September 2012

Special Report

The Pathways to Sustainability in Emerging Economies

http://environment.wharton.upenn.edu http://knowledge.wharton.upenn.edu

Sponsors
The Initiative for Global Environmental Leadership (IGEL) and Knowledge@ Wharton have partnered to create this special report on business and the environment. We are most grateful to Bank of America for supporting the collaboration and funding of this edition.

Contents
The Pathways to Sustainability in Emerging Economies
As part of Whartons Global Alumni Forum in Jakarta in June, the Initiative for Global Environmental Leadership (IGEL) assembled a panel to address some of the key issues Indonesia faces as it seeks to protect its rich natural environment and promote the welfare of all its citizens. Sustainability takes many forms in this large and complicated country, and the panel addressed a wide range of topics, including government regulation; the palm oil, ecotourism, and pulp and paper industries; and the work of non-profits. This special report draws on information from the panel discussions, as well as additional interviews and research, to explore three of the most pressing challenges facing Indonesia and Southeast Asia more generally.

Renewable Energy for Southeast Asia: A Market Ready for Takeoff

Southeast Asia has rich wind, solar and geothermal potential, and governments are beginning to incorporate renewables into their energy planning. In fast-paced Indonesia, the worlds third-largest greenhouse gas emitter, the economic importance of homegrown energy, including coal and much-disputed palm oil, has slowed renewable development. The country still subsidizes fossil fuel, but its slowly refocusing on a future that includes cleaner and greener forms of energy.

Southeast Asian Megacities: Big Challenges, Bigger Opportunities

More than half the worlds population now lives in urban areas. Southeast Asias megacities, including Jakarta, have grown enormously (past the 10-million mark) and face major challenges in aligning aging infrastructure with people housed in informal settlements that often lack basic services. Fortunately, there are innovative green solutions from cogeneration of energy to public-private partnerships to some of the regions most pressing problems.

Deforestation in Southeast Asia: The Future Is Being Decided in Indonesia

13

The development of Indonesias economy has led to the destruction and degradation of more than half the nations vast rainforests. As a result, the countrys greenhouse gas emissions have skyrocketed. But now, the government, Indonesias largest palm oil producer, major consumer goods companies around the world and key NGOs are all working towards a more sustainable future for the country. And the financial services industry is helping to develop the mechanisms needed to finance the transition.

Renewable Energy for Southeast Asia: A Market Ready for Takeoff Although it runs on domestic and
imported fossil fuels, Southeast Asia is waking up to the potential of renewable energy and energy efficiency, though its situation is complicated by the role traditional fuel exports as well as homegrown palm oil, whose value as a renewable is heatedly debated play in its own regional economy. The ASEAN countries (Brunei, Indonesia, Thailand, Vietnam, Cambodia, Laos, Malaysia, Myanmar, the Philippines and Singapore) have rich potential in geothermal, wind and solar energy. Renewable development remains embryonic, but government policies throughout the region are increasingly favoring it. In June, Wharton held a Global Alumni Forum event in Jakarta, entitled Indonesia, ASEAN and the World: Concentric Circles of Growth. A special panel organized by Whartons Initiative for Global Environmental Leadership (IGEL), Growing Greener: Indonesia and the World, looked closely at the regions existing energy base, and its potential for a more energy-efficient future. With Southeast Asian energy demand growing rapidly (up 7% a year in the last decade, with coal being the primary source), its a vitally important subject. Can Indonesia take a sustainable path while also continuing its pace of economic growth? Thats the route chosen by President Susilo Bambang Yudhoyono, who in 2009 said that Indonesia would achieve a 26% greenhouse gas emission reduction by 2020 (41% with international assistance) while simultaneously growing the economy by 7% per year. At the forum, Paul Wolfowitz, a former ambassador to Indonesia and World Bank president, pointed out that Indonesia has the potential to be a renewable energy powerhouse, with 40% of the worlds known geothermal resources. But theres a difficulty in committing to long-term pricing, he said, and without some assurance investments cant be made. Geothermal energy development is well within the range of commercial viability, provided the right economic policies are in place.

Indonesias energy mix: compared to potential, projected use of renewables is modest

Source: PLN Courtesy of Global Intelligence Alliance Bulletins

IGEL | Knowledge@Wharton Special Report

In fact, reports the Jakarta Globe, only 5% of Indonesias vast geothermal reserves (estimated at 28 gigawatts) have been developed. The country does have renewable energy goals, and hopes to install 6.7 gigawatts of wind, solar, biomass and hydroelectric power by 2025, raising its percentage of total energy production from 7% to 15%.

targets to reduce greenhouse gas emissions, it had the unwanted effect of accelerating the clearance of Indonesian rainforests for palm oil production, which contributes to greenhouse gas emissions. Pressure needs to build for all the palm oil producers to get serious and address the problem to international standards. Wahjudi Wardojo, a former government forester who is now senior advisor for international forest carbon policy at The Nature Conservancy (TNC), said at the Wharton forum that Indonesia suffers from one of the most degraded ecosystems in the world, which TNC is attempting to address with a major program of forest conservation, working with the campaign against deforestation and forest degradation known as REDD+. Indonesia has 23 million acres of land in palm oil production (mostly through state-mediated leases), with planned expansion of as much as 49 million acres. Sarene Marshall, managing director for TNCs global climate change team and a past speaker at Wharton conferences, said that a primary issue with palm oil production is where the plantations are sited. Oil palm is permitted on habitat- and species-rich primary forests in Indonesia, she said. At the same time the country has 40 million hectares [98 million acres] of degraded land, an area the size of Germany, which was cleared for other purposes. Its smarter, we think, to site palm oil on those lands.

A Palm Oil Power

If Indonesia is not yet a power in renewable energy, it is the world leader (with Malaysia) in the production of palm oil, which is used in the making of everything from potato chips to soaps and cosmetics. It is also used to make biodiesel, which can be burned in the worlds truck fleet and many passenger cars as well. Is palm oil production sustainable? Yes, says Franky Oesman Widjaja, chairman and CEO of Golden Agri-Resources, the largest domestic palm oil producer in Indonesia and the second largest in the world. The company produced 2.64 million tons of palm oil last year, a significant share of the 45-million-ton annual global yield. Widjaja said at the Wharton forum that palm oil production is a very efficient use of land, and employs 4.5 million people in Indonesia and Malaysia. He added that more than six million acres of farmland in Indonesia is low-yield, and would benefit from conversion to palm oil production. Food security and economic opportunity can co-exist, Widjaja said. A palm oil certification organization, the Roundtable on Sustainable Palm Oil (RSPO), was set up in 2003 to address environmental concerns about palm oil production, and claims 40% of the worlds producers as members. In a recent report, the group said it certifies 29 grower companies with 135 mills in six countries. In Malaysia, 14% of production is RSPO-certified. Indonesia has had 9% of production under certification, but as Wolfowitz pointed out at the forum, the Indonesian Palm Oil Association pulled out of RSPO in 2011. Other Indonesian palm oil producers remain as members. That could be a big issue with environmental groups, he said. Indeed, palm oil production is controversial, in part because its ongoing rapid expansion has resulted in substantial tropical forest deforestation in Southeast Asia. According to Eric Orts, who chaired the Wharton panel as IGEL director and is professor of s legal studies and business ethics and management at Wharton, The palm oil production problem is a good example of well-intentioned legislation having detrimental unintended consequences. For example, when the European Union mandated

