Palm oil vs carbon sequestration: Indonesia’s battle continues …

By  Amrita Kumar

On 16th of February 2009 Indonesia’s Agriculture Minister announced that the government has lifted the 14 month long ban on the use of peat land for palm oil plantations. This comes at the time when scientists are suggesting that mature rainforest trees are in fact getting larger and storing more carbon ( http://www.nature.com/nature/journal/v457/n7232/abs/nature07771.html) Why then do the Indonesians want to cut these precious forests down? With carbon trading at 6.13 USD, do the economics of avoided deforestation projects match up to palm oil at a price of 500 USD/metric ton? Is this a battle that is lost on its financial case or on political will?

BACKGROUND:

Indonesia’s forests are her main natural resource. They have been central to the country’s struggle towards progress over the past few decades and much of Indonesia’s growth has come at the cost of her biodiversity and forest cover. Until the last decade, Indonesia’s rapid deforestation went largely unnoticed. Then in 1997-1998, when unprecedented forest fires spewed thick clouds of smoke that blocked out the sun in many parts of South East Asia, people started to take notice. It was an ecological and human disaster that was brewing within the country’s borders since the 1960s. Total forest loss since the advent of the Suharto era in the mid-1960s is thought to be at least 40 million hectares–an area the size of Germany and the Netherlands combined . A WWF-EEPSA study estimates the total economic losses from this event to around $4.7 billion USD in 1997 alone, more than the damages assessed for purposes of legal liability in the Exxon Valdez oil spill and the Bhopal (India) chemical release disasters combined .

One would think that the memories of the 1997-98 fires would have served to slow down the rate of deforestation in the country, but today the pressures on the forests continue unabated. In 2006, Indonesia was generating emissions of 3,014 Mt CO2e yr from land use land use change and forestry (LULUCF), which is about 6 times higher than its emissions from the energy sector. A WRI analysis (http://www.wri.org/image/view/10335/_original) shows that Indonesia lost ~20 million hectares of forest cover between 1997–2005. With the introduction of financial market for forest preservation in the form of ‘Avoided Deforestation’ carbon credits, environmentalists are hopeful that the price on forest carbon will incentivize concession owners to abstain from deforestation. It remains to be seen if the markets will work effectively.

Objective

Having established the magnitude of the deforestation problem in Indonesia, the objective of this paper is to build on the carbon debt analysis of Fargione et al. and evaluate the business case for carbon sequestration on Indonesian peatlands. Peatlands are chosen because Indonesia is reputed to have 22.5 million hectares of forested peatlands with soil carbon thickness between 1-12 meters. Deforestation of peatlands amounted to 25% of all deforestation in SE Asia in the year 2005 and 27% of palm oil and timber plantation concessions in Indonesia are planned on peatland.

amrita_figure1

Finally, a third option is evaluated and presented as a possible solution – the use of degraded forestland as alternative sites for palm oil plantations in Indonesia.

Deforest and grow Palm oil or Avoid Deforestation and preserve the forest?

Palm oil, widely used around the world for cooking, cosmetics and as a biofuel, earned US$10.7 billion exports (http://www.opinionasia.org/PeatlandsClimateCrisis) for Indonesia last year, about 10 per cent of total revenue from non-oil and gas. The industry growth outlook has been dampened in 2008. The fall of palm oil demand was largely attributable to the impact of the global economic slowdown and the correction of oil prices as well as lower demand from the bio diesel industry. The price of palm oil has fallen by around 40 per cent from its peak last year as global demand.

amrita_table_2

It is no wonder then that the government wants to compensate for the price decline by expanding output to increase employment and raise income in rural areas.

