Members' Research Service By / February 19, 2018

Palm oil: economic and environmental impacts

Economical and versatile, palm oil has become the world’s most widely used vegetable oil. However, its production comes at a heavy environmental cost, especially in Indonesia and Malaysia, the two main producers. Efforts to make its production more sustainable still have a long way to go.

© photomagically / Fotolia

Written by Martin Russell,

Economical and versatile, palm oil has become the world’s most widely used vegetable oil. However, its production comes at a heavy environmental cost, especially in Indonesia and Malaysia, the two main producers. Efforts to make its production more sustainable still have a long way to go.

Palm oil: a vital commodity

Plantation workers prepare to unload freshly harvested oil palm fruit bunches at a collection point.
© photomagically / Fotolia

Oil palm trees are native to West Africa, but were introduced to tropical regions of Southeast Asia and Latin America in the late 19th century. Oil extracted from the fruit was traditionally used in Africa for cooking, but has now found a wider range of uses: as a substitute for animal fats such as butter in baked products, soaps and cosmetics, or as a basis for biodiesel. Around half of packaged products in supermarkets contain palm oil. Although palm oil is not particularly healthy (it contains higher levels of saturated fats than most other vegetable oils), it has many advantages: compared to soybean (the world’s second most widely consumed vegetable oil after palm oil), it requires only one-tenth as much land, one-seventh as much fertiliser, one-fourteenth as much pesticide and one-sixth of the energy to produce the same quantity of oil, and is therefore very cheap. In addition, palm oil is highly resistant to oxidation, making it suitable for frying and giving it a long shelf life. As a result, consumption of palm oil has doubled over the past 15 years to nearly 8 kg per inhabitant of the globe, and shows no signs of slowing down. Until the 1960s oil palms were mainly grown in Africa, but since then production has shifted to Southeast Asia: according to FAO statistics, Indonesia (53 % of global output) and Malaysia (29 %) are the leading producers, followed by Thailand (4 %), Nigeria (2.6 %), Colombia (2.3 %) and Ecuador (1 %).

The economic and social impact of oil palm cultivation

Palm oil is the main agricultural export of Indonesia and Malaysia, generating 10 % and 5 % respectively of their exports. The sector provides employment for 721 000 smallholders and labourers in Malaysia, and 4 million in Indonesia; a further 11 million in the two countries are indirectly dependent on it. Most oil palm jobs are in remote rural areas, where alternative employment is scarce, thus helping to promote rural development and alleviate poverty. However, not all have benefited; in both countries, indigenous communities often lack legal documents certifying their ownership of land, and there are many legal conflicts between oil palm companies granted government concessions in forested areas, and the people who have used the land for centuries. In some cases, this has led to local people losing access to land and resources. As a result of such problems, in one survey nearly half of 187 villages in Indonesian Borneo were opposed to palm oil companies. There are also serious concerns about abusive labour conditions on some plantations.

The environmental impact of oil palm

An even bigger concern is the environmental impact. A European Commission study (2013) estimates that between 1990 and 2008, 5.5 million hectares (an area nearly twice the size of Belgium) of forest were lost to oil palm plantations, including 3.1 million in Indonesia and 1.4 million in Malaysia. This process continues, with around half a million hectares of additional plantations in Indonesia, and 100 000 in Malaysia every year; much of this expansion is happening at the expense of the region’s dwindling rainforests.

Deforestation is a major concern for several reasons. Compared to rainforests, palm oil plantations support only one fifth as many animal species. By eating into the habitats of the orang-utan and Sumatran tiger (both critically endangered species) as well as numerous smaller animals, they threaten biodiversity. At the same time, oil palms have less than 20 % as much above-ground biomass as rainforest trees, and a correspondingly lower capacity to absorb carbon dioxide from the atmosphere. That effect is exacerbated for the estimated one-third of Indonesian and Malaysian plantations located on waterlogged carbon-rich peaty soils. Draining such soils, which is necessary for the oil palms to grow, exposes the peat to oxygen, causing it to decompose and release huge quantities of carbon dioxide into the atmosphere. Peat drainage in Southeast Asia, largely in order to clear land for oil palms, is estimated to cause the equivalent of 2 % of global fossil fuel CO2 emissions.

