Reconciling economic, environmental interests: The oil palm case

This year marks 100 years of oil palm commercialization in Indonesia. Oil palm was first planted on an industrial scale in 1911 in Sumatra. As the commodity became more widely cultivated, its expansion triggered fierce debate, as it brought good and bad things simultaneously.

Oil palm is widely utilized as a raw material in consumer products ranging from oleo chemicals and foods to biofuels. And now, in the midst of the current energy crisis triggered by ever-increasing demand for fossil fuels and volatile petroleum prices due to political instability in some oil exporting countries, one prospective source for raw biofuel material is oil palm.

When we consider that only 1 percent of oil palm is currently used for biofuel, that China and India are emerging as the main buyers of oil palm and that western countries’ increasing health awareness demands healthy, edible oil, we can anticipate a sharp increase in demand for oil palm in the foreseeable future.

This signals for ever-expanding oil palm plantations in tropical countries. According to the UN Food and Agriculture Organization (FAO), the land area used globally by oil palm plantations increased four-fold, from 3.6 million hectares in 1961 to 9.13 million in 2007.

Currently, oil palm is grown in 43 countries, with a total cultivated area accounting for nearly one-tenth of the world’s permanent cropland. Of that, more than 80 percent of oil palm plantations are in Southeast Asia — in Indonesia and Malaysia.

The lucrative oil palm enterprise nonetheless has a price to be paid, as the ever-expanding oil palm plantations bring environmental damage and biodiversity losses. This is in part due to the fact that the low-lying areas for these oil palm plantations overlap world biodiversity hotspots. Obviously, this raises a dilemma.

On the one hand, oil palm enterprises offer enticing economic benefits for developing countries such as Indonesia to improve the welfare of their people, 13 percent of which still live below the poverty line. For example, the opportunity to reap economic advantage is demonstrated by a projection by Koh and Ghazoul of Institute of Terrestrial Ecosystems (ETH) that indicate potential opportunity costs against biodiversity conservation where Indonesia is planning to increase its production to 80 million tons. Indonesia needs to designate 3.1-3.5 million hectares of additional land for oil palm plantations.

Furthermore, with the price at around US$750 per ton, these new plantations would have a net present value (NPV) of approximately $30-$53 billion over the course of their life-span, which can last for 25 years.

Moreover, this industry will be able to absorb about 4.5 million workers and it is expected to reduce the number of poor people by one-third, especially in rural areas. In the same vein, villagers with two to four hectares or more, on average, were earning $2,000–$12,000 a year according to 2010 study of John McCarthy of Australian National University.

It is hard to imagine that these economic forecasts will lead to anything but an expansion of oil palm production in Indonesia. Therefore, we must ask ourselves how to balance the economic benefits derived from oil palm plantations while maintaining our precious biodiversity and environmental sustainability for our children and future generations.

Oil palm (Elates guineensis) originated in West Africa and was initially introduced in Indonesia as an ornamental plant since as far back as 1848. Indonesia’s natural tropical conditions were favorable for growing the oil palm trees. It was not until 1911 that it began to become a commercial crop in Sumatra and later it expanded to other Islands as an industrial commodity in Indonesia in the 1980s.

Currently, Indonesia is the largest oil palm producer in the world followed by Malaysia. Together these countries are responsible for about 80 percent of oil palm production in the world. Indonesian Agriculture Ministry (2010) estimated that Indonesia has around 7.8 million hectares of oil palm plantations and produces 19.8 million tons. Approximately 40 percent of Indonesia’s oil palm plantations are owned by small-holder farmers.

Oil palm has some advantages compared to the other vegetable oil crops in some aspects such as higher productivity and lower per unit production costs.

Also, given the high price of this commodity in the world market, it encourages the government to provide an economic incentive for oil palm expansion.

Undeniably, this drives deforestation acceleration through the clearing of intact forest and planting on previously forested land which has been exploited for plywood, timber and paper pulp. These situations spark concerns among many environmentalists that the expansion of oil palm plantations poses a serious threat to biodiversity.

Forests in Indonesia have a wealth of biodiversity, comprising approximately 10 percent of the globe’s flowering plant species, 17 percent of all bird species, 12 percent of all mammal species, 16 percent of all reptile species and 16 percent of all amphibious species. This diversity has been and will continue to be threatened by the increasingly rapid forest exploitation and oil palm plantation expansion.

Endangered megafauna such as the Sumatran Orangutan (Pongo abelii), the Borneo Orangutan (Pongo pygmaeus) and the Sumatran Tiger (Panthera tigris sumatrae) will lose their habitats. Furthermore, the negative impacts are not restricted to species, but also affect entire ecosystems and create heightened social marginalization of indigenous people.

Based on the aforementioned situation, we need to find a middle way that can be achieved in reconciling the competing interests of economic and environmental concerns.

There are some avenues that Indonesia’s oil palm industry can strive to balance between economic and environmental competing interest. First, increasing productivity by expanding research and technology advancement to increase yield and reduce the input in order to maximize production.

Second, applying payment to ecosystem services (PES) policies in the oil palm industry would ensure that ecosystem services such as biodiversity preservation, water quality regulation, regional climate and air quality control can be maintained. CIFOR defined this as a kind of contractual payment to natural resource users, such payments being subject to the condition that they maintain a pre-defined environmental service.

Third, promoting proper land-use would ensure that oil palm expansion would not interfere with the ecosystem and biodiversity conservation. This can be achieved by integrating agriculture aptness with conservation priorities. In this case, the government, oil palm players and NGOs should sit together to reach common agreements on high conservation values (HCV) of land supported by effective regulatory systems.

Fourth, from the consumer side, the campaign to use certified oil palm products also needs to be expanded with support from the government. After all, making economic and environmental reconciliation happen will require concerted efforts supported by the government, producers, NGOs, financial institutions and consumers.

The writer is a researcher at the Center for Economic Studies at the Indonesian Institute of Sciences (LIPI) and a USAID Indonesia Forecast Scholar at the University of Maryland-College Park.