Indonesian palm oil moratorium: cutting carbon or confusing corporates?

by Nathalie Rasmussen, Head of Business Conduct Engagement at GES

“We are not letting this happen again. Mining concessions should no longer overlap with conservation land”, said Indonesia’s President Jokowi during a visit to Kepulauan Seribu, north of Jakarta, as part of the International Forest Day celebrations[1].

Indonesia’s President Joko “Jokowi” Widodo announced last week a moratorium on new palm oil and mining operations to help protect the country’s remaining tropical forests[2]. President Widodo vowed during and after global climate talks in Paris last year to improve Indonesia’s record on its rainforests and has issued a decree on the suspension of issuances of new oil palm plantation development in the country.

The pressure on Indonesia to cut carbon has increased and the country’s CO2-emissions related to the palm oil sector received attention last year after the forest fires in Sumatra, Indonesia, which at their height emitted more than the US economy combined per day[3]. Despite the moratorium, the President believes that palm oil production can be doubled on existing land through improved agronomy and plantation management.

Though a positive development in light of the Paris agreement, the messages from the Indonesian Government regarding forest conservation have been mixed. In contrast, the Government announced that it opposes the Indonesian Palm Oil Pledge (IPOP), an effort that wants to enable and promote the production of sustainable palm oil that is deforestation-free, expands social benefits and improves Indonesia’s market competitiveness. The IPOP was initiated by some of the leading palm oil producers and traders, such as Asian Agri, Astra Agro Lestari, Cargill, Golden Agri-Resources, Musim Mas and Wilmar, as well as the Indonesian Chamber of Commerce and Industry (KADIN).

The Indonesian Business Competition Supervisory Commission (KPPU) issued a letter in October 2015, stating that the IPOP might lead to cartel-like activities as it could create barriers to entry for palm oil farmers who conduct business with IPOP members. It also believes that a requirement imposed by the IPOP demanding that its members only buy palm oil from farmers who plant sustainable palm oil is too difficult for small farmers to meet. Though criticised by the Indonesian Government, many foreign governments support the IPOP, including the United States[4]. The IPOP, in turn, has welcomed the President’s moratorium: Golden Agri-Resources, the world’s second-largest palm oil company and a unit of Indonesian conglomerate Sinar Mas, supported the government’s move, stating: “Any government initiative that is focused on intensification over land expansion is to be applauded”[5].

Furthermore, according to Chain Reaction Research, which conducts sustainability risk analysis for financial analysts and investors, the ongoing conflicting messages from the Jokowi administration can be seen as ineffective financial risk management, which could undercut further global investment in Indonesia.

Having engaged with many palm oil producers and buyers for several years in Malaysia, Indonesia and Singapore, GES shares the concern regarding the mixed signals that the Indonesian Government has sent. The moratorium, however, if enforced, could help meet the requirements in the Paris Agreement and is, in itself, very positive. From having spoken to many palm oil companies, GES believes that large Indonesian palm oil producers would not be restricted too much by the moratorium as they possess large land banks, as well as know-how on improving yield. Smallholders that do not have business relations with large palm oil companies, however, do not have this advantage and would potentially be restricted from developing. It is essential for companies to establish good relationships and share knowledge with smallholders in order to give them the opportunity to improve their business.

The intention of the Government is strengthened by the appointment of Nazir Foead, formerly at WWF Indonesia, as head of the newly established Peatland Restoration Agency. All in all, these developments are indications of progress when it comes to environmental protection and carbon cutting.

However, both Government and companies have to work together to reach carbon emissions that would meet the levels outlined in the Paris Agreement. Global demand for palm oil is expected to continue to grow strongly. The World Bank forecasts that an additional 6.3 million hectares of land will be required to meet global demands by 2020 and much of the land to be converted developed is expected to be in Indonesia. GES believes that the moratorium will intensify attempts to improve rural livelihoods through changing agricultural practices and increasing average oil palm plantation yields.

[1] http://www.straitstimes.com/asia/se-asia/jokowi-announces-moratorium-on-new-permits-for-oil-palm-plantations-mining-activities

[2] http://www.wsj.com/articles/indonesia-bans-new-palm-oil-and-mining-operations-1460707310

[3] http://www.wri.org/blog/2015/10/indonesia%E2%80%99s-fire-outbreaks-producing-more-daily-emissions-entire-us-economy

[4] http://www.state.gov/r/pa/prs/ps/2014/09/232104.htm

[5] http://www.wsj.com/articles/indonesia-bans-new-palm-oil-and-mining-operations-1460707310

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