Box 4: Carbon Markets

There exist a variety of international and national car- bon markets under which carbon credits may be traded. A broad distinction can be made between compliance and voluntary markets. Under voluntary markets, credits are traded on a voluntary basis, while under compliance markets the credits are generated and traded according to regulatory requirements, usually part of a legally binding cap-and-trade system.

The most important compliance market is the European Union Emission Trading Scheme (EU-ETS). Other compli- ance schemes have been established, such as, the New South Wales Greenhouse Gas Reduction Scheme (NSW GGAS) and the New Zealand Emissions Trading Scheme and (NZ ETS). Individual country buyers are also actively sourcing compliance carbon credits to help meet their Kyoto Protocol emission reduction targets.

Thus far, developing countries have not been required to set legally binding emission reduction targets and neither have they established national or regional cap- and-trade systems, although there are moves in this di- rection. Therefore, developing countries may only enter carbon markets through project-based mechanisms. The most important mechanism to date is the Clean Devel- opment Mechanism, although voluntary schemes are an- other viable option.

At present, the compliance market is by far the largest mar- ket and there is a possibility that REDD project credits will be included after 2012 under a successor agreement to or the extension of the Kyoto Protocol, as well as in certain national or regional markets.

For REDD projects in Indonesia the voluntary market is at present the most important.

Voluntary markets Under voluntary trading, parties not bound by specific caps or regulations can voluntarily offset carbon emis- sions by investing in particular projects. Buyers in this

market are from both developed and developing coun- tries and can for example be governments, organizations and individuals.

In this market, purchases are mainly driven by corporate social responsibility (CSR) or anticipation of future compli- ance demand and initiatives. For example some compa- nies seek to be regarded as ”carbon neutral”, while some individuals aim to make their own behavior carbon neutral when air travelers purchase carbon offsets.

There are a growing number of voluntary market options including over-the-counter (OTC) deals and more transpar- ent trading platforms, such as the Climate Action Reserve of the United States. Important in the voluntary markets are third party certification standards such as the Volun- tary Carbon Standard (VCS) and the Gold Standard, as well as some developed with emphasis on community and bio- diversity co-benefits, such as the Climate, Community & Biodiversity Alliance (CCBA) standard. The VCS and CCBA standards are most popular among REDD project propo- nents in developing countries.

Carbon prices differ depending on which compliance or voluntary market is used, but below are some indicative values for forest projects, which include REDD, afforesta- tion and reforestation projects.

Market

Overall range Overall average1 Compliance market average2 Voluntary OTC

Price USD/tCO2 0.65-50.00 7.88 10.24 8.44

1. Volume-weighted average 2. Volume-weighted average for NSW GGAS, CDM, AAU’s and NZ ETS.

For REDD project credits traded over-the-counter the aver- age price ranged from USD 9.43/tCO2

to USD 17/tCO2 with

a weighted price average of USD 13.33 (data from REDD projects from 1990-2009 (Hamilton et al. 2009)).

Water Rivers and streams emanating from forests are utilized in many ways, both by communities close to the forest edge and those liv- ing much further away. Fresh water is used for drinking, cooking, bathing and irrigating agricultural lands. Water sources within Su- matran orangutan habitat also supply hydroelectric power plants, including several small plants in the Leuser Ecosystem and a much larger plant, PLTA Sipansihaporas, in the Batang Toru area. Te inland forests play a key role in ensuring downstream freshwater supplies, since the non-alluvial inland areas of the region tend to have very little or no underlying groundwater resources. (Map 23).

A rice field in Beutong, Aceh (Perry van Duijnhoven)

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Te economies of both provinces depend heavily on agricul- ture, such as rice and corn production. In 2008 agriculture con- tributed 26.2% of Aceh’s gross domestic product and 22.8% of