In order to evaluate the business case of palm oil plantation, the following assumptions and computations were used to compute the Net Income / hectare for palm oil:

• The EBITDA margin for the Palm Oil Industry on average in 2007 – 2008 was 30%. (PEFINDO) and the average price per ton of CPO was 836 USD for the year 2008. As of Feb 2009, the price was trading at 530 USD/ M ton.
• A range of CPO prices /ton were used to calculate Revenue/hectare from palm oil plantation. Price / ton of CPO – USD 500 (Base case), 430 (Low), 1140 (Best) (Based on 2008 data)
• Base case EBITDA / Hectare at 2008 prices: 803 USD (calculated. Table 1)

amrita_table_1

The calculations assume that the plantation owner doesn’t have to cut down the forest and that there are no start up costs.

In order to calculate the carbon stock per hectare of peat land forest in Central insular Indonesia the Fargione et al. calculations were used as follows:

Net Avoided Emissions (E) = Ea – Sa + Eb
Ea = Emissions from combustion of above ground biomass per hectare per year.
Sa = Carbon sequestered from Oil plantation (above ground and below ground) per hectare per year.
Eb = Below ground (Peat} emissions via drainage and fires per hectare per year.

Net Avoided Emissions (E) = 33 – 4.32 + 55 = 83.68 t C02e / hectare / year.
For calculating Ea, a production cycle is assumed as long as 25 yrs for oil palm. When a wetland (logged over) forest with C density of 225 t ha-1 is deforested, almost all of the carbon is likely to be emitted over the 25 yr period through burning and decomposing. The Ea is then 9 t C or about 33 t CO2-e ha-1 yr-1.

Sa is assumed negligible in annual crop based systems. A mature oil palm plantation contains about 36 t C, which corresponds to Sa of about 1.2 t C or 4.32 t CO-e ha-1 yr-1.

Eb is 55 t Co2e is based on estimated the CO2 released from drained peat soils over 50 years. This underestimates the CO2 that would be released if drainage were to be sustained for longer than 50 years. It is unknown how this annual rate of peatland decomposition compares to the net CO2 flux in native, undrained peatlands.

For validity, this number was compared with another estimate of carbon debt for oil palm presented in the International Symposium and Workshop on Tropical Peatland in 2007 which was estimated at 87 Tons C02e / hectare/year.

Next, in order to estimate the amount of carbon credits available for sale / hectare /year I apply a risk factor as required by the VCS/CCBA standards as follows:

• Avoided Emissions / Hectare / Year (E) = 83.68 t Co2e
• % with-held from market for risk mitigation and compliance = 10%
• Avoided Emissions available for sale = 75.31 T Co2E / hectare / year.

Therefore, from a palm oil plantation owner’s perspective, who is earning $803/hectare (Net Income) the price on carbon would have to be equal to at least $10.92/Mt Co2e (after project operating expenses). The breakeven price for carbon was calculated under different scenarios as shown below:

amrita_excel_graph

As a reminder the average price for carbon credits in the Voluntary Markets was 6.13 USD in 2007 and was expected to stay constant in 2008. Forestry projects, in particular those involving afforestation/reforestation, have remained some of the highest priced project types across 2006 and 2007 with weighted average prices of $6.8 to $8.2/ tCO2e with Avoided Deforestation credits coming in at an average of 4.8 USD/t Co2e, with prices going to highs of 30 USD/ ton Co2e.

Conclusion
The dramatic variation in palm oil prices, coupled with low prices of carbon in the voluntary market, make it clear why deforestation of peatlands is continuing unabated. A simple analogy made to the price of crude oil and its effect on the renewable energy sector illustrates this point. Furthermore, there is also no incentive for the Government of Indonesia to reduce the profitability of the palm oil sector, given the 1.13 million people it employs and tax revenue it brings to the budget. There are however, other creative ways around this problem. Using the degraded land from deforestation in the 1990s, Indonesian policy makers can guide new palm oil plantations away from peat land forests towards marginal land. Fargonie’s analysis has shown that the carbon debt of biofuel on such marginal lands is near negligible . Furthermore, existing concessions can be converted to sustainable forestry tracts and palm oil plantations would become eligible for carbon revenues for avoiding deforestation. This plan is being sponsored by WRI (See: POTICO: http://www.wri.org/project/potico) and seems to be a promising win-win solution for the government, the plantation owners and the forests.

