to in-migration, particularly from coffee farmers.
How: the project aims to set up sustainable enterprises focusing on improving coffee production and onsite processing. Offset revenue is used to fund activities including enrichment planting, protection and natural regeneration of native species, tree planting and agroforestry improvement. Communities are involved through forest patrolling and sustainable forest management activities.

Musi Banyuasin, South Sumatra
Private forprofit What: the project aims to restore 22,922 ha of peatland ecosystems in Musi Banyuasin Regency, which constitute habitat for critically endangered species (e.g., Sumatran tiger and sun bear), and protect them and from fire risk, illegal logging and plantation development.
How: by implementing ecosystem and habitat restoration activities while establishing sustainable avenues for economic growth in local communities. Offset revenue is used to fund restoration and replanting, local fire brigades, forest patrols and station posts, restoration in fire affected areas, and various community-centred activities.
Multiple regencies, Aceh* Private forprofit What: the project aims to restore mangroves, re-establish mangrove ecosystems and foster new community livelihood options (e.g., fish, crabs, shrimps, honey).
How: by planting a suitable mixture of mangrove species and restoration of original hydraulic systems, providing employment opportunities to local communities, constant local engagement in economic and land management planning.  (Simonet et al. 2020, updated by the authors). Of these, six were certified and five were in the process of securing certification under the Plan Vivo voluntary carbon standard. The remaining six projects were not seeking certification. By 31 October 2021, the six certified projects sold a total of more than 65.8 MtCO₂e, or more than 7.5 times the volume sold a little more than a year earlier (Table 2). Hence, these Indonesian REDD+ projects experienced tremendous growth during 2021. This underscores the significant contribution of Indonesian REDD+ projects to global climate mitigation efforts. Promoting the emerging value of carbon storage as a non-timber forest product could boost GDP growth from the forestry sector.
Generally, REDD+ projects have been developed by nongovernmental organizations (non-profit), private companies (profit oriented), or through collaboration between the two. Consequently, start-up funding has come either from donor aid or from investors. Some projects discontinued, either because they had fulfilled their intermediate objectives (e.g., capacity building or clarifying ownership over or access rights to forest resources to enable REDD+ implementation) or because their funding had expired. A few that are still ongoing have successfully raised revenue from trading carbon credits. Some projects do not put carbon credits up for sale, but instead set up donation systems whereby donated amounts correspond to carbon price and quantity. In the latter case, no carbon credits are transferred to donors/buyers; project developers provide certificates of donation in return. In addition to funding project operational costs, some portions of revenues are also shared with local communities living inside REDD+ project areas. Such revenue is used to fund various rural development and conservation measures, including alternative livelihood creation, providing start-up funding for local businesses, financing and providing equipment to village fire brigades, supporting local social forestry initiatives, providing infrastructure and procuring staple foods. in the context of forest carbon trading. 5 Regardless, for now carbon trading seems to be decided on a case-by-case basis as any trade involving private (including REDD+ projects) and global entities must ultimately be conducted under ministerial authorization. 6 Finally, the government imposes an 'offset buffer' of at least five percent for domestic trading and between 10 to 20 percent for international trading to mitigate the risk of not achieving NDC targets due to trading being conducted prior to 2030. Rights to these offset buffer credits can be returned to REDD+ projects at least by 2032, and sold elsewhere if the sectoral NDC target is achieved without the need to claim the buffer credit. 7 The government's openness to continued trading with foreign buyers was very much welcomed, with one interviewed project representative noting, In line with the trend depicted in Table 2 and the 2022 World Bank report, another interviewee stressed that demand for carbon offsets has been increasing, as their company has secured several potential international buyers even before the project in Indonesia is operational. Jejakin, Roxi and LindungiHutan), while existing businesses are trying to make use of the multi-forestry business permit (introduced under the Job Creation Law) to diversify their businesses, as such permits allow both traditional and carbonbased forest activities. On one side, new laws related to carbon pricing and job creation have created opportunities for private sector operators to seize financial opportunities from forest carbon. On the other side, the government needs to act swiftly to take advantage of these opportunities, while ensuring that forest carbon credits are of high quality, are ethically sourced, and are unburdened with greenwashing problems.

