Palm Oil Monitor Weekly Update – 26 November 2018

Commission consults – but does it listen?

Last week the European Commission held a consultation on the forthcoming Renewable Energy Directive Delegated Act, which will regulate the biofuels market in the European Union from February 2019.

By design or coincidence the meeting took place at the same time the revised RED text was passed into law.

Our intel from the meeting didn’t provide any major surprises, bar one (see below). Rather, it confirms the vigour with which European rulemakers are attempting to force imported biofuels and biofuel feedstocks out of the EU market.

There were four key points to note from the Commission’s presentations.

First, as we knew, the Delegated Act will specify the criteria for high- and low- ILUC risk biofuels. The Act will also be accompanied by a Commission-authored report on how biofuels have expanded, written by the Joint Research Council (JRC). This is to deal with the particular clause in the RED text, which states that biofuels will be considered high risk if there is ‘significant expansion’ into high carbon stock areas.

Second, the Commission is still attempting to deal with ILUC in a way that is “objective, balanced and based on solid scientific evidence.” This will be difficult given the problems faced in observing ILUC. As has been pointed out several times before, ILUC can only be inferred.

Third, and this is the surprise, Member States will be able to ‘make additional distinctions’ for biofuels after the ILUC criteria have been determined by the European Commission. The process or legal instrument for this does not appear to have been determined, and it may present some tension between the Member States and Brussels.

Fourth, the JRC is going to draw heavily on its previous studies on deforestation and crop expansion, with a particular emphasis on emissions coming from particular feedstocks. This is going to present some quite tricky problems for the Commission. The JRC report from 2014, for example, notes the large differences between emissions for different countries from the same feedstocks.

This problem was raised by the delegate from Fedepalma, who stated: “The European Commission shouldn’t focus on a crop globally but look at the situation in different regions. For example, for palm oil in Columbia, there is close to no deforestation. Some here say that palm oil is responsible for deforestation, that is not true, look at the situation in the different regions”.

This presents the problem of a potentially perverse outcome. If, for example, palm oil is considered a ‘high risk’ feedstock by default with no distinction between countries, but certain producers access the RED via certification, then there is nothing to prevent any number of countries simply cutting down large tracts of forest to plant oil palm going into the future. In other words, there is no incentive for any countries to adapt their domestic laws to prevent expansion. This underlines the sheer absurdity of the ‘feedstock’ approach.

One point of contention among most representatives at the meeting was that prior to the consultation, the EU held a government-to-government meeting with ‘high level experts’ from the EU’s trading partners. FEDIOL, the EU body that represents the bloc’s vegetable oil industry wondered why no one in the industry – or even NGOs – are considered ‘high level experts’.

Indonesia tees off at the WTO; Mahathir trashes EU

The Government of Indonesia has taken the European Union to task once again at the World Trade Organization over the Renewable Energy Directive during a Technical Barriers to Trade (TBT) meeting on November 15.

Following on from its questioning at previous TBT meetings, according to Borderlex, Indonesia didn’t hold back, stating:

Can the EU unequivocally state that RED II will not be used to discriminate against palm oil to the advantage of EU home produced vegetable oils, especially rapeseed, at EU, member states and regional level? … If no action is taken by the EU to counter trade-restrictive actions at member state or regional level, does the EU acknowledge the right of Indonesian regions to likewise encourage ‘voluntary bans’ on imports of, for example, wines from Europe to Bali?

Indonesia also accused EU Member States of asking processors to keep palm methyl ester out of biofuel blends and only use its rapeseed equivalent.

At the previous TBT meeting in September, a number of palm-producing countries – Malaysia, Indonesia, Ecuador, Colombia, among others – questioned the EU’s approach on renewable policy. Indonesia again raised the UN Sustainable Development Goals and whether or how the new rules would impinge upon developing countries’ ability to meet them.

Prime Minister Mahathir also let fly at the EU during last week’s ASEAN Summit, criticising the bloc’s overall approach to palm oil. When asked about free trade and the European Union, Mahathir stated, “On the matter of free trade, I said (how) free trade but they start labelling Malaysian palm oil … That is not part of free trade.”

Iceland and Greenpeace pop RSPO’s bubble

The Iceland advertisement controversy did an extraordinary job of spiking positive media coverage of palm oil and new ‘no deforestation’ commitments coming from RSPO members. The advertisement – which was a re-badge of a Greenpeace animation — was deemed to be ‘political’ by advertising clearinghouse Clearcast, and therefore couldn’t be considered a commercial advertisement.

