The costs of reducing deforestation in Indonesia

Abstract

In this second contribution to the Policy Dialogue, Colin Hunt emphasises the large contribution that oil palm plantations and the pulp and paper industry have been making to Indonesia's economic growth in recent years, notwithstanding the environmental consequences of such activities. The implication is that avoided deforestation can be expected to have a significant negative impact on segments of the population who would benefit from the business and employment opportunities that would otherwise be generated, directly or indirectly. Palm oil companies typically spend about three dollars on goods, services and labour for every dollar of profit. The author argues that any compensation package for avoided deforestation needs to include all the potential beneficiaries of palm oil production, not just the palm oil companies, and to generate economic activity similar to that being replaced. (Ed.)

Acknowledgements

The author thanks Frank Jotzo, the editor and anonymous referees for helpful comments. Any errors of fact or interpretation are, however, his sole responsibility

Notes

¹For an explanation of the workings of markets for forest carbon, see Hunt (2009).

²In parallel with REDD efforts is the consumer-driven need for large buyers of vegetable oils, such as Unilever, demonstrably to avoid buying palm oil from plantations that have replaced tropical forests.

³Smallholder involvement will not be as important in the future, given that recent oil palm legislation has severely reduced the smallholder component of plantations in favour of company-dominated concessions where companies can own outright up to 80% of the plantation.

⁴While local governments benefit substantially from oil palm developments, local officials may at the same time be nervous about the impact on local communities of the consequent immigration (Sandker, Suwarno and Campbell 2007).

⁵This arrangement was presumably framed in the expectation that a market would evolve for carbon credits derived from REDD. However, the situation now is that bilateral or multinational donors, rather than the market, will be the source of direct carbon payments to government.