Indonesia’s Forest Moratorium: A Decent Deal For Palm Oil

Source:  International Centre for Trade and Sustainable Development (ICTSD) – July 19, 2011
By Ahmad Maryudi

The recent Indonesian decree imposing a 2-year moratorium on new permits to convert natural forests and peatlands was initially thought to have adverse impacts on palm oil development, by limiting the land reserves for expansion. In reality, the decree still provides significant space for the expansion of palm oil plantations. First of all, the moratorium exempts concessions covered by “in principle” permits. This means that those that have secured permits prior the moratorium’s entry into force can continue to convert forests. More importantly, the country’s vast secondary natural forests fall outside the moratorium’s scope, meaning their conversion, including for palm oil plantation, is made possible. Overall, business as usual is expected for palm oil development.

Indonesia plays an important role in the global effort to slow down climate change due to its vast tropical forests and carbon-rich peatlands. However, rapid forest loss and forest degradation have raised global concerns. In order to address the problem, the government of Indonesia signed a deal with the Norwegian government last year. The deal outlined a number of tasks on the side of Indonesia, relating to conserving its forest resources and ensuring sustainable forest management.  Norway, on its part, has committed itself to financial support amounting to US$one billion. To fulfil its commitments, Indonesia is now imposing a two-year moratorium on new permits to convert natural forests and peatlands, which came into effect on 20 May this year.

At first glance, the decree would provide a major boost for the conservation of the country’s forests, while dealing a major blow to the country’s rapidly expanding palm oil plantations, which have been largely based on conversion of forest and peatlands. Understandably, the Indonesian Palm Oil Association bemoaned that the decree creates uncertainty for the palm oil business. Their concerns include a shortage of land reserves for plantations – which could eventually lead investors to consider turning their back on the country – and risks related to slower profit growth and reduced market shares. In fact, the moratorium was initially thought to come at a cost to the Indonesian economy. According to a US-based non-government organization, World Growth, the export earnings from palm oil related products, amount to approximately US$15 billion and provide millions of jobs to rural people. This means that losses due to the moratorium would not necessarily be offset by the payment made by Norway.

Palming the forests

Over the past few years, palm oil has become one of the world’s leading agricultural commodities. It is a highly versatile product with a diverse usage as cooking oil, an ingredient in food products, cosmetics and biofuels. In recent years, palm oil demand has exceeded supply. The increasing demand is principally due to trends in many developed countries to use healthier (but low-cost) alternatives to trans-fats, as well as growing use of biofuels. Correspondingly, the price of palm oil has been soaring. Oil World reported that the price of crude palm oil recently rallied to a level of 1,100 USD/ tonne, compared to a low of just over 400 USD/tonne in 2008.

Considering the prospects, and hosting vast hospitable land for growing palm oil, the government of Indonesia has aggressively developed its palm oil plantations and industries. In 1996, it announced its aim to become the world’s biggest palm oil producer, which has been duly met. In fact, the area of Indonesia’s oil palm plantations has increased remarkably from about 100 thousand hectares in 1967 to more than 10 million hectares in 2010. Aside from the much higher returns from palm oil than other crops driving rapid development, this trend has been facilitated by government provisions of low-cost capital, as well as the availability of land-banks. Plantation area and the production of palm oil have increased in tandem. Being ‘neck and neck’ with Malaysia as the world’s major producers for years, Indonesia finally surpassed the neighbouring country in production in 2008, producing over 18 million tonnes of palm oil.

The prolific expansion of palm oil plantations has, however, posed an increasing threat to the country’s natural forest cover. The majority of Indonesia’s palm crop is located in Sumatra, planted in areas that were previously forested. An independent study has revealed that palm oil plantations have contributed nearly 50 percent of rainforest loss in Indonesia. A preference among developers for newly cleared rainforest and peat-swamp forests – given that these areas are more suitable palm oil trees than degraded lands – has reinforced this trend. The additional incentives provided by valuable trees have made investments in palm oil development all the
more attractive, as the cash from the timber can be used to finance the planting.