The advertisement underlined the ‘anti-palm’ nature of Greenpeace’s most recent ‘drop dirty palm oil’ campaign, despite Greenpeace’s protestations that it’s not ‘anti-palm oil’ and only ‘anti-deforestation’.

Iceland has doubled down. It is sticking to its guns and stating that it does not believe palm oil can be sustainably produced or procured, even with ‘no deforestation’ commitments.

There are some reasonably high stakes here. At last week’s RSPO meeting, RSPO Board Member Belinda Howell – who represents European retailers – stated that she was convinced that voting for new, stricter Principles and Criteria on deforestation and peat would mean the end of attacks on palm oil. It took less than 24 hours between the RSPO’s vote in favour and the attacks to commence.

Greenpeace, unsurprisingly, has stayed silent. The video has been re-watched and re-tweeted again and again since the media blow-up, anti-palm oil messages included.

An honest question: Wilmar and GAR worked with Greenpeace in good faith on the High Carbon Stock Approach (HCSA) and getting ‘no deforestation’ commitments through RSPO; do they have any regrets?

Popping RSPO’s bubble … continued

What was notable at last week’s RSPO meeting was that there was close to no discussion of the RED. There were some indirect mentions, namely that the incorporation of HCSA might assist palm oil to gain compliance with the RED ILUC criteria.

This sums up the divide between the world of RSPO and what’s best described as the ‘real’ world of hard laws and regulations.

RSPO – rightly or wrongly – is completely fixated on certified and non-certified palm oil. Everyone outside of RSPO, which is to say most people and particularly those in Europe, are more likely to see palm oil or palm oil-free. This is underlined by Iceland’s use of Greenpeace’s campaign material to reinforce its no-palm stance.

It’s this kind of thinking that has pushed Europe further away from having a policy that looks at the overall sustainability of palm oil and towards a policy aimed at removing palm oil from the RED altogether.

With this in mind, two questions around RSPO are as follows.

First, can the RSPO increase demand? The certified and non-certified fixation may have run its course. The EU is the only substantial market for RSPO-certified oil. That market is saturated. Uptake has levelled out for now.  Producers are rightly saying that the ball is in court of the purchasers; purchasers got everything they wanted last week.

Second, can the RSPO increase supply? All the world’s major producers are part of RSPO. The barriers to entry are high, and there is an excess of certified product. Given the compliance costs, what is the business case for joining RSPO as a new major supplier? Why wouldn’t companies simply go with a national standard like MSPO?

One answer might be yes, but only if purchasers really come to the party. And when they do, they’re going to have to battle the Iceland, Greenpeace and ‘anti palm oil’ thinking all over again.

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RSPO Daily Update: 15th November 2018

The final day of the Roundtable and the General Assembly produced the results that were expected – with a few minor hiccups. Here are the key takeaways from both, plus some broader questions about the financial future of RSPO.

Sabah’s Deputy Chief Minister took a swipe at European NGOs. Deputy Chief Minister YB Datuk Seri Wilfred Madius Tangau – also the Minister for Trade and Industry – gave a speech that questioned whether European NGOs have a sufficient understanding of Malaysia’s economic, social and environmental context to be so critical of plantation practices in Malaysia. Tangau was at one point part of the Malaysian Timber Board, and travelled extensively with Plantations Minister Bernard Dompok when the country’s timber industry was singled out by European forest campaigners. Clearly that experience rubbed off on him.

The RSPO Board has signalled a new agenda. RSPO co-chair Dato Carl Bek-Nielsen gave an applause-inducing closing address that pointed out the long road ahead for RSPO. Bek-Nielsen highlighted a number of areas. His big point was uptake; he basically said that 65 per cent uptake is simply not good enough going forward. Reading between the lines, the message could be interpreted as follows: with the ‘no deforestation’ principles and criteria now approved (see below), there is simply no excuse for customers not to be buying RSPO. And more pointedly, purchasers and NGOs have got everything they wanted out of the RSPO process and then some; it’s now the growers’ turn, particularly smallholders.

Some big-ticket resolutions got through the GA. The revised P&Cs had overwhelming support in the GA, which included the new ‘no deforestation’ criteria. That said, it wasn’t without some discontent. Growers complained about the ratcheting of standards and the consequent increase in costs. Sadly, board members couldn’t respond to these concerns. UK retailers seemed to just brush off these concerns around cost completely. Perhaps they all need to spend a little more time in rural Sumatra.

One point that was made by one Indonesian grower is that significant delays in the HCVRN assessment proposal already add to costs and uncertainty – and there’s now a new process that will require additional training, capacity building and outreach.

