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National Institutional Arrangements for REDD Case Study – Indonesia (as of December 2009)

Prepared by

WWF-Indonesia Fitrian Ardiansyah, coordinator

International Financing for REDD

A Project of WWF US Policy Program

This is a report of the project “International Financing for REDD,” undertaken by WWF US Policy Program between July and December 2009, as part of WWF FC NI Program “Engaging Civil Society in REDD Programs.

The focus of the “International Financing for REDD” project was: (a) To further UNFCCC parties‟ understanding of the role and sequencing of public, private and market funding for REDD; and, (b) To discuss institutional and funding arrangements for REDD at international and national level

The project worked by (a) engaging in the international REDD discussion in the run-up to COP15; (b) producing or participating in the production of technical reviews, reports and proposals; (c) advising WWF network on these issues; and (d) collaborating with WWF country offices in the review of country level arrangements for REDD.

This scoping exercise on the state of Indonesia‟s REDD arrangements as of late 2009, was jointly commissioned by this project and by WWF Indonesia. To speed up its distribution we are releasing this document as a technical discussion that does not necessarily represent the official position of WWF Indonesia on these subjects. Please direct queries regarding the project to its director Pablo Gutman at Pablo.gutman@wwfus.org and questions regarding WWF REDD work in Indonesia to Fitrian Ardiansyah at fardiansyah@wwf.or.id

Table of Contents

Report No. 7 December 2009

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1. Introduction………………………………………………………...……………………………….. 2

1.1. Legal and Illegal Deforestation in Indonesia .................................................................................. 3 1.2. Forest Governance in Indonesia .......................................................................................................... 5

2. Indonesia’s Readiness: Progress on Key Elements of the REDD Design ...................... 8

2.1. Overall REDD Strategy: Paving the Way for REDD Implementation ....................................... 9 2.2. Reference Emission Level (REL) ....................................................................................................... 11 2.3. Monitoring, Reporting and Verification (MRV) ........................................................................... 11 2.4. Funding Preference ............................................................................................................................... 12 2.5. Readiness and Voluntary REDD Activities .................................................................................... 13

3. The National Institutional Design of REDD: Some Possible Options ........................... 14

3.1. Options for the Implementation Design of REDD ....................................................................... 14 3.2. Options for a Revenue Distribution Mechanism ......................................................................... 17 3.3. Social Safeguards – Indigenous Rights ........................................................................................... 18 3.4. Environmental Safeguards ................................................................................................................. 19 3.5. Anti-Corruption Measures .................................................................................................................. 20

4. Conclusion: What can be learned from Indonesia’s experience? ................................. 20

Annex 1. Indonesia REDD Strategy ............................................................................................................... 23 Annex 2. The Application Process for Licenses to Implement REDD .............................................. 24 Annex 3. The Distribution of REDD Revenues between Stakeholders ............................................ 25 Annex 4. A Summary of Current National Institutional Functions for REDD in Indonesia ...... 26

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1. Introduction

The alarming rate of deforestation in Indonesia has become a major concern nationally and globally. The Ministry of Forestry reported that the deforestation rate in the country had increased from 1.6-1.8 million hectares per year during 1985-1997 to 2.83 million hectares per year during 1997-2000. Although this upward trend declined after 2000, deforestation in Indonesia still reached 1.08 million hectares per year in 2000-2005. Deforestation and forest degradation have made Indonesia one of the major greenhouse gasses emitters. Greenhouse gases (GHG) emitted from deforestation and forest degradation in Indonesia are estimated at 1,880 MtCO2 in 2005 (NCCC, 2009).1 Together, the carbon emissions from deforestation and forest degradation in Indonesia and Brazil are estimated to be approximately four-fifths of the annual reduction target of the Annex 1 countries of the Kyoto Protocol (Santilli et al, 2005).2

1National Council of Climate Change (NCCC), 2009, Indonesia GHG abatement cost curve, National Council of Climate Change, Indonesia. 2 Santilli, M, Moutinho, P, Schwartzman, S, Nepstad, D, Curran, L & Nobre, C 2005, "Tropical Deforestation and the Kyoto Protocol: An Editorial Essay", Climate Change, vol. 71, pp. 267-276.

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A “Reducing Emissions from Deforestation and Degradation Plus” (REDD+) scheme has been recently adopted as one of the global efforts to mitigate climate change under the UN Framework Convention on Climate Change (UNFCCC). The scheme aims to provide incentives for developing countries to reduce emissions from the forestry sector, including actions to reduce deforestation, forest degradation, increasing afforestation and reforestation projects, and enhancing forest carbon in developing countries. The participating countries under the scheme would be eligible for financial benefits if they meet a number of criteria by performing forestry-related activities to reduce emissions. In response to the existing REDD initiative, the Government of Indonesia (GoI) is currently developing a national strategy to implement REDD. President Yudhoyono has also pledged a 26 percent cut in emissions by 2020 during the G20 summit, and the forestry sector was expected to contribute about 14 percent of the 26 percent target. Indonesia has moved forward in getting itself ready to implement REDD, however, a number of critical issues remain that may stall the implementation process if they are not properly addressed. This report aims to highlight the challenges and opportunities of REDD implementation in Indonesia and to provide suggestions to improve the national institutional design. First, the report discusses the existing situation of Indonesia‟s forests, including what drives deforestation and how Indonesia‟s forests are governed. It then presents progress made thus far in building readiness to implement REDD in Indonesia. The paper concludes by providing a number of suggestions on how to overcome some critical issues (bottlenecks) to improve the national institutional design and highlighting lessons learned from Indonesia‟s experiences in REDD implementation.

1.1. Legal and Illegal Deforestation in Indonesia

The Ministry of Forestry categorizes deforestation in Indonesia as planned and unplanned deforestation. The development of oil palm plantation expansion as so called planned deforestation (supplying 11.7 % of the total GDP) has cleared 1.8 million hectares, much of it because of rising biofuel demand. Planned deforestation mostly occurs in forests categorized as conversion forests, which usually are allocated for forest plantation and crop estates. Unplanned forest losses are caused by illegal logging, forest fires, forest encroachment, and unsustainable logging practices from legally permitted forest concessions. Several drivers of deforestation pointed out in the recent Indonesia REDD strategy paper include: 1) the growing population, which requires land reform and reallocation of forest estate; 2) pressures from forest dependent people due to their high reliance on forest products as their main source of livelihood and limited alternatives of livelihood; and 3) the difficulty of controlling the boundaries of production and protected forests, leaving them vulnerable to illegal logging.3 This situation is exacerbated by a lack of law enforcement, insufficient economic incentives for communities and local governments to maintain protected areas, and the low capacity of institutions responsible for protected area management. Complementing the official statement on deforestation above, it is important to discuss the current state of Indonesia‟s forests. From 1996 to 2000, more than 22 million hectares of forest were converted legally to other land use activities (GFW/FWI, 2002).4 Data from the Ministry of Forestry (2006) reveals that there are another 22.7 million hectares of remaining conversion

3 Ministry of Forestry, 2009, National Strategy Reducing Emissions from Deforestation and Forest Degradation in Indonesia: Readiness Phase 4 Forest Watch Indonesia (FWI) and Global Forest Watch (GFW), 2002, The State of the Forest Indonesia, World Resources Institute, Indonesia.

