In the past 20 years, world demand for palm oil increased by over 120 percent. The upcoming decade is expected to see an even steeper growth as global population bulges, leading to unprecedented demand for food and fuel and an upward pressure on commodity prices.

The palm oil industry, which supplies the majority of traded vegetable oil and is a major feedstock for biodiesel, will be driven to produce. Pressure will mount on forests and peatland in palm oil cultivating countries seeking to increase areas under plantation to gain larger harvests.

Indonesia and Malaysia are the largest producers of palm oil in the world. The neighbours champion the market, delivering 86 percent of global supply. This market advantage has been a key factor contributing to deforestation and peatland destruction rates, which are among the highest in Southeast  Asia.

While secondary producers such as Colombia, Ghana, Nigeria, Costa Rica, Guatemala and Honduras hold only fractional market shares, growing global demand means larger fractions for these developing nations.  If production were to be developed in the same fashion as it was in Southeast Asia, the consequences for forest coverage would be dismal.

Palm cultivation not inherently destructive to forests

While oil palm expansion in Southeast Asia has meant vast deforestation and rapid destruction of peatland, such environmentally harmful practices do not have to be the norm.

Requiring the least amount of pesticides, fertilizers and fuel for cultivation and harvesting, natural oil palm produces five times more output per unit cultivated than any other oil bearing crop.

Of the 229 million hectares of oil crops planted in the world, only 12.2 million hectares are under oil palm cultivation. This implies that 5.3 percent of land devoted to growing oil seeds produces over half of total supply of vegetable oil. Examined in relation to its competitors - rapeseed, cotton, coconut, sunflower, groundnut, and soy - palm oil requires the fewest inputs to achieve the greatest quantity of output.

Because of lax policies and implementation in Southeast Asia thus far, oil palm growers were able to continuously expand their land with little concern for the destruction they were wreaking on habitats.

Thus, they established plantations by harvesting forested land for timber and funding plantings with the proceeds, or instead drained peatlands to grow palm on the nutrient-rich soil. These practices were financially beneficial for plantation operators, but destroyed natural forests, decimated biodiversity, and turned carbon sinks into massive carbon sources.

Overall, producers had greater incentive to expand land under cultivation instead of increasing productivity and crop yield on land already in use.

Palm oil capable of meeting mounting world demand

If appropriately developed, the productive palm oil sector is in a strong position vis-a-vis other vegetable oils in terms of meeting growing demand. The key would be to focus on increasing yields and confining expansion to existing agricultural land.

Neither Indonesian nor Malaysian palm oil producers hit peak potential in terms of yields, which average between 3.0 to 4.4 tonnes of oil per hectare. Productivity could however, rise to 8.6 tonnes per hectare under a best-case scenario.

New initiatives to protect forests and peatlands - such as the Norwegian-sponsored Forest Clearing Moratorium in Indonesia - will provide incentives for increasing productivity instead of expanding holdings, which could potentially double production capacity on current land.

However, according to the World Bank Group, productivity increases alone will not suffice and an estimated 6.3 million hectares of palm oil plantations will be needed.

Studies show that areas once used for agriculture production, along with grasslands and kerangous heathlands, can host productive oil palm plantations. The Indonesian government has presented this fact, stressing that their needs for cropland expansion can be met on existing agricultural lands until 2020. The country is not expected to require an advance into degraded forests anytime before then to meet demands for palm oil expansion.

New strategy

Increased yields and a focus on previously-used agricultural areas could cut the threat to forests if policies that encourage these forms of sustainable cultivation can be successfully employed.

On 1 April 2011, the World Bank Group lifted an 18 month moratorium on new investments in the global palm oil sector outlining a strategy to do just that: encourage increased productivity and incentivise production on degraded lands.

The World Bank Group Framework and International Finance Corporation (IFC) Strategy for Engagement in the Palm Oil Sector, developed through a multi-stakeholder process, sites socio-economic benefits that investment in palm cultivation holds for the six million people employed in the sector and other ground-level stakeholders. Smallholders, which represent 60 percent of total oil palm growers, would be one group of stakeholders to receive benefits.

