JAKARTA (Reuters) - 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, Norway's environment minister said on Tuesday.

Indonesia imposed a two-year moratorium on clearing forest last May under a $1 billion climate deal with Norway aimed at reducing emissions from deforestation, despite resistance from some government departments and from resource firms looking to expand in the archipelago.

Norway has been impressed by what Indonesia has achieved in terms of transparency in the forest sector and by a change towards being more pro-environment in policy debates around land use, said its environment minister, Bård Vegar Solhjell.

However, deforestation continues in areas not covered by the moratorium as well as illegally in the country's carbon-rich tropical forests and peatlands. Permits to clear land are often given out by local governors and there is a lack of central government enforcement.

"We know that the moratorium itself is not sufficient to reach the climate mitigation pledged, or to stop deforestation in the speed that is necessary," Solhjell told Reuters in an interview.

It was the first time Norway indicated the moratorium may not be working.

Indonesia's President Susilo Bambang Yudhoyono signed up to the Norway deal and moratorium as part of his pledge to slash emissions this decade, but there have been few other policy steps to curb emissions in the fast-growing G20 economy.

"It's a very progressive pledge but it's also very challenging to actually put it into place," said Solhjell.

The country is attracting increasing foreign investment in manufacturing industries such as steel, cement and power that are all heavy emitters of greenhouse gases, while sales of energy-guzzling SUV cars, mobile phones and flights are surging.

Higher energy demand from power use, mainly produced from coal, will boost carbon emissions. Indonesia does not provide annual emissions data, though the World Bank rated it as the world's third largest emitter in 2005 because of deforestation.

SELLING PERMITS

The $1 billion Norway has promised under the deal is contingent on policy change and proven emissions reductions from the forestry sector. The forestry ministry makes billions of dollars from selling permits to use forests each year.

Only months after Yudhoyono signed the forest moratorium, the former governor of the country's westernmost Aceh province breached the ban by issuing a permit to a palm oil firm to develop carbon-rich peatland.

The permit prompted legal action from environmental groups and investigations by the police and several government bodies, making the case a test of the country's commitment to halt deforestation in the world's largest exporter of palm oil.

After the investigation, the government said on Monday that the permit was issued to palm oil firm Kallista Alam without following proper procedures, and that it would protect the strip of peatland in Aceh.

The forest, home to endangered orangutans, was partly cleared by burning even before the permit was issued, said Mas Achmad Santosa, a government official.

"The case of Kallista Alam in Aceh is the typical problem we are facing ... some parts have been turned to palm oil plantations, some have been burned, and it turned out the permit does not exist," said Kuntoro Mangkusubroto, who is in charge of overseeing forestry sector reform.

(Reporting by Olivia Rondonuwu; Editing by Neil Chatterjee and Robert Birsel)