The cows are afloat, with squawking chickens sharing their sturdy bamboo rafts. Children splash and swim in and around their homes, keeping away from the deeper channel of peat-coloured water that powers through the village of Meliau. Adults tightrope-walk across makeshift paths of hardwood thrown over huge floating logs. Others paddle around in long wooden boats. Everything that floats is lashed to everything that doesn't.

The monsoon rains are not due for a month or so, but the "dry" season for people in West Kalimantan province in Indonesian Borneo has been marked by three months of unrelenting floods. The sky is clear and blue and the stilted long houses and huts are reflected in mirror image on the water: it is a strangely scenic backdrop to one of the largest unfolding disasters on the planet – the stripping of the Borneo rainforest.

Indonesia has one of the world's largest areas of remaining forest but also one of the highest deforestation rates, ranking only behind Brazil. The vast green rainforest carpet has become a patchwork with more than half of Borneo's tree cover and peat swamps – which absorb much of the planet's carbon excesses – already gone after a decade's "goldrush" of uncontrolled timber logging that was at last partially curtailed in 2006.

But now the rest is being pillaged by palm oil and pulpwood plantations and networks of illegal loggers – the "timber mafias" – in an onslaught that is endangering not only the wildlife and the people but also contributing to global climate change on a scale far out of proportion to the island's size on the map. Indonesia's carbon emissions as a result of its deforestation and land use changes put it in third place of the world's worst offenders, behind only the US and China.

The timber from its rare 100- to 200- year-old diptocarp trees, each one the home of hundreds of insects, is eagerly snapped up, keeping consumers and the construction industry in the UK and elsewhere in tables, patio chairs, trinket boxes, doors and plywood. When consumers buy paper, furniture or even charcoal on the British high street there is an estimated more than 80% chance they are buying into this destruction.

Only four of the 300 timber concessions currently logging in West Kalimantan have written sustainability into their methods and only 16% of the world's timber goes through members of the WWF Global Forest & Trade Network, companies who commit to choosing sustainable wood where they can. Meanwhile, where the trees once stood and acted as a natural barrier, the floods rage.

Kalimantan is the largest chunk of Borneo. Brunei and Malaysia occupy the top third. Divided into three provinces – east, west and central – Kalimantan has almost 10% of the world's tropical forest and an extraordinary biodiversity that constantly multiplies with three new species being discovered there on average every month. It is the only home of some of the world's most endangered mammals: the pygmy elephant, the clouded leopard, the sun bear and the orangutan. All of them face extinction if the ancient forest is destroyed.

Already along many of West Kalimantan's rivers the black totem poles of dead and dying trees stand stark where rainforest once flourished. Indiscriminate chopping down of the big trees kills off the surrounding flora, too, a degradation that allows the free flow of flood waters to drown more trees, insects and plants and erode the habitat of apes and the resources of locals.

Saweng, 60, a father of five of the indigenous Dayak, the infamous headhunters tribe, was born in the Long House at Meliau, a stilted home where 32 families live under one, long roof. He complains of outsiders coming in to steal their trees and the rising water levels, a 20-year high he says.

"The forest is important for everything for us, for tools, for house and for boat, for food and for medicine. The loss of this forest is making our lives more difficult. Now if we found someone logging in our forest we would punish them, capture them and not let them go."

Another tenant, Susiana, 38, says that although the rivers have an abundance of fish the glut has seen the price crash; the result is plenty to eat but nothing to sell. The rattan that women use to weave mats and baskets is becoming harder to find. There are fears over the effect that the flooding will have on the rice harvests, pushing farmers to move further into the forest, using their traditional slash-and-burn methods to carve out new fields for their staple food.

Susiana has four children, three of whom have already had to leave for the towns to find work: "Not being able to speak to my children has made me very ill. I feel pain all the time and can't sleep. But many young people are leaving here. It's common for them to go to Malaysia to look for work. The waters are pushing them away."