Environmental Impact
The environmental impact of palm oil production has been identified by critics as biodiversity loss (including threats to critically endangered orangutans in Indonesia), an increase in greenhouse gas emissions, depletion of soil nutrients, water pollution and desertification. Advocates for indigenous groups also say that the development of large monocrop palm estates has led to land conflicts and human rights abuses. Oil palm producers counter that palm cultivation is more efficient (in terms of yield per care and energy inputs) than oils made from soybeans, sunflowers, rapeseed and others. When palm oil is blended with conventional diesel, it produces an affordable biodiesel at the pump that is cheaper than several alternatives. European Commission data, however, shows that biodiesel from palm oil has a carbon footprint larger than all three of those alternatives, though it bests oil from tar sands. In January, the U.S. Environmental Protection Agency issued a finding that palm oil biodiesel fails to meet the standards of the agencys
The Pathways to Sustainability in Emerging Economies

2007 renewable fuels mandate. A coalition of environmental groups, including the National Wildlife Federation, the World Wildlife Fund (WWF), the Union of Concerned Scientists and the Natural Resources Defense Council, agreed with the finding, but concluded that the EPA had actually underestimated the climate emissions from palm oil biodiesel. Analysis that examined the entire palm oil biodiesel lifecycle, including the draining and burning of peatland and the clearing of rainforest for planting, plus widespread use of chemical fertilizer to grow the palms, changed what had been an optimistic picture of the fuel. Robbie Blake, a bio-fuels campaigner at Friends of the Earth Europe, told the Guardian newspaper, Its getting quite indisputable that the use of soy or palm oil to fuel our cars is even dirtier than conventional fossil fuels. Ironically, as Orts notes, it was well-intended green initiatives that helped accelerate the growth of palm oil, in particular the European Unions goal of cutting greenhouse gas emissions 20% by 2020. That target was coupled with a mandate that 10% of vehicles run on bio-fuels and palm biodiesel meets that mandate. Certified palm oil undoubtedly has a lower footprint. RSPO says it currently represents 11% of global production, in Brazil, Colombia, Indonesia, Malaysia, Papua New Guinea and the Solomon Islands. The group says its work is independently audited, and in compliance with international standards for social, environmental and economic good practice. Beth Gingold, the Penn graduate who leads the World Resources Institutes program on palm oil, takes a balanced view. She points out that palm oil generated $12.4 billion in foreign exchange for Indonesia in 2009, and supports both millions of jobs and opportunities for rural farmers. Our take is that when produced using good practices, such as according to the RSPO principles, avoiding deforestation, involving small landholders, and respecting local rights, palm oil production can have many benefits, including poverty reduction. Gingold agrees with TNCs Marshall that Indonesia has enough degraded or deforested land to accommodate expected palm oil expansion. But she cautions, Much of this land is not legally available and developing it requires sorting out both social and land rights issues.

Consultants and EuroCham Indonesia, indicates that, by adopting energy-efficiency options, Southeast Asia could achieve efficiency gains of between 12% and 20%, which would translate into electricity savings of between 119 and 297 terawatthours (valued at $15 billion to $43 billion). Renewables are another leg of energy reform, but there are hurdles. Currently, Indonesia pays massive subsidies to support fossil fuel electricity generation and reduce gasoline prices, totaling $17.7 billion annually, or 17% of total government expenditures. Harry Surjadi, a Knight International Journalism Fellow and a founder of the Society of Indonesian Environmental Journalists, said that the federal government proposed a reduction in the gasoline subsidy, but the effort calling for immediate action met major opposition in Parliament. He said that Indonesia has publicly embraced renewable energy but could make a larger effort to support its development.

Huge Demand
Between 1980 and 2002, primary energy demand in developing Asia more than doubled; in the latter year, more than 75% of consumption was from fossil fuels (69% from coal and oil), reports the U.S. Agency for International Development (USAID). Natural gas, hydropower, biomass (a primary source for the urban poor and rural households) and nuclear power accounted for the remaining 31%. Through 2030, coal, oil and gas investments in developing regions of Asia are likely to reach $1.4 trillion ($56.7 billion annually). Investment in renewable energy is up, though its not on the same scale. The Asian Development Bank said in 2006 that if renewables are to account for just 4% of energy consumption in the Asia Pacific region by 2016, investments of $10 billion annually will be needed. USAID reported, Asias energy use is placing a severe strain on the local environment and increasingly contributing to global climate change, with its growing emissions criteria for air pollutants and greenhouse gases. This situation will be exacerbated as the contribution of Asias developing economies to global carbon dioxide emissions rises from its current level of 23% to nearly 50% by 2030. Renewables were only 2% of Indonesias energy generation in 2002 (compared to 13% in the Philippines), but WWF says they could meet up to 35% of the countrys energy needs by 2035. Geothermal represents a particularly big renewable opportunity for Indonesia and for Southeast

The Geothermal Option

A study, Market Potential in Energy Efficiency in Southeast Asia, from Roland Berger Strategy

IGEL | Knowledge@Wharton Special Report

Asia as a whole. Pak Efransjah, CEO of WWFIndonesia, says that the country is not only rich with fossil fuels, but also possesses an abundance of renewable energy sources. Although only 1,196 megawatts of geothermal have been installed in Indonesia (4% of the estimated resource), he said that the country currently has the biggest world potential for developing the underground resource. There are 276 geothermal sites in Indonesia, with at least 37 deemed capable of significant development. WWF estimates that Indonesia could increase its installed geothermal capacity 129% by 2020. Current government planning calls for a rapid ramp-up of renewable energy, with the urgency perhaps supplied by Indonesias recent change in status from oil exporter to net importer (with an attendant drop in export earnings). The new policy includes development of 4,000 megawatts of geothermal by 2018, although its unclear if this is a reach government goal or a reasonable target. If the ramp-up succeeds, however, WWF says that geothermal could reduce Indonesias greenhouse gas burden by 13.6 million tons annually. Achieving WWFs larger targets would result in an annual carbon dioxide reduction of 19.8 million tons by 2020, the group says. Indonesia has set attractive feed-in tariffs (benchmark prices) for geothermal energy of U.S. 10 to 20 cents per kilowatt-hour. This special tariff pricing is a mechanism adopted by governments to encourage renewable production, usually promising developers guaranteed grid access, long-term contracts for generated electricity, and purchase prices pegged to generation costs. A challenge in exploiting more of Indonesias geothermal resources is that only 65% of the country is currently connected to grid electricity, though the government is trying to extend transmission lines with World Bank support.

Global, an innovative supplier of sustainable waste and recycling services, sees opportunity in Southeast Asia. Food waste streams from breads, sugars and starches are a valuable asset, he said. In North America, Rubicon Global has put its ideas in practice by partnering with one of Americas leading pizza chains to produce E85 ethanol bio-fuel from waste pizza dough. Were seeing a number of opportunities to develop food waste streams from restaurants and other sources, Morris said. A third of the worlds food is wasted, and its a value thats currently going out the door to landfills. Its a tremendous environmental challenge, but also a major opportunity. Sugarcane waste is currently being converted to bio-fuels in Asia, and food waste can also be collected for that purposeprovided we can find sources with consistent quality. The rest of the world is looking to Asia for this kind of bio-fuel solution. The International Energy Agency sees great opportunity in what it calls second-generation bio-fuels. It estimates that if only 10% of global agricultural and forestry residues were available for that purpose by 2030, about half of forecasted bio-fuel demand (and 5% of total projected transport fuel demand) could be met with that resource alone. Indonesia is studying the wider possibilities of bio-fuels. A 2009 report from the Indonesian Institute for Energy Economics envisions smallscale, localized production of biodiesel for power generation. The report listed sugar cane, cassava and the fast-growing jatropha plant as possible bio-fuels feedstocks, in addition to palm oil.

