By Michael Taylor

JAKARTA (Reuters) - The Indonesian government is asking major palm oil companies to row back on the historic “no deforestation” pledges they made at last year’s United Nations climate change summit, officials and company sources say.

Major palm oil companies were invited to a series of meetings at the economics ministry last week, where officials expressed concern the pledges the plantation companies made are causing big problems for smaller palm oil firms in their supply chain, the sources told Reuters.

The government has asked palm oil firms who signed the Indonesian Palm Oil Pledge (IPOP) to exempt smallholders because they are not yet ready to practice the same level of sustainable forest practices as the big players, said Musdhalifah Machmud, deputy minister for food and agriculture at the coordinating ministry for economic affairs.

"Yah, they need to let smallholders fulfill their trade," she told Reuters.

Indonesia is the world's biggest palm oil producer and exporter and its industry employs nearly 5 million workers.

A top official at one of the major palm oil companies, who did not want to be named, said the companies “received guidance notes” from ministry officials.

PALM OIL STIGMA

A representative of an environmental group said the government is urging big palm oil firms to “water their stance down” by urging them to continue to buy palm oil from their suppliers, even if that company is cutting down forests for new plantations.

“This would pretty much ruin the whole attempt to create an industry-wide no-deforestation situation to remove the stigma from Indonesian palm oil,” the NGO representative said.

The pressure from the national government comes after local governments in Indonesia have begun taking away concessions from palm oil companies who tried to convert them into conservation forests, several big palm oil companies told Reuters.

The controversy over the IPOP pledges is arising as the Indonesia government comes under mounting pressure from its neighbors over the smoky haze from forest fires that has blanketed much of Southeast Asia the past month.

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Plantation firms who use “slash and burn” techniques to clear forests - most of them smallholders now - are one of the biggest reasons for the fires.

Home to the world's third-largest tropical forests – and the world's fifth-largest emitter of greenhouse gases mainly due to their destruction - Indonesia will be one of the countries in the spotlight at December's U.N. climate change conference in Paris. The meeting will try to get legally binding commitments from the 190 member nations to slash greenhouse gases.

SUPERMARKET PRODUCTS

The spectacular growth of palm oil plantations over the past quarter-century, now covering over 11 million hectares in Indonesia or an area bigger than Iceland, has been a leading cause of deforestation.

Cheaper than other vegetable oils and low in trans-fat acids, palm oil has increasingly found its way into products throughout the supermarket, most commonly as cooking oil, but also everything from snack foods and chocolates to soaps and soup.

Around five years ago environmental activists began pressuring some of the world's biggest consumer goods companies to demand their palm oil suppliers adopt more sustainable forestry practices. They organized demonstrations outside suburban U.S. supermarkets. A prime-time documentary in April 2014 featured an angry Harrison Ford, clutching an orangutan on a visit to peat forests in Indonesia being clear-cut for plantations. Activists and media reports began highlighting the use of child workers and forced labor on some plantations.

The campaign worked. In September of last year, all the major Indonesian palm oil companies signed a "No Deforestation, No Peat, No Exploitation" pledge. Together, they and their supply chains controlled well over half the global palm oil trade. Indonesia's two biggest timber and paper companies, Asia Pacific Resources International Ltd and Asia Pulp and Paper have signed similar forestry sustainability pledges.

Greenpeace, which in 2010 had launched a YouTube video against Nestle for buying palm oil from a subsidiary of Singapore-based Golden-Agri Resources, then joined hands with their former arch villains to help them implement the pledges.

It seemed like a turning point in the battle against climate change.

MONITORING COMPLIANCE

After the cascading movement of companies and their customers to adopt deforestation pledges, environmental activists and some of the companies themselves, set up online platforms to monitor compliance with their IPOP pledges.

Wilmar International Ltd, the world's largest palm oil trader, unveiled an online platform this year that provides transparency and "traceability" into its supply chain, including the names and locations of refineries and palm oil mills.

"Wilmar is the first agro-industrial giant to offer a way to follow palm oil all the way back to the mills where the oil is processed," says Scott Poynton of The Forest Trust, a forestry activist group, which brokered Wilmar's zero deforestation policy and built the online dashboard.