Investment geared towards smallholder productivity would support sustainable forest management. Currently, smallholders are the least efficient producers in the industry, with a yield 35 percent below average. The reasons for this are their lack of knowledge, technology and manpower to efficiently collect and transport harvested bunches to the mill. Strategic investment schemes could focus on their ability to plant, cultivate and collect fresh bunches of palm, as well as on the infastructure and means for smallholders to get their product to mill for extraction within the recommended 24 hours after harvest, vastly increasing yields.

Under the restructured World Bank and IFC investment framework, the higher yields could provide a win-win solution for poverty reduction by driving up profits and supplying sustainable wages for smallholders, while also easing pressure on expansion into forested area.

Investment geared towards boosting production on degraded lands provides another example of indirect measures encouraging reduction in deforestation.

However, the strategy should be employed in a targeted fashion that matches the needs of individual producer countries; the role of institutions is key. The production environment in up-and-coming palm oil nations such as Colombia and Nigeria is different from that of Indonesia or Malaysia.

Effective monitoring and certification

While investment may encourage more sustainable practices, the new monitoring scheme set forth by the Roundtable on Sustainable Palm Oil (RSPO) can serve as a deterrent against unsustainable practices.

Founded in 2004 to develop and implement a certification standard for sustainable palm oil, the RSPO is a multi-stakeholder body created in response to growing global demand for greater accountability in the industry.

Its Certified Sustainable Palm Oil (CSPO) certification system was launched in 2009 and saw a 100 percent year-on-year growth from 2009-2010 with nine percent of globally-traded palm oil now certified. In Indonesia alone, CSPO certified palm oil has gone from 200,000 metric tonnes in 2009 to 1.2 million metric tonnes as of April 2011.

This move by large multinationals - such as Unilever and Walmart - to certify their products is the result of strong advocacy campaigns run by green groups such as Greenpeace and Friends of the Earth. These campaigns rallied the support of citizens and put global pressure on suppliers to prove that their products are not contributing to further destruction of forests and biodiversity.

Some parties remain sceptical of the RSPO’s effectiveness, given the powerful members of the palm oil producing industry on its board. Green groups site cases of the RSPO allowing corporations - such as Unilever and GAR - to be registered with the RSPO even though they do not comply with regulations. Furthermore, critics contend, the RSPO lacks a legal framework and leaves major voids in systems for establishing accountability.

Yet since its establishment in 2004, the RSPO has only been gaining ground in monitoring one of the most complex and fragmented supply chains of the global marketplace. It is working to correct its mistakes and those of the companies registered with them.

Furthermore, while the requirements for RSPO and its certification scheme are being tightened and monitored more closely, the percentage of CSPO palm oil is growing.

The launch of the CSPO label on oil-related products earlier this year highlights the desire of consumers and a plethora of international stakeholders to see meaningful reform in the management of palm oil supply chains. The stronger the CSPO certification scheme becomes, the more difficult it will be for producers to rely on unsustainable forest practices.

Understanding the past to ensure a greener future

Between 2005 and 2010, Indonesia lost 3.4 million hectares of forest coverage. In Malaysia, forest area decreased by 434,000 hectares on the mainland over the same period, and the region of Sarawak alone lost 65 percent of peatland to palm cultivation.

Yet with its high yield per unit as compared to other vegetable oils and potential for use of secondary and degraded agricultural land, palm oil expansion can be carried out sustainably.

The revised World Bank and IFC investment framework and the RSPO are initiatives towards this end. A dynamic change in the nature of oil palm cultivation is possible.

Abigail Hunter is a graduate student specialising in international trade at the International University in Geneva.

Teoh, Cheng Hai, 2010. “Key Sustainability Issues in the Palm Oil Sector,”Discussion Paper for Multi-stakeholder Consultations commissioned by the World Bank Group.

World Bank Group, 31 March 2011. “The World Bank group Framework and IFC Strategy for Engagement in the Palm Oil Sector.”

Fairhurst, T and McLaughlin, 2009. “Sustainable Oil Palm Development on Degraded Land in Kalimantan.” World Wildlife Foundation.

Saxon, E and Roquemore, S, June 2011. “The Root of the Problem: What’s driving tropical deforestation today?” Chapter 6: Palm Oil.

World Bank Group, 31 March 2011. “The World Bank group Framework and IFC Strategy for Engagement in the Palm Oil Sector.”

Lucas, Louise, 22 May 2011. “Growing issue for palm oil producers,”Financial Times.