Malaysian Palm Oil Futures up to August 2008. Indonesian Palm Oil futures have followed suit and have continued the decline into 2009

Last week the Indonesian government announced the creation of new palm oil plantations on peat lands, causing dismay in the environmental sector. As reported in my blog last week, suggested reasons fall into two camps: firstly it gives the palm oil plantation owners something in an election year and secondly the global recession, thereby providing employment and much needed currency.

Indeed this recession has led to a collapse in commodity prices in general, and palm oil prices in particular, hitting Indonesia hard. While increasing production could partially offset this fall, it would eventually lead to a glut in palm oil and a complete collapse in palm oil futures, similar to coffee in the 1990s. However Indonesia has moved to control the price of palm oil raising the spectre of a palm oil equivalent of OPEC – or OPOEC (Organisation of Palm Oil Exporting countries).

Indonesia, together with Malaysia, controls 85 per cent of the world’s crude palm oil (CPO) output and 40 per cent of the natural rubber production so any agreement to protect the price of palm oil will have global repercussions. However there is another factor in Indonesia and Malaysia agreeing to co-operate with each other: the demand by many importing countries (mostly Europe and the United States) to have Crude Palm Oil (CPO) imports subscribe to the Roundtable on Sustainable Palm Oil (RSPO) standard. At present only one Indonesian plantation meets these standards so in future a potentially paradoxical situation could occur: the price of palm oil will skyrocket because of the non-tariff environmental restrictions on palm oil, yet Indonesia will not benefit because of the lack of accredited plantations.

Therefore Indonesia and Malaysia have agreed a number of measures primarily aimed at boosting domestic demand. These include:

<!–[if !supportLists]–>· <!–[endif]–>Replacing and replanting palm oil plants more than 25 years old thereby reducing supply;

<!–[if !supportLists]–>· <!–[endif]–>Mutual investment in each other’s countries;

<!–[if !supportLists]–>· <!–[endif]–>Joint lobbying of importing countries;

<!–[if !supportLists]–>· <!–[endif]–>Carrying out a bio-fuel program and increasing the amount of CPO in fossil fuels for both public transportation and industrial consumption from 1 per cent and 2.5 per cent to 2.5 and 5 per cent respectively.

Given, for example, Europe’s requirement for at least 10% of the fuel used in transport will be biofuels by 2020, it will be interesting to see what happens first: a ‘rush’ by Indonesian palm oil plantations to get accreditation or a relaxation of environmental standards in the importing countries. By trying to boost domestic consumption however, Indonesia is creating an ‘artificial’, captive market for its products meaning more land will be converted to palm oil production in the future.

As President Yudhoyono was first greeting and then demanding leadership from visiting US secretary of State Hillary Rodham Clinton on climate change, the old saying ‘those in glass houses shouldn’t throw stones’ comes to mind. In particular two recent events do not bode well for the future, namely the re-emergence of the forest fire problem and the decree to use peat lands as palm oil plantations.

Forest Fires

Forest fires are one of the main reasons that Indonesia is the third largest carbon dioxide emitter in the world. Beyond that, it also creates tensions with Indonesia’s neighbours: for example in 1997-8, the forest fires blanketed the whole of SE Asia causing health problems and economic damage. Faced with these issues the Indonesian government has made routine pledges to prevent the situation ever arising again. For example the National Action Plan for Climate Change promises to reduce forest fire hot spots by 50% in 2009. Unfortunately this year, severe fires have already been detected in Riau, Sumatra, resulting in haze over Pekanbaru, the provincial capital. Two factors suggest that this problem will only get worse, not better:

1. El Nino/ La Nina effect: This is a southern hemisphere oscillation that has a large effect on the weather across the globe. As a general rule La Nina brings heavy rain to Indonesia while El Nino conditions are associated with drought. So far this year has been La Nina: nonetheless there have still been hundreds of fires. However these conditions are likely to end in April, with El Nino starting either later this year or next year, resulting in a significantly drier climate, which of course encourages fires.
2. Lack of government supervision: despite government promises to stop the building of commercial sites of forested lands, the recent fires have been directly linked to forest clearance for palm oil plantations. While independent programmes exist to help control burning on the local, subsistence level, there appears to be no such effort in the commercial field.