Embryonic Wind and Solar

Indonesia has until recently seen little development of wind and solar energy, despite good resources for both. In mid-2012, Hasul Azahari, the Indonesian ministry of energys renewables director, said that the country planned soon to introduce new feed-in tariffs for wind and solar, with new targets, including 2,000 megawatts of solar photovoltaics by 2014 and 300 megawatts of wind. The wind target, while not large by world standards, mirrors development elsewhere in the region. Vietnam is a regional leader, with the potential (according to a 2009 World Bank survey) to produce more coastal wind than Thailand, Cambodia or Laos. General Electric is a partner in major wind farm development in Vietnams Mekong Delta, and GEs Peter Cowling says it has one of the best wind resources in Southeast Asia. Vietnamese wind
The Pathways to Sustainability in Emerging Economies

A Recycling Opportunity: Food Waste

As noted, biomass is a popular energy source for heating and cooking in Asian households. But wood collection has also been a significant source of the deforestation that plagues the region and is a declining resource. Without significant reforestation and conservation efforts, woody biomass production is projected to decline in Southeast Asia from 815 million tons in 1990 to 359 million tons in 2020. Alternatives could serve the dual purpose of leaving natural resources intact while diverting waste streams from landfills. Nate Morris, CEO of Rubicon

development received a substantial boost in 2011 with a $1 billion credit package from the ExportImport Bank. Southeast Asias first wind farm, totaling 33 megawatts, was developed in the Philippines. The countrys renewable energy act, passed in 2008, has encouraged investment, but typhoon risk has slowed foreign investment. Clean tech fundraising has also been somewhat stymied by the lack of a track record in successful development projects in the region.

Small-scale solar could become a cottage industry in Indonesia. The Kolomotua Womens Solar Project is supporting the training of solar mothers to install and maintain photovoltaic equipment in underdeveloped regions. The Asian renewable picture is complex. Robert Giegengack, a professor in the department of earth and environmental science at Penn, points out that China is a wind and solar manufacturing powerhouse without yet fully making use of the technology on home ground. The Chinese are underwriting wind and solar in Europe and North America; at the same time theyre opening new coal plants every week, he said. Installed solar, for instance, is expanding in China, but not nearly as quickly as coal, which is cheap and abundant.

Jump-starting Wind
Indonesia could jump-start its wind industry with a planned $100 million investment in a wind farm on the south Java coast. In the summer of 2012, the energy ministry signed an agreement with UPC Renewables Indonesia for up to 33 turbines totaling 50 megawatts facing the Indian Ocean. Without construction or regulatory snags, the project could begin producing energy in late 2013. Some Southeast Asian wind projects are being developed by foreign investors, but there are also regional powers, such as the Thai power generation group Ratchaburi Electricity Generating Holding (RATCH), which has a global portfolio. RATCH is increasing its wind power investments in Australia from 200 to 300 megawatts, with a $600 million investment. Southeast Asia has abundant sunshine, and as governments in the region prepare favorable feed-in tariff structures (in concert with corporate tax abatements and duty exemptions), solar development is gathering steam. Thailands energy ministry, which has prepared aggressive incentives, has received applications for more than three gigawatts of solar, which is six times the existing national target. The Philippines has targeted 50 to 100 megawatts of solar capacity, but its energy ministry has already fielded proposals for 537 megawatts. Indonesia has its own approach to solar. The national utility, PT PLN, said in 2011 that it would set up communal solar power plants on 100 small islands as a pilot project, with as many as 1,000 islands to be added in later years. The 100 islands are in eastern Indonesia, only 69% of which currently have electric service, said PLNs construction director, Nasri Sebayang, who projected a completion date at the end of 2012.

Chinas Solar Over-capacity

The availability of inexpensive solar panels from China was a major factor in the bankruptcy of American solar producer Solyndra, which was the recipient of more than $500 million in Department of Energy loan guarantees. In fact, China has significant over-capacity in solar production, which recently led the Chinese government to increase incentives for solar use domestically. China could have 30 gigawatts cumulative of installed solar by 2015, up from four to five gigawatts in 2012, says GTM Research. According to Roger Raufer, a consulting environmental engineer who has taught at the University of Pennsylvania, The Chinese have built incredible amounts of solar on the production side and shipped nearly all of it to Europe because the feed-in tariffs there are so high. Now nearly everybody has surplus solar capacity, and the markets have shiftedthats why the industry in China is focusing more on selling its products domestically. China has no Kyoto constraints, which is why weve seen so much coal development there, but with the government setting carbon-intensity goals were seeing a move toward cleaner power plants. Renewables are not currently a major factor in Southeast Asias energy picture, but as government incentives combine with abundant natural assets, and the important palm oil sector moves (albeit slowly) toward certified sustainability, the region is on track for a brighter future.

IGEL | Knowledge@Wharton Special Report

Southeast Asian Megacities: Big Challenges, Bigger Opportunities Indonesias rapid economic growth is
dramatically changing its capital, Jakarta. While just over nine million people live in the central city, more than 23 million people live in its larger metropolitan area, making it the largest megacity in Asia and the third-largest in the world. The worlds urban areas are experiencing rapid growth. In 2007 for the first time in history more than half of the worlds people (3.3 billion then) were living in urban areas. By 2030, nearly all the worlds population growth will be in cities. Many will be living in megacities, which are defined as cities that have populations above 10 million. New York was the worlds first megacity, but today it is in eighth place for population size. Greater Tokyo, which has largely stopped growing, remains the worlds most populous metro region, with more than 34 million people. By 2025, Asia will host seven of the worlds 10 largest metro regions.

In addition to Jakarta, Asian megacities include Bangkok, Manila, Guangzhou, Seoul, Shanghai, Beijing, New Delhi, Karachi and Mumbai. Megacities are also home to sprawling slums and poverty. Many of them suffer from overburdened and aging infrastructure. The blackout that covered half the country and affected 600 million people in India in the summer of 2012 is an example of what happens when the system spins out of control. One major contributing A growing number of the worlds megacities are located in Southeast Asia factor was a spike in power demand brought on by a heat wave in New Delhi.

Megacities Great Potential

Still, its a mistake to conclude that megacity problems are intractable and life in them untenable, as some contend. Gavin W. Jones report, Megacities in the AsiaPacific Region,
Taubenbck H, Esch T, Felbier A, Wiesner M, Roth & Dech S (2012): Monitoring of mega cities from space. In: Remote Sensing of Environment, vol. 117, pp. 162-176.

