By Pablo Pacheco
Asia Pacific – “No Deforestation. No Peat. No Exploitation”: The pledges echoing throughout the palm oil sector, as major consumer goods manufacturers and retailers seek to remove deforestation from supply chains, sound simple enough. But the commitments are highly complex, and major palm oil corporate groups along the value chain are struggling to clearly define and operationalize them.
And in the world’s largest producer of palm oil, Indonesia, which is planning to boost supply through the expansion of plantations into forest and peatland areas, these companies are facing public opposition from the national government.
Therefore, while simple in their aim, the zero deforestation commitments, and their associated sustainability goals, have divided the palm oil sector in terms of which rules to follow and whose rules to follow.
A POLEMIC CROP
The rapid expansion of oil palm plantations across Indonesia during the past decade—the crop now covers 10.5 million hectares—has been accompanied by fervent controversy.
On the one hand, the palm oil industry generates significant fiscal earnings for the government and stimulates economic growth in rural areas, with important spillover effects on the development of local infrastructure and support to people’s livelihoods. On the other hand, large-scale plantation development has been implicated in numerous social conflicts, and the unequal distribution of economic benefits remains an issue.
But perhaps the crop’s greatest offense is its potential for devastating environmental impacts. Oil palm expansion often occurs at the expense of both primary and secondary forests, and, increasingly, of peatlands. The result is major loss of biodiversity and release of greenhouse gas (GHG) emissions, which certainly raises questions about when, if ever, palm oil can qualify as ‘carbon neutral’.
The impacts of unchecked oil palm expansion once again attracted global attention in 2015 as forest fires raged across Sumatra and Kalimantan, with huge costs to the environment and human health. Although attempts to profit from land speculation and oil palm cultivation are an important factor triggering the spread of the fires, these are associated not only with oil palm. The Indonesian government has estimated that deforestation and fires account for 63 percent of the country’s GHG emissions, but other estimates suggest that it could be as high as 80 percent.
PRIVATE SECTOR, BOLD COMMITMENTS
Major corporate groups began embracing the concept of sustainable production of palm oil through certification under the Roundtable on Sustainable Palm Oil (RSPO), a standard that has seen a slow but steady increase in uptake since its inception in 2005. Some producers have also adopted, in parallel, the International Sustainability and Carbon Certification (ISCC) standard that enables them to export to biodiesel markets under the European Union’s Renewable Energy Directive (RED). These same companies, operating in Indonesia, must also achieve ISPO certification. Therefore, companies have often been forced to apply three certification standards to the same drop of oil.
Growing pressure from civil society groups, in the form of attacks on corporate brands and reputation, led several major consumer goods manufacturers to go above and beyond these standards and pledge to delink their supply chains completely from deforestation. Momentum began in 2010 when the Consumer Goods Forum (CGF) and its members committed to zero net deforestation by 2020. This was followed by individual and collective pledges, notably the Sustainable Palm Oil Manifesto (SPOM), the Indonesia Palm Oil Pledge (IPOP), and the New York Declaration on Forests in 2014.
As of December 2015, Supply Change estimated that 188 companies had made commitments to support sustainable supply in the palm oil sector, 61 of which included commitments to zero deforestation. These pledges to zero deforestation have been embraced by many downstream processors and traders, but have yet to be fully understood and embraced by their third-party suppliers, including smallholders.
GOVERNMENT, WALKING TWO PATHS
The Indonesian government is pursuing two parallel agendas, with implications for both forest conservation and palm oil development. It has put in place policies to protect primary forests and peatlands while at the same time promoting palm oil production and seeking to make it sustainable.
It is the contravention of Indonesian law and threats to national sovereignty that seem to have had the greatest impact.
The Yudhoyono administration (2005–2014) installed several policies to protect primary forests and peatlands, the most prominent of which was the Presidential moratorium on the issuance on new plantation licenses on forest and peatland. Despite its good intentions, its effectiveness at reducing deforestation has been called in to question.