A resolution to have lists of third-party suppliers published made it through, but a proposal to have auditors and companies financially ‘delinked’ didn’t. This was a thankful show of common sense. Although auditing isn’t perfect, conventional audit processes are used in safety standards for medical equipment, hygiene and food. These are things that have an immediate impact on a daily basis. Until there’s a resolution that proposes a compelling reason for re-thinking the audit relationship, this should be thrown in the trash.

Two smallholder resolutions got over the line that were important. One was an exemption for smallholders from ‘immediate suspension’ in the lead-up to the smallholder standard; another was for the continuation of the Smallholder Interim Group’s work on standard development.

RSPO’s financial health has some question marks.  This year’s financial report was possibly the biggest surprise of the GA. In short, RSPO is burning through its cash and isn’t quite meeting its revenue projections. The financials indicate that much of the expenditures have gone into outreach and engagement activities. This isn’t entirely surprising. One of the comments from the floor was a criticism of using PR and advertising agencies to undertake much of the outreach work, particularly in European markets.

Here’s a broader question: is the organisation simply trying to do too much? RSPO can and should be proud of everything it is achieving on environment, labour and livelihoods. But it can’t be everything to everyone. Mission creep is risky – and expensive.

Notably, the Board was cognisant of the fact that opportunities for broadening the revenue base are limited. Their main sources of income are membership fees and levies on the palm oil trade. Volumes are flat. Certified area may expand, but only if there is a greater demand response. This places an additional onus on the uptake question, which is not just about ‘shared responsibility’ in terms of sustainable outcomes, but the very financial sustainability of the organisation.

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RSPO Daily Update – 14th November 2018

Day Two at the RSPO Roundtable moved into ‘official’ business, with the opening address from RSPO CEO Datuk Daryl Webber and a keynote address from Professor Kai Chan of the University of British Columbia. But when it came to substance, the day was about two things: no deforestation commitments and smallholders. Here are the key points:

The revised principles and criteria are probably a shoo-in. Members of the Secretariat walked through the entire P&C revision process and gave an overview of the revisions themselves. The ‘no deforestation’ commitments were in their words probably the most controversial and difficult part of the revisions process. Although the assessment methodology has been defined, there are still some elements that haven’t been finalised. These are going to be left to a joint HCSA-RSPO steering group. This is a slightly uncertain element that members should probably keep an eye on; the idea that unfinalized elements can be voted on is, well, vague.

The emphasis on smallholder inclusion continues. Although the largest smallholder-related resolution is about keeping the smallholder program and strategy going, the more important element is the introduction of a smallholder standard next year, and a vote on the standard at the Roundtable in 2019. But the points that were reiterated at the meeting today were:

  • It’s essential that RSPO do better on including smallholders;
  • Smallholders will require a less stringent standard to participate;
  • Smallholders will require a high degree of support from millers and other stakeholders for inclusion to happen.

There was also a (belated) recognition that RSPO was set up for large plantation companies, and that this has led to the ongoing exclusion of smallholders; and that RSPO is by its very nature exclusive, i.e. it is difficult. Unilever’s representative was particularly outspoken on including smallholders; this is no doubt a response to the criticism the company received after excluding around half of its smallholders from its supply chain in 2013 in order to achieve traceability targets.

A speculative theory: No deforestation commitments and smallholder inclusion are related.  RSPO’s volumes are up on last year, but down from the year prior. Does this mean volumes have plateaued? If that’s the case, how does the organisation expand those volumes, particularly if it’s going to severely crimp expansion? By including smallholders, the organisation has something of an approach to expanding volumes and area, as well as achieving more on social and economic outcomes. The support the smallholder initiatives have from large processing companies adds to this narrative. While this could be read as ‘win-win’, it’s still disappointing that smallholders remain second place in relation to no deforestation commitments.

Tomorrow: the General Assembly votes on the new P&Cs and numerous other proposals.

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Latest from Brussels

POM’s intel sources in Brussels indicate the EU’s Deforestation Criteria drafting process is well underway. They also indicate that the EU expert visit to Southeast Asia has done little to change the anti-palm flavor of the new regulation.

Here’s what we know about the delegated act so far.

First, as we reported last week, the Commission will propose that all first-generation oilseed crops will be assumed to be ‘high risk’ under the Deforestation Criteria.

The Deforestation Criteria effectively acts as a filter: if the crop passes, then it moves through the filter to become ‘low risk’. If it does not meet the Deforestation Criteria, it remains high risk and is subject to an immediate freeze on imports.