Forest fires are another even bigger contributor to global warming and a recurrent environmental disaster in Indonesia. Such fires can occur naturally, but many are started deliberately – mostly by smallholders practising ‘slash and burn‘ agriculture, but sometimes also by large plantation operators. In the dry season, fires can easily get of control, destroying huge tracts of forest. Around one-fifth of such fires can be directly attributed to palm oil, which also contributes indirectly, given that drained peat soils burn easily, helping fires to spread.

Some of Indonesia’s worst forest fires to date were in 2015. Over several weeks, Indonesia became the world’s biggest emitter of greenhouse gases, as fires destroyed an area almost the size of Belgium. Choking haze spread as far as Singapore, costing the Indonesian economy at least US$16 billion and causing as many as 100 000 premature deaths.

Producer country and EU efforts to make palm oil more sustainable

Indonesia has taken several measures to limit the social and environmental costs of palm oil, with varying results. For example, the One Map initiative aims to systematically record land ownership to prevent disputes between plantations and indigenous communities. In 2011, the government imposed a moratorium on issuing new permits for agricultural and logging activity in primary (not previously cleared) forests and peat lands, recently extended till May 2019; however, the moratorium has had little effect as large areas of forest are outside its scope, and in any case enforcement has been patchy. A few palm oil companies have been fined for their part in forest fires, but many more have escaped punishment.

In order to limit the need for new land, Malaysia hopes to raise output through increased productivity; however, there is no evidence of this happening, as palm oil yields per hectare have stagnated for several years. Planting palms on degraded land, on which forests have already been cleared or burned down, is an option, although one estimate suggests that in Indonesia just 0.3 million hectares of such land are suitable for oil palm – not nearly enough for the sector to avoid deforestation at its current rate of expansion.

Since 2014, EU law requires food products to list palm oil to be clearly identified as an ingredient on labels (and not merely as ‘vegetable oil’). France considered imposing a ‘Nutella tax’ on palm oil imports, but the proposal met with strong protests from Indonesia and Malaysia, and was dropped in 2016. In any case, deterring consumers from palm oil containing products may not help the environment given that other vegetable oils such as soy and rapeseed are also linked to large-scale deforestation.

Particularly controversial is the use of palm oil to manufacture biofuels. To reduce dependence on imported oil, Indonesia has set an ambitious target for 30 % palm oil blending in domestic fuels (Malaysia’s target is 15 %); for its part, the EU uses 45 % of its palm oil imports for biodiesel, and a further 15 % to produce heat and power. Given that at present more palm oil production is likely to mean more deforestation, total greenhouse gas emissions from palm biodiesel are probably higher than from fossil fuels. In January 2018, the European Parliament proposed amendments to the EU’s proposed directive on renewable energy, which if accepted by the Council would result in palm oil being phased out as a biofuel component by 2020.

Sustainable palm oil certification schemes

In its April 2017 resolution on palm oil and deforestation, the Parliament also recommends ensuring that all palm oil entering the EU is sustainable. Voluntary certification schemes already exist, of which the most widespread is the international Roundtable on Sustainable Palm Oil (RSPO). The governments of eight EU countries (Belgium, Denmark, France, Germany, Italy, the Netherlands, Sweden and the United Kingdom), as well as several major companies, have already committed to only buying from producers certified as sustainable. Among other things, RSPO standards include commitments not to clear primary forest, set off fires, or plant oil palms on land whose ownership is disputed. However, environmentalists argue that such commitments do not go far enough, as they do not ban deforestation in general. The European Parliament is in favour of a new certification scheme with tougher standards, to replace the RSPO and similar schemes. For its part, RSPO points out that higher standards would make it even harder to get producers on board; at present, just 19 % of global output is RSPO-certified, and most of this goes to Europe. Around two-thirds of the world’s palm oil is consumed in Asia, where there is less willingness to pay more for sustainable products. Moreover, even RSPO’s weak standards are frequently violated by the scheme’s certified producers, many of which use fire to clear land, or plant in areas claimed by indigenous communities without their consent. EU criticism has drawn a sharp response from producer countries, with Malaysia describing the proposed ban on palm oil in biofuels as ‘crop apartheid’ and threatening to boycott EU products.

Read this At a glance note on ‘Palm oil: economic and environmental impacts‘ on the Think Tank pages of the European Parliament.

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