Additional efforts include regulations on land-use planning, the management and protection of peatlands, and the One Map Initiative, which aims to develop a unified map agreed upon by all ministries. However, these initiatives have come up against numerous barriers to implementation, including tensions between government levels and sectors, the intertwined interests of local politicians and investors, uneven law enforcement, and government reliance on revenues from concession permits.
In response to the fire and haze crisis in mid-2015, the government issued a presidential instruction banning the clearance and exploitation of peatlands, as well as new planting in burned areas. Yet it remains unclear how this will be implemented and enforced and whether it will eventually be transformed into a higher-level legal instrument.
In 2011, to support sustainable palm oil, the Indonesian government developed and launched the mandatory Indonesian Sustainable Palm Oil (ISPO) standard based on pre-existing Indonesian legislation, but third-party audited. But again, ISPO implementation has been slow, forcing the original deadline for compliance to be postponed. The illegal status of many smallholders and plantation companies, located in public lands, has made it particularly difficult to achieve broad uptake of ISPO, as well as implementing other capacity-building and productivity-enhancing interventions.
In July 2015, the Indonesian government launched the Crude Palm Oil (CPO) fund, built on a levy from palm oil exports. The fund is to be used primarily for biodiesel subsidies, as well as complementary activities that support the development of sustainable plantations, expand the downstream processing industry, and build capacity among smallholders. As a complementary step, in November 2015, Indonesia and Malaysia created the Council of Palm Oil Producer Countries (CPOPC), with the primary goal of managing global CPO stocks and harmonizing national sustainability standards.
One of the key challenges for government remains the fragmented governance of the palm oil sector. Regulation of the industry is divided into sectoral silos, and the lack of harmony between ministries often means that the government ends up “tripping over its own feet”, as the presence of one policy or regulation limits the success of another.
To add a layer of complexity, some subnational governments have been actively embracing “No Deforestation” commitments, seeing them as an opportunity for increased investment and green growth. They see potential for improved land-use planning and tenure clarification, smallholder inclusion and production practices, and they recognize the need for supportive provincial regulations to enforce sustainable supply practices. Although many of these efforts originate from the climate change agenda, they are increasingly heading toward supporting low-carbon development strategies.
Neither public rules nor private commitments must dictate the rules of the game.
By taking actions along both these paths, which are not clearly articulated, the government risks undermining its own capacity to transform the palm oil sector. Linking the two more strongly will be important for paving the road toward a more sustainable palm oil sector.
OPPORTUNITIES AND RISKS
The broad goals of the zero-deforestation movement are threefold, as I have described in an earlier article: to stop expansion on forest and peatlands, while ensuring smallholder inclusion and sustaining economic growth and profits. Meeting these parallel objectives creates many challenges, but also brings unprecedented opportunities for change.
Commitments create an important incentive to invest in intensification and improve plantation management with more efficient use of inputs. This includes upgrading smallholder production systems, and expanding plantation development into “degraded” or “low-carbon” lands, thus helping to meet national emission reduction targets under Indonesia’s Intended Nationally Determined Contribution (INDC).
The main risk associated with the commitments is that of excluding those smallholders who cannot meet, or report on, stringent “zero deforestation” standards because of unresolved legal issues and capacity constraints. The risks of fragmentation in to green (clean) and brown (dirty) supply chains, as a result, could prompt leakage effects as some suppliers could turn their attention to less demanding markets.
In addition, the potential for large-scale producers to intrude on community and smallholder lands, considered as “low-carbon” or degraded, may lead to increased social conflicts, while committed companies are still divided over a definition of forests and a methodology for designating “go” and “no-go” areas – see the HCS approach, HCS plus, HCV and RSPO Next.
Of primary concern to many at the government level, however, is the potential to slow economic development of rural areas. This is a legitimate concern shared by many local stakeholders.