Second, a key element in determining the criteria will be the phrase ‘significant expansion’ of feedstocks on high carbon stock areas.

What we don’t know is what ‘significant’ actually means. The June compromise stated where ‘significant expansion … is observed’. It’s also not clear whether this is forward- or backward-looking.

Is it going to be ‘significant’ in relation to the expansion of all agriculture on HCS areas? Or only in relation to other biofuels?

Assuming the RED cut-off date of 2008 will be retained, the EU will be looking to bring in criteria that label palm oil’s expansion since 2008 as ‘significant’ – but the expansion of other crops, such as rapeseed, will be spared (primarily because it will be deemed as not affecting HCS areas).

Is ‘significant’ going to mean only from particular countries? For example, would Nigeria’s non-expansion of oil palm estates be punished for expansion of oil palm in Colombia?

If such a diverse group is lumped together and uniformly labelled ‘high risk’ by the EU. It’s important to note that this would be a departure from the current EU sustainability criteria under RED, where certification is achievable by individual companies, through the EU’s approved certification schemes.

Third, there is likely to be room for bilateral arrangements in the regulation. Trying to isolate feedstocks by country will bring up problems at the WTO. But clearly this would be a preferred option. This is one of the reasons DG Trade has been giving DG Energy such a difficult time in the drafting process.

One of the ways countries are able to resolve this problem of treating countries differently is by undertaking ‘good faith’ negotiations with their trading partners and, if possible, reaching an agreement.

A sign of good faith in this instance might be leaving room for bilateral negotiations and a potential agreement in the new regulation.

There is still a way to go with this drafting process. The EU is attempting to balance protection for its farmers with its rather obsessive and narrow global environmental objective, i.e. reduce carbon emissions.  For the past ten years it has failed. Numerous multilateral agreements – the WTO, UNFCCC, SDGs – expressly warn against or prohibit the use of environmental rules as a form of protectionism. The RED is a very good example of why it’s a path best avoided.

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RSPO Daily Update – 13th November 2018

The first day of this year’s RSPO Roundtable took place today and POM is reporting daily from Kota Kinabalu in Malaysia. We won’t give you a full breakdown of the day’s events, just key points from the day’s presentations and proceedings.

This year’s RT is significant because of the 5-year review of the Principles and Criteria. Everything that happens at this meeting shapes RSPO’s rules for the next five years. Consequently, there’s a lot of lobbying and pressure being put on members to vote in a particular way.

Day One comprised ‘Preparatory Clusters’; this was about giving delegates background on proposals being voted on in the General Assembly.

Here are the day’s takeaways.

Smallholders are still on the fringe. The smallholder session bore out the fact that RSPO hasn’t come close to meeting its smallholder inclusion targets – originally 1.2 million families by 2018. Companies such as Musim Mas and NGOs such as Wild Asia pointed out that certification for smallholders might be the end goal, but it’s very far from the entry point. According to both, most farmers are still struggling to have productive and profitable farms, let alone trying to be ‘sustainable’. The daily concern of farmers isn’t anything to do with certification; it’s prices. One great call came from Wild Asia, which called on the big brands to get more involved in the smallholder story.

Uptake targets continue to be a problem. The ‘progress’ session looked at whether the organisation’s uptake and production targets are being met and what can be done to change them. In the EU breakout group, some interesting points were raised. First, although the uptake on paper might only be 55 per cent, it may be higher; not all RSPO-certified palm is being sold as certified palm. Some of it is being sold as ISCC, and therefore not registering. Second, a lot of the ‘final quarter’ of uptake in the EU is made problematic by palm oil’s diverse industrial applications in Europe. Third, many food producers simply don’t want to highlight their use of palm oil in the EU, even if it comes from RSPO – that’s how far negative perceptions have gone.

RSPO may be trying to do everything. There’s a call for ‘shared responsibility’ all along the supply chain. This is the idea that producer commitments on labour and other social outcomes should be mirrored by other companies that are further downstream. This is a noble pursuit in that it places equal responsibility on all participants. However, there is the likelihood that it will simply scare off new players. This highlights the tension throughout the RSPO itself; tighter rules might achieve a better outcome, but they will inevitably exclude some participants.

The HCSA-HCV process still excludes smallholders. The HCSA-HCV integrated approach will likely be introduced as of the vote on Friday. The objective is to ‘de-link’ palm oil from deforestation. However, the rules for HCSA and smallholders are still yet to be defined. According to the HCSA proponents, the goal is to come up with a simplified HCSA approach that looks more like a checklist than an assessment; and HCS-HCV assessments will be left off for smallholders. The timeline for the checklist is mid-2019, but this seems overly ambitious. Moreover, given the problems that RSPO has had attempting to include smallholders, is this going to make things any better?

