Caitlin Randall reports on how concerns over the climate impacts of palm oil are spreading to the carbon market

A major environmental battle to stop the destruction of Indonesia's tropical rain forests is finding recruits in the carbon market, with participants increasingly unwilling to trade greenhouse gas (GHG) emission reduction credits from projects that may be linked to deforestation, say brokers and traders.

"A lot of companies in the European market are actively turning away from these projects. They see the reputational risk," says Lucy Mortimer, global manager of the Clean Development Mechanism (CDM) and Joint Implementation business at TFS Brokers in London.

Palm oil, used in products ranging from food to cosmetics to biofuels, has come under heavy fire from environmentalists who charge that the unchecked expansion of palm plantations is at the heart of Indonesia's vanishing rainforest and tropical peat swamps.

"Our policy is to buy from any palm projects we think meet the right criteria, with the exception of any from Indonesia," says Mark Meyrick, with EDF Trading in London. "However, the issue for me is far more complex than simply boycotting Indonesian palm projects ... sustainable livelihoods have to be supported in forestry areas if there is any chance to save the habitat there."

One London carbon trader whose firm no longer trades palm oil-linked CERs says: "A lot of the larger firms feel their corporate image is involved. Who wants WWF calling about orang-utans dying in deforested jungles? And there's the wider environmental view – some of these projects just don't pass vetting."

"A lot of people are actively turning away from these projects. They see the reputational risk."
In a recent report, Greenpeace said demand for palm oil has soared since 2000 and is expected to double by 2030. The NGO notes that, while Indonesia already has 6 million hectares of palm oil plantations, plans have been drawn up to add 4 million more by 2015, dedicated to biofuel production alone.

The report, released ahead of December's UN climate summit in Bali, Indonesia, charges that much of the current and expected palm oil expansion is taking place on forested Indonesian peat-land, rather than existing agricultural land. Already, 10 million of the country's 22.5 million hectares of tropical peat-land has been deforested and drained, they write.

According to Greenpeace, around 4% of the world's GHGs are released by burning the archipelago's peat swamps, making Indonesia the world's third highest GHG emitter behind the US and China.

"There's no doubt that palm oil planting is having severe environmental consequences but, as long as the CDM methodology committee approves projects linked to palm, there will be buyers," says Koen Dejonghe, a carbon business developer with Statkraft Markets in the Netherlands.

"There are enough buyers out there that don't care where the CERs come from and it's easy enough to sell into that pool ... but that doesn't mean there aren't a number of buyers who won't look at palm oil projects," says Gilles Corre, director of carbon markets at broker Evolution Markets in London.

However, some carbon market players argue their willingness to accept palm-linked CERs can hardly be considered environmentally reckless. "Most [palm oil-related] CDM projects are not linked to the expansion of palm plantations," says Soeren Varming, managing director of Malaysia-based project developer SV Carbon. "The worries are unfounded and are even counter to more sustainable palm oil development. The CDM is not promoting the destruction of biodiversity."

Indonesia currently boasts 52 CDM projects in the pipeline, nine of which are registered, while Malaysia – another hotspot in the palm oil battleground – claims 81 projects in the pipeline with 17 registered. Indonesia generates 1.8 million CERs annually and Malaysia 1.9 million CERs, according to the UNEP Risø database.

It can be difficult to determine if a project is linked to palm oil production, but UNEP Risø estimates that roughly 50% of CERs from Malaysia and Indonesia collectively are generated by palm oil-linked projects. While most of these CERs are from Malaysia, where 90% of CDM projects are palm oil-related, the real concern is the number of new Indonesian projects in the pipeline.

For Mortimer at TFS, the CDM Executive Board risks "rewarding deforestation" by approving palm oil projects. She argues that the board's remit only allows it to take a narrow view of projects' potential carbon offset – whether it contributes or not to sustainable development is up to the host country government to decide, and some have laxer standards than others.

Lex de Jonge, a member of the CDM Executive Board and an official at the Dutch environment ministry, doesn't deny that "negative impacts are flagged" by the Methodology Panel and the Executive Board when palm oil-linked projects pass through their hands. But, he notes; "when this refers to impacts on GHG emissions, the board can rule but, for other elements referring to sustainability, we have to rely on the host country's determination.

"While we may be aware of the impact beyond our mandate, we're still constrained by the criteria set out in Kyoto and the Marrakech Accords. A project may be morally inadequate, but officially meet the CDM standards."

And it is here that de Jonge sees room for change, noting that the issue of sustainable development for a range of projects, including those linked to palm oil, needs closer examination by policy-makers at the UN summit in Bali. Others see the summit as an opportunity to put pressure on the Indonesian government.

"There's clearly a glitch in the CDM process," says Marcel Silvius, senior programme manager at NGO Wetlands International, based in the Netherlands. "All current CERs linked to palm oil projects are based on inadequate information. CDM credits were provided before CO2 monitoring tools were established and CO2 emissions from peat-land were never taken into account."

If you're aiming to support environmentally sustainable development, says Silvius; "don't buy CERs related to palm oil, but keep your options open. I don't exclude the possibility that a monitoring system will develop to determine if a CDM project is linked to sustainable palm oil."