Project POTICO: Palm Oil, Timber & Carbon Offsets in Indonesia

Indonesia’s tropical forests are being cleared at a record rate, with oil palm plantations emerging as a major threat. One consequence of this deforestation is that Indonesia is now, according to some estimates, the third largest global emitter of greenhouse gases. Although the country may have 15-20 million hectares of degraded land, oil palm—as well as timber and rubber—plantations continue to push into virgin forests.

In partnership with NewPage Corporation, WRI is spearheading a new project in Indonesia called “POTICO” (Palm Oil, TImber, Carbon Offsets) to curb new oil palm plantations from clearing virgin or primary forests. The project will convene and lead a number of partners to pilot test and roll out transformational investment strategies. POTICO consists of a portfolio of investments—in sustainable palm oil, FSC-certified timber, and carbon offsets—that is designed to divert new oil palm plantations onto degraded lands and bring the forests that were slated for conversion into certified sustainable forestry. The strategy would relieve pressure on virgin forests and curb illegal logging. As a result, the strategy would reduce greenhouse gas emissions, conserve the country’s biodiversity, and enhance sustainable livelihoods of local people.

[Top]

About Indonesia’s Forests

Spanning 90 million hectares, the forests of Indonesia constitute 10 percent of the world’s remaining tropical forests and provide people with a variety of benefits or ecosystem services. For instance, local communities rely on the forests for food, medicine, freshwater, and building material. The global community relies on them for carbon sequestration, timber, and tourism. In addition, the forests of Indonesia are a biodiversity “hotspot,” with new species discovered every year.

These forests, however, are under threat. Since 1990, approximately 25 percent of the country’s forests—about 28 million hectares—have been cleared. According to the Food and Agriculture Organization, the country has the second highest amount of annual forest loss of any nation, losing approximately 1.9 million hectares per year. Deforestation is having significant implications for people, biodiversity, and the climate. Forest-dwelling people are losing their traditional ways of life and nearby communities are losing sources of food, clean water, and protection from flooding. Deforestation is threatening species including the Sumatran tiger, the orangutan, and many others with extinction. Furthermore, according to some estimates, deforestation and the burning of peat in swamp forests has made Indonesia the third largest global emitter of greenhouse gases in the world.

Logging for timber and wood pulp has been a major driver of deforestation in Indonesia for many years. Most of this logging—more than 60 percent according to one study—is illegal. But oil palm plantations have recently emerged as a leading threat to the country’s remaining virgin or primary forests. From just 600,000 hectares in 1985, oil palm plantations have exploded to more than 6 million hectares in 2007 and are expected to increase to 10 million hectares by 2010 in response to increasing global demand for palm oil as a biofuel and as an ingredient in food, cosmetics, and other products.

[Top]

Indonesia’s Degraded Land: A Missed Opportunity?

Lowland forests are cleared—and swamp forests are drained and cleared—to make way for oil palm plantations. However, approximately 15-20 million hectares of degraded lands exist in Indonesia, concentrated on the islands of Sumatra and Borneo. Most of these lands were once forested but were cleared years ago for timber or wood fiber and since then have neither returned as healthy forest nor been actively managed on a large scale for other uses. If developers were to locate all new oil palm plantations—or new timber and rubber plantations for that matter—on these degraded lands, then pressure to clear the remaining virgin forests would abate. Why, then, are developers not doing so?

The primary reason is economics. Oil palm trees do not start producing fruit until after 2½ years and the amount of oil produced does not start generating net income until year 4. A developer, therefore, seeks an interim revenue stream for the period between the plantation’s inception and year 4 to fund the project and increase overall return on investment. Income from the sale of timber that is cleared when preparing the plantation provides this revenue stream—although much of this timber enters the market illegally. Degraded land, on the other hand, does not have sufficient timber to provide an interim cash flow.

In some cases, a secondary reason concerns land tenure. Degraded lands sometimes have unclear tenure status or competing claims between different communities, villages, or people. Developers therefore often find it “easier” to deal with virgin forests because tenure is secured by the government’s concession.

[Top]

More About Project POTICO

POTICO’s main goal is to divert new oil palm plantations away from forests, onto degraded areas. This would ensure that oil palm plantations could keep expanding to meet demand—generating local revenues and jobs—while halting the destruction of forests. POTICO aims to demonstrate that it is possible to pay for this “more expensive” way to develop new plantations by developing a combination of different revenue streams. This will circumvent the perverse economic incentive to clear virgin forests when establishing oil palm plantations.

WRI will convene and lead a number of selected institutions and companies to implement one or a combination of three components:

1. Certified sustainable palm oil. Oil palm companies (with investor support) would establish several new, large oil palm plantations on degraded lands. Palm oil from these plantations would be certified by the Roundtable on Sustainable Palm Oil. This portion of the POTICO investment would generate attractive, long-term cash flows from year 4 through year 20 or 25.
2. Certified timber. Many oil palm companies already have concessions to convert large tracts of virgin forest to oil palm plantations. Under POTICO, a set of investors would finance one or more oil palm companies to switch their concessions from oil palm to timber and then contract with a firm to selectively log in accordance with Forest Stewardship Council (FSC) guidelines. This step would save the virgin forest—and its biodiversity—from being destroyed. Passage of the Lacey Act Amendments might further enhance demand for and the value of FSC-certified wood. FSC-certified timber would provide interim cash flow until the oil palm plantations start to generate sizable yields in year 4.
3. Carbon offsets. Because POTICO prevents the clear-cut of virgin forests (the oil palm plantation is established on degraded land), it might generate “avoided deforestation” carbon offsets. Investors could sell such offsets to entities seeking to reduce their carbon footprints via voluntary markets or in a possible post-2012 Kyoto Protocol mandatory market. Revenue from the sale of carbon offsets could be a third cash flow of the POTICO portfolio.

It is important to note that degraded lands in Indonesia are usually not empty. These lands are often used by local communities. Any new developments by companies on those lands would need free, prior and informed consent from the communities. Under POTICO, WRI will work with communities and the companies to meet the highest standards of free, prior and informed consent.

[Top]