Safeguarding REDD+ projects and benefiting from their experience and emissions reduction potential
Prior to the issuance of carbon economy-related regulations in 2021-2022, REDD+ project proponents traded their carbon credits without specific rules or limits imposed by the government. Naturally, the trade was concentrated in voluntary markets with demand for carbon credits from diverse sources (World Bank 2022). However, their operation was not entirely beyond government oversight. In 2013, two privately funded REDD+ projects in Central Kalimantan (Sills et al. 2014) and one in South Sumatra operated under ecosystem restoration concession licenses (IUPHHK-RE) now known as multi-forestry business permits, all of which are still operational to this day. 8 The ecosystem restoration concession (ERC) concept itself can be recognized as a manifestation of transformational change in forestry sector governance. As the timber boom ceased in the 1990s, foresters were bound to find alternative ways to signify forestry sector contributions to the economy. However, making an ERC operational (and profitable) is difficult, as one respondent noted, saying,  The emerging domestic carbon market, even though it has yet to expand to the forest and land-use sector, will be a potential source of funding that will make ecosystem restoration attractive and profitable at scale. On paper, the carbon benefit potential from five local REDD+ projects in Indonesia is promising, but sales have remained suboptimal (Table 3). To illustrate, the REDD+ project in Merangin Regency in Jambi had sold only 1,541 tCO₂e by 2020, or only around six percent of its expected annual carbon credit generation.
Two other interviewed REDD+ project developers also voiced similar difficulties when they first went to their respective sites. Their approach and attitude were similar: change is gradual and will require long-term engagement, perseverance and sufficient resources before the first sale could be made. "By helping poorer people to make ends meet, and helping to prevent disasters (e.g., forest fires), they finally understand that protecting their forests will provide them with direct and sustainable benefits" (interview #1, June 2022).
It is equally important to have support and buy-in from local governments.
"Early on, we coordinated with local governments from the village, subdistrict and regency levels to relay our business intention and align our activities with those of the government and what they think constituents need. It was not easy as we had to compete with business-as-usual interests (e.g., oil palm) that can promise revenues up front, which is not the case with sales from ER activities" (interview #5, August 2022).
In one case, local community buy-in was possible as they already had first-hand experience of the impacts of a changing climate.

Practical recommendations for the upcoming domestic carbon market: A supply side perspective
To assist in the design of Indonesia's upcoming domestic carbon market, we have synthesized some recommendations from interviews. These are as follows:

a. Diverse forest mitigation actions
It is desirable for the upcoming ministerial regulation to list forest mitigation actions explicitly and comprehensively. These should at least consist of actions to avoid deforestation and forest degradation, prevent forest fires, and enhance forest carbon stock (e.g., rewetting, restoration, rehabilitation) for various classes of land use. Such activities are basically the core operations of REDD+ projects today.

b. A common set of rules, agreed by all
There must be a common set of rules that apply across the board, and include: 1. New and clear allocation of baselines/forest reference emission levels (FRELs) to subnational jurisdictions and projects; 2. A nationwide MRV system and ER accounting standard that works at all scales and modes to integrate projects' data into the national registry and/or MRV system in real time; 3. A uniform safeguards system and clear benefit-sharing rules that work across scales.
Arguably, all of these, particularly points 1 and 2, are challenging as multiple baselines, ER accounting standards and MRV systems are used by the government and different REDD+ projects.

d. Clear attribution between domestic and international trading
A 'nested' system will harmonize carbon accounting of ER activities at multiple levels (i.e., RBPs and local REDD+ projects). Such a system will require consistent rules and methodologies that work for tracking and accounting ER across scales. This is certainly a difficult task, but must be performed nonetheless so that Indonesia can benefit from both domestic and international carbon markets. A transition to a nested system in Indonesia can be illustrated by following the case of the REDD+ regulation in Cambodia (RTS Cambodia 2020): 1. Stage I (pre-nesting): REDD+ projects established prior to the enactment of the carbon market-related regulation are subject to a grandfather clause -allowing them to continue working with current methodologies and baselines for a period of time before shifting to a common set of rules once they are ready. However, new REDD+ projects must start by preparing their business with a new common set of rules in mind. This is also the period where all REDD+ projects must register with the National Registry System (SRN). The SRN will be the backbone of a functional carbon market. Thus, it is reasonable to expect its capacity to be strengthened along the way to allow for optimal monitoring of all climate change-related projects (interview #3, June 2022). 2. Stage II (early nesting): A transition period whereby REDD+ projects start shifting and using the new common set of rules. Progress may differ from one area to the other as some jurisdictions were exposed to large-scale REDD+ earlier (i.e., East Kalimantan and Jambi). Much like the 'learning by doing' phases traversed by REDD+ project developers, this stage also involves trial and error, which means there should be sufficient flexibility and support in adopting the common set of rules without running the risk of undermining a particular project or the whole system. 3. Stage III (full nesting): A fully nested system can be achieved when, for example, a fully integrated MRV mechanism, registry system and safeguard information system, and relatively equal human resources and institutional capacities across places and scales are in place.

Conclusion
Smaller-scale REDD+ projects have been an integral part of global and national REDD+ development. They have now become commercial heavyweights in global voluntary carbon markets despite only a few of them operating in such markets. Overall, the insights provided by interviewees representing REDD+ projects highlight the potential opportunities and challenges they face in the upcoming domestic carbon market in Indonesia. As the country works towards a low-carbon economy, it is crucial to ensure that the market is designed in a way that maximizes benefits for all stakeholders, including smaller-scale REDD+ projects, as the future forest carbon suppliers in the domestic carbon market. With the right policies and support, these projects can continue to play a key role in mitigating climate change whilst contributing to rural development and the transition to a low-carbon economy.