Purdue economists warn palm oil solutions may have unintended consequences

rainforestAs the European Union (EU) and others call for measures to slow palm oil sales to limit deforestation, carbon and biodiversity losses, a decrease in palm oil production may have repercussions in Malaysia and Indonesia, affecting the rest of the world, said Purdue University economists

“If Malaysia and Indonesia let the Europeans use trade policy to reduce palm oil production, those countries are going to be hurt significantly because the demand for their products and prices will decline. We show that it would be better for Malaysia and Indonesia to be proactive in the face of demands for change,” said Farzad Taheripour, a Purdue research associate professor of agricultural economics and lead author on the study.

Palm oil production has increased 53 mmt from 1990 to 2016 based on its wide use in foods and cosmetics. That expansion, most of it in Southeast Asia, also has led to significant carbon emissions from burning and clearing forests to plant oil palms and the loss of biodiversity, including critically endangered orangutans on Indonesian and Malaysian islands.

Taheripour and Thomas Hertel, Purdue Distinguished Professor of Agricultural Economics, collaborated with Navin Ramankutty, professor and Canada Research Chair in Global Environmental Change and Food Security at the University of British Columbia, to understand the ramifications of three potential policy proposals. They used the GTAP-BIO model, a Purdue-led computer model of the global economy available to researchers around the world for quantitative analysis of international policy issues.

In the first scenario, Malaysia and Indonesia would voluntarily revert to 2011 levels of palm oil production through regulation or taxes on the palm industry. But, according to the model, persistent global demand for vegetable oil and other foods would lead farmers in those countries and elsewhere to continue clearing land to plant other crops.

In the second scenario, Malaysia and Indonesia would limit palm oil production to 2011 levels and offer subsidies to farmers to stop them from clearing forests. In that case, forested land increases and other countries cannot make up the shortfall in palm oil, causing prices to rise and benefiting the Malaysian and Indonesian economies.

“This is the best option for Malaysia and Indonesia because they are using monopoly-like power to control the market,” Hertel said. “It shows the importance of direct intervention and providing incentives to halt deforestation.”

In the third scenario, other countries, including those in Europe, would take action, setting tariffs on palm oil importation. That raises prices and slows demand while also achieving similar results on forest cover as the second scenario – provided forest subsidies are still implemented. In this case, the economic benefit goes to the European countries that collect tariffs and not Malaysia and Indonesia.

“By restricting output and forest land conversion domestically, the Malaysia and Indonesia region reap the benefits of higher palm oil prices. When they leave it to others to implement import restrictions, these benefits go to the importers in the form of higher tariff revenues and improved export prices,” the authors write.

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