JAKARTA JANUARY 31, 2008
Making carbon pay
The Kyoto Protocol provides three mechanisms for countries that have ratified the convention, which aims to reduce greenhouse gases. It provides a mechanism for emission trading; allows for joint implementation; and clean development mechanisms (CDM).
For Indonesia, the last route seems to be an option capable of implementation, but the development of CDM has been very slow.
Data from the Ministry of Environment states that there are at least 125 million tons of potential carbon per year that can be traded from Indonesia, produced by industries such as palm oil, energy and electricity.
At the current price of $8 per ton, Indonesia can earn $1 billion or more per year from the mechanism. Indonesia needs to take radical steps by the 2012 deadline to reduce its emissions by 5% from the 1990 benchmark, and carbon trading is one way of achieving the goal.
Yet despite the financial potential and the national requirement, to date only a few companies have registered for the CDM program.
Opportunity
Agus Sari. Regional Director for Eco Securities for South Asia, believes the palm oil sector in Indonesia can trade more than 28 million tons of carbon (tCO). From the oil and gas sector, the potential is greater, more than 50 million tons of carbon.
Agus sees additional opportunities to reduce emissions in the palm oil sector. From 400 or more palm oil mills, businesses opportunities can be created building on their current problem of waste management.
By implementing composting programs, the waste can be recycled, providing many benefits to the oil palm operation. Operating costs can be reduced, while some companies can receive direct grants from developed countries for reducing emissions.
Another route has been taken by cement producer PT Holcim Tbk. It is using alternative fuels and has implemented various processes to optimize systems to achieve reductions in CO2 emissions from the company's plants in Citeureup and Cirebon, West Java.
Participants in these varied types of programs can apply for financial assistance from the World Bank Prototype Carbon Fund (PCF), which aims to reduce greenhouse gases by 1,000,000 tCO2 per year.
Paul Butarbutar, a director at Eco Securities' Indonesia operation, says a lack of information about the huge opportunities in CDM has restrained interest from Indonesian companies.
A pioneer in the CDM business, Ecosecurities has invested $1.6 million for its CDM business in Indonesia. The company is part of an international network which has quickly developed a reputation in carbon trading and the provision of consultancy services to industry in many countries of the world.
In Indonesia at least 40 companies are working with Eco Securities to develop CDM projects, although most are in the early stages. Paul admits that only three projects are being seriously handled and should be able to be certified in order to trade on the international carbon market within the next year.
One such company is PT Lampung Bekri, where Eco Securities is providing technical and financial assistance worth over $500,000 to create a waste water treatment system to produce biogas to meet the company's energy needs.
The three projects are all expected to achieve certification, although it can be two years on the path from registration to certification. Support from consultants can speed up the time for the certification process, says Paul.
Some benefits can be obtained even before certification is complete. These range from cost reduction on the production side to value increases for a company through internal rate return (IRR). On the production cost side, the use of compost can cut operating costs by as much as 30%.
Clear benefits
At PT Swadaya Indophalma, an oil palm company that operates three oil palm mills, director Halim Gozali admits that CDM projects will bring advantages for his company.
Indophalma recently signed an agreement with a consulting company by which it will receive financial assistance from Eco Securities to build its composting facility.
“Upon completion of the composting project, the company will save more than 30% of funds spent on fertilizer. And in this business, 70% of production cost goes to buy chemical fertilizer,” says Halim.
The director hopes that once the project is finished his company will be awarded a “certified emission reduction” (CER) status that can be traded in the international carbon market.
Nevertheless, even though many companies have expressed interest in CDM, only eight have registered with the National Commission for Clean Development Mechanisms, a national body under the United Nations.
PT Holcim Tbk is one, with the others including PT Multimass Nabati Asahan; PT Murini Samsam (an oil refinery operated by the Wilmar Goup in Sumatra); PT Solar Cooker and Chevron.
