Looking through the source code of sage/geometry/lattice_polytope.py I found the method which is calling PALP, it is poly_x. In the documentation for poly_x there is an example which suggests that PALP has certain limits which are determined at compile time:
IMPORTANT: PALP requires some parameters to be determined during

Thus, it looks like you can't change POLY_Dmax unless you rebuild PALP manually. It might be a good idea to post your question to the sage-support list and mention the authors of the Sage interface to PALP: Andrey Novoseltsev and William Stein.