Market-mediated responses confound policies to limit deforestation from oil palm expansion in Malaysia and Indonesia

Abstract

The global demand for palm oil has grown rapidly over the past several decades. Much of the output expansion has occurred in carbon- and biodiversity-rich forest lands of Malaysia and Indonesia (M&I), contributing to record levels of terrestrial carbon emissions and biodiversity loss. This has led to a variety of voluntary and mandatory regulatory actions, as well as calls for limits on palm oil imports from M&I. This paper offers a comprehensive, global assessment of the economic and environmental consequences of alternative policies aimed at limiting deforestation from oil palm expansion in M&I. It highlights the challenges of limiting forest and biodiversity loss in the presence of market-mediated spillovers into related oilseed and agricultural commodity and factor markets, both in M&I and overseas. Indeed, limiting palm oil production or consumption is unlikely to halt deforestation in M&I in the absence of active forest conservation incentives. Policies aimed at restricting palm oil production in M&I also have broader consequences for the economy, including significant impacts on consumer prices, real wages, and welfare, that vary among different global regions. A crucial distinction is whether the initiative is undertaken domestically, in which case the M&I region could benefit, or by major palm oil importers, in which case M&I loses income. Nonetheless, all policies considered here pass the social welfare test of global carbon dioxide mitigation benefits exceeding their costs.

Keywords: Malaysia and Indonesia; deforestation; economic impacts; market-mediated responses; palm oil restriction.