The role of carbon sequestration credits in influencing the economic performance of farm forestry systems

ASEM/1999/093: The role of carbon sequestration credits in influencing the economic performance of farm forestry systems

Indonesia

University of New England, Australia

Dr Oscar Cacho
Phone: 02 6773 3215
Fax: 02 6773 3596
Email: ocacho@une.edu.au

http://www.une.edu.au/febl/Econ/carbon/

• Center for International Forestry Research, Indonesia
• Centre for Socio Economic Research on Forestry, Indonesia
• NSW Agriculture, Australia

$420,886

01/01/2001 - 31/12/2002

01/01/2003 - 30/06/2003

Dr Ken Menz

Carbon dioxide (CO2) is the main greenhouse gas. The increase of CO2 and other greenhouse gases in the atmosphere is considered likely to cause global warming. While a forest is growing it is a net absorber of carbon through photosynthesis. After harvest, CO2 is released, although the time scale for its release depends on the fate of the harvested products. To help offset CO2 (or equivalent gases) emitted, it is possible to increase the world's absorption of CO2 through forest growth. Carbon that is sequestered in plant tissue in this way is taken out of the atmosphere and diminishes global warming. This fact is the basis of trading in carbon credits, which will allow a country that is a net CO2 emitter to trade with one that is planting forests or refraining from logging a growing forest. Such trading is allowed under the Kyoto Protocol, at prices determined by the market.
The Australian Greenhouse Office has studied the feasibility of a national emissions-trading system to help meet Australia's difficult commitments under the Kyoto Protocol, while the State of New South Wales has been one of the first governments to enact legislation to facilitate carbon-credit exchanges. The carbon credits concept, when globalised, has important implications for development assistance. Countries need to know about the profitability of carbon credit policies, both nationally and at the individual farmer level.
This project was designed to explore the economics of carbon offsets by forestry, for tropical Indonesia and temperate Australia. Given the long time frames involved in carbon sequestration in trees, as well as the release times, a model was the only realistic way to study the entire process.
Long-term models of rubber tree production and carbon cycles in farm forestry systems were available, and some were calibrated for Indonesian conditions. These models were adjusted to specific productions systems in Australia and Indonesia and incorporated into an economic analysis.

The project was designed to determine the most appropriate farm forestry systems for capturing carbon credit payments, and to evaluate the effect of different mechanisms for translating international exchanges of carbon credits into incentives at the level of individual farmers.

The project comprised two sub-projects. The first was designed to determine the most appropriate farm forestry systems. The team evaluated existing Indonesian and Australian systems and collected data to calibrate models. In Indonesia, the focus was on the large areas of previously forested land. Three regions were surveyed (in Jambi, East Kalimantan and Sulawesi). The team estimated both the flow of carbon fixed by trees above ground and flows in soil and roots. The costs of establishing, maintaining and harvesting trees, along with discount rates and prices of selected species, were all incorporated into an analysis, using a modified cost:benefit framework.
The second sub-project defined mechanisms for transmitting carbon credits to individual farmers, since different mechanisms for carbon sequestration payments have different effects on the profits, costs and risks faced by producers. The team identified policy mechanisms, estimated the costs and constraints for each one, and then evaluated the various policies.

The project achieved its objectives. The outputs of this project could influence the nature of payments for carbon sequestration services in Indonesia and beyond. Some delays did occur as a result of security issues in Indonesia, but these were overcome by various means, largely through electronic communication.
Proposals for carbon sequestration credits have been plagued by difficulties on both the policy and methodological fronts. One of the major issues has been the problem of 'permanence', caused by the fact that carbon sequestration can be reversed, so a unit of carbon sequestered cannot be equated directly to an avoided emission. This project examined the efficiency of alternative accounting methods that had been proposed to deal with permanence. The main contribution of the project on this front was to bring solid economic analysis to a problem that was generally discussed only in bio-physical terms.
The project also assisted the Ministry of Forestry and the Ministry of Environment in Indonesia to gain an understanding of the Clean Development Mechanism (CDM) of the Kyoto Protocol. This occurred through three means: (i) A member of the Indonesian team was also a participant in a National Strategy Study on land use, land-use change and the forestry sector, under supervision of the Ministry of Environment; (ii) A member of the project also became a member of the CDM Secretariat formed by the Ministry of Forestry, so she was able to communicate results of the research to policy makers; (iii) a workshop on the CDM held at the end of the project attracted government officials and researchers from various organisations in Indonesia and from overseas.
The findings should have an impact even without further intervention, since the practicalities of making payments to smallholders for carbon sequestration are under active consideration and review by many organisations throughout the world. Recent increased concern re global warming has brought this issue even more to the forefront. However, to increase the likelihood of a direct project impact in Indonesia (versus indirect), a follow on project (ASEM/2002/066) was implemented in an effort to input directly the concepts elucidated here into project designs in Indonesia.