RSPO still doesn’t understand anti-palm campaigns. UK purchasers of palm oil and palm products – represented by UK retailers – apparently believe that tighter standards and the ‘no deforestation’ approach will end attacks on palm oil and anti-palm oil statements from companies such as Iceland. This is about as naïve as it gets. This was one of the motivations for RSPO being set up in the first place – and the attacks continue. Both purchasers and Greenpeace appear to believe that slogans such as ‘Drop Dirty Palm Oil’ make enough of a distinction for the public between ‘good’ palm oil and ‘bad’.  Greenpeace are communications experts; they know full well that there’s nothing positive in a slogan like that.

We’ll have a full summary of Day Two’s plenaries with you tomorrow.

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Palm Oil Monitor Weekly Update – 12th November 2018

RSPO GA Preview

The RSPO Roundtable and General Assembly takes place this week in Kota Kinabalu. Although much of the outreach and public activity takes place at the Roundtable meeting, the General Assembly is where the more substantial decisions are made via proposed resolutions. The revised Principles and Criteria are the most significant item on the agenda, but there are others worth noting, as well as specifics within the revised P&Cs.

  • Third-party supplier lists: A resolution to have RSPO members that are procuring palm oil to publish all suppliers into their supply chain. This will provide greater transparency in supply chains.
  • Discouraging member withdrawal: This aims to prevent companies selling down their stakes in a subsidiary once it is subject to a RSPO complaint. Although there is some logic to this, it is also the precise opposite of everything that the divestment movement is aiming to achieve.
  • Extending the smallholder initiative group: The work around smallholders and smallholder inclusion remains – unsurprisingly – incomplete; this aims to continue this work.
  • Delinking auditors from companies: This aims to have the payment link between companies and auditors severed. Several NGOs see this as a problem. However, the solution arguably lies in RSPO’s governance structure itself. RSPO and Accreditation Services International (ASI) have a services and license agreement. This means the governing body (RSPO) has an exclusive relationship with the accreditation body, and not an arms’ length separation. Most other industries – from food safety auditing to automobiles – have no problems with the ‘user pays’ model. This is arguably because accreditors (i.e. International Accreditation Forum members) are completely separate from standard developers (ISO and national standards bodies).
  • Revised P&C – No Deforestation, No Peat:  The Deforestation Working Group within RSPO has put forward new criteria for high carbon stock. In short, the new criteria will prevent any new plantings on areas assessed as ‘high carbon stock’ after the meeting. The crucial factor here is the assessment methodology, which is the HCSA Toolkit (largely written by the HCSA Steering Committee) and the HCS-HCV Assessment Manual (written by Proforest). It’s worth remembering that HCS under these definitions covers most – if not all – forest types, including young regenerating forest.  There is one caveat here, and that’s for local groups and indigenous groups in high forest cover countries, i.e. countries with greater than 60 per cent of forest cover, but less than 1 per cent oil palm cover. In addition, there is a new prohibition on planting on peat of any depth.
  • Revised P&C – Labour: -The labour requirements in the revised P&C are much more prescriptive and require greater levels of record keeping and compliance by members (see below).

Will these resolutions and revisions be approved? Different members have different interests. The RSPO’s larger members have no problem pushing up compliance levels; they are easily able to absorb the costs. Smaller operators will be more resistant. The prohibitions on forest clearing and peat will prevent any new expansions, which might be problematic for smaller players.

The RSPO Board of Governors is neutral or undecided on many of the proposals; the revised P&Cs is a clear exception.

Corley: Does RSPO have a future?

Dr RHV Corley – arguably the most knowledgeable plant physiologist in the world when it comes to oil palm – has asked whether RSPO has a future. Now it needs to be made clear that Corley is an unavowed supporter of RSPO. But he raises three points about where certification is headed in the future. He writes:

“The profusion of different standards seems likely to undermine the RSPO. Thus we have MSPO and ISPO introducing more grower-friendly versions of the original RSPO P&C, while RSPO Next and the POIG aim to raise standards.

One must wonder for how long major plantation companies will accept the limitations on new developments imposed by RSPO Next and the POIG, when certified oil constitutes such a small percentage of total palm oil sales.

The limitations on development risk destroying the historic role that oil palm cultivation has played in poverty alleviation throughout the humid tropics. It must be recognised that agricultural expansion is the only viable route to economic development in some countries.”