The Pathways to Sustainability in Emerging Economies

concludes, [C]onditions of life are in general much better than in the countryside, and improving over time. And because of their rapid growth, megacities will be a defining aspect of humanity for years to come. A panel at the recent Wharton Global Alumni Forum in Jakarta, entitled Growing Greener: Indonesia and the World, brought together many different environmental perspectives on megacity issues, with a special focus on Indonesia. The Forums overall theme was Indonesia, ASEAN and the World: Concentric Circles of Growth. According to Eric Orts, the panel chair, director of Whartons Initiative for Global Environmental Leadership (IGEL), and a professor of law and business management at Wharton, Major environmental problems facing Indonesia include a booming population; large-scale deforestation and biodiversity losses; and issues facing particular business sectors, such as mining, palm oil production, and tourism. If Indonesia succeeds in handling these issues responsibly and efficiently, then it promises to become a leading example for other emerging economies in the second half of the 21st century. Jakarta is the face of the future with respect to the massive challenges of sustainability that everyone on the planet must deal with going forward. Indonesias dynamic economy it has a 6.4% annual growth rate in 2012, according to the Asian Development Bank belies some of the countrys challenges, which are particularly acute in its largest urban regions. Jakarta, for instance, is a city on the move, but with mobility paralysis and attendant air pollution that cuts into its economic success. The Jakarta Transportation Agency reports that congestion costs the city $5.4 billion annually.

to try traffic-engineering schemes, such as switching inbound lanes to outbound during evening rush hours. The situation is exacerbated by erratic train service (with cars so packed that some people ride on the roof). An innovative TransJakarta bus service which has its own dedicated corridors and echoes successful transit systems in Curitiba, Brazil and Ottawa, Canada is helpful but needs expansion. More cars and more congestion have led to increasingly poor air quality. In 2010, the city had 27 clean air days per year, with particulate matter far above the upper limits recommended by the World Health Organization (WHO). Jakartas air would be far worse, however, if auto manufacturers had not dramatically reduced tailpipe emissions, and if the citys government had not banned open garbage burning, removed lead from gasoline and imposed curbs on industrial smokestacks. In an energy consumption business-as-usual scenario, emissions of two major air pollutants (sulfur dioxide and nitrogen oxides) would increase by 2020 to two or three times 1990 levels, says the Impact Assessment of Growing Asian Megacity Emissions report. According to the study, Urban air pollution in Asia has worsened in the developing countries, a situation driven by population growth, industrialization and increased vehicle use. The Stockholm Environment Institute identifies Asian air pollution as resulting from increased coal use, the steady growth in road traffic (especially diesel trucks and motorcycles), and residential heating and cooking. Erik Assadourian, a senior fellow at the Worldwatch Institute who has studied sustainable communities, said that megacities can take the lead in shifting urban transportation norms away from the car and back to trains, bus and bus rapid transit. Jakarta is ahead of most megacities in already having a bus rapid transit system its challenge is to expand the service to serve a wider swath of the community. Congestion pricing (which charges a fee for cars entering downtown cores) has been effective in reducing traffic in Europe (especially London), but has yet to see widespread adoption in the worlds megacities.

Challenges and Solutions for a Carcentric City

There are 11 million vehicles on the road in the city, up from 1.3 million in 1994, according to the Jakarta Police. Their frequent use is encouraged by federally subsidized gasoline through the state-owned Petramina oil company. Traffic congestion in the capital has long been at an alarming level, particularly during the morning and evening peak hours, reports the Jakarta Post. Its a common problem for rapidly growing cities not designed to handle the traffic load. The problem has led the beleaguered city government

Clean Water: A Critical Goal

Clean water is another challenge for Jakarta and Indonesia as a whole. The United Nations Millennium Development Goals call for reducing by half the worlds population without access to clean drinking water by 2015, but that goal is not yet in

IGEL | Knowledge@Wharton Special Report

sight for Indonesia. According to the Jakarta Globe, only 40% of the citys population has access to piped water, and only 20% have access to a private toilet. Water flowing from an open tap is a luxury for only a few people in Penjaringan, one of Jakartas densest neighborhoods, reports the IRC International Water and Sanitation Centre. The French-run PT Palyja, one of two private companies that control Jakartas water supply, provides only a communal tank for the local residents to use. Even the smallest daily activity, like brushing ones teeth, requires a trip to the tank, where people pay a large portion of their meager salaries for containers of cloudy, brackish water. A related issue is the lack of sanitation access in megacities. Across Indonesia, 94 million people live without sanitation and up to 24 million must pay to use communal latrines, mostly in urban areas. Without sanitation, disease spreads rapidly through the water supply and other means, and quality of life is significantly impacted, especially for women. wH2O: The Journal of Gender and Water at the University of Pennsylvania makes these issues a main focus. But even in Penjaringan, life is getting better for many residents, thanks to the international aid organization Mercy Corps, which in 2008 launched a program called Master Meter and installed its own clean water supply and ran lines to households that could afford the initial $20 fee. Despite its unsustainable population increases, Jakarta is beginning to confront its megacity problems, as are the regions other sprawling urban enclaves.

endangered and charismatic primate, the orangutan. It also is host to the third-largest tropical rainforest in the world, covering 100 million acres. The bad news is that Indonesia has lost 1% of its forest area annually every year for 20 years. Indonesia is responsible for 5% of all global warming emissions (making it the worlds third-largest emitter, behind the U.S. and China). Indonesia has many obstacles to overcome. Corruption, once concentrated in the all-powerful federal government, has become localized with political decentralization, Wolfowitz said. To evolve toward sustainability, he said, land-use management in Indonesia has to address questions of chronic poverty and securing a productive livelihood for the people who live in regions under threat, including the countrys large cities. He pointed to Singapore as a model of what can be accomplished. Worldwatchs Assadourian points out that its hard to imagine a utopian megacity, because the inherent challenges make sustainability much harder to achieve than in village-based ecosystems. A sprawled-out city built around cars and parking lots, thats the worst possible design, he said.

Singapores Solutions
Megacities can look to their smaller urban cousins, like Singapore, for solutions. Unsustainable population growth makes the problems worse. According to the CIA Factbook, the tiny city-state of Singapore, although somewhat authoritarian, has a highly developed and successful free-market economy and enjoys a remarkably open and corruption-free environment, stable prices, and a per capita GDP higher than that of most developed countries. One reason for its success is a family planning program that achieved one of the worlds lowest fertility rates and made a virtue of necessity Singapores five million people live in an island environment that is 30 miles long and only 16 miles wide. Singapore, which has avoided megacity status by design, is the only metropolis rated well above average on the Asian Green City Index, part of a global project assessing and comparing major urban areas on six continents. (Six Asian cities rated above average are Hong Kong, Osaka, Seoul, Taipei, Tokyo and Yokohama.) Also pointing to Singapore as an example is Susan Wachter, a professor of real estate and finance at Wharton and co-director of the Schools Institute for Urban Research. She cites Singapores development

Indonesias Importance
Paul Wolfowitz, a former ambassador to Indonesia, U.S. deputy secretary of defense and head of the World Bank, also spoke at the conference. Sustainable development is absolutely critical to Indonesias economic development and economic future, he said. According to Wolfowitz, Indonesias environment is considerably endangered, and sprawling megacity growth, which annexes habitat and agricultural land, is one important reason for that. The countrys environmental challenges have dramatic implications for the rest of the world, Wolfowitz said, because Indonesia is home to a disproportionate share of the worlds biodiversity, including 25% of its fish, 17% of its bird species, and 12% of the its mammals including a critically

The Pathways to Sustainability in Emerging Economies

of a clean water system for its population, in part through desalination technology developed with corporate partners such as GE Power & Water. What is called Singapore NEWater is reclaimed wastewater that has been purified using membrane technology and ultra-violet disinfection.