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forests that can be converted for other land use activities.5 Most of the conversion forests are located in Riau, Central Kalimantan, Maluku and Papua. In the period of 2003 to 2006, approximately 250,000 hectares of conversion forests were altered to be used as plantations. Some forest conversions for other land use activities were allegedly driven by rent seeking behaviors. It has been suspected that the companies obtaining these licenses are not genuinely interested in pursuing the proposed original plan; instead, they only seek quick cash by extracting timbers from forest clearance (FWI/GFW, 2002). Only a trivial portion of the cleared forested-lands has actually been planted, leaving the remaining cleared forests highly degraded and deforested. Less than 30% of 10 million hectares of land, which have been allocated for timber plantations since 1990, have actually been planted even though a substantial area of that has been cleared (The World Bank, 2006).6 A similar case is also observed in terms of the conversion of forests for oil palm plantations. In the bordering provinces of East and West Kalimantan, of the 2.5 million hectares of land allocated to oil palm companies only 20% had actually been planted with oil palm by 2005 (Wakker 2006).7 Recent forest sector reviews found that deforestation and forest degradation in production forests were caused by poor forest management, a lack of foresight, as well as a lack of transparency of the logging concession holders‟ operations. The concession holders took little responsibility for sustainable forestry management and there were insignificant signs of improvement (GFW/FWI, 2002). Most forests under logging concessions were in damaged condition as the firms violated the regulation on selective cutting. In 2006, the Department of Forestry reported approximately 77.8 million hectares of forests were in critical condition, ranging from critical to very critical. This is a sharp increase from the 2000 estimate that 23 million hectares were in critical or very critical conditions. The magnitude of illegal activities in the forestry sector is also significant and concerning. The supply-demand imbalance in Indonesia‟s forestry sector is considered to be an underlying structural problem of illegal logging. The demand for timbers was approximately 60 million cubic meters of round wood per year while the sustainable yield from natural production and timber plantation forests was around 8 to 9 million cubic meters and 3 to 4 million cubic meters respectively (The World Bank, 2006). According to the Ministry of Forestry, in 2006 the supply shortage of about 40 million cubic meters was met with illegally harvested logs. Illegal logging is defined as all forestry practices or activities connected to wood harvesting, processing, and trade that do not conform to Indonesian Laws (GFW/FWI, 2002). Two classifications of illegal logging include: 1) being carried out by legitimate operators who violate the terms of their licenses, and 2) being carried out by timber theft or people who have no legal right to cut trees. The country‟s annual economic loss due to illegal logging was recently estimated at US$ 3 billion a year (The World Bank, 2006). The extent of conservation and protected forest has increased over time, however, the quality of the forest is continuously under threat. The protection or conservation status does not always stop the illegal practices that are encroaching on the forests. Protected lowland forests in Kalimantan declined by more than 56% from 1985 to 2001, which was mostly due to

5 Ministry of Forestry, 2006, Forestry Statistics of Indonesia 2006, Ministry of Forestry, Indonesia. 6 World Bank, 2007, Public Expenditure Review: Spending for Development, Making the Most of Indonesia’s New Opportunities, World Bank, Indonesia. 7 Wakker, E, 2006, The Kalimantan border oil palm mega-project, Aidenvironment. Commissioned by Friends of the Earth Netherlands and the Swedish Society for Nature Conservation.

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concession-based timber extraction and plantation establishment (Curran et al, 2004).8 Moreover, the deforestation rate prior to and after the establishment of the Bukit Barisan Selatan National Park (BBSNP) was 0.65% per year and 0.63% per year respectively (Gaveau et al, 2007).9 BBSNP has performed better than its neighboring landscape. It has successfully halted the large-scale logging development but failed to address the agriculture encroachments. The government of Indonesia has acknowledged the need to refocus forest policies due to considerable challenges in the sector over the past ten years. Over the past few years, the government has implemented a program of the Forest Law Enforcement National Strategy (FLENS) to curb illegal logging. A Presidential Instruction on illegal logging, which was issued in 2005, has resulted in the arrests of a number of high profile illegal operators. A law against money laundering issued in 2003 has encouraged a number of cases related to illegal logging to be investigated and prosecuted. Furthermore, the Ministry of Forestry has created four new avenues for improved access to and rights over forest resources. However, some challenges remain that are particularly related to governance issues, such as ambiguous and conflicting laws and regulations, elite capture, poor performance of public institutions, and the high level of corruption (which exists even in the justice system).

1.2. Forest Governance in Indonesia

Law 41/1999 on Forestry grants the authority to manage 120 million hectares of state forests to the national-level Department of Forestry.10 The Department has control over almost every activity in state forests. The implementation of the Forestry Law was further operationalized by the Government Regulation 06/2007, which stipulates that the management of forests in Indonesia will be divided into Forest Management Units (FMUs). The Minister of Forestry has the authority to designate a forest zone as a FMU with a specific function including protection, conservation, or production forest.11 On the other hand, different governmental levels have the authority to establish an organization to manage the FMU. If the forest boundaries fall under one district only, the district government will have the responsibility to establish the FMU‟s organization. When the forest unit stretches across districts, the provincial government will be responsible for establishing, organizing, and managing the FMU. On the other hand, if the forest area crosses the boundaries of one province, it will be under the authority of the Ministry of Forestry. The authority of local governments was narrowed following the issuance of Government Regulation 03/2008, which revised the Government regulation 06/2007. The new regulation deleted most clauses related to the authorities of local governments related to forest management in the country. The establishment of FMU organization is now under the control of the Ministry of Forestry. As a result, the local governments only have the authority to provide a

8 Curran, LM , Trigg, SN et al. (2004). "Lowland Forest Loss in Protected Areas of Indonesian Borneo." Science 303(5660): 1000-1003. 9 Gaveau, DLA, Wandono, H, McDonald, AK, Astiani, D, Hardiono, YM, Siregar, P, Caniago, I & Kasischke, E 2007, „Three decades of deforestation in southwest Sumatra: Have protected areas halted forest loss and logging, and promoted re-growth?‟ Biological Conservation, vol 134, No 4, pp. 495-504. 10 Some areas designated as forest zones however include grassland and settlement. This leaves approximately only 87 million hectares of forests because almost 33 million hectares of the total 120 million hectares have no forest cover (Government of Indonesia, 2002) 11 Production forests are usually designated under timber concessions with the main function being to produce forest commodities. A number of forest areas that can be legally converted to other land-use activities are also classified as production forests, but often referred to as conversion forests. Protection forests aim to provide environmental services such as water resource regulation, flood prevention, erosion control, avoidance of seawater intrusion, and soil fertility maintenance. Conservation forests are set aside for wildlife or habitat protection including national parks, nature reserves, wild animals asylums and sanctuaries.

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recommendation on the organization of the FMU. Moreover, the authority to issue commercial timber utilization permits within the production forest (which is the most lucrative activity) also remains at the national level. Again, local governments only have the authority to provide recommendations to the Ministry for the issuance of commercial timber utilization permits. Local governments are authorized to issue other utilization permits including environmental services permits and exploitation permits to collect a limited amount of timber and non-timber products. The financial importance of these activities is less significant in relation to the commercial activities. Local governments consider the management of forest resources as very centralistic despite the massive decentralization process in public administration in Indonesia. This arrangement limits the capacity of local governments and the amount of financial resources allocated to support forest protection and conservation at the local level. Whilst local governments should play an important role in forest monitoring and law enforcement due to their close proximity to forests, the amount of authority that remains with the central government hinders meaningful participation of local governments in forest management. Box 1 summarizes the tug of war between the central and district governments in forest management soon after the decentralization process in Indonesia. Box 1. A Tug of War between Central and District Governments following Decentralization in

Indonesia

Following the process of decentralization in the country, local governments were granted the authority to allocate the large commercial timber concession for up to 50,000 hectares in a single district or province. District governments were also allowed to issue small-scale forest product exploitation rights (Hak Pemungutan Hasil Hutan – HPHH) and timber exploitation and utilization permits (Ijin Pemungutan dan Pemanfaatan Kayu – IPPK) for areas up to 100 ha in conversion forests or in production forest areas.