Corley argues that the continued path of certification will only mean that RSPO will become more of a niche product. For this he considers NGOs and food manufacturers to be largely responsible via their push for higher standards rather than broader inclusion.

The solution, as he sees it, is greater uptake. The strongest point he makes is as follows:

“Perhaps members who are users should be obliged to put forward, and be audited against, time-bound plans to move to 100% certified oil, just as producers are audited on time-bound plans for all their production to be certified. Some members have published plans, but these have been voluntary, and are not a requirement of RSPO membership.”

It’s a pity this wasn’t something advanced in 2018 for the GA; perhaps NGOs, producers and purchasers could push for this in 2019.

CGF: An Own-Goal on Labour

In the lead-up to the RT, the Consumer Goods Forum (CGF) published a report on labour issues within the palm oil supply chain. The report is the result of the CGF’s Social Committee, which is headed up by Unilever and Marks and Spencer.

The report itself contains very little in the way of on-ground knowledge; it is largely a desk survey informed by a large number of ‘grey literature’ reports on alleged labour problems within the palm oil supply chain. Many of these reports were put forward when US labour organisations were lobbying against Malaysia’s inclusion in the Trans Pacific Partnership in 2014 and 2015. It also draws on some stakeholder consultations. But the study limitations are mentioned in the report itself, almost as a footnote. The key weaknesses are:

  • Lack of overview of labor recruitment processes from the home locations of migrant workers to palm estates;

  • Lack of analysis of the internal human and labor rights management systems that the company, palm oil companies, and plantations have. While some overview of companies’ programs is publicly available in their respective annual reports, no independent third party review of their program is available.

In other words, the researchers did not assess how migrant workers are recruited, and nor how they are managed. But it also doesn’t address the drivers of undocumented migration to countries like Malaysia, where economic opportunities are better than in many countries in the region.

And before European companies get righteous about their labour record, note the following from the Financial Times:

“Fairwork Belgium, an organisation that helps to protect [undocumented workers] from exploitative employers, is contacted by hundreds of undocumented workers every year, many of them Brazilians and Moroccans. Jan Knockaert, co-ordinator at Fairwork, says he has even handled cases for construction workers who helped to build the EU’s headquarters. “Undocumented workers have been involved in building the new European Council building and the crèche of the European Parliament, as well as cleaning the [Belgian] Palais de Justice,” he says.”

It’s a fair assumption that the report was published to generate support for revised labour principles and criteria under the RSPO. This isn’t unreasonable, but it is very risky. Whether CGF likes it or not, this document will now be used by any number of anti-palm oil campaigners to smear the industry – and the commodity more broadly. And those campaigners don’t care whether palm oil is RSPO-certified or not.

KPK, PT SMART and HCS: A rocky road ahead?

There were several news reports last week that Sinar Mas’ palm oil arm – PT SMART/Golden-Agri —  is under investigation by Indonesia’s anti-corruption agency (KPK) , following the arrest of a number of its staff, including a director.

The big question: Is this going to present a problem for SMART’s role in other forums?

SMART has been one of the leading members of the High Carbon Stock Steering Group, and has been instrumental alongside Greenpeace in generating support for the initiative. The HCS Group has a strongly worded ‘zero tolerance’ anti-corruption policy in place, which states that it applies to staff, contractors “or any other person or persons associated with us (including third parties)”, among others.

The investigation and arrest follows a number of policy developments that have impacted the HCS Group’s other leading sponsor, Asia Pulp and Paper, also part of the Sinar Mas Group. In May, Greenpeace stated it was tearing up its ‘non-campaign’ understanding with APP after accusations of widespread peat clearances were levelled against the company. In August, the Forest Stewardship Council (the timber and paper equivalent of RSPO) also said it was halting its process to have APP readmitted to the organisation based on the same information.

Could it also present a problem with its RSPO membership?

RSPO P&Cs require companies to have policies and audit controls in place to prevent corruption. This may be questionable now given that the alleged bribery was undertaken at such a high level.

But the bigger problem now lies with the HCS Group. In the past three months, the group’s most prominent companies have come under fire publicly for alleged environmental and/or governance problems.

Neither the HCS Group nor Greenpeace have made any statements on the KPK investigation.

Greenpeace has never hesitated in piling on when it comes to environmental accusations against companies. Is corruption less important? Questions, questions.

WWF says consumers confused on palm, then adds to the confusion

In the lead up to the Annual Roundtable Conference of Sustainable Palm Oil 16 (RT 16), WWF is placing a greater emphasis on consumer demand. It’s calling on brands to do more, particularly in light of gaps in RSPO uptake in Europe.  It also says “consumers are confused” about conflicting messages on palm oil.