In the flooded town of Lanjak life goes on. The clothing stores are open and in the tea shop the owners serve wading calf-deep in water. Jimmy Bond is the WWF officer for this area, a charismatic 42-year-old Indonesian eco-warrior who spends much of his time out in the jungle, monitoring the dubious practices of some of the palm oil plantation managers and tracking illegal logging. Last year he was viciously beaten up by police officers for getting too close to logging machinery with his camera.

"Lanjak used to be the biggest illegal logging port, there were 20 sawmills and every day 400 trucks were carrying out wood day and night," he says. "It seemed unstoppable and the social impact was huge – land battles caused clashes between families, between ethnic groups, local wisdom was eroded and modest and humble people became more violent as they used their new money to drink, use prostitution and gamble."

The shutting of the border with Malaysia ended the town's dominance and now the timber mafias have moved deeper into the forests.

Wading into Bond's office, past a floating black giant centipede the size of a large bar of chocolate, is his new convert, Unja. The former boss of a logging gang who admits he cut down around five sq km of virgin forest – around 16,000 cubic metres of timber – this Indonesian farmer effectively has a bigger carbon footprint than Finland.

After having a gun held to his head in a dispute over money, Unja gave up the illicit trade. He says that he believes the tensions between local tribes are going to lead to a resurgence of the land disputes that saw widespread violence and killings across Kalimantan 10 years ago. "The hate is unresolved in many hearts here," he says. "The issues with the watershed and the trees being cut down will make things worse, things are tough for people."

Staring out at three little boys tormenting a scorpion they have imprisoned with strips of wood, Unja says that deep down he regrets wielding the chainsaw, although it made him a relatively well-off man with his own car, which is an uncommon sight in Lanjak.

"The deer and boar have gone far away now, the rivers have become wider and more shallow and the rains wash away the soil. For my son, the crystal waters and the fishing is only a story I can tell. I cannot show him."

Bond introduces another repentant man. Hendri Jali is head of 38 families who live at Sungai Luar Long House, rebuilt on the proceeds of illegal logging, but now he is trying to grow rubber and replant the ruined forest. He is angry that he has closed his sawmill in the forest but that a Russian company has just marked trees around his land to cut to create a palm oil plantation.

"I was promised aid money if I stopped logging, but I have had none and now they are giving the land to foreigners to destroy" he says. "Already hunting is almost impossible, we fail to find any meat and the plants for medicine are hard to find."

What is not difficult to find is the ongoing illegal logging. The evidence of small-scale plundering is everywhere. Paths of wood planks leading from the road or river off into the forest, half a dozen men pulling out the spoils, sometimes by bicycle, from the sawmills tucked out of sight that cut the giant trees down before they are collected by trucks or rafts. Yelling men chase away the Observer with sticks.

At the small port of Ketapang alone last year, 30 boats loaded with illegal timber were counted leaving each day, smuggled wood worth an estimated $6m (£3.8m).

But it is not just the locals; unmonitored, unscrupulous companies can easily haul out extra timber over and above the amounts specified on their licence. There are huge discrepancies between figures for export of Indonesian wood and reports of imports in other nations.

Ian Kosasih is the forest director of the Heart of Borneo initiative, an ongoing effort to ringfence and protect 22m hectares of rainforest across the three nations of Borneo.

"The companies usually are even more difficult to prove a case against, they can use their existing permits and it's much more difficult to prove," he says. "There are many, many cases with a lot of timber posing as coming from a certain area but the volumes are ridiculously high. Formal timber tracking is not working; you need to be able to document from the stump to the entry of the timber to the market.

"For palm oil plantations there are no real rules at all, they are supposed to use degraded areas, but many just cut into the virgin forest.

"In 2006 we knew that 70% of the logging was illegal but now it's a lot smarter, before you could actually go out and film the illegals, they were so brazen. Now its more smart, more hidden. The timber mafia can control a whole district and be running 150 to 200 trucks out and sending hundreds of teams into the forest."