In a recent ambitious plan, Indonesia has committed itself to doubling its production of crude palm oil by 2020. Under this plan, the government is emphasising palm oil development on forestland on islands beyond Sumatra, notably Indonesian-Borneo and Papua. Under a strategic plan prepared by the ministry of forestry, millions of hectares of forest land have been appropriated for plantations.

Unsurprisingly, the continued forest clearance for palm oil plantations has come under strong opposition from environmental activists. Beyond the loss of forest cover, environmental concerns include the loss of biodiversity – as monoculture plantations replace the biodiverse rain forests – and the loss of habitats forendangered species. Recently, carbon emissions have emerged as a major concern related to palm oil development. Once a primary forest is logged, it releases significant amounts of carbon into the atmosphere, and the new secondary forest will not be able to sequester equivalent amounts. Poor practices, such as burning the land in preparation for planting, as well as constructing drainage canals, do not help as they lead to further carbon being released. Amidst these concerns, last year the government of Indonesia made an “audacious” plan to classify palm oil plantations as forests, although the plan has never been put in place.

Palm oil industries benefiting from moratorium’s exceptions
The growing concerns regarding the adverse impacts of palm oil development on forests has led the government of Indonesia to take on board environmental issues in national economic development planning. The new moratorium decree itself resulted from long and cautious examination of the likely impacts on sectors other than forestry, and of identifying appropriate ways to cut emissions while still spurring economic growth. Still, prior to the issuance of the moratorium, concerns have been growing that Norway’s contribution to conservation efforts will not offset the losses if palm oil development is jeopardized. The bottom line is that the expansion of palm oil plantation remains a bold government agenda, including in the recent decree on the forest moratorium. This was manifested in the way the decree was developed.

Initially, the government promised to impose the moratorium by the start of this year. There have been some allegations that its delay until May was intentionally set, in order for the government to issue licenses prior to the moratorium’s entry into force. As it reads, the moratorium exempts concessions covered by “in principle” permits. This means that those that secured permits prior the moratorium can continue to convert forests. As to new mills, the government has already issued 40 new permits, covering an area of approximately three million hectares. The staggering area of forestland assigned in the new permits clearly satisfy the expected annual
growth of plantations, which – according to the Indonesian Palm Oil Association – is planned at about half a million hectares. Thus, expansion is safe and secure over the two-year period of the moratorium, and even beyond.

The decree itself also still allows the development of palm oil plantations. The Indonesian president’s special advisor on climate change has also reassured investors that banning firms from palm oil expansion has never come into the equation. A “vital for development” clause has been included in the decree, and given the economic opportunities previously mentioned, palm oil plantations and industries are strongly favoured by the government. Concerns related to the land-banks for expansion were quelled, as the moratorium in fact formally allows expansion on secondary natural forests. Although what is meant by secondary forests remains undefined, no less than 35 million hectares of forestland are classified as such.

A win to toast for palm oil plantations
The moratorium has marked a great win for Indonesia’s palm oil plantations and industries. Contrary to the general perception, the moratorium will have limited impact on palm oil development. Areas for expansion are still abundantly available. Those committed to investment in palm oil development should welcome the moratorium for it provides them a great favour. Therefore, the growth of the industry, based on expansion, can still respond to the expected future increase in demand for palm oil. Some stock markets warmly responded to the development of the decree, as the shares of Indonesia-listed plantation firms mostly have improved. This all reflects the bright future of palm oil plantations. On the other hand, the moratorium is less likely to achieve its formal objective of reducing emissions, as it does not directly address the underlying causes of deforestation and degradation – principally the conversions of the natural forests and peatlands. Furthermore, the fate of the forests remains in doubt as the moratorium can be lifted at any time.

Ahmad Maryudi is a lecturer at Gadjah Mada University in Yogyakarta, Indonesia. The Economic Benefit of Palm Oil to Indonesia (World Growth 2011)

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