WWF is only adding to that confusion.

Last week they released their ‘Living Planet’ report for 2018. The report is best described as a stocktake of habitat and biodiversity. The paper is a distilled summary of the work of conservation biologists around the world. Some of the numbers reported are alarming, for example, a 60 per cent decline in species numbers around the global since 1970.

However, like an addiction, WWF singles out palm oil – and very subtly. There is a full page picture for the opening of “Chapter 2: The threats and pressures wiping out our world”. The image choice is of an oil palm plantation in Malaysia. A full-page splash on consumption habits calls out the use of palm oil in supermarket products.

Just a reminder: The deforestation footprint for livestock is ten times that of palm oil. Soy’s is twice that of palm. Maize’s footprint is larger than palm’s.

No wonder consumers are confused.

TPP Ratification: Will Malaysia join?

The CPTPP (Comprehensive and Progressive Trans Pacific Partnership) Agreement will come into force before the end of the year. The Agreement has been triggered by ratification of six member countries, the last of which was Australia. The remaining five signatories will need to submit their own ratification instruments for the agreement to apply.

As we’ve pointed out before, the CPTPP could provide some benefits for palm oil exporters – the most significant of which in CPTPP (by far) is Malaysia.

Earlier this year, Moodys Research stated:

“Malaysia will prove the biggest winner from the revised agreement, because the deal will provide export access into new markets, including Canada, Peru and Mexico; benefiting palm oil, rubber and electronics exporters.”

Tariffs on palm oil going to Canada and Mexico will fall, which will likely see increased demand in both countries.

Our understanding is that the Malaysian government is reviewing its position on the CPTPP. It will weigh up any positive and negative impacts across all sectors — not just palm oil.

Colombia joins the effort to oppose EU’s RED

Governments in palm oil exporting countries appear prepared to step up their activity against the European Union’s revised Renewable Energy Directive (RED).

Malaysian Deputy Minister of Primary Industries Datuk Seri Shamsul Iskandar Mohd Akin announced last week that Colombia is prepared to join with Malaysia and Indonesia in facing off with the EU.

The Deputy Minister stated that the government has approved a significant budget — RM23.4 million —  for campaign activities. This was in the lead up to a CPOPC meeting scheduled for early November.

At the same time, Indonesian trade director Tri Purnajaya issued a statement underlining the significance of palm oil to the Sustainable Development Goals (SDGs) in Indonesia.  First, as the country’s largest export commodity, second as a renewable energy source, and third, as a source of employment.

Referring to the revised RED, Pak Tri stated, “The Ministry of Foreign Affairs will not remain idle facing the barrage of attacks faced by the national palm oil industry.”

UK puts out post-Brexit feelers to ASEAN

The UK is upping its trade diplomacy in the ASEAN region in advance of its exit from the European Union. UK Secretary of State for Trade Liam Fox met Indonesia’s Minister for Trade Development Enggar Lukita on the sidelines of the China International Import Expo in Shanghai. The two ministers declared their general opposition to ongoing US-China trade tensions.

George Hollingbery, the UK’s Trade Deputy is likely to meet with Malaysia’s Trade Minister Darrell Leiking. Both ASEAN countries will seek to expand their exports of commodities to the UK, particularly palm oil. The UK for its part has been emphasising military and government procurement programs in its trade push into the Asia-Pacific region.

Will it be possible for both countries to see eye to eye? The UK imports around 40 per cent of its palm oil from Papua New Guinea, specifically from New Britain Palm Oil (NBPOL), a division of Sime Darby. NBPOL established a segregated supply chain and refinery going into the UK market. The remainder of the trade is from Indonesia and Malaysia. Both countries will be seeking better trading conditions with the UK, but also guarantees that the UK Government will not impose regulatory barriers to palm oil.

Unlike much of Continental Europe the UK doesn’t have a significant oilseed producing sector attempting to erect trade barriers – it just has a very vocal green sector, which could undermine the UK’s trade push if it rubs up against the future palm oil trade.

Indonesia EU negotiations

The EU-Indonesia trade agreement negotiations continued in October; the European Commission has released an update for stakeholders on negotiation progress. However, the update contained very little and is best described as ‘diplomatic’. There is little doubt that the negotiations have been tainted somewhat by the EU’s aggressive stance on palm oil in the Renewable Energy Directive, particularly the bloc’s refusal to accommodate Indonesia’s notification requests in the WTO.