Singapores Innovations
Singapore is far more innovative than we are in the U.S. with environmental regulations and incentives, Wachter said. By 2030, 80% of Singapores building stock will meet Green Mark certification on energy efficiency. Singapore has also adopted congestion pricing on highways, which has done wonders in reducing traffic problems. They dont have as much bicycle use and walking as they could have, so there is room to move there. Wachter also points out that megacities are only one facet of urban growth in Asia. In the region as a whole, she said, there is faster growth out of the megacities than into them. Though urban growth is continuing, much of it is in secondary cities. China, for instance, leads the world in the creation of new urban enclaves that quickly become large population centers. The Chinese city Shenzhen is one such overnight city, a skyline of skyscrapers and 14 million people, belying the fact it was little more than a fishing village 30 years ago. Today, its the newer second-tier cities that are attracting major manufacturing and attendant job growth. Wachter differentiates Chinas planned new city growth from the informal shantytown growth that swells the population of megacities like Mumbai and New Delhi. India and Africa have many examples of urban growth through informal settlement, she said. And its growth without access to public services. According to the Rapid Urbanization and Megacities report from the International Federation of Surveyors, more than 30% of the world is living in such informal settlements, and 70% of the growth in these urban enclaves currently takes place outside the formal planning process. And thats why the work of relief agencies such as Mercy Corps, which works in 41 countries including Indonesia, is so important. Among many other issues, the group works with local governments and private sector partners to build better access to clean water, both private and communal sanitation facilities, and hand-washing stations. The services are not free, but experience shows

that people, even very poor people, are willing to pay for clean water, sewers and other services vital to their health. Wachter sees these kinds of publicprivate partnerships as critical to improving lives in informal settlements. Its a way for residents to have access to public services, with ownership rights, she said. We dont have widespread adoption of these solutions yet.

Climate Change and the Environment

Daily life in the megacities is exacerbated by climate change (sea level rise being one vivid example), and by natural events, such as the recent devastating flooding in metropolitan Manila, that may be intensified by climate change. Rafael Senga, manager for Asia-Pacific energy policy at World Wildlife Fund International, rates Jakarta as eight out of 10 among megacities in climate vulnerability. Jakarta, he wrote in a recent report, faces particular challenges because of its size, its exposure (particularly to flooding) and its relatively low adaptive capacity. Jakarta was flooded as recently as April 2012, but that event was dwarfed by flooding in 2007 that killed more than 50 people and displaced 200,000. In 2011, Bangkok, Thailand (with a population of 12 million) became the first megacity to contemplate relocating because of epic flooding. Sataporn Maneerat, a member of the Thai parliament, said that the country should consider either relocating Bangkok or building a second capital. The capital will face more and more problems from natural disasters and the environment, he told Agence France-Presse. Sarene Marshall, managing director for The Nature Conservancys global climate change team, said that TNC has traditionally worked mostly on the intersection of nature and people in rural environments. But most of the worlds population is living in cities, and as an organization weve begun paying more attention to urban dwellers and their relationship with nature and natural systems, Marshall said. TNCs investigation of Jakartas 2007 flooding shows that its primary impacts were felt by the urban poor living in low-lying areas and along riverbanks. And one of the main issues is that the watershed is badly deforested; water flows freely into rivers instead of being absorbed by trees along the route. Further, so much trash is being dumped into rivers that they become clogged with debris, which gives the water nowhere to go but over the river banks.

10

IGEL | Knowledge@Wharton Special Report

Fred Scatena, chairman of the earth and environmental science department at Penn, points out that the lack of strong community organizations in informal settlements (especially when compared to established village structures) is a problem when trying to make megacity infrastructure improvements. Churches are sometimes the strongest local institutions and can be conduits, he said. Monasteries and mosques also act in this role. Scatena also said that informal settlements are often located on poor or risky land, including floodplains or steep slopes rejected by other population groups. The danger, he said, is making the problem worse by attempting to make it better. For instance, if you put in water infrastructure and electricity, you encourage a larger influx of people and the building of more houses, so you end up with an even larger settlement on unstable terrain. Its hard to remove people once theyre settled, and thats why you need planning.

opportunities for different types of institutional investors. Some would forego income opportunities for perceived greater impact on how the funds are deployed, but others wouldnt want to accept any reduction in returns. Theyd have to be convinced that the reward would be commensurate with what they were used to seeing. Identifying new funding has to work closely with improvements in governance, says the Megacity Challenges report sponsored by Siemens. In its stakeholder survey, Siemens said, Over half of respondents with knowledge of urban management see improved planning as the priority to solving city problems, with only 12% that prioritize increased funding. In addition to a more effective planning process, those polled identified poor infrastructure management (one likely cause of the Indian blackout) as a hindrance to progress.

Financing Progress
Financing for projects that benefit the poor in megacities and could possibly address the conditions that led to Jakartas human toll in 2007 is vital, but scarce. Theres no question that both the challenges and opportunities of environmental sustainability are more pronounced in Southeast Asia than they are anywhere else in the world, Mira Arifin, president and managing director of Bank of America Merrill Lynch (BAML) in Indonesia, said at the Forum. She added that BAML has made a 10-year, $50 billion environmental commitment to address climate change, reduce natural resource demands and create momentum for low-carbon economic options. According to Abyd Karmali, managing director and global head of carbon markets at BAML, Our goal is to help clean technology companies gain access to equity and debt markets, which enables them to implement green infrastructure projects in megacities like Jakarta. Karmali said that the embryonic climate bond market, estimated at just $3.5 billion to $5 billion in development bank-issuance, and $174 billion when corporate and asset-backed project bonds are included, is something that will likely grow, and that will help a lot in getting megacity-targeted projects funded. Climate bonds are issued to raise capital for specific projects aimed at reducing climate change impacts. The structure of climate bonds is key, Karmali said, to have the appropriate risk and reward

Energy Cooperation: An Efficiency Solution

Roger Raufer, a consulting environmental engineer who has taught at the University of Pennsylvania and who wrote two books on the role of emissions trading in environmental management, offers a sustainability solution for megacities: energy integration. He notes that Asian cities rely primarily on coal as their main source of commercial energy, and that China and India combined account for 79% of the projected increase in world coal consumption between 2005 and 2030. One result: Asian cities have the highest air pollution levels in the world, and more than 500,000 premature deaths annually as a result of it, says the World Health Organization. Coal is also the fossil fuel with the biggest impact on climate change, which is one reason greenhouse gas emissions from coal-rich China are projected to double between 2002 and 2030, says Geophysical Research Letters. By 2015, says the Beijing-based Climate Policy Initiative, China could be emitting 50% more carbon dioxide than the United States.

Asias Huge Energy Demand

Energy demand is expected to grow significantly in Asia. The International Energy Agency projects that China alone will see a 75% demand increase by 2035, compared to 2010 levels. To help meet that demand, Raufer says a citys overall energy needs can be evaluated together and addressed with sustainable, and in many cases more affordable, systems. For example, he said,

The Pathways to Sustainability in Emerging Economies

11

integrating combined heat and power (CHP) with district heating/cooling systems (DHC) offers a long-term approach to addressing energy demand requirements in fast-growing urban areas. Nuclear power, in small-scale pebble bed reactors, can also be combined with coal gasification in urban settings unless public reaction made such a solution politically untenable. Raufer added, Some of these approaches are almost like science fiction, but integration is key. Asia is where the big megacities are, and there are a lot of opportunities for making them work better. Centralized DHC systems that can tap into the abundant renewable geothermal or biomass resources that countries such as Indonesia have in abundance, offer huge energy-efficiency and

emissions gains, Raufer said. Waste management also offers abundant untapped energy generation, he said, citing Tokyo as a city whose 18 incineration plants have processed and generated energy from 87% of post-recycled and 100% of Bureau of Waste Management-collected waste since 1998. Raufer said that buildings, which account for 52% of urban energy consumption in South and Southwest Asia, also present opportunities for reducing energy demand through the use of efficient insulation and more efficient appliances, and through new building designs that include grid-connected energy generation. Asian megacities need not be seen as perennial obstacles to building regional sustainability. The good news is that innovative ideas, and the funding necessary to make them reality, are coming into focus.

