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Will Indonesia’s new palm oil subsidy undermine no-deforestation push?

The canopy of oil palm trees on a plantation in Aceh, Indonesia. Photo by Rhett A. Butler

  • Questions remain about whether the CPO Fund will carry environmental safeguards and how its resources will be divided between its two main purposes: helping farmers increase their yields and subsidizing biodiesel.
  • A senior adviser to the energy minister worries the subsidy, if administered haphazardly, could throw an unfortunate lifeline to the dwindling market for palm oil from deforestation, peatland coversion and land grabbing.
  • The man who designed the fund says it’s all about sustainability because it will reduce dependence on foreign petroleum and shore up flagging palm oil prices.

With the demand landscape for Indonesian palm oil set for a seismic shift from export to domestic consumption, the result of a huge new government intervention, experts are wondering how true to its mandate of bringing sustainability to the sector the policy will prove to be.

Key decisions about the nascent Crude Palm Oil Supporting Fund (CPO Fund), whose initial parameters were outlined in a May presidential decree, have yet to be made, including whether it will carry environmental safeguards to prevent the destruction of important ecological landscapes in the country losing more forest – largely as a result of oil palm expansion – than any other.

It is also unclear how the money in the fund, whose vast resources have already started to be derived from a new levy on palm oil exports, will be divided between its two central mandates: helping farmers increase their yields and subsidizing biodiesel.

The logic behind the former is that if Indonesia can boost smallholder output, now dwarfed by that of corporate plantations, it will be able to meet higher production targets without opening new land for cultivation. The country is a leading carbon polluter – mostly because of deforestation and peatlands degradation – and has committed to a major emissions reduction below a projected 2020 baseline.

The pivot to biofuel, meanwhile, is billed as a means to reduce an expensive dependence on foreign petroleum with a shift toward what is seen as a greener alternative: blending palm oil with diesel fuel.

Those in favor of the subsidy, which was preceded by an increase in the blending rate to 15 percent from 10 percent – the plan is to reach 25 percent by 2020 – also hope it will shore up flagging CPO prices, hit hard by slowing demand in the food and fuel sectors as well as a supply glut.

The fear going around, though, is that the subsidy, if haphazardly administered, could undermine a growing movement to stop deforestation and land grabbing for palm oil. The past few years has seen a wave of pledges from conglomerates that produce and use palm oil to purge their supply chains of forest destruction, peatland conversion and rights abuses, which are not necessarily illegal in Indonesia.

Palm oil fresh fruit bunches in Aceh, Indonesia. Photo by Rhett A. Butler

William Sabandar, senior adviser to the energy minister on renewables, is one official who has argued for the fund to carry its own such safeguards. Without them, he told, the fund could throw an unfortunate lifeline to the dwindling market for so-called conflict palm oil, now being phased out by Wilmar International Ltd., Golden Agri-Resources Ltd. and the three other corporate signatories to the Indonesia Palm Oil Pledge (IPOP). Together, the five commodity traders control around 80 percent of global refining capacity.

William’s ministry is not without leeway over the fund. According to the presidential decree, his institution is responsible for vetting beneficiaries of the biodiesel subsidy against a series of yet-to-be-defined requirements – and for laying out those requirements in a regulation of its own. If William has his way, that regulation will include criteria meant to protect Indonesia’s remaining forests and peatlands and secure the rights of its indigenous peoples.

“I want to make sure the regulation is crafted in this way,” said William, who was deputy of operations for Indonesia’s National REDD+ Agency before it was dissolved by the new president, Joko “Jokowi” Widodo, in February. “We need to bring sustainability into the discussion of CPO and biofuel policy.”

A drainage canal runs through a peatland cleared for oil palm in Riau, Indonesia. Peat is a marshy material that stores huge amounts of carbon. Photo by Rhett A. Butler

‘An Indonesian agenda’

William faces some opposition. The man who designed the fund, Lin Che Wei, a well-known investment banker and financial analyst who advises the coordinating economic minister and the head of the National Development Planning Board on policy matters, says it is already about sustainability.

Besides cutting reliance on imported fossil fuels, Lin holds, the fund will shore up palm oil prices by injecting the sector with new demand, providing a boon for small farmers.

“If they are hungry, they will become a destruction for the environment,” Lin warned, arguing that a further drop in prices could spur them to abandon their plantations and turn to logging instead. “My main policy target is how to increase the welfare of those independent farmers.”

While Indonesia has a “duty” to protect its forests, Lin said, the fund should not be hamstrung with safeguards as William sees them.

“For me, I don’t want to focus too much on whether to open [new] land or not,” he told “That’s another battle which I don’t want to be involved in. My mandate at the moment is to use whatever you have.”

Others in government have taken a similar stance. After an interministerial meeting on Friday, senior Jokowi administration officials expressed indignance at IPOP’s position, portraying it as an affront to Indonesian sovereignty and a drain on the economy.

Deputies at the Environment and Forestry Ministry and Coordinating Ministry for Economic Affairs both said foreigners have no right to pressure Indonesia to change its policies, a reference to the IPOP signatories’ commitment to lobby the government to bring the standards of the law in line with those of the pledge.

“For me the pledge already breaches the constitution,” San Afri Awang, director-general of spatial planning at the Environment and Forestry Ministry, told journalists. “We lose our sovereignty because we are controlled [by the pledge]. Our authority is being taken over by the private sector.”

A sprawling oil palm plantation in Riau, Indonesia. Photo by Rhett A. Butler

Lin also dismissed the notion that Indonesia should follow IPOP.