Rainforest Action Network started a "Snackfood 20 Scorecard" that monitors the implementation of deforestation pledges by companies that buy palm oil from major plantation firms for their products, such as PepsiCo Inc , Kellogg Co and Kraft Heinz Co.

The speed and alacrity with which the major plantation companies began enforcing their "no deforestation" pledges – which also apply to companies in their supply chain - caught both the national government and smaller growers by surprise.

Efforts by big palm oil firms to convert concessions into protected forests have run into roadblocks at the local government level.

CONFLICT OVER CONCESSIONS

When Golden Agri, one of the IPOP companies, tried to convert an area designated for plantations in Indonesian Borneo into a conservation forest, the local government threatened to revoke the concession, said Agus Purnomo, the company's director for strategic stakeholders agreement. He said the company was still negotiating with officials in the Kapuas Hulu district of West Kalimantan.

"If we are not developing it into plantations, they cancel (the concession) and give it to somebody else – a competitor," said Purnomo, a former director at WWF Indonesia and a presidential advisor on climate change.

Officials in Kapuas Hulu could not be reached for comment.

Wilmar and unlisted Singapore-based palm oil firm Musim Mas told Reuters they, too, had experienced problems similar to that of Golden Agri.

The conflict over whether concessions should be planted or preserved reflects a major policy dilemma in Indonesia: The forests are a prime source of employment and development in the world's fourth-most populous country, but their rapid depletion has economic as well as environmental consequences.

ENCROACHING ON POLICY

Palm oil is a key driver of economic growth in Indonesia, said Machmud at the economics ministry. And growth is slowing: Indonesia’s GDP is expected to decline to 4.9 percent this year from above 6 percent over the last decade.

"Part of our country we have to protect for forests, and the other part we have to do some economic activity so the people around it can improve their prosperity," she said.

The no-deforestation pledges made by the big palm oil companies are putting smallholders at risk, she said.

"My concern is (small) farmers cannot sell,” said Machmud. “The entire supply chain cannot do something that is not allowed by IPOP."

Moreover, IPOP was never coordinated with the government and encroaches on government policy and guidelines, she said.

The problem, she said, is that companies like Golden Agri are setting aside forests in their concession area for preservation that the government has already assigned for development.

"If you don't like it, no problem," she said. "Another company will come to develop it."

It’s a stance that makes environmental groups unhappy.

The biggest palm oil and timber companies in Indonesia have all committed to the "no-deforestation" pledge and now they were losing concessions when they try to preserve forests, said Bustar Maitar, head of Greenpeace's campaign to save the forests in Indonesia. "This is enough to gain the momentum to tell the government that business as usual has already passed," he said.

HAZY POLICY

Caught in the middle is Nur Masripatin, appointed in June to the new role of director-general in charge of climate change policy within the newly merged environment and forestry ministry.

The government has had competing aims around development and conservation, she said in an interview, and her job is to help coordinate those priorities between different ministries.

The previous president, Susilo Bambang Yudhoyono took a high-profile approach to climate change policy because he "was more (about) exposing this country to the world," she said. "Our new president really wants to focus on developing the country and especially improving the welfare of the poor."

The environment and forestry ministry can do little about the conflicts over whether to preserve or develop forests in concession area, she added, because land use comes under the purview of the agricultural ministry.

It puts Indonesia in an awkward position in trying to defend its efforts to fight the forest fires – and the smothering haze it engenders – with its enraged neighbors. Malaysia's prime minister on Monday demanded that Indonesia take action against those setting fires in the forests.

Smallholder companies seeking to clear land for palm oil and pulp wood plantations have been accused of setting the fires that smolder for weeks in underground peat deposits in Sumatra and Indonesia’s part of Borneo island.

Indonesia’s Vice President Jusuf Kalla said his country had no need to apologize for a month or so of fire and haze each year. "Look at how long they have enjoyed fresh air from our green environment and forests when there were no fires,” he said during a dialogue session with Indonesians in New York in late September. “Could be months. Are they grateful?”

(Reporting by Michael Taylor.; Editing by Bill Tarrant)