12

IGEL | Knowledge@Wharton Special Report

Deforestation in Southeast Asia: The Future Is Being Decided in Indonesia Economic development feeds on forests,
or at least it always has. The United States gobbled up forests as it grew into a world power, sacrificing, says the U.S. Forestry Service, something like 200 million acres of forestland in the second half of the 19th century alone. By 1926 the nations economy was booming, but the price the U.S. paid for its development was enormous: there were almost no forests left east of the Mississippi. Today, notes Sarene Marshall, managing director Economic development feeds on of The Nature Conservancy (TNCs) Global Climate
Economic development feeds on forests
forestcover.pdf 2007-05-28 10:59:50 forestcover.pdf

Change Team, the environmental cost of such forest clearing is so great that we can no longer afford it as a planet. Already, deforestation and forest degradationaccount for nearly 20% of global greenhouse gas emissions, more than the entire global transportation sector and second only to the energy sector, reports The United Nations Collaborative Program on Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (the UN REDD Program). And just Brazil and Indonesia, forests two countries, approximately 55% of the account for
10:59:50

2007-05-28

The deforestation of the United States over 300 years

1620 1950
forestcover.pdf 2007-05-28 10:59:50

The deforestation of Borneo, Indonesia over 70 years

1950 1985 1985 2000

C C

1950

CM

1850 2005 1985

CM

2005 2010 2000

2010 2020

worlds deforestation, not including the loss of peatlands, which can account for half the greenhouse-gas emissions in Indonesia in some years, says the Washington Post. So now that industrialized countries like the United States no longer depend on unregulated deforestation for their economic well-being, the challenge is whether emerging powers like Brazil and Indonesia will be able to forge new greener paths to their own economic development. Brazil has already made significant progress, decreasing deforestation by 78% in recent years and undertaking new initiatives that promise even more success in the years ahead. Indonesia, by contrast, is still in the early stages of the process. Its economy, the largest in Southeast Asia, is defying the economic malaise affecting much of the world and growing at an annual rate of about 6%. But this growth is coming at a severe environmental cost. Indonesia is today the worlds third-largest emitter of greenhouse gases, after the U.S. and
The Pathways to Sustainability in Emerging Economies

MY

MY

CY

CY

CMY

CMY

2005

2010 1926

Projected

2020

CM

MY

CY

CMY

Atlas of the Historical Geography of the United States. Charles O. Atlas of the Historical Geography of the United States, Charles O. Paullin (editor), American Geographical Society of New York, 1932 Paullin (editor), American Geographical Society of New York,1932 http://www.cartoko.com/2010/05/area-of-virgin-forest-1926/ http://www.cartoko.com/2010/05/area-of-virgin-forest-1926/

Radday, M, WWF Germany. 2007. Borneo Maps. Radday, M, WWF Germany. 2007. 'Borneo Maps'. Cartographer/designer: Hugo Ahlenius, UNEP/GRID-Arendal. Cartographer/designer: Hugo Ahlenius, UNEP/GRID-Arendal. http://www.grida.no/graphicslib/detail/extent-of-deforestationhttp://www.grida.no/graphicslib/detail/extent-of-deforestatio in-borneo-1950-2005-and-projection-towards-2020_119c n-in-borneo-1950-2005-and-projection-towards-2020_119c

13

China, largely because of the countrys historically high rate of deforestation. According to Agus Purnomo, the special assistant to the President of Indonesia and head of secretariat for National Council on Climate Change, 85% of the nations carbon footprint comes from deforestation and uncontrolled land conversion. Just how, and how successfully, Indonesia will manage to maintain the vitality of both its economy and its rainforests is not yet clear. But an understanding of the forces that have led to the current situation and the new forces that are helping to shape Indonesias future suggests that Indonesia may someday, like Brazil, aspire to become a green super power. The panel on Growing Greener: Indonesia and the World at the 2012 Wharton Global Alumni Forum in Jakarta brought this point home. In his opening remarks, Eric Orts, a professor of legal studies and business ethics at Wharton, noted the many environmental challenges Indonesia faces, including large-scale deforestation. But said Orts, who is also director of Whartons Initiative for Global Environmental Leadership (IGEL), if Indonesia succeeds in managing these challenges, then it promises to become a leading example for other emerging economies in the second half of the 21st century.

oil palm plantations. And even timber companies that fail to thrive leave behind roads and partially cleared land that others can more easily and illegally exploit. Regulatory mismanagement: Speaking at the Jakarta panel, Paul Wolfowitz, a former ambassador to Indonesia, deputy Secretary of Defense and head of the World Bank, pointed out that, In 1998 when the economy collapsed here, GDP declined by 14%, the province of East Timor seceded from Indonesia and there were ethnic conflicts all around the periphery of Indonesia, very few people would have bet on the future of this country. Many, in fact, predicted that the country would, in the words of Indonesian President Susilo Bambang Yudhoyono, break apart into pieces. One important reason it did not, says the president, is that the central government pursued an ambitious process of decentralization. While this process may have helped save the nation, it also complicated efforts to combat deforestation. The centralized exploitation of resources was one thing, says Jack Hurd, Asia Pacific deputy director for TNC, but decentralized exploitation of resources was even more chaotic. For years, Hurd explains, the Indonesian government has lacked the resources and staff to manage even the nations national parks, which it directly controls. Not surprisingly, the national government has had even more trouble overseeing the land it allows others to manage. While the government, says Hurd, is more concerned than it used to be about a more planned approach to land use management, and is probably in a better position to implement its plan than it used to be, it still does not have the manpower to properly police its own regulations. As a result, the World Resources Institute estimates that illegal logging accounted for 80% of Indonesias timber exports in 2008, depriving the government of more than $100 million in tax revenue annually and often depriving local communities of their livelihood. Finally, concludes Hurd, at the local level where much of the power resides, the district governor generally issues local land permits without the benefit of a national planning perspective. Like most local officials, the governor is far less focused on national policy than on attracting industry that will generate jobs and tax revenue. Adding to this regulatory confusion are often acrimonious conflicts about land tenure. According to a recent study of by the Center for International

Three Major Factors Have Driven the Deforestation of Indonesia.

According to the Rainforest Action Network, less than half of Indonesias original forest cover still exists, and much of the rest has been badly degraded. The causes are numerous, but three forces account for much of the destruction: commercial pressures, regulatory mismanagement and international neglect. Commercial pressures: The timber industry in Indonesia has prospered by harvesting ancient trees to feed the worlds growing appetite for plywood and paper pulp. Palm oil companies, often closely allied with the timber concerns, have cleared huge swaths of primary forests to create plantations that today make Indonesia the worlds leading supplier of palm oil (used in everything from candy bars to face creams, not to mention bio-fuels). Still more trees have been bulldozed to facilitate the mining of two other natural resources, coal and minerals. These drivers of deforestation often feed on each other, creating a destructive synergy. Profits from thriving timber concessions pay for the creation of

14

IGEL | Knowledge@Wharton Special Report

Forestry Research (CIFOR), Tenure insecurity is at the crux of forest controversies. The dispute at the heart of its study, says CIFOR, illustrates a quandary faced by local governments and forest communities across Indonesia an unclear boundary between a state forest and a communal forest claimed by villagers who have lived there for generations. In such cases, the conflict is often between government sanctioned harvesting of timber by a private company and the traditional agricultural practice of shifting cultivation (often termed slash and burn) by the local community. Lack of international assistance: Despite the now-obvious relationship between tropical rainforests and climate change, the 1997 Kyoto protocol did not address the carbon dioxide emissions from deforestation in the developing world. Only Annex 1 nations were bound by the protocols emission reduction commitments, and these 37 industrialized countries were not allowed to use any emission offsets from forests in developing countries. So while the decentralized Indonesian government struggled to contend with mounting commercial pressures, the rest of the world failed to even recognize the importance of deforestation, let alone provide badly needed assistance. But a lot has changed since Kyoto, both on the ground in Indonesia and throughout the world. In recent years, global corporations, local companies, international NGOs and the Indonesian government have begun working individually and collaboratively to find new ways forward. And while much remains to be done, significant progress is being made.

