An innovative deal will not only make good commercial sense, it will help save valuable animals and rain forest
Saving rare rhinos and valuable forests is not your everyday kiwi lawyers’ job, but for Bell Gully’s climate change team they’re concluding a world-first deal in the tsunami-struck Indonesian province of Aceh.
The deal that combats deforestation in Indonesia as well as providing an innovative financial product onto the world financial markets.
Bell Gully’s climate change team, lead by Simon Watt, have been involved in the complex deal involving the trading of carbon credits derived from Indonesia’s tsunami-hit Aceh province.
The 2004 tsunami killed more than 168,000 people in the province alone. Since then, Indonesia has partnered with Australia to develop mechanisms that not only reduce emissions from deforestation and degradation (REDD). Indonesia’s deforestation has been a major environmental concern as well as a major carbon emission contributor, for many years.
Bell Gully’s have developed a growing practice in climate change law with Simon Watt receiving a Chambers Global accolade last year as one of 10 partners worldwide identified as a legal expert in the area. Along with colleague Kate Radka, the team have been working on the deal with Indonesian officials, bankers and other professionals on what is potentially a billion dollar deal in terms of carbon credits.
The innovative deal is being financially orchestrated by Australian company Carbon Conservation, and will be the world’s first commercial financed deforestation avoidance project. Deforestation is the third largest source of carbon emissions worldwide. The current deal involves a massive commitment towards a reduction in deforestation across 750,000 hectacres of tropical forest in Aceh’s Ulu Masen region.
In broad terms, the deal involves a carbon broking relationship under which Carbon Conservation sources buyers of the carbon credits from around the world. The first tranche of credits will be sold to Wall Street bank Merrill Lynch, who intend to market the credits to their investment banking clients, including ‘carbon poor’ companies in Europe and elsewhere.
“Striking the right balance, in terms of how the risks and returns are shared between the parties, is one of the bigger challenges of the deal”, according to Simon Watt. He says the transaction has been structured in a way that provides incentives to secure carbon credit sales that will maximise revenue for the Aceh Government, while at the same time recognising the risks being taken by the commercial parties and giving them a full opportunity to achieve a reasonable return on their investment.
“A further challenge is to ensure investor confidence in the project and its ability to deliver the carbon credits over time”, comments Kate Radka. To that end the deal incorporates a mechanism to ring-fence and set aside a portion of the carbon credits as insurance against the risk of illegal logging activity encroaching against the protected forest area.
“A further important feature of the deal is the role of development and environmental NGOs, in particular Flaura and Fauna International and Oxfam, in delivering the infrastructure on the ground to channel carbon credit revenue to local communities to fund activities that will preserve and protect the forest areas in which they live”, according to Simon.
Apart from the unique, commercial aspects of the deal it has important environmental consequences in the Aceh province, which was not only devastated by the tsunami but also suffered from conflict and civil unrest. The preservation of the forestry areas is vital to ensure the protection of endangered Sumatran rhinoceroses, tigers, orangutans, elephants and clouded leopards. Almost 75 percent of the remaining Sumatran orangutans are in Aceh.
The REDD concept was adopted during the UN-sponsored climate change conference in Bali last year where negotiators from 190 countries held intensive talks on cutting carbon emissions, recognized as the main contributor to global warming.
The Bali meeting required forestry countries first to perform demonstration projects and build REDD mechanisms to be examined in a Copenhagen meeting next year.
One aim of the Copenhagen conference on climate change is to determine whether the REDD concept can be adopted as one of the legal mechanisms to reduce greenhouse gas emissions when the Kyoto Protocol commitment ends in 2012.
Under the Kyoto Protocol, wealthy nations, except the United States, are bound to cut emissions by about 5 percent. The protocol allows only the clean development mechanism and forestation/reforestation projects as legal mechanisms for developing nations to take part in emissions cuts.
Developing nations, which are the most vulnerable to the impacts of climate change, will be able to trade their carbon with rich nations to receive financial incentives based on tons of carbon reductions.
Indonesia is the third-largest forestry country in the world, with 120 million hectares of tropical forests.
In December 2007 at Bali, Carbon Conservation, one of the parties involved in the deal, convened the Governor's Green Gala involving the Governors of Aceh, Papua, Papua Barat (three Indonesian provinces) and Amazonas (Brazil), together representing around 200 million hectares of the world's remaining tropical rainforests. The goal is to create and value a global infrastructure of forest factories, producing oxygen and absorbing carbon dioxide.
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