Palm oil is one of Malaysia's biggest exports worth around £17bn a year but the growing backlash over the destruction of Asia's biodiversity has sparked an angry response from farmers; who already see their livelihoods under threat from an European Union ban on palm oil in biofuels in 2020.
Earlier this year the chain announced that it would remove palm oil from all its products.
Iceland won't sell palm oil products after 2018, and made the advert with Greenpeace to highlight the environmental impact.
Clearcast declined to speak to Sky News, but in a statement said: "Clearcast and the broadcasters have to date been unable to clear an ad for Iceland because we are concerned that it doesn't comply with the political rules of the BCAP code". It would have blown the John Lewis ad out of the window.
Iceland's Christmas TV advert has been banned from United Kingdom television as it has been deemed too political.
But Iceland's Christmas ad is getting more attention than any of them - specifically because it hasn't even been allowed on TV.
Iceland raising awareness of palm oil consumption.
However the now-banned advert, which was voiced by actor Emma Thompson, was deemed to be in breach of political impartiality rules set out in the 2003 Communications Act which prohibits advertisements that are "directed towards a political end." .
You were getting so weighed down with Christmas sandwiches, pumpkin spice lattes and Primark jumpers that you forgot all about palm oil consumption.
"This year we were keen to do something different with our much anticipated Christmas advert".
The retailer had hoped to use a short film, Rang-tan, as its main Christmas advert. "The culmination of our palm oil project is offering our customers the choice of an orangutan-friendly Christmas, and we wanted to reflect this in our advertising".
"It was so emotional", Iceland's founder Malcolm Walker said as cited by The Independent.
A spokesman added: "Mother, the creative agency which produced the video, submitted the Rang-tan script to Clearcast in July to test the system again and see if there was an option for us to advertise as part of our campaign alongside planned cinema screenings and social media".