By Andy Mukherjee
    Bloomberg

    Monday 14 May 2007

    Alarm bells are ringing loudly about the future of our planet.

    The environmental mess we find ourselves in has been caused by the developed world, though we need the help of developing countries to solve the crisis.

    Of course, they won't be too keen to save the world by sacrificing their own shot at prosperity.

    So the key challenge and opportunity for global venture capital may lie in discovering a feedstock, which is at least as cheap as coal. China and India will have an incentive to contain the amount of coal burnt in electricity generation only when they can do so without risking their economic-growth rates.

    Otherwise, as Standard & Poor's notes, "if all announced coal-fired plants are built in China and India, additional carbon-dioxide emissions could be multiples of the overall cuts proposed by the Kyoto Protocol."

    Reversing environmental degradation isn't only about technology. In the debate on climate change, one large and populous country that's not getting enough attention is Indonesia, whose emission levels make it the third-biggest polluter after the U.S. and China.

    While two-thirds to three-quarters of the carbon-dioxide equivalent of toxic fumes released in China and India is related to energy use, Indonesia's enemy is deforestation.

    A study done on behalf of the U.K. Department for International Development and the World Bank makes estimates that as much as 85 percent of the harmful stuff that gets pumped out into Indonesian skies comes from degradation of forest lands.

    The Biofuel Challenge

    Clearing of forests in Indonesia has been historically linked to illegal logging for timber and the diversion of land to oil-palm plantations. Palm oil goes into soaps; it's also used as cooking oil.

    Interestingly, biofuels, touted to be the main weapon in the fight against climate change, are going to make the emission challenge worse in Indonesia.

    By 2025, Indonesia might put 1.4 million hectares, or an area 2 1/2 times as big as the island of Bali, under oil-palm plantations to meet biodiesel demand, the study says.

    "The risks of deforestation - and to some extent land-use conflicts with biofuels - have not been thoroughly assessed," it says.

    So what can be done?

    Clean Development

    It may be time to put to use the Clean Development Mechanism, the carbon-trading system under the Kyoto agreement, to help Indonesia regain its forest cover.

    Indonesia has eight ongoing projects - and one more seeking registration - under the mechanism.

    They will make money by reducing the equivalent of 1.7 million metric tons of carbon dioxide per annum, and by selling the "credit" for this improvement to Western nations that carry numerical targets to cut their emissions under the United Nations' Kyoto Convention on Climate Change.

    Indonesia's share of the annual carbon-credit market is a paltry 1 percent. More importantly, none of the Indonesian projects have anything to do with reforestation.

    The largest proposed reductions in Indonesia will occur in cement manufacturing.

    This problem isn't Indonesia's alone. Reforestation hardly shows up on the global carbon-trading map.

    The World Bank's BioCarbon Fund recently signed an emission-reduction purchase agreement that provides an economic incentive to some of the poorest farmers in India to grow timber in an environmentally sustainable manner.

    This was the first such initiative for India, which has more than 200 projects registered to sell carbon credits.

    No Momentum

    There are many reasons why reforestation projects have been slow to take off. First, unlike industrial projects, the rules for forestry-related carbon trading have only been clear for a little more than two years. The momentum is yet to build up.

    Second, the approval procedures are cumbersome.

    Third, forests that were degraded after 1989 are ineligible.

    That's particularly frustrating in Indonesia where a big part of the damaged land is new. The deforestation rate, which was as high as about 1.3 million hectares in the 1990s, is widely believed to have accelerated after the fall of the Suharto dictatorship in 1998.

    In October 2006, the air quality in Singapore and parts of Malaysia reached unhealthy levels because of Indonesian forest fires, caused when farmers burn trees to clear land.

    Forest fires, manmade or otherwise, undo the emission gains; that, in turn, becomes an additional challenge for investors.

    The successor to the Kyoto Protocol must address these difficulties and make sustainable reforestation worthwhile.

    After all, creating an economic incentive for planting trees ought to be easier than getting the Americans, the Chinese and the Indians to agree to cut back on energy consumption.

    Let Indonesia, the venue for a crucial December meeting of the parties to the Kyoto Protocol, be an acid test: Either we reverse the degradation of the country's forest cover, or we stop dreaming that we will one day overcome global warming.

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