After obtaining the authority to issue HPHH and IPPK in 2000-2002, local governments granted a massive amount of permits without much consideration for the sustainability of forest resources. It was suspected that local governments embarked on such activities for two main reasons. First, most of the districts saw the timber extraction as a way to generate significant local revenues. Timber extraction is preferable for generating quick revenue because forests are easily converted to cash without requiring investment on capital and technological inputs. Secondly, there was political pressure from forest-dependent communities to claim land and forest resources following decentralization. The people that had been displaced or marginalized during the previous regime demanded their rightful share of the land and benefits generated from forest resources. There was considerable political pressure from the local stakeholders to make forests available for exploitation.

In 2002, the Ministry of Forestry revoked the rights of local governments to issue these permits. At first, local governments refused to abide by the new regulations, which were seen as an effort to recentralize the authorities in forest management in the country. However, in 2003 the local governments ceased issuing these permits. Several explanations for why local governments finally agreed to stop issuing more permits include: 1) the threat from the Ministry of Forestry to bring district officials who issue illicit timber permits to trial for illegal activities. The Ministry and provincial authorities have instituted more stringent enforcement of official transport documents on the legally harvesting permits. 2) Since transfer of revenue sharing and reforestation funds were substantial in the fiscal balancing system, local authorities opted to maximize district timber revenues by actively cooperating with provincial and central authorities and then structure commercial timber extraction around a more limited number of medium and large scale logging concessions.

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The increased deforestation rate during the decentralization era has been used as the main argument for the national government‟s reluctance to decentralize the function of forest management to the local level. However, it is important to note a lack of evidence to prove that the permits of forest exploitation covering some 69 million hectare of forests issued by the Ministry of Forestry have been managed more sustainably than the areas allocated under district logging permits. Source: Barr, C, Resosudarmo IAP, Dermawan A, McCarthy, JF, Moeliono, M, Setiono, B 2006, Decentralization of forest administration in Indonesia: implications for forest sustainability, economic development and community livelihoods, Center for International Forestry Research (CIFOR), Bogor, Indonesia.

Furthermore, overlapping claims for power over state forests are also pervasive between national and sub-national levels and between the government and local communities. This leads to confusion and further exacerbates the difficulty of managing these forests. The confusion created by overlapping regulations situates rural communities, who are dependent on the forest for their livelihoods, in the losing position. In the case of logging activities, many concessions are often granted without considering community rights. The local community often finds it difficult to provide any legal evidence of their existence. A group of people will only be acknowledged as a customary community when they are able to provide required evidences. However, there is still a lack of clarity about what is required to prove a community is a “customary community”, therefore, many of the customary forests have not been granted legal status. See Box 2 to understand the complexity of legal arrangements related to land tenure in Indonesia‟s customary forests.

Box 2. Complication of Land Tenure in Indonesia’s Customary Forests The 1960 Agrarian Law regulates that “an indigenous law shall be recognized, providing this does not contradict national and state interests.” The latter part of the clause was frequently used to undermine adat law. Forestry Law 5 of 1967 recognized adat rights but treated them as weak usufruct rights and subordinated them to the national interest.

12 Furthermore, the Law on Village Government No. 5 of 1979

dismantled adat institutions and the functions of indigenous leaders. The 1999 Forestry Law did not change the concept of customary community tenure rights but added more confusion. It states that certain forest areas can be recognized as “Adat Forests” but the areas must be classified as “State Forests”. This is an apparent legal contradiction since “State Forest” areas are forests with no rights attached to the lands while “Adat Forests” can only exist when Adat rights are exercised on the lands. While the Agrarian Law and numerous subsequent natural resource management regulations give much attention to the recognition of Hak Ulayat (customary rights), there is in fact little de facto recognition and, thus far, little political will. One prominent exception is the procedures for the recognition of private communal land title for Adat communities discussed in a 1999 Department of Agraria Ministerial decision, providing guidelines for the registration of Adat lands (Ministerial Decision 5).

Quoted from Page 7 of Contreras-Hermosilla, A and Fay C, 2005, Strengthening Forest Management in Indonesia through Land Tenure Reform: Issues and Framework for Action, Forest Trends.

Finally, benefits generated from forestry activities such as non-tax revenues have not been returned or earmarked to local communities living within or around forests. District governments, who have the authority to provide public services for local communities are restricted in spending funds generated from forestry activities. For instance, the reforestation levy (dana reboisasi) transferred to the district level can only be used for forest rehabilitation activities and

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Adat refers to the cultural beliefs, rights and responsibilities, customary laws and courts, customary practice and self-governance institutions shared by an indigenous group prior to incorporation into a colonial or post-colonial state. Adat is location-specific and changes over time, where the communities have maintained systems of local governance according to customary law as opposed to uniform and formal structures imposed by the central government.

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not for community-based development. Logging companies, who are supposed to pursue corporate social responsibility, have made relatively insignificant improvements for the benefit of local communities. Local people therefore tend to pursue activities that generate quick cash, such as converting forests to oil palm plantation for survival.

2. Indonesia’s readiness: progress on key elements of the REDD design

REDD is expected to create optimism and hope for better forest management in Indonesia. The financial benefits of REDD are estimated to be US$ 15-50 billion, which is 10 to 30 times higher than the amount of international aids for developing countries in the forestry sector.13 The financial benefits, if utilized properly, could offset the opportunity costs of forest protection and address the drivers of deforestation. An initial positive response has been demonstrated by many stakeholders in Indonesia, which have quickly equipped themselves to partake in the REDD scheme. In order to ensure a smooth start, the Indonesia Forest Climate Alliance (IFCA) was formed in 2007 as a forum for REDD stakeholders to share information on REDD methodologies, strategy, financing, and revenue distribution. The IFCA, which is coordinated by the Ministry of Forestry, involves both national and international experts, supported by a number of multilateral and bilateral donors. As a result of the IFCA‟s recommendation, the Government of Indonesia has developed the REDD-Indonesia framework. Figure 1 summarizes Indonesia‟s REDD framework, including the reference emission level (REL), the overall REDD strategy, monitoring, reporting and verification (MRV), funding preference, and payment distribution. The progress achieved thus far in each of the components of the REDD framework will be discussed in detail in the next subsections.

Figure 1. REDD Indonesia Framework

Source: Ministry of Forestry (2009) National Strategy

Reducing Emissions from Deforestation and Forest Degradation in Indonesia: Readiness Phase

13 Assuming that carbon price is at US$ 7-20/ton CO2

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2.1. Overall REDD strategy: paving the way for REDD implementation in Indonesia

In terms of the overall strategy of REDD implementation, Indonesia aims to adopt the “national accounting with sub-national implementation” approach. This approach will require a national system of Monitoring, Reporting and Verification (MRV). The sub-national level is encouraged to participate in the implementation of sub-national REDD projects but carbon credits generated at the local level would be standardized within the national MRV system. This approach is deemed appropriate considering that forest conditions vary from very low to very high rates of deforestation historically. Moreover, this approach is expected to work well under the existing decentralization setting as it allows the involvement of local stakeholders and at the same time prevents national leakage as all sub-national activities are accounted in the national MRV.14 An overall strategy has also been developed at the national, provincial and district levels. See Annex 1 for details on Indonesia‟s overall REDD strategy. At the national level, the Government aims to issue appropriate regulations on REDD and tackle the drivers of deforestation occurring at all forest classifications in Indonesia, including protected and production forests as well as providing specific attentions to oil palm plantation and peat land. Strengthening the methodology of REL and MRV as well as building institutions will be carried out at all levels. Finally, demonstration activities are expected to take place at selected provinces and districts in Indonesia. Over the past two years, a number of regulations have been developed to provide an umbrella for REDD implementation in Indonesia. The regulatory framework established related to REDD is summarized in Table 1.

Table 1. Regulatory Framework related to REDD in Indonesia Regulation Description

Permenhut P.68/Menhut-II/2008 (December 2008)

Allow for REDD demonstration pilot projects

List possible objectives, locations and proponents of REDD demonstration activities

Regulate that REDD demonstration activities can be implemented in state and private forests

Permenhut P. 30/Menhut-II/2009 (May 1, 2009)

Provide mechanisms for REDD Implementation

List the possible locations (in all types of forests) and proponents (national and international; government, corporation and international entity) of REDD activities

Regulate the procedure and process of application, assessment and approval (including REL and MRV). See Annex 2 for the flow of process from application to approval.

