Indonesian fires could cost palm oil companies up to $15bn
The palm oil industry could face massive costs if a carbon tax is implemented
Palm oil companies would have faced increased costs of 15 billion US dollars if a carbon tax had been levied on fires in Indonesia between 2015 and 2018, analysis by Unearthed has found.
World-leading brands Mondelēz, Nestlé, P&G and Unilever, buy palm oil from producers heavily linked to fires, according to a report released earlier this year by Greenpeace.
A subsequent Greenpeace report, released last week, found that many of these fires occurred within Indonesia’s carbon-rich peatlands. It calculated that between 2015 and 2018, fires in land set aside for palm oil released 200 megatonnes of CO2 into the atmosphere, equivalent to the amount 52 coal plants emit in a year, or the combined annual emissions of the Netherlands and Norway.
An Unearthed analysis has determined that this could have translated into costs of $15 billion if a carbon tax had been implemented, with a knock-on effect on major consumer goods companies.
A carbon tax has received widespread support from mainstream economists and over 40 governments worldwide have adopted it in some form. These have tended to focus on industrial emissions, however, rather than those produced by land use change such as through deforestation or fires.
According to the OECD, only 17% of carbon emissions from energy use in Indonesia are taxed, and even then at a comparatively low rate. Emissions from fires are not taxed at all.
World leaders at the UN climate conference, COP25, are this week discussing how to implement a global carbon market. They are negotiating Article 6 of the Paris Agreement, which states that there should be a “mechanism” for countries to trade emission reduction credits. This, many hope, could form the basis of an international carbon price.
No specific price is on the table at the COP, which is expected to continue well into the weekend. But in 2018, the Intergovernmental Panel on Climate Change estimated that a price of between $135 and $5,500 per tonne of CO2 was needed to prevent global warming of over 1.5C.
In October this year, the International Monetary Fund (IMF) stated that limiting warming to 2C or less required a global carbon tax of $75 per tonne by 2030. For its analysis, Unearthed used the IMF’s more conservative figure, reaching a total of $15 billion for the 200 megatonnes of CO2 emitted by all fires that occurred between 2015 and 2018 within peatlands set aside for palm oil production.
Greenpeace’s report used government data on fires and palm oil production to identify the 30 palm oil producers most heavily linked to fires. These producers control 35% of palm oil land where fires occurred in Indonesia between 2015 and 2018.
It then scanned supply chain disclosures for the names of these 30 producers to reveal the exposure of four large consumer goods companies: Mondelēz, Nestlé, P&G and Unilever. These firms make Oreos, Kit Kats, Head & Shoulders shampoo and Dove soap, among other well-known household items.
The American multinational Mondelēz, which owns Cadbury in the UK, was exposed to the largest share of emissions in its palm oil supply chain. Between 2015 and 2018, fires in peatlands controlled by the company’s suppliers amounted to 61 megatonnes of CO2, equivalent to the annual emissions of 16 coal plants.
Nestlé, meanwhile, was exposed to 57 megatonnes of CO2 emissions, while P&G and Unilever were exposed to 49 megatonnes and 51 megatonnes respectively.
Unearthed spoke to Lord Nicholas Stern, former chief economist at the World Bank, at the UN climate conference in Madrid, asking him whether companies should be preparing for the possibility that they may have to bear the cost of emissions produced by fires and deforestation in their supply chains.
Lord Stern replied: “Potential legal liability is an important incentive. We are responsible for the consequences of our actions so that kind of legal liability is part of a proper incentive structure.
“The responsible firms are looking through their supply chains and if they can say they are – and convince the people who work for them and the people who buy from them that they are – then they’ll get more customers and better workers.”
Just a couple of months ago, the confectionary company Mars estimated that it would owe more than $1 billion a year under a carbon tax of just $50 per tonne. The company has been lobbying the US Congress to bring in a carbon pricing system.
The majority of Mars’ agricultural produce is cocoa from west Africa, but it does also source palm oil from Indonesia. It has stated publicly that it is seeking to reduce greenhouse gas emissions in its supply chain.
At the climate conference, Mars sponsored an event on land use, with a keynote speech by Margaret Kim, CEO of Gold Standard, which verifies projects to reduce carbon emissions.
Unearthed asked Kim whether companies should be prepared for the potential financial costs of land-use emissions under future carbon accounting.
She said: “As corporates – I come from the corporate sector – yes, we need to be looking for the global negotiations to set the pathway. But at the same time, corporates should be prepared for whatever the negotiation results will turn out to be.
“Starting from corporates’ perspective, yes, I would be prepared. But at the same time, we hope that the negotiations will guide us through.”
Unearthed contacted Mondelēz, Nestlé, P&G and Unilever to ask whether they are making such preparations.
A spokesperson for Unilever told Unearthed the company supports the principle of carbon pricing and added: “Unilever has been leading corporate efforts to address this issue for over two decades and is committed to building a supply chain that delivers more efficient land use and forest protection, while improving the lives of local communities.”
A Nestlé spokesperson said the firm was opposed to deforestation and concerned about fires in Indonesia, adding: “We are currently investigating and verifying occurrences of land cleared through burning, as we do for other deforestation clearances. We will immediately cease sourcing from any supplier found to be linked to any deforestation activity. Ten suppliers have already been removed from the Nestlé palm oil supply chain for not complying with our Responsible Sourcing Standard requirements.”
The other two firms did not respond.
While these figures do indicate the extent to which the big four companies are exposed to CO2 emissions from these palm oil producers, consumer goods companies are unlikely to bear the costs directly. Any carbon tax is likely to be levied at other points in the supply chain, on large commodity traders such as Cargill or on the Indonesian producers themselves.
In its climate change submission to the Carbon Disclosure Project (CDP) for 2019, Mondelēz acknowledged that carbon taxes applied in its supply chain could have an indirect impact on its balance sheet, but did not provide a figure for this potential impact. P&G did the same in its submission.
Nestlé, in its submission, did give a figure, estimating that a single carbon price between $110 and $120 per tonne could cost it between $660m and $720m per year.
Unilever’s climate change submission was not available but the company mentioned the risk of higher costs resulting from a carbon tax in its CDP submission on forests.
This year’s fires in Indonesia resulted in 900,000 people reporting respiratory illnesses, 12 airports halting operations and hundreds of schools temporarily closing. But the World Bank also estimated this week that the total damage and economic loss from the fires amounted to $5.2 billion, or 0.5% of Indonesia’s GDP.