John Howard said the fund would be used to fight illegal logging, plant new trees and offer alternatives to the timber industry.
Critics however have accused Howard's government of hypocrisy for allowing forests to be burned in Australia while seeking to curb such activity overseas.
Howard has also come in for criticism for refusing to clean up Australia's huge coal industry, which is among the world's biggest per capita greenhouse gas producers.
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"This is how we can address carbon levels in the atmosphere immediately"
Malcolm Turnbull,
Australian environment minister |
Announcing the fund on Thursday, Howard said 20 per cent of the world's greenhouse gas levels were due to deforestation, which ranked second to electricity production as a source of carbon dioxide pollution.
"What this initiative will do, in a shorter period of time, is make a greater contribution to reducing greenhouse gas emissions than, in fact, the Kyoto Protocol," Howard told Australia's ABC radio.
Britain, Germany and the US have been invited to join the fund, to be managed by the World Bank.
But Australia, like the US, has refused to ratify the Kyoto agreement which calls for industrialised nations to make steep cuts in carbon dioxide emissions by 2012.
Howard says the agreement would disadvantage Australia's coal-driven economy by limiting its emissions while allowing energy-hungry developing countries like China and India to pollute freely.
Immediate action
Malcolm Turnbull, Australia's environment minister, said the plan to plant new trees will succeed in slowing down Indonesia's deforestation rate, which is second only to Brazil's.
"This is how we can address carbon levels in the atmosphere immediately. We don't need to wait for new technology," Turnbull said in the capital, Canberra.
Indonesia has reportedly responded positively to the proposal which will see funds being distributed to forestry projects overseen by Australia's national aid agency.
Bob Brown, a Greens senator, said Howard was putting in a lot of money to stop forest burning in the region while approving it in southern Australia.
"Under his signature yesterday, 14 massive forest burns took place in Tasmania, sending thousands of tonnes of greenhouse gas into the atmosphere," he said.