Permenhut P. 36/Menhut-II/2009 (May 22, 2009).

Provide mechanisms for REDD voluntary carbon market

Revenue sharing between developer, community and government (See Annex 3)

Transition to carbon market

These regulations should be seen as an immediate and positive response of the Government to provide a platform for REDD implementation in Indonesia. However, there are a number of issues that are worth highlighting related to these regulations. This is the case because refinement can be more thoughtfully considered to improve the proposed design of REDD implementation under the compliance market. The issues include:

14 Leakage is a potential problem related to terrestrial carbon sequestration where protection of forest in one particular area causes deforestation or adds more pressure to forests in other locations

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1. Involvement/participation of local stakeholders including local governments and local communities are limited in the existing regulations. Although it is stated that local stakeholders can be the proponents of REDD activities, the involvement of local governments and communities should also be guaranteed in the decision making process from the designing process through the implementation phase. In the regulations, local governments are only allowed to provide recommendations for project proposals. Furthermore, under the existing regulations, local people are also ruled out throughout the decision making process of REDD implementation. This poses a threat to the rights of local communities that currently live surrounding and/or inside of forests due to the land tenure issues. Several possible suggestions to improve access for local stakeholders are provided in the next section of this report.

2. The distribution of revenue amongst stakeholders as listed in Permenhut 36/Menhut-II/2009 is not supported by a robust analysis related to the costs of REDD implementation. In order to determine the right portion of REDD revenue distribution to different stakeholders, it is important to calculate the actual costs of avoiding deforestation borne by all actors at different levels. It is also crucial to allocate funds to where they are most needed to address the causes of deforestation at all levels. Furthermore, as REDD requires a cross-sectoral coordination amongst relevant government institutions, the distribution of REDD benefits is proposed to be regulated by a government regulation (a higher regulation in hierarchy than a ministerial decree).

Following the issuance of the Ministerial Decree 30/2009, a national working group on REDD will be established to oversee REDD implementation. The National REDD Working Group (NRWG) will consist of representatives from relevant sectors and stakeholders. The members of the working group will be high-level officials at the Directorate General level (which is one level below a Minister). They will mostly handle strategic issues supported by the Technical Team (at the Director level) and the REDD Secretariat. Several main institutions dealing with the REDD scheme in Indonesia presently are:

1. Ministry of Forestry, which has the responsibility to manage state forests. Within the Ministry, Directorate General of Forest Planning (DGPLAN) and Research and Development Agency (FORDA) are key-players in the process of REDD implementation. In collaboration with the Australian Government, DGPLAN is responsible for the Forest Resource Inventory System (FRIS), which is integrated into the National Carbon Accounting System (NCAS). This collaboration also aims to develop a satellite-based system that will enable Indonesia to monitor forest and agricultural fires on a daily basis. In addition, FORDA is providing support by conducting research activities on FRIS/INCAS.

2. The Ministry of Environment served as Indonesia‟s focal point for UNFCCC until the establishment of the National Council on Climate Change (Dewan Nasional Perubahan Iklim or DNPI). DNPI is a body established by a Presidential Decree with a mandate to advise and oversee implementation of both climate change adaptation and mitigation policies. DNPI has recently become Indonesia‟s focal point for UNFCCC.

3. The National Development Planning Agency (BAPPENAS) is the coordinator of national

development and manages assistance from development partners. A climate change multi-donor trust fund has been established within BAPPENAS, which aims to support

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climate change related initiatives and can potentially include work related to REDD activities.

4. The Ministry of Finance is responsible for designing REDD payment distribution

mechanisms. A task force for developing fiscal policies relevant to climate change has been established within the Ministry.

2.2. Reference Emission Level (REL)

REL is the level against which the impacts of REDD policies and measures are assessed in order to determine whether participating countries have reduced emissions and should receive financial rewards for their efforts. The government aims to apply a mixed approach to developing REL, where emissions from planned and unplanned drivers of deforestation are treated separately. Emissions from unplanned deforestation are measured against a REL based on historical unplanned emissions or on an average of historical emissions. Emissions from planned deforestation would be developed on the basis of the area of forest to be converted for the purpose of other land uses. In the case of oil palm development the complexities of land conversion are managed within different authorities not only under the authority of the Ministry of Agriculture but also the Ministry of Forestry; this type of coordination is challenging for integrated emission planning. The recently published report of Indonesia‟s Second National Communication (SNC) to UNFCCC has projected carbon stock changes in the living biomass from 1990 to 2030 using a historical trend of deforestation and land rehabilitation data.15 Under the business as usual (BAU) scenario, carbon stocks in the living biomass will continue to decrease until 2030. In late 2009, Indonesia‟s President made a public announcement and set the target of GHG emission reductions at 26 percent by 2020 against the 2005 baseline, with approximately 14 percent or reductions planned to come from the forestry sector. The SNC report has also ambitiously stated Indonesia‟s target to be a net GHG sink country in the next 10 years. This target is expected to be achieved under the following mitigation scenario:

1. Afforestation and reforestation programs on approximately 0.7 million hectares per year 2. Forest plantations will be developed to match the demand of 2010 (based on FAO

estimates ~ this rate resides somewhere between 0.3 and 0.4 million hectares per year) 3. Enrichment planting of between 0.2 and 0.6 million hectares, which is 45 percent higher

than the BAU scenario 4. Illegal logging to decrease rapidly from 0.5 million hectares per year in 2000 to

nonexistent after 2020 5. Deforestation is assumed to be 75 percent of the historical rate (0.45~0.65 million

hectares per year) 6. 50,000 hectares per year will be used as plantations for energy

2.3. Monitoring, Reporting and Verification (MRV)

MRV is an important activity under a REDD mechanism as it will determine whether a country has achieved significant and credible reductions in emissions from deforestation and degradation. Monitoring involves data collection and the necessary calculations for estimating emission reductions or enhancement of carbon stocks, while verification aims to assess whether

15 The Ministry of Environment, 2009, Summary for Policy Makers: Indonesia Second National Communication Under the United Nation Framework Convention on Climate Change (UNFCCC)

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the information is well documented based on IPCC methodologies and is in compliance to UNFCCC guidelines. Following such processes, the financial benefits can be granted to participating countries based on performance. The SNC report has estimated national greenhouse gases inventory in the forestry sector using Tier 1 and Tier 2 of the 2006 IPCC reporting guidelines.16 In order to assess the change of areas within different land categories, Indonesia has decided to apply Approach 2 using spatially explicit land conversion information.17 This approach allows for the estimation of both “gross” and “net” changes in land categories. However, no experience presently exists in monitoring and measuring areas of degraded forests on a regular basis and very little data exists on the impacts of timber harvesting on carbon stocks. The Ministry of Forestry has recently initiated a systematic forest-monitoring program using MODIS/TM satellite imagery to assess deforestation from the period of 2000 to 2006. However, the MODIS/TM data cannot accurately identify forest degradation in an optimal manner. More detailed remote sensing data sources and methods will be required to detect degradation, potentially including high-resolution satellite systems and other advanced forms of technology. Moreover, in the mid-1990s, a national forest inventory (NFI) was carried out in Indonesia generating stock tables for all forest functional classes and for all provinces (IFCA, 2008). The National Forest Inventory (NFI) should be revived and improved with more plots of forest types that are currently under the highest threat. Developing a robust monitoring system for forest degradation requires training and methodology testing, as well as the acquisition of more detailed satellite data and air photos.