Peat Land conversion

Peat lands are crucial carbon sinks, trapping CO2 that would otherwise be released into the atmosphere. Greenpeace estimating that Indonesia’s peat lands contain 37.8 billion tonnes. In order to grow palm oil on peat lands, it must be first cleared then drained thereby releasing the trapped CO2 into the atmosphere. Furthermore this practice increases significantly the chances of fires: a report by Wetlands International in 2006 concluded that in this entire process, Indonesia emits 6.5 times the CO2 it does by burning fossil fuels.

Despite this, the government announced new plans to open up peat lands for conversion to commercial palm oil plantations. The agriculture and environmental ministries tried to assure environmentalists that the process will be strictly regulated, will recapture all the carbon lost in the conversion process and that the plantations will not be opened on peat land more than 3 meters deep.

Such claims have led to anger among activists: for example Yuyun Indradi of Greenpeace states “the government needs to protect the remaining peatlands and forests if we are to slow down climate change and protect the livelihoods of forest-dependent communities and biodiversity.” This is also a slap in the face of campaigners who have been pushing for the utilization of degraded land for palm oil plantations (last week’s blog dealt with this issue) rather than forests. It seems that the government has ignored these pleas.

So why? The first reason involves economics and the global recession. Gatot Irianto, from the Agriculture Ministry, admits as much when he said “we still need land for oil palm plantations. We must be honest: the sector has been the main driver for the people’s economy”. The second deals with domestic politics and the upcoming general elections. As Bustar Maitar of Greenpeace accuses “with the general elections coming up, the Agriculture Ministry’s plan is fishy, because it seems like an attempt to satisfy the country’s powerful paper and palm oil industries at the expense of the environment.”

Overall this has been a bad week for Indonesia who once again seems to put short-term economic interests above those of the health of its people and the global climate. By pursuing such dubious policies, it puts at risk Indonesia’s participation in future REDD projects. While it is important to demand action from leading Developed countries like the US, it must also show commitment at home to take action. So far it is failing.

The connections between climate change, deforestation and the growth of palm oil plantations are pretty clear. What to do is another thing. While it is easy enough to demand that the Indonesian government stop creating palm oil plantations this is an unrealistic objective. Caught between a rapidly increasing fiscal account deficit and its stated development goals, palm oil production is, like it or not, here to stay.

There are signs however that changes is afoot. To increase revenue, the Indonesian government would like to expand exports of palm oil to new markets, with Eastern Europe particularly targeted for expansion. However this runs into a major problem: from 2010, the EU will require biofuels to achieve a net carbon dioxide saving over oil of 35%. At present only one out of 300 listed producers do this, primarily because of the huge amount of carbon released into the atmosphere when clearing land away.

Furthermore, echoing one of the conclusions of the Economy and Environment Program for South East Asia (EEPSEA) report, fears about increases in floods and landslides due to deforestation have led the State of the Environment to instruct local administrations to cancel plans to convert natural forest into commercial areas. While putting the emphasis for action on the local administrations Masnellyarti Hilman, from the environment ministry, states that ‘It is time for local administrations to think in the long term rather than simply focus on the economic benefits of the short term, because the threat of natural disasters will most likely increase with climate change in the future’.

A solution? Use degraded land

This has the potential to not only help Indonesia’s economy but provide jobs and potential carbon offsets. Project POTICO (Palm Oil, Timber & Carbon Offsets) aims to rehabilitate 1.25 million acres of degraded land into palm plantations over three years. Created by the WRI (World Resources Institute) and NewPage Corporation, this new scheme was formed partially in response to changes in the US Lacey Act banning the use of paper from illegally harvested trees.

The link between illegal logging and palm oil plantation creation is primarily economic: as it takes four years from planting to generating an income from oil production, the revenue from the cleared timber helps offset costs. POTICO aims to counter this by creating up to three potential revenue streams:

• potential carbon offsets under REDD;
• a sustainable palm oil certification scheme to generate long-term cash flows;
• timber certification whereby oil palm companies with current timber concessions, are paid not to use the timber concessions until the palm oil plantation starts commercial production.

