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New Age Timber Tycoons

01 Oct 2010
Harvesting the forests has enriched many. Two entrepreneurs are try ing the opposite, aiming to make millions selling carbon credits for not cutting down the trees.

From a carbon trading perspective, Katingan is a near-perfect site ... it's peatland, the world's densest natural storage system for carbon.
In a remote corner of Kalimantan, two entrepreneurs are trying to develop the country's largest carbon trading site using $10 million of their own money. It is a bold plan, one that could bring many times that investment or -possibly- lose everything. And the two aren't sure which scenario will materialize. "You can say I'm smart or just plain dumb. I'm so smart that I know what is going to happen or too dumb to realize that I shouldn't be doing this," says Dharsono Hartono, President Director and sole owner of PT Rimba Makmur Utama. His partner, Rezal Kusumaatmadja, runs environmental consulting firm Starling Resources based in Bali.

Their Katingan Peat Conservation Project covers 227,000 hectares, an area three times that of Singapore, nestled between two rivers in a relatively untouched section of Kalimantan. While there are some two dozen carbon trading projects in Indonesia, most are driven by eco-motivations and involve an NGO or government agency. Katingan is the only major one set up to make a profit. "We are purely private investors, trying to make this into a business. It's difficult," admits Dharsono.

The pair graduated from Cornell University, Dharsono getting a master's in financial engineering then spending several years as an investment banker for JP Morgan in New York. Rezal got a master's in urban planning from the University of Hawaii before setting up Starling Resources. Meeting in Cornell, they separated only to bump into each other ten years later at a conference in Bali in 2007, where Rezal told Dharsono of carbon trading's potential. "Dharsono is the one who translated my idea into a business,' says Rezal. "He said the opportunity had to be taken."" Aside from his idea, Rezal also contributed his family network, as his father is the former Minister of Environment Sarwono Kusumaatmadja.

It took two years for the pair to select the area. In June 2009, the Forest Ministry said Dharsono's Rimba Makmur Utama could have the site with a 60-year concession once environmental studies, now finished, are approved by Jakarta. The pair hope that approval will come next year. Once it does. Dharsono will need to pay $5 million for the concession fee. With the setup and running costs, the total investment climbs to $10 million. One big cost is the survey work, validating how much carbon is there worth trading -complex process of drilling deep into the carbon deposits in at least 100 different sites across the area. To get to the sites, the monitoring teams have to hike through the tropical heat and thick jungle. "The most challenging part is how to survey the area, and having enough samples so that we can get accurate carbon measurement in the area," says Dharsono.

The effort is probably worth it. From a carbon trading perspective, Katingan is a near-perfect site. It's classic Borneo forest, complete with a large population of endangered orangutans and other exotic fauna. As important, it's peatland, the world's densest natural storage system for carbon. Composed of compacted dead plant matter, peatland is found in only 3% of the earth's land area. Indonesia, however, is home to an estimated 20 million hectares of peatland scattered in Sumatra, Kalimantan and Papua. Much of those valuable carbon deposits are destroyed, however, as peatland gets used up by logging, plantations or mining. By some estimates 40% of Indonesia's total annual carbon emissions are coming from the destruction of peatland.

The more peatland is destroyed, however, the more valuable Katingan becomes. Dharsono estimates the site could hold as much as 800 million tonnes of carbon. Although carbon credits are currently selling around $8 a tonne on carbon credit markets, that doesn't mean Dharsono owns a fortune worth $6.4 billion. Most of that can never be sold under the arcane rules of carbon trading.

Dharsono figures that when he can finally start selling credits, perhaps in another two years, it will be one or two million tonnes at most. To be sure, at $8 a tonne, that's $8 to $16 million a year, which would quickly recoup most or all of his sunk cost of $5 million, plus other investments and any additional running costs. Even with a 20% government tax on any profit, and 20% more to aid local communities, the pair would still have enough to live well. Dharsono feels prices can only go up, as demand increases and carbon supplies dwindle -he's looking forward to the day when carbon credits sell for as much as $20 a tonne. In 2009, some 21 million tonnes of carbon credits traded hands for $130 million ($6 a tonne average), according to a recent study by U.S. nonprofit Forest Trends. On the other hand, he admits: "What if there are no buyers?"

First the pair have to get the site qualified for carbon trading. They are asking to be paid, in effect, to not cut down the trees and develop the area, generating a credit that can be sold to offset someone else's carbon emission. It's a tricky business to measure. The two are trying to meet a complex set of standards, many of which are still in flux or not yet finalized. "Progress has been made in development of international standards and verification system for the voluntary market" as Dharsono put it in a recent Rimba Makmur Utama powerpoint slide.

To help develop his plans, Dharsono has been talking to Australia's Macquarie Bank and the World Bank to build support. "We're pleased to be working with the Katingan project, which aims to be a world-leading demonstration of how forests can be retained by using carbon finance," says Brer Adams, senior manager at Macquarie in charge on carbon financing. There's also the possibility that some multinationals would like to fund the project for the corporate governance bragging rights. The U.S. Clinton Foundation, for example, has already helped support the surveying work "We have a good site, I'm sure there are many who'd like to help us," says Rezal.

Despite their business focus, the two also don't mind the positive benefits of Katingan. "We are not just exploiting the environment like previous generations. This business feels right because we are doing a good thing," says Dharsono.

Source: Forbes Indonesia, October 2010

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