2.4. Funding preference

In terms of financing options, REDD can be implemented as either a market or non-market approach. Market approaches enable developing countries to generate credits from REDD measures and sell them to developed countries, who may purchase and use the credits to meet their emission reduction commitments. Non-market or fund-based approaches propose a fund created by developed countries to reward developing countries for their efforts to reduce emissions from deforestation and forest degradation. Indonesia‟s submission to the FCPF and the UN-REDD Program is intended to support the country in designing and creating high quality projects (of which Indonesia already has several), to enable them to be ready to tap substantial resources from carbon markets by protecting Indonesian forests. Regarding forest carbon credits, Indonesia's submission explains that such an investment could result in alternative and sustainable livelihoods for many of Indonesia's 10 million lowest income families who currently survive on uncontrolled harvesting of forest and the expansion of slash and burn agriculture. Clearly, Indonesia believes that the market will provide strong incentives to enable behaviors to change, and those changes would support real emissions reductions and act to reduce man-made activities that cause "reversals”. This market

16 According to IPCC, several tiers can be used for the assessment of emission factors (changes in carbon stocks), including: 1) Tier 1 assesses the mean annual increment for degradation and/or forest biomass stock (for deforestation) values forest classes for each continental area; 2) Tier 2 assesses mean annual increment and/or forest biomass values from existing forest inventories and/or ecological studies. Default values provided for all non-tree pools; 3) Tiers 3 measures trees repeatedly from permanent plots and/or calibrated process models. (Source: IFCA, Consolidation Report, 2009) 17 Approach 1 identifies the total net area change for each land category but does not provide information on the nature area of conversions between land uses, while Approach 3 extends Approach 2 by using spatially explicit land conversion information; thus allowing for an estimation of both gross and net changes in land categories. (Source: IFCA, Consolidation Report, 2009)

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approach is expected to provide a robust REDD framework because it adheres to a national carbon accounting scheme and has the strength of financial incentives which creates a stronger underpinning of integrity to the process. However, the Government is currently waiting for the result of the negotiations that will dictate the type of REDD funding that will be pursued and implemented.

2.5. Readiness and Voluntary REDD Activities

The Ministry of Forestry aims to advance the progress in building REDD infrastructure both in sorting out the methodological issues and strengthening institutions to implement REDD in Indonesia. The estimated cost is US$ 18.86 million. This figure excludes support for demonstration activities and policy interventions to tackle drivers of deforestation and forest degradation. The breakdown of the budget required for readiness activities is included in Table 2 below.

Table 2. Required budget for readiness activities

Strategy Category Estimated costs (US $ Million)

Methodology (REL and MRV system) 12.628

Regulations, institutions and analytical works 6.236

Total 18.864

A number of demonstration activities have also been implemented to test and develop methodologies, technologies and institutional designs of REDD. Several selected demonstration activities have been implemented as collaborations between the government of Indonesia and several agencies including:

1. Germany (BMZ, implemented by KfW/GTZ). The project will be working in a number of districts in the provinces of East and West Kalimantan. The project focuses on a district implementation model.

2. AusAID. AusAID has initiated the “International Forest and Climate Partnership”. The partnership supports the development of large-scale project based demonstration activities in Central Kalimantan, particularly in the Kapuas district. A second demonstration project is currently being prepared in another district in Indonesia.

3. UN-REDD. The project was signed in late November 2009. The project, which involves

FAO, UNDP and UNEP, aims to help the Government of Indonesia to develop a REDD architecture that will allow fair, equitable and transparent REDD implementation.

4. The World Bank. Indonesia participates in the Forest and Carbon Partnership Facility (FCPF) and therefore is eligible for readiness support. The Ministry of Forestry has requested a total of USD 3.09 million for building readiness in the implementation of REDD in Indonesia through FCPF. See Table 3 below for the breakdown of funding requested to FCPF.

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Table 3. Requested Budget to FCPF

Activities Requested budget (US $ 1000)

Background studies (follow up IFCA studies) including further studies on rivers of DD and ways to address them

138

Management of REDD, consultation, communication and participation 491

REDD implementation framework: assist institutional setting including national registry, institutional capacity building etc.

652

REDD implementation framework: assist institutional setting including national registry, institutional capacity building etc.

469

Assessment of environmental and social benefits and other co-benefits 342

Assist in developing RED/RL, data acquisition, background studies (coordinated activities: Australia – UNREDD – FCPF – others)

719

Design MRV system (coordinated activities: Australia – UNREDD – FCPF – Others)

285

Total 3096

Furthermore, in the province of Nanggroe Aceh Darussalam (Aceh), a voluntary REDD project in the Ulu Masen Ecosystem (750,000 hectare forest) has been launched. The project aims to reduce deforestation in the area by 85% and avoid 3.4 MtCO 2 per year in emissions (Aceh Province, 2007).18 This was the first REDD project in Indonesia to be approved as conforming to the Climate, Community and Biodiversity standards. The project is supported by a tri-partnership of government, non-governmental organizations and the private sector, which are represented by the Provincial Government, Fauna and Flora International (FFI), and Carbon Conservation Ltd, PTY.

3. The National Institutional Design of REDD: Some Possible Options

This report has thus far summarized Indonesia‟s main achievements in a number of readiness activities mostly related to technical functions such as developing REL and MRV. However, a number of challenges still exist, including addressing the overlapping claims and regulations in the forestry sector, ensuring greater access of local stakeholders (i.e. local governments and indigenous communities in the implementation of REDD), and designing a fair and transparent distribution mechanism of REDD payments. (See Annex 4 for a summary of current national institutional functions for REDD). This section aims to provide suggestions of possible institutional designs for REDD implementation in Indonesia.

3.1. Options for the Implementation Framework of REDD

Effective forest governance at all levels is considered a prerequisite for managing forests sustainably. Moreover, the national government needs to develop sub-national reference levels due to the wide-variation of regional situations across a country. The adoption of a “national approach with sub-national implementation” is a good start however it needs to be further

18 The Government of Aceh Province, 2007, Reducing Carbon Emissions from Deforestation in the Ulu Masen Ecosystem, Aceh, Indonesia: A Triple-Benefit Project Design Note for CCBA Audit

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detailed down particularly related to who will be doing what at different levels. Several options for the implementation of REDD within Indonesia context are below:

1. A centralistic model – The existing forest governance in Indonesia can be considered as centralistic, where most functions are in the hand of the Ministry of Forestry at the national level. Under this model, the national government would decide on REL and instruct local governments to implement REDD at the local level to support the national priority. Relying on the existing forest governance to implement REDD would provide more advantages in terms of reducing transaction costs from creating new institutions or delegating new mandates. However, in the case of Indonesia, the existing forest governance is far from ideal with many overlapping regulations, claims and authority over forest resources. Local governments have a restricted authority over forests whilst their involvement in the protection and conservation of forests is deemed to be crucial in order for REDD to be successful. Local communities, who have de-facto control over many forest areas, need to be provided a greater role in the management of resources. Several issues that will hinder the successful implementation of REDD under the existing centralistic model include:

Monitoring difficulties due to the wide extent of Indonesia‟s forest resources especially without full supports from local stakeholders;

Reduced likelihood of taking local situations and circumstances into account in the development of REL as well as REDD policies and measures to address the drivers of deforestation;

Limited participation of local communities because the decision making process takes place at the central level that is very distant from where local communities, that are impacted directly by REDD implementation, reside.

2. A functional model - IFCA suggested some sort of a „functional‟ approach where

functions are apportioned to different institutions. The functions include oversight, financing, technical REDD implementing institutions and accountability. Potential institutional roles and responsibilities for REDD in Indonesia suggested by IFCA are listed below in Table 4. One issue that might be persistent under this model is the difficulty in horizontal coordination between sectors (actors/players). Cross-sectoral coordination seems to be a very problematic issue in Indonesia. It also has an implication of high transaction costs as many parties involved and complicated bureaucracy can frequently slow down the process. In addition, to increase capacity within so many institutions due to a new mandate would require more resources. However, the involvement of the existing institutions based on their routine mandate is crucial. For instance, the Audit Supreme Body (BPK) and the Independent Anti-Corruption Agency (KPK) need to be involved in the auditing process of all REDD activities. However, their involvement should be seen as part of their regular function without adding a new assignment to their existing roles and responsibilities.

