* Government decision on forest moratorium expected in May
* Agriculture and Forestry ministries have conflicting views
* Palm industry urged to use degraded forest land
By Michael Taylor
JAKARTA, Jan 14 (Reuters) - Indonesia should embrace its key role in climate change and extend a ban on the destruction of forests and peatlands despite opposition from the agriculture minister and the influential palm oil industry, a senior forestry ministry official said.
Indonesia, home to the world's third-largest expanse of tropical forests, is under intense international pressure to limit deforestation and destruction of its carbon-rich peatlands, at risk from urbanisation and the rapidly expanding palm oil and mining sectors.
Southeast Asia's largest economy imposed a two-year moratorium on clearing forest in May 2011 under a $1 billion climate deal with Norway aimed at reducing emissions from deforestation, and the government has yet to announce what it plans to do about the ban.
Hadi Daryanto, secretary general at Indonesia's forestry ministry, told Reuters he hoped it would be extended.
"The ministry of forestry would like to continue the moratorium and provide degraded land for business," said Daryanto, whose ministry is legally responsible for the economic and ecological management of Indonesia's forests.
"We have had success with the moratorium," he added, citing a decline of the deforestation rate since 2011.
Illegal deforestation is common in Indonesia, and especially in Central Kalimantan, where scores of palm oil and mining concessions overlap with protected forests.
The forestry ministry makes millions of dollars from selling permits to use forests each year, and a recent survey by the government's anti-graft agency showed it was perceived as one of the most corrupt institutions in the country.
Daryanto said a more transparent tender procedure should put an end to allegations of graft, adding: "The corruption is in the past."
Indonesia in the world's biggest producer of palm oil and its pledge to protect its forests is being tested by soaring demand for the edible oil. Palm oil companies such as Sime Darby, Wilmar International, Sinar Mas and Astra Agro Lestari, are some of the biggest in the country, and edible oil exports totalled $21.6 billion in 2011.
Environmental groups see the moratorium as a step in the right direction, but activists lament the various loopholes in the ban that they say are concessions to the palm oil industry.
Palm oil companies want the moratorium scrapped, saying it casts Indonesia's management of plantations in a bad light.
The agriculture minister also says the ban is unnecessary and should be replaced by a stricter permit criteria for palm plantations.
Palm estates sprawl across around 8.5 million hectares in Indonesia, and that number is expected to rise by about 200,000 hectares a year for the next decade.
Daryanto said palm oil plantations should expand on the almost 24 million hectares of degraded forest land currently available, even if the area is inhabited.
"It is better to use degraded land for investment for palm oil," he said. "The companies don't want degraded land because normally people are already there, and to remove them is very expensive."
Last month, Indonesia approved a rainforest conservation project that sets aside an area roughly the size of Singapore and rewards investors with tradeable carbon credits in the first of its kind to win formal backing in the country.
The project, Rimbay Raya Biodiversity Reserver, is part of a U.N.-led scheme called reducing emissions from deforestation and degradation (REDD) and is aimed at showing forests can pay for themselves and compete with powerful palm oil, mining and timber interests.
Norway, however, has said Indonesia's progress in reforming its forestry sector will not be sufficient to meet its pledge to reduce carbon emissions by 26 percent by 2020. ($1 = 9635.0000 Indonesian rupiah)
(Additional reporting by Yayat Supriatna and Rieka Rahadiana; Editing by Miral Fahmy)