TO PLANT OR NOT TO PLANT: AN ENVIRONMENTAL ECONOMIC PERSPECTIVE TO CULTIVATION OF OIL PALM ON PEAT

Abstract

The oil palm industry has always been subjected to heavy criticism due to various environmental and social-economic implications such as destruction of tropical forest, causing reduction in species richness & diversity, emissions of greenhouse gases (GHG) and alleged labor/human rights violations. And, the recent large-scale palm oil expansion on the tropical peat lands has caused further public outcry. Despite all the alleged environmental implications facing the oil palm industry, it would also be ignorant to not acknowledge the economical progresses and societal development brought forth by the industry. Due to such conflict of interest, both the pro-development and pro-conservation group have always believed that this is a zero-sum game. And, the main purpose of this study is not to debate which camp has it better but wish to bridge the communication gap between the conservationists and the commercial groups from an environmental economic approach.

A Threshold Value Analysis (TVA) has been conducted in this study base on a simple simulated scenario in Indonesia. That is, the development and preservation of certain hectares of peat land will not be able to co-exist. A range of Net Present Value (NPV) has first been established through different potential yield profiles on peat land and projected revenues based on historical fresh fruit bunch (FFB) price levels. As a result, the calculated NPV ranges from RM 3740 to RM 57,180 ha-1 for an estimated economical life span of 20 years. By drawing on this set of NPV, a wide range of TV has been further established by using 1) two different discounting rate (0% and 7%) as well as 2) two different proxies for the derivations of preservation benefits (rate of carbon accumulation and willingness to pay (WTP)). Base on the carbon accumulation proxy, the minimum TV at 7% and 0% discounting rate is RM 329 and RM 1465. And, the maximum TV at 7% and 0% discounting rate is at RM 5040 and RM 8206. As for the WTP proxy, the minimum TV at 7% and 0% discounting rate is RM 222 and RM 889. And, the maximum TV at 7% and 0% discounting rate is at RM 4009 and RM 6114. Since TVA can be highly subjective, an attempt will be made to demonstrate if the benefits of preservation will be greater than the highest generated TV – RM 8206. Hence, the rationale would be, if it can be demonstrated that the present value of the benefits of protecting a hectare of peat land is worth more than RM 8260, then the preservation option would be preferred and vice-versa. By employing the restoration cost method, total economic value (TEV) principles, comparing against the cost of social damages and qualitative assessment on the impacts of future palm oil production due to peat land aggravated climate change, it can be concluded that the preservation option would have been preferred under the simulated scenario. However, this decision could have been different under different circumstances and the core message from this study is to demonstrate the possibility of a more comprehensive financial assessment through the application of environmental economics pertaining the land use changes decision surrounding peat lands.