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Table 4. Possible distribution of functions amongst relevant institutions

Function Possible Entity

National/regional/local fund managers e.g. BLU (Fund Manager for Afforestation/Forest rehabilitation activities at the local level)

National/regional/local registries e.g. BPN (Land Agency), BAPLAN (Planning Agency within the Ministry of Forestry)

Monitoring entities, linking local to national scale

e.g. BPS (Statistic Bureau), civil society, contracted service providers

National/regional/ local legal institutions Legislative, Ministry of Forestry, BPN

Emission reduction agents and providers of alternative livelihoods

Local communities and corporations

Auditing

e.g. BPK and KPK and verification entities, with international support

3. A decentralized model - In the implementation of REDD, several activities are best handled by the national government, while others would be best devolved to the local level. Based on the ongoing REDD negotiations, national governments need to develop national carbon accounting, monitor the implementation of REDD policies and measures, receive and distribute REDD credits, and assume liability after payment has been received. Local governments are in a better position to develop local policies and measures at the local level. Local authorities are considered to have better specific information related to local resources, which results in better-targeted policies and lower transaction costs.

In Indonesia‟s context, local stakeholders need to be provided with a greater amount of authority in forest management to ensure the successful implementation of REDD. The national level needs to ensure a robust monitoring and evaluation system to avoid leakage and to hold any local project liable if it fails. In order to encourage local governments‟ participation, the central government could decide on a national reference level and seeks expressions of interest from local governments to implement REDD in their administrative areas. Alternatively, the central and local governments could decide on a national reference level jointly and the local governments could implement REDD measures at the local level.

Under a decentralized model, a robust monitoring system is also imperative in order to reduce national leakage. This issue would become evident when a local government refuses to partake in REDD and allows land use change to take place in the locality while other localities tighten up their policies to reduce deforestation. Furthermore, the capacity of local governments needs to be urgently developed under a decentralized model. The capacity of local governments in REDD implementation is generally low. With a total of 451 districts in 33 provinces, the capacity of local government varies widely between one locality and others. Support provided by ongoing demonstration activities only covers a small number of regions. It is time to escalate and extrapolate the experiences to cover more regions in the country. National socialization and public education, particularly to all districts, is an important start to build the capacity of local stakeholders.

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3.2. Options for a revenue distribution mechanism

REDD funding would be granted based on performance to participating countries. However, upfront investments to set up a REDD project can be costly for developing countries. Intermediate payments are deemed necessary to reward the achievement of critical milestones towards full implementation of plans and facilitate progress towards successive milestones. Indonesia considers the importance of implementing REDD using a phased-based approach. If REDD payments are disbursed only after emission reductions from deforestation and forest degradation are achieved, then intermediate financing to reward and facilitate strategic milestones need to be provided. Several venues are also considered for intermediate financing, such as the government budget, donor funding and private investment from oil palm, pulp and timber companies, and private sector financial institutions.19 The World Bank, for instance, considers providing concessional funding of $500 million through the Forest Investment Program (FIP) to supplement national government financed components. Following the achievement of REDD targets, compensation would be received and would need to be distributed among all stakeholders, including indigenous peoples and local communities in a fair, efficient, transparent, and equitable manner. Related to the payment distribution mechanism, two possible options suggested by IFCA (2008) are based on where primary transactions take place between international buyers or fund providers. These include:

1. Transaction with the central government, who will be responsible for distributing the funds to local stakeholders. This approach has the advantage of reducing transaction costs because interacting with one single party will be less costly as compared to dealing with multiple parties. The distribution of REDD revenue from the national to the local level could utilize the existing mechanisms such as fiscal transfers from national to local governments (BLU and forestation levy or Dana Reboisasi). However, the implementation of REDD using the existing mechanism requires several adjustments otherwise it would compromise the success of REDD implementation. The experience of the existing implementation of Reforestation Levy (Dana Reboisasi) shows that local governments have difficulty spending the funds for forest rehabilitation due to the strict guidelines regulating how the funds should be spent. The guidelines provided by the national governments fail to take into account local conditions.

2. Transaction with lower government levels or directly with projects in accordance with the relative share of the location in the national baseline. The national or higher governmental level will collect some sort of „tax‟ from the transaction to finance monitoring and accounting. This approach will empower sub-national stakeholders to have sufficient authority to implement REDD according to local circumstances. However, a number of issues remain such as: a) high transaction costs from dealing directly with many entities; and b) difficulty in monitoring and control without a robust monitoring system leakage could be prevalent.

Within the proposed “national approach with sub-national implementation” system, it is obvious that the national government would hold the authority to receive funds and further distribute to local stakeholders. This arrangement offers a number of advantages such as a more

19 Ministry of Forestry, 2009, National Strategy Reducing Emissions from Deforestation and Forest Degradation in Indonesia: Readiness Phase

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straightforward approach to reduce national leakage and lower transaction costs. Under this arrangement, the national government would need to distribute REDD benefits equitably to different stakeholders. Several important considerations related to the distribution of REDD revenues are: 1) the strategic conditional terms of earning and spending revenue from REDD activities 2) the amount (percentage) of revenues to be allocated to each stakeholder at different levels and 3) the best mechanism to distribute the funds to communities. Determining the correct amount of revenue to be distributed amongst stakeholders is important as it would determine whether deforestation actors would be interested to participate in REDD. It is also important to pay special attention to customary land users and poor communities (or localities) in REDD payment distribution, which also requires clarity on the overlapping claims. Otherwise, the poor and marginalized would be in a losing position in the overall process of REDD implementation.

3.3. Social safeguards – Indigenous Rights

Indigenous peoples and national and international NGOs have closely monitored the REDD preparation process in Indonesia and demanded a more participatory approach. They see REDD as an opportunity to raise the importance of issues such as land tenure, although to solving this issue goes beyond the Ministry of Forestry‟s jurisdiction. One of the main challenges in this process going forward is to agree on participatory structures that would permit the inclusion of various stakeholders groups in the debate on how to structure REDD activities in Indonesia.

REDD brings hope for better and secured land tenure but also puts pressure on local customary lands. It is not always clear how REDD, or more specifically the existing grants, will be able to contribute to or solve these generic issues, such as land tenure, transparency, participation and bureaucracy. During the past 40 years, nearly 2000 cases of conflict affecting some 600,000 households over more than 10 million hectares of forest land have been documented in Indonesia (IFCA, 2008). These conflicts are likely to persist until a consensus is reached between the government and forest-edge and enclave communities.

As a response to ongoing initial REDD activities by the Indonesian government REDD, a letter was addressed to the Human Rights committee by the Aliansi Masyarakat Adat Nusantara (AMAN), a prominent national indigenous peoples‟ organization. The letter protested that Indonesia‟s approach to REDD vests exclusive authority over forests in the State without recognizing or protecting the rights of indigenous peoples. Moreover, the letter also raised concerns over Indonesia‟s submissions to the FCPF, which is called as „entirely silent‟ about any measures to secure indigenous peoples‟ rights in relation to REDD activities.

The letter also claimed that REDD without land tenure will not work, and there is a consensus among experts that the current forestry laws hinder local communities‟ ability to secure legal rights and entitlement to land because there is no process for recognizing the existence of adat communities. Furthermore, there is no procedure either in the law or in actual on-the-ground practices to facilitate the identification and demarcation of adats –communities‟ traditional jurisdiction areas.