The battle between Palm Oil and Carbon Sequestration continues…..

i – Barber, Charles V., and James Schweithelm. Trial By Fire: Forest Fires and Forestry Policy in Indonesia’s Era of Crisis and Reform.
Publication no. ISBN 1-56973-408-9. World Resources Institute, 2000.
ii – Same as i above. Pg 15.
iii – Hooijer, A., Silvius, M., Wösten, H., and Page, S.E. Peat-CO2, Assessment of CO2Emissions from drained peatlands in SE Asia.
Report ID Q3943. Delft Hydraulics, 2006.
iv – Fargione, Joseph, Jason Hill, David Tillman, Stephen Polasky, and Peter Hawthorne. “Land clearing and biofuel carbon debt.”
Science 319 (2008): 1235-238.
v – See iii: Page 1.
vi – Hertanto, Ronald. Palm Oil Industry. Rep. PEFINDO, 2008.
vii – See vi above.
viii – Fahmuddin, Agus, Suyanto, Wahyunto, and Meine Van Noordwijk. “Carbon -Climate – Human Interaction –
Carbon pools, fire, mitigation, restoration,.” REDUCING EMISSIONS FROM PEATLAND DEFORESTATION AND.
Proc. of International Symposium and Workshop on Tropical Peatland, Indonesia, Yogyakarta. 2007
ix – See iv above. Supporting online material.
x – See ix above.
xi – See viii above.
xii – Bayon, Ricardo, Katherine Hamilton, Guy Turner, and Douglas Higgins. State of the Voluntary Carbon Markets: 2007. Picking Up Steam.
Publication. Ecosystem Marketplace and New Carbon Finance, 2007.
xiii – See xii above.
xiv – See iv above.

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4 Responses so far »

  1. 1

    matt said,

    This blog’s great!! Thanks :).

  2. 2

    Sean Killian said,

    Interesting analysis. My impression is that, to the casual observer, the carbon content of peat land forests is underestimated. In print and broadcast reports, the displacement of fossil fuels by biofuels is sexy, and therefore your analysis and the analysis conducted by Fargione et al are overlooked. According to your analysis, this omission is not slight: roughly 55 to 4 tons CO2e per ha. per year, disregarding CO2 release through clearing. I do, however, have three questions. One, even if the market price of carbon were to clear, say, $11 or $12 per ton CO2e, are there effective systems in place to distribute the funds to farmers (especially in a cash economy) and would farmers trust that system (it is not nearly as simple as I cut my forest and you give me cash). Two, irrespective of the price of carbon, would population growth in Indonesia, while only 2 percent nationwide, drive farmers to peat lands anyway? And, three, does Indonesia have effective land right and enforcement regimes to prevent illegal use of land? While I realize these questions might be beyond the scope of your analysis, I nonetheless wonder if they warrant consideration for practical reasons.

  3. 3

    Mukesh Patir said,

    I found your suggestion for shifting palm oil plantation to the degraded marginal land rational as it will help create more carbon sink and sequestration beside being an economic activity in the region. However how it is going to effect the productivity of the palm oil production in marginal land and its economic viability for the plantation owners needs to be probed further ?

  4. 4

    john said,

    why the whole world bother to strugle themself? when the key is in the hands of the US president and IMF? The indonesian current president is prepared by IMF, who won by systemic cheating. It´s the president of Indonesia himself who keep inviting foreigner companies to open the forest for biofuel. What do the Indonesian people get? NOTHING, nearly all the palm oil companies are foreigners: china, french, US, taiwan, singapore. The Indonesians become the cheap workers only in the plantations. So, you cannot battle this in the traditional way anymore. It’s the IMF and CIA that you should battle to stop putting their persons to become the future Indonesian president!


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