But the palm oil industry has begun to follow a new trajectory: Much has been made of the work being done by the Roundtable on Sustainable Palm Oil (RSPO), a collaboration of all the major stakeholders dedicated to the growth and use of sustainable oil palm products through credible global standards. But the 2007 Greenpeace report which focused attention on specific plantations and major consumer goods companies stated, On-the-ground investigations by Greenpeace reveal that RSPO members are dependent on suppliers that are actively engaged in deforestation and the conversion of peatlands. Quoting what it said was a major food retailer and member of RSPO, Greenpeace said the key issue was the inability of companies to trace the palm oil they used up the supply chain. Consequently, said the report, consumer companies who manufacture products using palm oil have virtually no way of knowing whether or not the palm oil they are using is from rainforest destruction and conversion of peatlands. Greenpeace also conducted a number of highprofile media campaigns aimed at specific companies, many of which responded positively. But its agreement with Nestl was the most farreaching. With the help of The Forest Trust (TFT), Nestl developed a plan, just two months after it began talks with Greenpeace, to identify and remove any companies in its supply chain with links to deforestation, including Sinar Mas Agro Resources and Technology (SMART), one of the largest palm-oil companies in Indonesia. The agreement was so complete and reached with such speed that Greenpeace was caught off guard, confessing online that it didnt expect Nestl to come up with such a comprehensive zero deforestation policy so quickly. It was, Nestl announced, the first time that any company has made such a commitment. Just two months after it began talks with Greenpeace, Nestl developed a plan to identify and remove any companies in its supply chain with links to deforestation, including Sinar Mas Agro Resources and Technology (SMART), one of the largest palm-oil companies in Indonesia. The agreement was so complete and reached with such speed that Greenpeace was caught off guard, confessing online that it didnt expect Nestl to come up with such a comprehensive zero deforestation policy so quickly. It was, Nestl announced, the first time that any company has made such a commitment.
The Pathways to Sustainability in Emerging Economies

New Forces Are at Work in Indonesias Forests

A report published by the United Nations Environment Program (UNEP) in 2007 says that palm oil plantations are the leading cause of rainforest destruction in Malaysia and Indonesia. And a report by Greenpeace that same year, How the Palm Oil Industry Is Cooking the Climate, explains, Much of the current and predicted expansion of oil palm plantations is taking place on peatlands which are among the worlds most concentrated carbon stores. The destruction of peat is already unprecedented, and according to a 2011 article in Science, If people continue to chop, drain, and burn [peatlands] at current rates, researchers report, by 2030 no native swamps will remain and billions of metric tons of carbon will be lofted into the atmosphere.

15

The speed with which the agreement was reached is a tribute to all involved: Nestl, Greenpeace and TFT, which played the role of intermediary/interpreter, says TFT executive director, Scott Poynton. Without that role, adds Poynton, the agreement would either have taken much longer to gestate or possibly never have emerged at all. And without strong implementation in the field, the Greenpeace campaign would likely have started again very quickly. This June, Greenpeace once more announced its astonishment that Golden Agri-Resources (GAR), the owner of SMART, is leading the way in what could be the starting point for the palm oil industry to phase out deforestation, a result, Greenpeace said, that was unthinkable just two years earlier. The new program is an outgrowth of the Forest Conservation Policy (FCP) GAR introduced in 2011. Working with both Greenpeace and The Forest Trust (TFT) GAR has launched what TFT calls the first practical, scientifically robust and cost-effective methodology for defining and identifying areas of high conservation value. In consultation with the government, local communities, industry experts and other relevant stakeholders, GAR is now working to avoid any development of High Carbon Stock (HCS) or High Conservation Value (HCV) forests or peatlands. Forest certification is advancing sustainability on two fronts: The Forest Stewardship Council (FSC) offers a globally accepted certification program based on a set of principles and criteria related to forest management. For Indonesian timber companies, acquiring FSC certification serves two critical functions. It provides objective proof of a companys sustainable forest management both to the government and to high-value customers; and it provides a mechanism for working out the oftencomplicated relationship between the company and the local community. The importance of this second function, explains TNCs Hurd, is that it ensures a companys ability to operate. The timber companies, says Hurd, can handle a bunch of activists in Jakarta screaming and yelling about the forestry. What they cant handle is a bunch of communities that protest in strong and potentially violent ways. Over the years, for instance, communities enraged by logging on disputed land have blockaded logging roads, vandalized company machinery or otherwise interfered with company operations. As part of the FSC certification process, timber companies have to identify High Conservation Value

Forests (HCVF), and since a forest can earn HCVF status for cultural as well as strictly environmental reasons, the FSC process offers the companies a tool for negotiating agreements with local communities about where the company will and will not harvest timber. In this way, a commercial pressure the demand for certified sustainable wood helps companies resolve the daunting problems of land tenure. Working to improve the regulatory environment: In a recent survey by the Soegeng Sarjadi Syndicate, 80% of Indonesians believe that their nation can become a superpower. This national sentiment reflects Indonesias long-held intention to play an active role in international diplomacy, says Endy Bayuni, senior editor of the Jakarta Post. To realize its global aspirations, Indonesia has, says the East Asia Forum, taken consistent steps to rebuild its international image since emerging from the political turmoil of 19981999. The country has focused on re-establishing its leadership role within ASEAN, and has demonstrated a desire to assume a global role by promoting itself as the worlds third-largest democracy, largest moderate Muslimmajority country, and as a bridge-builder and a problem-solver in the wider global community. Keenly aware that its reputation for deforestation tarnishes its image as a problem-solver, not to mention the negative effect deforestation has on the countrys long-term economic development, the Indonesian government has begun to tackle the tangle of often conflicting regulations that has hobbled its efforts at land use management. One notable accomplishment was the enactment in 2009 of a national Timber Legality Verification System (SVLK). SVLK assures other countries that Indonesias own laws are being followed, and that timber and other forestry products leaving the country are certified as legal and traceable to their points of origin. What makes SVLK especially impressive is that in order to enact it, the government had to streamline an incredibly cumbersome process (TNC and other groups had identified some 900 conflicting rules and regulations governing the legal operation of forestland in Indonesia). And SVLK has been so successful that, as part of a large program sponsored by the United States Agency for International Development (USAID), TNC is now working with ASEAN to turn SVLK into guidelines other nations can use.