Tenure in the context of REDD might have important implications for the probability of reducing emissions and on how to proceed with the financial revenue sharing process. From a financing and investment perspective, tenure may have an important impact on the perceptions and

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willingness of international investors who are expected to become important players in the global forest carbon market. Without effective measures to secure indigenous peoples‟ rights, REDD concessions and activities could cause additional and potentially irreparable harm particularly given that a substantial percentage of the forests are in indigenous peoples‟ traditional territories.

What can be done to address the issue of indigenous rights?

1. Participatory mechanisms or structures should be identified to allow involvement of civil society groups and indigenous peoples in REDD decision during the international negotiation and the national implementation. This consultation should move beyond information sharing to more active engagement of civil societies or indigenous peoples to address specific concerns, e.g. benefit sharing, land rights, forest governance, local knowledge, etc.

2. Conduct risk analysis and legal reviews of REDD on indigenous peoples and other forest dwellers in the planning and implementation process of REDD, in particular on how the protection of forest dependent people rights can be seen in the context of REDD. Acceptance of project design documents and the disbursement of REDD benefits can be made contingent upon evidence of adequate consultation and consideration of indigenous interests. 20

3. Ensure equitable distribution of REDD benefits with respect to the indigenous proprietary and land rights.

4. Put in place an independent committee to oversee the implementation of REDD where grievance procedures are established in every stage of REDD implementation.

3.4. Environmental safeguards

REDD can provide several environmental benefits such as water supply, soil stabilisation and protection of communities from climatic changes. REDD can play an important role in supporting biodiversity conservation because tropical rainforests are among the most biodiverse ecosystems. However, many studies also warn that there will be trade-offs between carbon storage and biodiversity so a policy targeted only at carbon would fail to conserve biodiversity. If REDD focuses solely on cost-effectively reducing carbon emissions, the benefits for biodiversity will be low, protecting only slightly more species than if funds were allocated at random among forest-losing countries. However, if the same REDD funds were targeted to protect biodiversity, almost four times the number of species would be protected (Venter et al, In Press).21 What can be done to maximize the environmental benefits of REDD?

1. Targeting REDD funds to maximizing both objectives of carbon and biodiversity simultaneously by diverting some of REDD revenue for biodiversity conservation and incorporating biodiversity values into carbon payment. The second option however would require an international commitment to pay a premium for REDD projects with a specific attention to save biodiversity rich ecosystems or areas with high-profile species.

2. Applying a specific consideration/priority to protect critical ecosystems that provide important support for environmental services and prevent the likelihoods of natural disasters in project development stages.

20 Barnsley, I (2008) Reducing Emissions from Deforestation and Forest Degradation: Guide for Indigenous People, UNU-IAS 21

Venter O, Laurance WF, Iwamura T, Wilson KA, Fuller R, Possingham H. 2009. Harnessing carbon payments to protect biodiveristy. Science

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3.5. Anti-Corruption Measures

The corruption problem in Indonesia is a systemic problem that goes well beyond the forestry sector. The recent anti-corruption movement proves that public information is key to initiating any anti-corruption action. Transparency will contribute to the efficiency of REDD markets by providing buyers and sellers with timely, accurate and accessible information. In regards to REDD, information management such as real-time public access is now available for events such as land clearing fires, deforestation, and illegal logging. Such information can put pressure on the country to improve governance by constraining opportunities for corruption and elite capture.

What can potentially be done to strengthen the anti-corruption measures of REDD funding? 1. Reduce the point of transactions where misuse of power/money/resources is possible 2. Eliminate the use of forestry revenues as a source of funding for political parties by

ensuring forest concessions are allocated independently and REDD financial flows are fully disclosed to the public22

3. Involve corporations to participate in REDD, but make their participation conditional on meeting specific standards and indicators of good governance

4. Enhance cooperation with Indonesia‟s major international partners in forest trade and investment to control log smuggling and money laundering23

5. Put in place an independent committee that can address reports of corruption incidence

4. Conclusion: What can be learned from Indonesia’s experience?

Given the strong endorsement of REDD and the 26% reduction target by the Government of Indonesia, the country still needs to be assured that the implication of mitigating climate change from the forestry sector will not hinder its socio-economic development. Only if REDD can provide an alternative source of income that can compete with the revenues available from other land uses can it provide a rationale for change.

Due to the multi-sector approach to REDD that attempts to address many drivers of deforestation and degradation that fall outside the forestry sector, there is a need for a comprehensive and integrated „whole of government‟ approach to REDD within the country. Some progress shows that the country has yet to put in place the appropriate or necessary institutional arrangements to manage a national REDD program effectively and strategically. Currently, there are several agencies and provincial or local governments engaged in REDD processes with insufficient communication and coordination. As it stands, DNPI has the national mandate for climate change coordination and carbon markets, and Ministry of Forestry has the national mandate for managing forest lands and licensing. BAPPENAS has the national mandate for coordination on development planning. In this capacity, BAPPENAS chairs the steering committee for the Australian REDD investments, as well as the Indonesia Climate Change Trust Fund. This creates some overlapping of roles and confusion of responsibilities in pursuing the 14% reduction target where most of the budget allocation has been planned for planting activities. It is recommended that the various Ministries involved in land use should convene and set up a National REDD Steering Committee that will be responsible for the REDD decision making

22

Ministry of Forestry IFCA 2008 Consolidation Report : Reducing Emissions from Deforestation and Forest Degradation in Indonesia, FORDA Indonesia. 23 ditto

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process. The composition of this committee should have representation from sectors engaged in land use (agriculture, infrastructure, planning, forestry as well as forest dependent people, NGOs, indigenous peoples, private sector, research institutions and others). Furthermore, this committee should be legalized by a higher authority e.g. by a government regulation, presidential decree, and be provided with the mandate to set up: roles and responsibilities; rules or regulations; and effective systems or structures for the formulation of REDD.

The ownership and control of significant areas of Indonesia‟s forests are contested between government agencies, private companies and local communities. All these conflicts, many of them dating back decades, would need to be resolved before the rightful stewards of forest areas can be compensated by REDD schemes. Indonesia however has quickly equipped itself to get ready to partake in the REDD scheme, particularly related to technical functions such as in developing REL and MRV. Several demonstration activities are currently being implemented to test and improve methodologies and institutional designs of REDD. Local stakeholders need to be provided with a greater authority in forest management to ensure the successful implementation of REDD. The national government however should ensure a robust monitoring and evaluation system to avoid leakage and impermanence.

This paper has summarized some possible options and suggestions particularly for REDD implementation designs. A number of suggestions related to the implementation framework, revenue distribution mechanisms, and social and environmental safeguards are also provided. In order to choose between possible options, the existing administrative and political situation and the capacity of stakeholders at different levels need to be taken into account.

The national government would be very likely to receive REDD payment and further distribute benefits to different stakeholders. Three important issues related to the distribution of REDD revenues are: 1) the strategic conditional terms of earning and spending revenue from REDD activities, 2) the amount (percentage) of revenues to be allocated to each stakeholder at different level, and 3) the best mechanism to distribute the funds to communities. Several adjustments on fiscal transfers in the forestry sector are necessary. Refining and drawing on the lesson learned about existing effective disbursement that help to impact local governments and help communities change their behaviour are more than necessary, as it will be financially and politically costly to test new payment mechanisms that are prone to corruption.