THE POLITICS OF IMPLEMENTATION
The capacity of some large firms to incorporate social and environmental criteria into their operations is improving, partly as a result of the zero-deforestation commitments. Efforts to improve traceability within supply chains are underway, but for many this stops at the mill. While company disclosure is improving, transparency varies, and independent evidence and monitoring are lacking.
The lack of independent evaluation of the commitments and their impacts on equity is worrisome to many stakeholders, but in the current political climate, this is of minor concern to the companies.
A major issue for the implementation of commitments is that the Indonesian government has expressed open opposition to the very concept of the “zero deforestation” movement. The government’s concern is that the risks of these commitments may outweigh the opportunities, in terms of the threats they pose to smallholders and SMEs, and the potential for undermining local development.
However, it is the contravention of Indonesian law and threats to national sovereignty that seem to have had the greatest impact. The commitments embraced by groups such as IPOP, framed around compliance with HCV and HCS, are seen by the government as contradicting its national laws and regulations on land and forest governance.
In a different line, the Indonesian government is doing its best to support domestic producers by stimulating and supporting expansion of the domestic market using the CPO Fund to subsidize biofuel blending quotas. This is seen as an attempt to transform the sector by improving its efficiency.
Recently, national regulations set a blending target of 20 percent for the transportation sector, and 30 percent for electricity generation. The creation of the CPOPC can also be seen as an attempt to regain control over the global palm oil market and sovereignty in regulating the industry. Furthermore, it is hoped that key palm oil purchasing countries, such as China and India, will embrace the CPOPC standards for sustainability, despite a lack of clarity over what these will actually be.
This brings us back to the questions of which rules and whose rules should be applied for sustainable palm oil, an issue that is related to the extent to which end markets actually care about those rules.
A MULTIFACETED PUZZLE
The public and private sectors each faces its own challenges.
The public sector’s main dilemma is how to govern the industry so that it supports medium-scale and smallholder producers, but does so under credible and enforceable national governance standards. It must bear in mind that 50 percent of the industry lacks access to capital and training, as do the civil servants whose job it is to enforce such standards. At the same time, the government must maintain its competitive edge in international markets so that the industry can continue to contribute to national fiscal earnings and economic spillovers.
The private sector must respond to pressure from civil society and buyer demands to maintain its market, but it must do so in such a way that doesn’t risk losing third-party suppliers. Businesses must do this at the same time as making a profit, finding investments to upgrade their value chains, and gaining efficiencies from production and improved supply chain design and management.
Solving this puzzle requires a collaborative approach: bringing together public and private initiatives and pooling finance.
Third-party suppliers and smallholders face multiple challenges, many of which they are unprepared for. But, ultimately, they must protect their position in the market without risking any chance to expand their plantations, so to keep profiting from this polemic crop.
There are not many other options anyway.
The irony is that all have the same objective: healthy economic growth.
SEEKING A RESOLUTION
Solving this puzzle requires a collaborative approach: bringing together public and private initiatives and pooling finance. Neither public rules nor private commitments must dictate the rules of the game. The private sector must do what it does best—invest and innovate to gain efficiencies and increase profits—while government must look to protect the wider national interests and natural capital.
To benefit both the Indonesian people and the nation’s rich environmental heritage, the government must think seriously about resolving internal disputes and power plays, legalizing smallholder land rights, conditionally granting subsidies or supporting those who adhere to higher production standards and include independent smallholder in their value chains, as well as stimulating land use zoning efforts taking into account needs for production, conservation and restoration.
Companies, for their part, must focus on improving yields in their own plantations and those of their suppliers, reducing their GHG emissions, and providing finance and other capacity-building services to their third-party suppliers as part of improved strategies for supply chain management.
This is a mammoth challenge.
We must hope that decision-makers in both private and public sectors embrace collaboration as a way of resolving the puzzle of how to achieve a sustainable palm oil supply.
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Photo credit: Istockphoto.com