16

IGEL | Knowledge@Wharton Special Report

Ultimately, the success of SVLK and other similar programs depends on the willingness of other countries to outlaw illegally logged timber. The EU, among others, has put restrictions in place, but more needs to be done. Caroline DAngelo, IGEL communications coordinator and lead author of the recent IGEL report, Forest Product Eco-Labeling and Certification: Efficacy and Market Drivers, notes, Certified forestry products may only account for as little as 4% of the international forestry trade. That is why the Multi-stakeholder Forestry Program, a collaboration between the Indonesian and British governments, has been pushing for the 27 countries in the EU to close down the illegal market for timber products. It would be useless if we have these products certified, says Diah Raharjo, director of the program, but [the EU countries] still keep on buying cheap [uncertified] wood and timber products. Copenhagen Accord focuses world attention on deforestation: At the 2009 UN conference in Denmark, 12 years after Kyoto, an international agreement was finally reached concerning deforestation in developing nations. As part of the Copenhagen Accord, the participating nations officially recognized for the first time the crucial role of reducing emissions from deforestation and forest degradation (known as REDD and later as REDD+). As defined by the UN REDD program, REDD is a cutting-edge forestry initiative that aims at tipping the economic balance in favor of sustainable management of forests so that their formidable economic, environmental, and social goods and services benefit countries, communities, biodiversity and forest users while also contributing to important reductions in greenhouse gas emissions. REDD+ goes beyond deforestation and forest degradation to include the role of conservation, sustainable management of forests and enhancement of forest carbon stocks in reducing emissions. The Copenhagen Accord also recognized that accomplishing this reduction would require innovative and potentially costly efforts on the part of developing nations. In many cases, what was required would be profitable in its own right: increased agricultural efficiency, for instance, or growing demand for green products. In addition, however, the Copenhagen Accord envisioned the need for developed nations to provide financial incentives to developing nations. As a start, developed nations at Copenhagen established a Green Climate Fund (GCF) to make effective use of the $100 billion they pledged to

raise by 2020. Beyond this, they said, incentives might take a variety of forms, including the use of markets that would establish a financial value for the carbon stored in a countrys forests. None of this was legally binding, but the impact on countries like Indonesia was significant. By establishing the international importance of deforestation to global climate change, committing funds to support the efforts of developing countries and looking forward to a day when these countries could realize the financial value of the carbon stored by their forests, the Copenhagen Accord motivated Indonesia and other countries to get serious about deforestation to an extent they had not before. An ambitious demonstration project is helping chart the path forward: Now in its third year, the Berau Forest Carbon Program (BFCP) is well on its way to figuring out at the district level what it will take at the national level to achieve REDD+ goals. Led by the local government in partnership with TNC and funded in large part by a debt-for-nature swap between the U.S. and Indonesia, BFCP is bringing together stakeholders to develop pilot projects that include both emission-reduction strategies and enabling strategies. The latter involve land-use planning, regulatory policies and other initiatives that will help ensure enduring results. According to Marshall, BFCP has most of the components of the answer to Indonesias deforestation.

Involving the Financial Industry

Much more needs to be accomplished when it comes to deforestation if the average global temperature is to be stabilized within two degrees Celsius, which is all society will reasonably be able to tolerate, according to the UN REDD Program. And making the needed progress will require huge amounts of capital, as much as $30 billion a year. The $100 billion promised by GCF is a good beginning, but government funding will not be able to meet the ongoing need. The transition to a sustainable economy will require a significant investment from both government and the private sector, said Mira Arifin, president and managing director of Bank of America Merrill Lynch (BAML) in Indonesia. The example of Greenpeace, TFT, GAR and Nestl demonstrates the important role major consumer product companies can play in this process, but as Arifin noted at the IGEL panel in Jakarta, the financial services industry will be at the heart of this transition.

The Pathways to Sustainability in Emerging Economies

17

Green bonds: Abyd Karmali, global head of Carbon Markets at BAML, notes that multi-lateral development banks, such as the World Bank, the Asian Development Bank and the European Investment Bank, are already issuing green bonds. The Euromoney Environmental Finance Handbook notes, The appeal of the product lies in its simplicity: the credit quality of the bonds is the same as that of other World Bank triple-A rated bonds; it can be traded as easily as other plain vanilla bonds issued by the World Bank and it offers a competitive return. While green bonds require the same sort of due diligence as other bonds, they may in some cases include regulatory risk, since government actions can affect the underlying economics. Some forms of insurance can help mitigate some of these risks. TNCs Marshall points out that the U.S. governments Overseas Private Investment Corporation (OPIC) offers insurance against political risk, and Karmali notes that, there are private insurance companies that are looking to issue insurance for certain scenarios that might occur in the carbon market. But, he adds, such policies are very case-specific. Carbon markets: Looking beyond these projectspecific bonds, many in the financial community expect that functioning emission markets will be needed to provide the level of financing it will take to sufficiently reduce emissions from deforestation and degradation. This begs a pair of critical questions: will such markets materialize in time and will the price of credits on those markets be competitive with the opportunity cost in the industries affected? In Indonesia, for example, Karmali points out that the government must be able to earn more from emission credits than it can from granting concessions to very profitable oil palm plantations. The challenge is illustrated by the apparent failure of the two-year deforestation moratorium, which was implemented as part of a $1 billion REDD deal between Indonesia and Norway. It seems that even that amount of money has not been enough to compete with the income promised by two years worth of plantation permits. Whether or not the price of emission credits is ultimately high enough to compete with opportunity costs will be determined primarily by how tough emission targets get. The tougher the targets are, the greater the demand will be for credits. No one

can say, of course, whether or not the demand will be high enough to yield prices at the necessary levels, but Karmali is guardedly optimistic. Our base expectation from here is that the emission reduction targets are going to get tougher and that with a much tougher emission target regime, we should see REDD+ as being very competitive. Marshall adds that, Carbon finance alone will not solve deforestation. We need to harness the financial flows in underlying commodities towards greener practices, as well. Whether higher-priced credits provide some or all of the necessary financing, the other question whether regulatory markets materialize in time also remains open. At this point, the best hope lies in national and/ or regional markets like those being organized in California and Australia. Unlike the European Union Emissions Trading System (EU ETS), todays largest carbon market, the California and Australian markets have indicated that as long as they can develop appropriate standards, they will accept REDD+ credits. And emission markets like these seem to be gaining momentum, observes Karmali. But given the challenging transition period we are now in between the end of the first Kyoto compliance period and whatever comes next these new markets are unlikely to develop quickly. Even the $100 billion GCF is not scheduled to be in place until 2020. So the challenge seems to be less about whether or not markets will emerge and more about whether they will emerge in time. A 10-year rainforest bond that BAML has in the works would help by attracting investors before the markets fully develop. With their principal guaranteed, investors in these bonds would provide capital sooner rather than later, and derive annual income from the markets as they develop over the 10 years of the bond. Another possibility, suggests Karmali, is an Advanced Market Commitment (AMC) like the one the Bill and Melinda Gates Foundation funded together with five national governments Italy, Canada, Norway, Russia and the United Kingdom to guarantee a market for vaccines in developing countries. The same kind of mechanism, says Karmali, is possible in the case of REDD+, with funding from the GCF being used to guarantee a REDD+ market in order to attract investors before the necessary emission markets themselves are fully operational, presumably by 2020.

18

IGEL | Knowledge@Wharton Special Report

Notes:

The Pathways to Sustainability in Emerging Economies

19

20

IGEL | Knowledge@Wharton Special Report

The Initiative for Global Environmental Leadership (IGEL) Corporate Advisory Board
Bank of America BASF Dow Enterprise Holdings FMC International Paper Johnson & Johnson Merck Nestle Waters North America Rubicon Global SAP Shell United Water Xerox

Special Report

The Pathways to Sustainability in Emerging Economies

http://environment.wharton.upenn.edu

http://knowledge.wharton.upenn.edu http://knowledge.wharton.upenn.edu
Eric Orts Faculty Director Initiative for Global Environmental Leadership (IGEL) The Wharton School, University of Pennsylvania ortse@wharton.upenn.edu Joanne Spigonardo Associate Director Initiative for Global Environmental Leadership (IGEL) The Wharton School, University of Pennsylvania spigonaj@wharton.upenn.edu