The potential for this is huge: Indonesia has 15-20 million hectares of degraded land. As Jonathan Lash commented “Project POTICO will relieve pressure on Indonesia’s virgin tropical rainforests, reduce greenhouse gas emissions from forest clearing, and prevent the loss of biodiversity in forests slated for conversion to oil palm plantations.”  While hurdles remain to be overcome, especially in how to demarcate degraded land from rainforest, this project suggests a way where palm oil production can increase while reducing greenhouse emissions and stopping deforestation.

When asked to think about the relationship between climate change and Indonesia, the most likely answers would revolve around rainforests, deforestation, orangutans and loss of livelihoods. Missing from this picture is any appreciation of the role played by the oceans of Indonesia. This is especially surprising given that Indonesia’s:

• the world’s largest archipelago;
• 17,000 islands stretch over 5000 thousand kilometres East to West, or an eighth of the world’s circumference;
• total sea area is four times bigger than the land area.

This makes Indonesia particularly vulnerable: as Rachmat Witoelar, the environment minister pointed out, the country could lose 2000 islands by 2030 if sea levels continue to rise. But it is not just Indonesia that stands to lose out. Globally the effect of climate change on coastal communities and island states is potentially horrendous. This therefore makes the neglect of oceans in recent climate change conferences all the more puzzling. As noted by Gellywynn Jusuf, in Bali only one session out of 800 discussed climate change and its impact on oceans: in Poznan, oceans were barely mentioned.

This, together with new research suggesting that sea-level rises have been under-estimated, makes the recent announcement of the World Ocean Conference in May all the more important. Taking place in Sulawesi, Indonesia, it is hoped that the WOC will refocus the world’s attention on the important relationship between the oceans and climate change. It aims to increase awareness of:

1. the links between climate change, the implications for the socio-economic position of coastal peoples and the ecological conditions of coastal and marine zones;
2. the vital role that oceans play in mitigating climate change;
3. the need for mitigation of disasters caused by climate change;
4. the need for a strong commitment for continued discussions on the role of oceans in climate change and the effects of climate change on oceans.

There is a further possible reason for the conference: besides increasing awareness of the relationship between climate change and the oceans, and shifting some of the focus away from forests, it is possible that this conference may lay the groundwork for some sort of remuneration scheme for those countries with large oceans.

Given the potential carbon sink capacity of oceans, with Indonesia alone purportedly having the ability to ‘absorb’ up to 60 million tonnes of CO2 a year through the oceans, a REDD-like scheme for oceans could bring huge monetary sums for those countries directly affected by rising sea-levels. As Freddy Numberi, the Indonesian Maritime and Fisheries Minister, suggests “by protecting the oceans, we will be saving the livelihoods of so many people in small-island states. For this reason, wealthy nations should contribute to the cause.”

Is such a scheme feasible? REDD at its core is simple: pay money to stop cutting down trees. Trying to quantify not only degradation in the oceans but also their ability to act as carbon sinks maybe impossible but such a scheme [I am suggesting Reducing Emissions from Oceanic Degradation in Developing Countries or REOD as the name for such a programme]could provide at the very least compensation for those island countries hardest hit by climate change. This makes it a possibility worth exploring.

The good news

As reported in this blog last week, new rules governing the distribution of foreign donor aid under the REDD scheme had been delayed. It was however announced earlier this week that the new rules, as well as the new climate change fund, would be ready before the Bonn climate change talks in June. Agus Purnomo, former head of the WWF in Indonesia and speaking on behalf of the DNPI (National Board on Climate Change), stated that it was issues over taxation on profits and Indonesia’s bureaucracy that was putting investors, and especially private businesses, off investing in Indonesia but the new rules should address these concerns. Add to this the announced 70 approved CDM projects and it appears that the Indonesian government is finally building up some momentum in the climate change realm. While I share this blogger’s concern over how much of the money will be put into effective climate change policies, it is hoped that the rules will provide a clear explanation of how the money will be spent, thereby encouraging investments.