“The Indonesian government will develop our own sustainability model which must be respected by everyone,” he maintained. “We don’t want a partial sustainability model which is being used by other people and imposed on the Indonesian government.”

William framed it differently. “Sustainability is an Indonesian agenda,” he insisted. “If anyone says we are being driven by foreign countries or foreign interests, it’s not true.”

‘Open faucet’

The fund’s basic parameters were laid out in Presidential Decree No. 61/2015, issued by Jokowi in late May. Its foundation is a law on plantations signed last year by his predecessor, Susilo Bambang Yudhoyono, at the tail end of his term.

Of the six purposes for which the money in the fund can be used, five relate directly to the plantations law. They address measures like training farmers, improving access to quality seeds and fertlizer, felling and replanting stunted oil palm trees and supporting research and development.

Of biofuel – or of anything pertaining to energy – the plantations law makes no mention. Yet the decree lists as the fund’s sixth purpose “procurement and usage of plant-based diesel.”

Here, the function of the subsidy is to bridge the price gap between biodiesel, which is more expensive, and regular diesel. Under the onus of an agency set up to manage the fund, the money will flow to state oil and gas company Pertamina and to designated private firms to make it economically viable for them to buy more biodiesel in line with the increased blending mandate.

With the export levy per ton at $50 for CPO and $30 for palm oil derivatives, the fund could be huge. Bayu Krisnamurthi, a former deputy trade minister who leads the agency, has said he hopes the annual take reaches 10 trillion rupiah ($711 million).

How that vast sum will be divvied up among the fund’s various purposes is an open question. Lin said that while the decision lies with the agency, he foresees that “in the early years most of the money will be dedicated to biofuel and replanting,” with biodiesel the “main mandate.”

A further indication of the priorities at hand perhaps came when Pertamina said in May it hoped to enter the plantation sector through a “biofuel joint venture” with a state plantation firm and had budgeted $200 million for the purpose.

The canopy of an oil palm plantation in Aceh, Indonesia. Photo by Rhett A. Butler

Some stakeholders are concerned. Mansuetus Darto, head of the Oil Palm Smallholders Union (SPKS), supports raising productivity but worries the money will actually be used to subsidize biodiesel in such a way as to drive further plantation expansion for corporate benefit at the expense of the environment and local communities.

“We still remember the government’s plan to develop one million hectares of oil palm on the [Indonesia-Malaysia] border,” he told Mongabay-Indonesia, referring to a controversial megaproject that was shelved in 2006 after a public outcry. Oil palm expansion in the name of energy security, he added, “could become a new weapon for plantation businesses” to ignore environmental and social issues.

Zenzi Suhadi, forest campaigner at the Indonesia Forum for the Environment (Walhi), an NGO, also questioned the fund’s green credentials.

“An open faucet of government money for palm oil is more accurately described as a measure to ensure the continuance of the palm oil industry,” he told Mongabay-Indonesia.

Good for business?

The fund would seem to present a dilemma for the IPOP companies, without whose biodiesel processing capacity it would be impossible to meet the blending mandate, William said.

Most of the money in the fund will also come from the IPOP companies’ tax dollars, he added, putting them in an uncomfortable position if the fund turns out to be a force for deforestation.

“They have to be the ones that protest,” he said. “They have to cry, they have to shout, for sustainability criteria to be put on this process.”

IPOP – which includes the Indonesian Chamber of Commerce and Industry as well as the five traders – has taken neither a strong public stance for or against the fund.

Nurdiana Darus, IPOP’s executive director, said the organization is “in discussions with the government to strengthen the existing safeguards of agencies involved in biodiesel.”

Representatives of Musim Mas Holdings Pte. Ltd., another IPOP member, and Golden Agri gave virtually the same answers about safeguards, with a Golden Agri spokesperson adding, when asked to what extent it would be supportive if the government asked it to be involved in the biofuel push in forested areas, “As a good corporate citizen, we fully support the government’s initiatives and mandates. At the same time, we remain committed to our internal sustainability policies that mandate the conservation and protection of [forest] in our concession areas.”

Separately, Golden Agri has noted the benefits to be accrued from the higher blending rate. “The industry experienced positive momentum starting from the second half of 2013 after the Indonesian Government’s announcement to increase its biofuel targets,” CEO Franky Widjaja said in a statement last year.

Golden Agri has been hammered by flagging prices and reduced demand from China, but it has two biodiesel processing facilities coming online in 2016.

Still, Moody’s Investor Service recently downgraded the company’s outlook from “stable” to “negative,” noting that “efforts to stoke demand for CPO by the major producers, Indonesia and Malaysia, by accelerating the imposition of biodiesel blending, have yet to drive the price of CPO sustainably higher” and that “excessive refining capacity challenges the near-term profitability of [Golden Agri’s] downstream investments.”

An oil palm fruit in Indonesia. Photo by Rhett A. Butler

Even if IPOP sticks to its guns, and despite its control over four fifths of the market, there are hundreds of lesser-known companies of various sizes that haven’t committed to no-deforestation.

Some of these are big players, like billionaire Peter Sondakh’s Rajawali Group, said Chip Fay, a fellow at the Samdhana Institute, which helps local communities address pressing environmental concerns.

Others are medium-sized. While often lumped in with “smallholders,” Fay said, these operators actually constitute a “missing middle” of the industry that shouldn’t be let off the hook because they’re less visible.

“You have the IPOP companies. What about the rest of the industry?” he asked. “A lot of the supply comes from them, and they are the ones that are hiding behind the commmitments of IPOP. My hope is that it has to continue down into the less-visible companies to make similar commitments.”

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