Green Party co-leader Russel Norman said palm kernel and palm oil was produced on land cleared of tropical rainforest in Indonesia and Malaysia, which was a major source of carbon emissions and the extinction of animals.
Palm kernel imports went from 0.4 tonnes in 1999 to 455,000 tonnes in 2007 and then to 1.1 million tonnes in 2008.
Dr Norman said this was a quarter of all global palm kernel production, which threatened not only the local grain industry, but New Zealand's environmental reputation.
He said the Government and Fonterra, which part owns rural supply chain RD1, had to do something to stop the "addiction" to the cheap, but unsustainable palm kernel, which was being used to prop up unsustainable dairy farming.
Greenpeace NZ climate campaigner Simon Boxer also said it was a "scandal" that Fonterra was feeding its dairy cows a product that was directly contributing to the destruction of the world's remaining rainforests - and climate change.
Wilmar International, the company supplying kernel to RD1 to sell, was the world's largest trader of palm oils and kernel and had a bad reputation for rainforest destruction, he said.
But Fonterra sustainability manager John Hutchings told Radio New Zealand Wilmar International was a reputable company.
"They've been working very hard to ensure that all of their mills and plantations are RSPO - Round Table on Sustainable Palm Oil - certified, and they have almost completed that task."
Mr Hutchings said palm kernel was an important feed supplement when grass was in short supply.