Now the Bad news

It has always been the presumption that billions of dollars will flow into the Indonesian economy once these rules had been formulated. However it appears that the global economic crisis could claim yet another victim. Mahendra Siregar from the Adaption Fund Board at the United Nations Framework Climate Change Convention (UNFCCC) was adamant: “the idea that Indonesia will finance its climate change programs on foreign money generated from the signing of the Kyoto protocol is a fantasy. No amount of foreign funding would be enough to deal with Indonesia’s climate change problems.” Add to this a collapse in the price of CO2 and a drive within companies to reduce operating costs, means payments into the UN Adaption Fund may not be what developing countries are hoping for. Indeed Mahendra speculates that instead of billions of dollars, the entire adaption fund would only amount to $150 million split between all developing countries. Indonesia’s budget for climate change in 2009 is Rp 1.8 trillion (US$ 200 million) and relied on a sizable investment from the Adaption Fund.

What to do? Local community engagement

So if international donor money does dry up, what can be done? One suggestion is engaging with local communities two ways. First of all, local engagement can reduce deforestation caused by palm plantation. And it need not be expensive. Yayasan Orangutan Indonesia, an Indonesian NGO dedicated to saving the orangutan, provides education and information to villagers explaining the dangers local communities face to their environment if they sell land to palm oil cultivators. Once explained what impact these plantations have, the communities are much more likely to refuse payments for land, thereby preventing deforestation.

Secondly, reforestation projects could utilize local labour and knowledge, along with direct private funding, thereby cutting out the multiple layers of government. A good example of this is the WWF NEWtrees scheme, created in conjunction with Nokia and Equinox Publishing. Originally launched in November 2007 in Sebangau National Park, Kalimantan, it initially planted 100,000 trees with Nokia providing the trees and tagging technology. This week, the scheme was extended to Mt. Rinjani, East Lombok hoping to replenish the 40000 hectares of deforested land. In collaboration with the local communities, the program hopes to help the 3 million people who have been directly affected by deforestation.

These programs and schemes highlight simple, effective ways to tackle climate change. By engaging with local communities and addressing their livelihood issues, climate change can be tackled at the local level at minimal expense. Whether schemes like this will be rapidly expanded in the coming year remains to be seen, but the global economic crisis should not be used as an excuse for inaction.

A recent report from the Economy and Environment Program for South East Asia (EEPSEA) makes grim reading for anyone concerned about the effects of climate change in South East Asia generally and Indonesia in particular. Combining hazard maps for five climate-related risks (tropical cyclones, floods, landslides, droughts, and sea level rise) with population density and adaptive capacity data, major points of alarm include:

• Climatic ‘hotspots’ in western and eastern parts of Java (see figure 1.);
• Java is one of least ecologically protected areas in South East Asia, primarily because it is the most densely populated island in the region;
• Adaptive capacity to climate change higher than Laos and Cambodia but lower than Malaysia, Thailand and Vietnam;
• Parts of western Java and western Sumatra are extremely vulnerable to climate change;
• Jakarta is the most vulnerable area in the whole of South East Asia.

These alarming findings confirm an earlier Environmental Ministry report declaring that sea-level rise could put parts of Jakarta permanently under water, including the international airport. Given these disturbing conclusions what can be done?

Tackle Primary Causes: Deforestation

Well it is always good to try and tackle the causes of climate change. One of the key contributors is rapid deforestation, with Indonesia experiencing a ‘boom’ primarily in palm oil cultivation. Perceived incorrectly as a clean bio-fuel, palm oil plantations not only destroy the natural habitat of vulnerable species like the Sumatran tiger and Orangutans, but also adversely affect the local population through land loss. Indeed, altogether deforestation pumps over 2.6 billon tonnes of CO2 into the atmosphere, making Indonesia the third biggest source of CO2 in the world.

Reality Bites

This is exactly what the REDD scheme is all about, making money available to prevent deforestation. However as reported in my last blog there has been confusion who will control the inflow of money from donors as well as the disbursements to various sectors. Two further factors suggest government inaction is the way forward. Firstly, the price of palm oil has risen by 70% in the last year making it an integral part of the Indonesian economy. There are plans also to create a palm oil exchange market in Indonesia suggesting that palm oil will be become more important, not less, with time.

