Rimba Raya reignites regulatory and transparency concerns for carbon projects

(This is the second piece 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. The first piece detailed the wide swathe of the carbon market exposed to the project .)

While the license revocation of Rimba Raya Biodiversity Reserve Project has added to the long list of regulatory risks for carbon projects in Indonesia, the lack of transparency has made it tougher for market participants to manage the disruption.

Carbon markets are vulnerable to political risks due to their small size and because efforts to strengthen market mechanisms are still work in progress. Individual policy decisions by a host country have the potential to impact a significant share of global carbon credit supply.

There's also no clear policy at the UN-level to prevent host countries from coming up with disruptive policies, and market participants have limited tools to hedge against unforeseen risks. Carbon policies of different countries, or even states in the same country, are also evolving independently, creating a Tower of Babel with little information sharing.

At the project level, rules and regulations are even more entangled involving land ownership, forest custody rights, protection of indigenous groups, business regulations and even homeland security laws. The emerging issues around Rimba Raya are just the tip of the iceberg.

Prices of carbon credits from Rimba Raya were already falling in late 2023, and several traders voiced concerns that plans to revoke the project's license may have been known even before the government's official statement in early March.

"We suspected that some sellers seized the time window and sold their credits to buyers who were unaware of what happened. Such information asymmetry damages fair play in the market," a Singapore-based trader complained. "What really annoys me is the lack of transparency and timely communication for such an important announcement," the trader said.

"I think people will think twice about doing carbon projects in Indonesia going forward," another Singapore-based trader added.

Indonesia's environment ministry didn't respond to queries about the timeline or process for cancelling licenses.

Project developers and traders have called for authorities in host countries to ensure clear communication of important policies and create a stable business environment for the carbon industry. "Without doing so, the confidence in VCM will never be rebuilt," one of the Singapore-based traders said.

The gap between real-time project information and carbon market's responses has been an ongoing issue, not just for regulatory risks but also for things like changes in ecological conditions for forests, protests of indigenous communities, or weather patterns impacting projects.

License cancellation

Rimba Raya is a REDD+ [Reduced Emissions from Deforestation and Forest Degradation] project certified by Verra, the world's largest carbon credit issuer, with a carbon crediting period ending in 2039, according to Verra's website.

In Indonesia, business entities need to hold a government-issued license, called Forest Utilization Business Agreements (PBPH), to develop nature-based carbon projects and trade the carbon credits generated. This license can be revoked if local laws are violated.

PT Rimba Raya Conservation was the PBPH license holder as well as the owner of the Rimba Raya REDD+ project. Infinite-Earth Limited is the project developer registered in Verra's registry and Indonesia's national carbon registry Sistem Registri Nasional or SRN.

The Indonesian government announced the revocation of Rimba Raya's license on March 2, saying PT Rimba Raya Conservation "engaged in several violations."

"The company had transferred its permit to third parties without the approval of the Ministry of Environment and Forestry. Rimba Raya is also reported to have conducted carbon trading transactions exceeding the licensed area, including violating cooperation agreements with Tanjung Puting National Park," the government said.

"Additionally, PT Rimba Raya Conservation is accused of not paying non-tax state revenues in accordance with prevailing laws and regulations," the statement added.

"I see an impact where project developers and investors will need to be more thorough in complying with local laws and host countries' carbon trading regulations," Chamss Ould, Head of Carbon Finance at project developer dClimate, told Commodity Insights, adding that there have been concession revocations in other jurisdictions.

Market participants, who worried about more revocations in host countries, have started leveraging insurance products to hedge against political risks, even as a UK-based carbon trader called the incident a "nail in the coffin of the VCM market."

Considerable uncertainities

Indonesia's attempts at resource nationalization have previously disrupted commodities markets from oil to coal, including the 2022 ban that suspended carbon credit exports. The revocation of Rimba Raya's license has exacerbated risks at a time when nature and forestry resources are emerging as a new asset class.

The future of Indonesian carbon offsets has been unclear with the moratorium on exports, while the government has signaled that some international trades can still be permitted but subject to complex and demanding conditions to ensure that the carbon budget is not depleted by foreign buyers or puts Indonesia's own emissions reduction pledges at risk, said Eszter Bencsik, VCM analyst at Commodity Insights.

"The complexity of the rules does present a risk to other offset projects operating in Indonesia, although it is worth pointing out that the revocation of the license of Rimba Raya seems to be the result not of some misunderstanding of complicated legal lingo, but instead of a much more blatant non-compliance with the contractual terms of the project's operation," Bencsik added.

She said the Indonesia government is working on a set of rules that will determine which carbon credits can be authorized for trading across national boundaries, which presents a considerable risk for all Indonesian offset projects that's difficult to assess.