Since the inception of palm oil’s commercial applications in the early 1900s, it has been promoted as a major agro-based industry in Southeast Asian economies such as Indonesia, Malaysia, and Thailand.
As the world market for multiple uses of palm oil expanded, a new-era of plantation growth started in Indonesia and Malaysia from the 1990s.
Currently, Indonesia and Malaysia are the biggest crude palm oil, or CPO, producers with about 75 percent of their combined annual production, estimated at 60 million tons, going to international markets. Palm oil production in Indonesia, the world’s top producer of the commodity, is expected to rise 4.5 percent to 53.9 million tons in 2021.
Palm oil has a variety of uses in food, animal feed, oleochemicals and other cosmetic products. One significant use in Southeast Asia and other palm oil importing countries is biodiesel, which can replace imported diesel fuels in the transport sector.
Indonesian, Malaysian and Thailand palm oil producers have been facing growing market demand domestically. Indonesia’s 30 percent oil mixed biodiesel, or B30 Program, is expected to drive further demand for palm oil in the coming years.
Palm oil has a variety of uses in food, animal feed, oleochemicals and other cosmetic products. One significant use in Southeast Asia and other palm oil importing countries is biodiesel, which can replace imported diesel fuels in the transport sector
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The European Union has historically imported large quantities of palm oil for use in biodiesel production. The consumption of palm oil as biofuel in many countries, especially in the EU, has largely been driven by national renewable energy targets, reduction of imported diesel oil, and directives, such as blending mandates.
Palm oil contributes around 20 percent to the production of biodiesel in the EU and about 90 percent of palm oil consumption is imported from Indonesia and Malaysia.
This year, China and India are expected to lead the global palm oil demand, which has been affected by COVID-19.
The positive impacts of the palm oil industry in Indonesia, Malaysia and Thailand include a foreign exchange income of about US$40 billion per year and the employment of around 10 million workers, contributing to meeting the Sustainable Development Goals by 2030.
The reported negative impacts of aggressive palm oil plantation expansion comprise deforestation, biodiversity loss, reduced capacity of carbon sinks, forest fire incidents and community conflict.
There are several unknowns regarding the sustainability debates surrounding palm oil production and trade. For example, there is debate about key tradeoffs and their net impact on increased use of biofuel and food security as well as other socioeconomic impacts that are core values of the Sustainable Development Goals.
It is also uncertain how energy security and low-carbon benefits could be maximized through sustainable palm oil production. They need complementary action by public, private, as well as international actors in a coordinated way.
Below is a three-point pathway that can enhance the sustainability performance of palm oil production and trade.
First, innovation through harmonized sustainability certification programs. In response to internal motivation to conserve natural capital and market demand for fair trade, voluntary sustainability standards – such as the Roundtable on Sustainable Palm Oil, and country-specific mandatory standards such as Indonesia Sustainable Palm Oil, and Malaysian Sustainable Palm Oil – are being implemented.
Furthermore, these certification programs are often treated as voluntary systems and not equivalent to that of national regulatory standards and international laws.
In the long run, harmonization of multiple certification programs and upgrading these to a regulatory status will foster productivity-related innovations at the plantation level, improve transparency along the value chain, and build international consumer trust.
Second, efficiency through adoptions of digital technologies. By digitalizing palm oil value chains and collecting large amounts of data and then translating these data into efficient production practices, the sustainable plantation industry can support climate-resilient, low-carbon growth.
As such, applying information and communication technologies can also boost farm productivity through improved production and resource-allocative efficiency.
The economic divide resulting from the systemic difference between large and small plantations can also be narrowed by increasing digitally enabled production methods as well as improved access to consumers, labor markets and financial services.
Advances in digital technologies were found to enhance transparency and effective social inclusion within migrant labor as observed in Malaysia during the pandemic.
Third, inclusion through green financing. Commercial banks and institutional investors are reluctant to finance the green technologies that are capable of preventing pollution and reducing carbon emissions from palm oil plantations.
But those niche technologies have high upfront costs. As a result, risks of small scale plantations that have not yet adopted sustainable practices are increasing, because these actions often reduce their sales turnover, increase their production costs, and contain their business growth.
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For banks financing the new palm oil plantations, the risk to their customers means decline in the value of collateral, making loans in general underpriced.
Governments could reduce the lending risks of commercial banks by formulating new risk-guarantee mechanisms while mainstreaming these by establishing risk-bearing entities like the Green Investment Bank.
The challenge is not to gain and support agreement on sustainability, but to act on goals and outcomes that call for economically productive, environmentally sustainable, and socially coherent palm oil plantations.
The author is director of Research Strategy and Innovation, Economic Research Institute for ASEAN and East Asia. The views do not necessarily reflect those of China Daily.