Secondly, the Indonesian government has delayed releasing rules aimed at governing the billions of dollars of investment expected to flow into the country in return for carbon credits. Expected in December, these rules were meant to decide who benefits from the selling of REDD credits as well as which forests would be suitable for the scheme. An integral part of REDD is to share the benefits with the local populace which is only to be applauded. But given that it has now been put out for review with no new deadline for release, concern is rising that REDD implementation is stalling in Indonesia and even if implemented will benefit central government over local people.

At Poznan a number of developing countries – China, Mexico and Brazil – took the opportunity to announce new climate change initiatives. Indonesia’s initiative, one of the world’s top 20 greenhouse gas emitters, was conspicuous by its absence and, given recent disagreements over budgetary control, we shouldn’t expect anything soon.

The body expected to take control is the National Board on Climate Change (DNPI). Formed in July 2008, its key aim was to implement the National Action Plan announced in 2007, coordinating the actions of 17 government ministries in:
• Formulating new climate change mitigation policies;
• Regulating the country’s carbon trade system;
• Overseeing development projects so to measure and control emissions;
• Taking the lead internationally in demanding developed countries take more responsibility for climate change.

This unified approach didn’t last long, however, with problems emerging in October 2008. The National Development Planning Board (Bappenas) announced that, along with the Finance Ministry, it was setting up a climate change trust fund to manage mitigation financial support from donor countries. However it was not until this week that the DNPI hit back reiterating that all funding for climate change would fall under the council’s control with Rachmat Witoelar, the Council’s director, declaring “as a national council we will manage all activities related to climate change in the country. All incoming money from donors will go through the council, including spending the donor money”.

The importance of the disagreement becomes apparent when numbers are mentioned. So far the US, Germany and Australia have pledged some $6o million in grants to combat climate change. The real prizes are the soft loans from countries like Japan who is providing up to $300 million for climate change mitigation as part of its “Cool Earth Promotion Programme“. Furthermore there could be much more on the way from the Reduction in Emissions from Deforestation and Degradation (REDD) scheme.

A cynic may suggest that having presidential and legislative elections in July may have something to do with this. But even then surely, one may ask, the money will still be used for climate change policies. Well this seems more a hope than a certainty as the trust fund will not have the same focus on climate change as the DNPI. This was made abundantly clear when the Bappenas director of forestry and water resource conservation, Basah Hernowo, stated “the trust fund will decide where the loans go. It can also be used to plug the deficit in the state budget”. Given the economic crisis and global recession, it is a valid, yet worrying question to ask how much of the donor’s money will actually be spent on climate change.

In Bangkok, Thailand, the Better Air Quality Workshop (BAQW) is currently underway. The event is aimed at regional and local government delegations to foster cooperation on reducing urban pollution, notably of CO₂.

Delegates have heard about the challenges faced by projected population rises of half a billion by 2030 in Asian cities alone. One major challenge for climate policy is how to deal with a parallel rise in cars–and with them carbon emissions.

While more low-key than the UNFCCC, the BAQW is making important in-roads, particularly in the area of information sharing and best practice. Participants have been using Singapore’s model of urban expansion as prototype for growing Asian metropolitan areas; instead of building outwards from the city and increasing travel distances, BAQW workshop presenters have advocated building upwards, creating a compact urban area with well-planned public transport systems. This, they argue, allows city and population growth without parallel automobile increases.

In comparison to the burgeoning UNFCCC process, BAQW appears to benefit from a focus on spreading best practice through information sharing, rather than engaging in complex negotiations to find a common treaty. BAQW essentially encourages national-level policy through international coorperation, as opposed to the law-making UNFCCC that attempts to create international-level policy.

A second ‘best practice’ summit has also been announced for March 2009: the Green Energy Summit (GES), this time in Bangalore. While a more high-level meeting, agendas for GES once again appear focused on national policy comparisons, assessments of successes and failures, and, fundamentally, a discussion of how to move forward.

In this growing season for summits not all approaches to yielding the low-carbon fruit are the same. As the over-arching greenhouse continues to warm, and the summit growing seasons intensify, there are certainly things to be learnt from the new kids on the block.

UPDATE–12/11/08 10.17 GMT: News just feeding in this morning is that the U.S Governors–led by California’s Schwarzenegger–will also host a global summit on climate change. The meet is scheduled for Nov. 18-19.