All of the above discussions are related to developing a national institution for the implementation of REDD. However, many issues remain unclear as countries are waiting for the result of the international REDD negotiations. The uncertain situation at the international level actually slows down the progress in developing readiness at the national level. Several important steps that need to be taken at the international level to help expedite the process at the national level are:

o Provide unambiguous definitions, guidance, and rules to reward countries –

including countries like Indonesia that have taken early action on terrestrial carbon management even before the detailed rules are known. The international community should demonstrate that it will cooperate and follow up once

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negotiations conclude. This will help reduce policy ambiguity at the national level. Such clarity will facilitate national and local consultation and allow relevant stakeholders to develop better-targeted policies to achieve the policy goals.

o Provide the long-term mandate and financing to finish building the international institutional infrastructure necessary to guide and coordinate the implementation of forest carbon mitigation at the required scale. To set up the necessary infrastructure to implement REDD in a country is costly therefore financial assistance during the initial stage of REDD implementation will be very important.

o Create and implement a credible carbon market. This is crucial for correcting the market failures that lead to the over-exploitation of forests to begin with. In order to preserve the largest areas of forest possible, REDD would indeed target large-scale landowners, and must provide sufficient incentive to make it economically rational for them to avoid contributing to deforestation or degradation.

o Tackle the drivers of deforestation that exist beyond national boundaries such as increasing awareness of international timber markets to cooperate with REDD participating countries in wood tracking and log smuggling control.

o Put pressure on participating countries to ensure sound social and environmental safeguards and put anti-corruption measures in place as a prerequisite condition of REDD implementation.

o Developing national baselines will require time, capacity building and resources. Yet there is great urgency to begin immediately reducing deforestation and significant value in lowering the cost of real reductions. Therefore to provide incentives for nations to establish national-level accounting for the forest sector, credits for activities in nations with significant emissions that have not shown adequate progress toward a national emissions accounting framework should be discounted and ultimately eliminated if the country's progress remains stalled. The key is to support and incentives best practices, high quality standards and a workable, effective system that reduces the likelihood of international leakage.

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Annex 1. Indonesia REDD Strategy

Category Key Strategy Component

NATIONAL LEVEL

1. Tackling drivers of deforestation and degradation

Protected area: Develop more effective conservation and management of Protected Areas

Production Forest: i) Develop more effective management of production forests, ii) Options for forest harvesting and management to supply the requirements of pulp and paper industry

Oil Palm: Options for supplying the requirements of the oil palm industry Peat land: Testing strategies for restoration of peat lands

2. REDD regulation Development of technical and institutional guidance to implement REDD Establishment of National REDD Committee/REDD National Working Group

3. Methodology Establishment of REL at the national level Establishment of MRV system at the national level

4. Institution Establishment of the National Registry Institutional setting to implement REDD Setting up the incentive/payment distribution mechanism Stakeholder communications / coordination/ consultations Capacity building and institutional strengthening

PROVINCIAL LEVEL

1. Methodology Establishment of REL/RL at provincial level (shall be consistent with national REL)

Establishment of MRV system at provincial level 2. Institution Stakeholders communication/coordination/consultations

Capacity building and institutional strengthening

3. Demonstration Activities (DA)

Enhance DA to represent different bio-socio-geographical conditions in 28 provinces (existing at 4 provinces: East Kalimantan, Central Kalimantan, South Sumatera and East Java)

Enhance capacity of local communities, including adat communities to engage in forest management through REDD activities.

DISTRICT LEVEL

2. Methodology Establishment of REL at district level (shall be consistent with provincial and national REDD)

Establishment of district level MRV system

3. Institution Stakeholder communications/ coordination/ consultations Capacity building and institutional strengthening

4. Demonstration Activities (DA)

Implement Demonstration Activities at district level or management unit (with bundling to district level wherever possible)

Enhance capacity of communities, including adat communities to engage in forest management through REDD activities

ALL LEVELS

Relevant analysis Analyze costs of alternative land uses Analyze environmental and socio-economic impacts of REDD Evaluate potential additional benefits of REDD Assess trade-offs and risks of REDD to sustainable development Assess risks of the REDD strategy

Source: Ministry of Forestry (2009)

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Annex 2. The application process for licenses to implement REDD – Permenhut 30/2009

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Annex 3. The distribution of REDD revenues between stakeholders – Permenhut 36/2009

Tabel N2JL No.

Permit holder / Developer

Distribution

Government Community Developer

1. IUPHHK-HA 20% 20% 60%

2. IUPHHK-HT 20% 20% 60%

3. IUPHHK-RE 20% 20% 60%

4. IUPHHK-HTR 20% 50% 30%

5. Community Forest 10% 70% 20%

6. Hutan Kemasyarakatan 20% 50% 30%

7. Adat Forest 10% 70% 20%

8. Village Forest 20% 50% 30%

9. KPH 30% 20% 50%

10. KHDTK 50% 20% 30%

11. Protected Forest 50% 20% 30%

Note: 1) The share of government is to be split 40/20/40 between central, provincial and district

governments respectively. 2) Many stakeholders have objected to this distribution formula. One of the major issues is the

absence of cost analysis and calculations behind the issuance of the distribution formula.

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Annex 4. A Summary of Current National Institutional Functions for REDD in Indonesia

Oversight functions

International interface National level

Indonesia has a focal point to manage the relationship with UNFCCC Ministry of Environment together with DNPI with Ministry of Forestry as the coordinator of WG in REDD

Several demonstration activities supported by international multilateral and bilateral donors are undergoing (UNREDD, Australia, WB, etc)

Mechanism to allow the implementation of voluntary carbon market has been put in placed

An initial REDD strategy has been developed but clear roadmap to achieve the 14% reduction target is still under preparation

National WG group REDD will be formed to oversee implementation and review of the REDD strategy

Finance functions

International interface National level

Request funding from international sources Forest Investment Project (WB)

The fiduciary reporting procedures of the demonstration activities are based on the respective agency‟s guideline that funds the project

Close consultations with relevant stakeholders are still necessary

Technical functions (standards and other)

International interface National level

Initial GHG stock in the forestry sector has been reported in the SNC report serving as the initial baselines

MRV methodologies comply with Tier 1 and 2 of UNFCCC guidelines

Ongoing activities to refine the methodological issues in REL and MRV (Approach 2)

Data collection and processing are in progress

Some activities at the local (provincial and district) level but still a lot to do considering the number of local governments in Indonesia at present

REDD Implementation Functions

National level

Readiness activities in Indonesia have progressed

REDD programs and project in accordance with REDD national strategy are being implemented

Request funding for REDD programs and projects under FIP and several demonstration activities have been carried out

Lack of robust social and environmental safeguards

Certification (and Registry) Functions

International interface National level

Submit country REDD strategy to FIP

Submit the Second National Communication report, which includes the proposed REL and MRV system to UNFCCC

The national REDD MRV needs to be further improved, particularly in monitoring forest degradation

One VCM project (Ulu Masen – Aceh) has been submitted for review national REDD certification and obtained Climate, Community and Biodiversity standards

Accountability Functions

International interface National level

Social and environmental standards are still not being regulated clearly by COP

Social and environmental safeguards are still lacking at the national level.

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International Financing for REDD

A Project of WWF US Policy Program List of Publications

All these publications can be downloaded from WWF Connect or copies can be obtained from

Melissa Tupper Melissa.Tupper@wwfus.org or Pablo Gutman Pablo.Gutman@wwfus.org

Report No. 1 P. Gutman; “The State of REDD Negotiations and Possible Outcomes at

COP15. A September 2009 Update”

Report No. 2 C. Loisel; “REDD Initiatives Outside the UNFCCC. An October 2009

Update”

Report No. 3 A. Sen; “National Institutional Arrangements for REDD. Case Study Guyana”

November 2009

Report No. 4 T. Blanco Freja (cord.) “National institutional Arrangements for REDD. Case

Study – Colombia” November 2009

Report No. 5 M. Cigaran Tolmos (cord.) “Challenges, Opportunities and Critical Aspects

Regarding the Possible Implementation of REDD in Peru” December 2009

Report No. 6 P. Gutman “Funding for Developing Countries’ REDD in the US Climate

Change Legislation. A December 2009 Update”

Report No. 7 F. Ardiansyah (cord.); National institutional Arrangements for REDD Case

Study – Indonesia” December 2009

Related publication by a partner institution, with the participation of this project staff

C. Streck, L. Gomez-Echeverri, P. Gutman, C. Loisel and J. Werksman” REDD+

Institutional Options Assessment, available at www.REDD-OAR.org