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Two ways to value sustainable palm oil

Who’s hands is palm oil really in? World Bank Photo Collection

What is the value of sustainable palm oil? For some, it is the conservation of tropical forests and wildlife in highly biodiverse regions. For others, it is US$3.

That’s the latest price of certificates on the GreenPalm trading platform; a market designed to allow producers of palm oil certified by the Roundtable on Sustainable Palm Oil (RSPO) to sell their certificates to manufacturers and retailers. Yet its existence is coming under fire from environmentalists concerned that the strategy of pricing sustainability has become divorced from its delivery on the ground.

It is a tension between two values that would not surprise Karl Marx, who showed that a commodity has both a use-value and an exchange-value. And as Marx went on to argue, it is a tension that has the potential to result in crisis.

Mainly produced in South-East Asia, palm oil is a ubiquitous ingredient that appears in all manner of food, cosmetic and cleaning products. Walmart has estimated that it’s in one of every two products they sell.

When the roundtable conducts audits on producers using its standard, which in theory prevents plantations from harming the environment and local communities, it allows them to sell the certified palm oil in a number of ways.

One is to bundle the certificates with the palm oil and trace that oil right through the supply-chain: from the field to the shop floor. Under this approach, end-users know they are buying palm oil from a reputable source and can pass this information onto the consumer through a label on the final product.

Another way is to detach the certificate from the palm oil, so that you have a physical commodity sold as conventional palm oil and an intangible commodity sold via the GreenPalm trading platform. Companies such as Walmart then purchase these certificates to prove to consumers and environmental groups that they have a responsible sourcing strategy. Since the money paid for the certificates goes back to certified producers, the buyers can claim that they are supporting the production of sustainable palm oil, even though they continue to purchase conventional palm oil that by definition is unsustainable.

Critics say GreenPalm allows greenwash. Certificates are picked up on the cheap, currently just 0.4% of the cost of the palm oil itself, and are used as a kind of moral offset by brand-name companies to insure themselves against activist campaigns.

Take the case of Kellogg’s, which was criticised in July 2013 for its joint venture with Wilmar, a palm oil producer accused of degrading land in national parks and other protected areas in Indonesia. The cereal manufacturer defended itself by saying that, thanks to the certificates it had bought on the market, “all of the palm oil we use is 100% sustainably sourced”. Greenpeace has since dismissed this system simply as a way of laundering “dirty” palm oil.

For their part, the roundtable and influential members such as the WWF have supported GreenPalm as a means to an end. They argue that while it would be better for manufacturers and retailers to purchase palm oil directly from certified producers, because of the complex ways palm oil gets from the field to the shop floor - passing through a range of shipping, storage and processing intermediaries - it is prohibitively expensive for many to do this.

In addition, from the producer’s point of view, if they are selling to markets like China and India where there is less public scrutiny of corporate sourcing strategy, then there may be little demand to become certified. Certificate trading changes that, as it allows them to realise a sustainability premium by selling their certificates to Europe and the US, regardless of where their palm oil ends up.

In short, the roundtable sees certificate trading as instrumentally useful in drawing companies into its scheme and helping them realise their ambition “for all global palm oil production to be certified as sustainable”.

Global production of palm oil and RSPO-certified palm oil

Global production of palm oil and RSPO-certified palm oil. Data from USDA Production, Supply and Distribution Online (2013) and RSPO Quick Facts (2013).

So who’s right? Well, the RSPO makes much of its rapid presence in the industry. At the end of 2012 this stood at 6.7 billion tonnes of certified palm oil; impressive given the organisation didn’t even exist ten years ago. Certificate trading has been central to this, accounting for the majority of sales of sustainable palm oil to date. But as shown in the figure below, it has not been fast enough to keep up with the number of new palm oil plantations being established. These continue to be linked to the logging and burning of woodland, leading to record levels of air pollution in South-East Asia among other things.

As many palm companies have themselves pointed out, one reason why the take-up has not been greater has been the dwindling exchange-value of sustainability certificates, which has fallen from US$50 in September 2008 to US$3 today. This means there is less financial incentive to undertake the costly investment in becoming certified. The price fall was arguably the result of the initial certification of several conglomerates with multiple palm oil plantations, leading to a glut of certificates on the market.

The danger for manufacturers and retailers involved in the RSPO is that, while they benefit from a falling exchange-value, if this also depresses the use-value of the commodity (because fewer people believe that sustainability certificates genuinely help to protect the environment) then just like the EU carbon market, the whole scheme risks collapsing. This could open the door to more reputational attacks and possibly even government legislation.

But on the question of use-value, the critics are not in agreement. For some it is the marketisation of sustainability certificates that is the problem; for others it is the very idea of defining plantations as sustainable and monitoring their behaviour through soft-touch market mechanisms. Either way, it is the outcome of this debate that will shape whether the members of the RSPO end up reforming its certificate trading system, or whether they begin to abandon the RSPO altogether.

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