Wide swathe of carbon market exposed to Indonesia's Rimba Raya project revocation risks

This story is the first of a two-part series on the impact of the Indonesian government's revocation of the license of Rimba Raya, one of the world's largest nature-based carbon projects, on the carbon market.

The Indonesian government's recent revocation of the license of Rimba Raya, one of the world's largest nature-based carbon projects, has reignited concerns around regulatory risks for carbon projects and had a ripple effect on the global voluntary carbon market or VCM.

The Rimba Raya Biodiversity Reserve Project, located in Central Kalimantan on the Indonesian island of Borneo, was one of the largest producers of nature-based credits, supply of which is now in limbo, leaving market participants, traders and brokers in a state of uncertainty.

From June 2013 to April 2024, standards body Verra issued around 33.63 million carbon credits from Rimba Raya, accounting for about 6.84% of total nature-based avoidance credits issued by Verra, data from S&P Global Commodity Insights showed.

As of April 2024, 25.70 million Rimba Raya credits have been retired and used for emission offsetting claims, accounting for 9.1% of the total retired volume of all nature-based avoidance credits. Major retirements from this project were made by entities such as Volkswagen Group, Gucci, and Delta Air Lines, according to Commodity Insights data.

Supply Uncertainty

Due to the large volume of credits from Rimba Raya, there is a long chain of market participants exposed to supply risks who are still assessing the scale of the impact.

One market segment impacted is carbon exchanges such as Singapore-based Climate Impact X. CIX has a standardized spot contract for nature-based credits called Nature X (CNX) and Rimba Raya is one of the flagship projects under the UNFCCC's REDD+ mechanism whose credits can be delivered into the CNX basket.

"The latest update around Rimba Raya's license is developing quickly and we are monitoring the situation. Currently, there are no changes to CIX Nature X and the project's credits remain deliverable into the contract," a CIX spokesperson said.

It is worth noting that due to an absence of recent-vintage credits in circulation, any delivery of Rimba Raya credits into CNX contracts would be for vintages 18 or older, rather than the headline CNX vintage 2020-2023 contract, CIX said.

"CIX's products are offered in line with country regulation and registry guidance. We will continue to monitor progress of the situation and keep our customers informed of any material changes," the spokesperson added.

Meanwhile, Verra said it would not issue a public statement on this issue for now and that it was in discussions with internal stakeholders to examine the status of the project and next steps.

Sales-and-purchase agreements

Carbon credits, besides exchange-based trading, are traded through brokerages, which sign long-term contracts with project developers for the supply of credits that are resold to corporate buyers to meet net-zero targets.

After Rimba Raya's license revocation, Toronto-based carbon project investor Carbon Streaming issued a statement saying it had a purchase-and-sale agreement dated July 30, 2021 with project developer InfiniteEARTH for Rimba Raya and that the Forest Utilization Business License had been renewed in November 2021.

Carbon Streaming said InfiniteEARTH intends to dispute any license revocation that would impact its carbon rights and was seeking clarification from the environment ministry on the current status of the license, the ramifications of any revocation, including on the status of InfiniteEARTH as project proponent under the national carbon registry.

InfiniteEARTH was also clarifying any impact on rights to both historical and future credits, Carbon Streaming said, adding that it will continue to work with the developer to preserve the continuity of the project. InfiniteEARTH did not respond to queries.

Market participants said that for sales-and-purchase agreements, if the supply of credits from a major project is disrupted, it could impede supply to downstream customers, and if replacement credits are not available, it may lead to declaring force majeure or some form of legal recourse like arbitration, depending on the contract structure.

Over-the-counter trades

Indonesia's previous bans on carbon credit exports were disruptive as they impacted future issuances. However, a license revocation risks impacting trade of existing credits already issued in some market segments, such as delivery into specific sales-and-purchase or exchange contracts that specify requirement of carbon credits with "CCB labels".

Some exchange-based and over-the-counter or OTC agreements require carbon credits delivered should carry Verra's CCB labels -- which refers to Verra's Climate, Community & Biodiversity or CCB standards that certify local benefits, but which may no longer exist if licenses have been revoked.

At the time of writing, Verra's website showed Rimba Raya's credits still carry the CCB label, but traders are worried the CCB status of the project may change and make existing carbon credits ineligible for delivery under contracts.

Meanwhile, Rimba Raya has already seen reputational damage as it used to be regarded as a high-quality project with price premiums. People are now reluctant to buy the older credits due to uncertainty around CCB standards, Singapore-based traders said.

One Europe-based carbon trader said there was a flurry of buying interest for Rimba Raya credits before the license revocation was officially announced on March 2, but interest has faded and credits that were offered on the market in the week of April 22 are still outstanding.

A project developer said Rimba Raya credits had seen little to no demand since the revocation as buyers sought more clarity and waited for the "dust to settle."

Price Signals

Carbon traders said the impact on prices will take time to filter through as the overall market has been lackluster anyway.

CIX said on May 3 that recent spot prices for Rimba Raya credits were around $7-7.50/mtCO2e for vintage 2018, $7/mtCO2e for vintage 2017, $6-6.50/mtCO2e for vintage 2016, and $4-5/mtCO2e for vintage 2014.

Platts, part of Commodity Insights, heard Rimba Raya credits were offered at $7.15/mtCO2e for vintage 2018 in the week commencing April 22. Platts also heard the project's credits were offered at $5.00/mtCO2e and $6.50/mtCO2e for vintage 2015 and 2016, respectively, on May 1.

The price of nature-based avoidance credits was assessed at $3.8/mtCO2e on May 9, which indicates that Rimba Raya credits are still priced above market average.