The UN-sponsored program sets an even longer certification program, says Paul. “They go through a quite complicated process from the initial agreement through validation, due diligence and assessment until certification.”
Savings
PT Gandaerah Hendana is another company developing composting systems at its palm oil operations in Riau. The systems will be managed by PT Enviro Mitra Abadi and will have a capacity of 60 tons of material an hour for a total 360,000 tons per year of waste.
The composting plant will use 100% of the palm oil mill effluent (POME) produced at the mill to spray on shredded empty fruit bunches (EFB). POME is treated through an anaerobic process. At the moment, the empty fruit bunches are just left to decay in an unmanaged dumpsite.
By using EFB and POME to produce compost, the project applies zero discharge and waste technology and increases reuse and regeneration of the residues in the palm oil business.
The compost produced can replace up to at least 20% of chemical fertilizer in the plantation. The project qualifies for CDM and is expected to generate up to 79,900 certified emission reduction units per year. Eco Securities is providing financial assistance to buy machinery to be used to produce compost.
Promotion urgent
Few Indonesian business people are aware of the opportunities even though they seem to be clear. Composting technology expert D. Darnoko says that for many, carbon trading is too abstract. “Business people always ask, will there be money here?”
Indonesia needs more examples of successes before business will line up to join the programs. What they don't appear to realize is that the assistance programs will end in 2012 and Darnoko believes a campaign to explain the benefits of CDM is urgently needed.
Related business opportunities also emerge in association with CDM projects. Darnoko, a director at PT Kwarsindo Lenggeng Makmur, says that one means is selling machinery to treat waste from bunches in the palm oil business. So far he and his team have sold 12 Bachus, a heavy machine for composting palm oil waste, units to companies following the CDM program.
Paul Butarbutar notes that companies can also capitalize on the emerging carbon market through reduction of associated greenhouse gas emissions. With oil palm, carbon credits can be created through sector-specific projects such as controlled anaerobic digestion of liquid palm oil mill effluent (POME) and producing methane for on-site energy.
Management of empty fruit bunches (EFB) creates waste for energy generation, displacing expensive diesel and fuel oil. Palm plantations can also produce liquid biofuels, which many countries in the developed world are now requiring as a mix with standard fuels.
Riau already boasts one plant that produces 9 MW of power from oil palm waste, catering to the electricity needs not only of the plant but also the surrounding community.
The experts believe, in fact, that the biggest opportunities will come in the energy sector.
Waste gases from oil and gas fields such as at the Dumai concessions can be utilized to create energy. Forest operations can also be channeled toward an energy-producing income source.
Paul states that by implementing a CDM project, a company can increase its internal rate of return (IRR), which will also boost the company's value in the market. Without CDM, a company's IRR may stand at around 12%, but will jump to 20% or more in the program.
Darnoko says CDM is also likely to raise the level of feasibility of projects, since the inclusion of independent power generation will increase efficiency levels.
Business is starting to wake up to the benefits of CDM and now Japanese major Mitsubishi is providing consulting and offers a financing scheme.
Eco Securities provides three business models as part of the Emission Reduction Purchase Agreement (ERPA). Under the first model, Eco Securities buys CER earned between 2007-2017 at an agreed price. This requires the palm plantation to invest to finance the project.
In the second option, using ERPA financing, Eco Securities provides pre-financing to buy machines and other related equipment to build composting projects.
In the last model, a cooperation program is created with a financial institution, such as a bank.
Not everyone is convinced. Handoko, a businessman in the energy sector, still hasn't any clear picture of the program. For the business community, examples will speak loudly and he suggests that a state-owned company should set the standard. After all, he says, the government is still a major player in the forestry business.
At the end of the day, Handoko still can't see how you can make money out of a scheme that remains abstract to him. To persuade operators like him, companies that are making a success out of CDM need to shout more loudly.
BEST REGARD
RACHMAD YULIADI NASIR
INDEPENDENT
rbacakoran at yahoo dot com
