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Abstract

As the two leading palm oil producing countries, Indonesia and Malaysia have come under external pressures to limit deforestation and greenhouse gas emissions related to land use conversion for oil palm cultivation. We examine various institutional frameworks that have emerged to mediate these pressures. These frameworks can be distinguished by their geographic scope—domestic, region, and global—as well as by the nature of control—private, non-profit, and governmental. The frameworks have taken the form of sustainability certification systems from non-profit organizations or governments, corporate sustainability policies, or the setting through global or bilateral negotiations of voluntary national targets for limiting deforestation or reducing greenhouse gas emissions.

We interpret these frameworks in terms of basic theories of institutional economics, in particular the Coase theorem, which posits that the allocation of resources will be efficient if there are zero transaction costs and legal rights are well defined. Some efficiencies are certainly attainable. Certification systems can be operated by intermediary organizations with specialized capacities to monitor the sustainability practices of oil palm growers associated with various crude palm oil mills. Larger corporations similarly may be able to commit themselves more or less credibly to observance of strict sustainability standards. This does not necessarily reflect purely altruistic impulses. It will add to costs, but may also add to revenues: as consumer groups globally pressure consumer products companies to use sustainably sourced palm oil, these companies may be willing to pay more for sustainability assurance by their palm oil suppliers.

Given transaction and information costs, and economic incentives of the relevant economic actors, there has been slippage in the monitoring and enforcement of certification systems and corporate policies. The quality and effectiveness of governance have also been major issues. Technological developments, particularly the increased use of satellites to monitor deforestation and fires, may offer enhanced transparency, and increased global awareness and concern over these issues should drive further progress, if the forests can last long enough.