In Ketapang, the illicit timber trade has made one especially noticeable impact. In a small compound in the town, three orangutans throw branches at visitors through the bars of a small cages. Several babies and other adults are kept in a house nearby.

"I know, I know," says Dr Karmele Llano Sánchez apologetically. Sánchez is a Spanish vet who set up this sanctuary under the International Animal Rescue banner last year. "But when we came they were in cages just a metre square, at least now it is a little better, of course not ideal."

The compound contains 17 apes and is already overwhelmed. Oil palm workers are regularly confronted with aggressive orangutans violently defending their habitat and some, who fear killing an endangered species, ask for them to be humanely removed. Others, of course, will just kill them on sight.

"Also we know of another 40 to 50 orangutans now in captivity as pets who need to be rescued but we simply cannot help them right now," said Sánchez.

They hope to build a far larger enclosure, which might help them to do what to date they have been unsuccessful in achieving – re-releasing orangutans. It is a problem not only because of the reduced forest cover but also because there are so many babies, left behind or sold on as pets by the hunters, who can also find a market for the hands and feet of the dead mothers from locals who regard the meat as a delicacy.

"Orangutans have few instincts, they learn everything from their mothers, so youngsters are very vulnerable if left alone in the wild," said Sánchez. "But orangutans can survive in managed forests, so to save the orangutans we need to tackle our consumer behaviour."

The illegal wildlife trade is booming. In the street markets of Pontianak, the capital of West Kalimantan, which sits directly on the Equator, the trade is brazenly open, although stallkeepers say the confiscation by the authorities of a baby orangutan on sale here last week has frightened a few dealers away.

But still, in one short stretch of just a few hundred metres, it is possible to count seven species of birds and fish for sale in small cages and overstuffed tanks which are on the Convention on International Trade in Endangered Species endangered species list. From the rare red arowana river fish to the black hornbill and spotted doves, the conditions mean they die quickly, keeping the demand high.

The "mist nets" for catching birds in the forest are also openly on sale. One man tells the Observer he has a waiting list for the endangered hill mynah, a bird prized for its ability to talk and which has been found on sale in the US for $1,000. Along with local demand, China, Malaysia and Singapore are big importers of the Kalimantan forest creatures.

But, like the police raid on the Pontianak pet shops, there are pockets of hope for the Kalimantan forests.

Above Ketapang is the PT Suka Jaya Makmur concession, a company awaiting its Forest Stewardship Council certification, a scheme backed and supported by WWF. They log, but sustainably and selectively, leaving cover and fruit trees for the sweet-toothed orangutans.

The timber is stamped immediately after felling, and monitored in its journey to the markets and can be bought in the UK in stores including B&Q, John Lewis and Argos, although consumer demand is so low that sometimes its eco-credentials are barely advertised.

Many believe that the saving of the depleted Kalimantan forest can only happen through pressure from the outside, when consumers start to question the wood they are buying. In the Indonesian capital, Jakarta, the new secretary-general of the Ministry of Forestry is late for a meeting with the Observer. Hadi Daryanto is helping with the emergency relief effort as flash floods have killed more than 150 people in the previous 24 hours.

"We have halved the numbers who have access to the forests and are working to protect our forests from illegal loggers," he says.

Norway has just given the country a grant on condition that it suspends new concessions in the forests from 2012, but Hadi insists a full moratorium is not the answer. "There is $10bn coming in from palm oil, $4bn from pulp and paper, and the people who work in these concessions are many, so we cannot just stop it all or the IMF will collapse us as an economy.

"So please be wise about this, who will pay for that? Europe and the US has a financial crisis and who is going to help us just for the sake of climate change? Nobody.

"We were told to democratise and this is the price of democracy. Climate change is the price of democracy. Indonesia is trying to be a good boy, but we can't paint the sky for you. "