Price incentives and unregulated deforestation: Evidence from Indonesian palm oil mills

Abstract Global demand shifts and supply chain interventions have the potential to reduce palm oil's environmental footprint, especially in otherwise unregulated plantations. This ultimately depends on deforestation reacting to prices in upstream, complex plantation–mill systems. We produce the first microeconomic panel of geolocalized palm oil mills, and we model their influence on palm plantations across Indonesia where the issue is most critical. We leverage our data granularity and the nature of the value chain to isolate downstream mill‐gate price shocks that are exogenous to deforestation upstream. We find a positive elasticity to the mill‐gate price of crude palm oil, in general and in two specific cases of unregulated deforestation—for smallholder plantations and for illegal industrial plantations. However, smallholder deforestation decelerates as palm fruit prices increase. These results inform the design of fair and effective conservation policy.