The round followed an announcement in mid-October that Malaysia and the EU will sign a PCA (Partnership and Cooperation Agreement) in January. PCAs are the prerequisite for broader trade agreements. The contain very little that is specific; they are generally principles-based, with a view to greater levels of cooperation. They don’t prevent trade disputes; the EU-Indonesia PCA was signed in 2014 and FTA negotiations began in 2016. Disputes between the EU and Indonesia – particularly over palm oil – have continued unabated since then.

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Indonesia Sounds Alarm over Brussels’ Biofuels Trojan Horse

This week, according to our sources, the European Commission will officially start drafting the Delegated Act outlining the ‘Deforestation Criteria’ for the Renewable Energy Directive.

In advance, POM has received an exclusive copy of Indonesia’s ‘non-paper’ critique of RED II’s use of indirect land-use change (ILUC) in the upcoming revision of the Renewable Energy Directive (RED).

The paper opens by stating:

 “The Government of Indonesia (GOI) does not wish to be associated to the ILUC Study as it is not a globally accepted environmental standard and it is highly controversial in that different models have different outcomes … From the perspective of the GOI, ILUC represents a political compromise within RED II to address first generation biofuels in the EU”.

It goes on to underline ILUC’s ‘limited credibility’, but it offers an area of cooperation to the EU: the UN Sustainable Development Goals. The approach is simple: we’ll go along with your study if you acknowledge palm oil’s significant contributions to poverty reduction and sustainable development more broadly.

 “[…]Indonesia considers that the production of first generation biofuels is essential to meeting the SDGs by 2030 … The GOI is willing to consider an independent Indonesian based study that would asses the relevance of ILUC within the framework of the SDGs; and the extent to which criteria from SDGs could be applied within ILUC to lend some global credibility to the works being undertaken”.

The problem for Indonesia and for any countries exporting biofuels and biofuel feedstocks to the European Union is that the European Commission has been decidedly opaque about how they are going to assess the ‘ILUC risks’ of different biofuels.

At this stage, there’s nothing to critique. There’s no way for exporters to assess what sort of impacts or how credible the EU approach will be. Mistrust of the EU has been amplified by several announcements of a palm oil ‘phase out’.

Despite repeated requests by Malaysia, Indonesia and other exporting nations for transparency on any future regulations at the World Trade Organization, the Commission has not been forthcoming.

We have received reliable information that the Directorate-General for Trade (DG Trade) is leaning heavily on DG Energy, which is drafting the regulations and criteria. This is because most things the Commission is attempting to do on biofuels will fall afoul of the WTO’s Technical Barriers to Trade (TBT) Agreement.

At the last formal TBT meeting at the WTO, Indonesia directly asked the question: “[Is] the intention of such a ban, in whole or in part, to give preference to domestically produced rapeseed oil?”

At that meeting the issue was raised by Malaysia, followed up by Indonesia, with Colombia, Guatemala, Honduras, Costa Rica, Ecuador and Thailand all piling on afterwards.

So what regulatory approach will the EU end up taking?

The EU prefers a precautionary approach to regulation. It prefers to place the onus on importers to prove a lower risk. It has used this approach for animal welfare, hormones and timber imports.

For ‘illegal’ timber imports, the Commission established a risk assessment tool for importers themselves. The idea is that importers of those products assess the risks of those products being harvested. If the assessment points to a high risk, then it becomes an offense to then import the products. But the implicit assumption is that everything is high risk; the onus really is on importers to prove otherwise.

And with our knowledge of the illegal timber debate, we now understand the Commission’s grand strategy to block and discriminate against palm oil.

Here’s the problem: assessing risk of illegality (e.g. non-payment of royalties or taxes, environmental permits, etc.) is significantly different from assessing the risk of indirect land-use change which, as many technical studies have pointed out, can’t be observed directly.

Every study commissioned by the Commission on ILUC points to the interconnectedness of food and feed markets. Soybean oil and palm oil are interchangeable in Asian food markets, as well as in biofuel markets; soybean and rapeseed are interchangeable in biofuel and feed markets.

For this reason, we think it’s reasonable to assume the Commission do the following:

  • First, it will label all feed and fuel crops as ‘high risk’ under the new Deforestation Criteria. At the same time, it will publish its set of criteria for sustainability or deforestation certification schemes, as previously announced.  These criteria will determine either which existing schemes are acceptable, or determine what these schemes should look like.

This approach will naturally favour domestic producers or producers from developed countries that will have systems in place to track and trace feedstocks from their source, and will be able to ‘prove’ low risk.

  • Second, we can expect the ‘freeze’ period (2019 to 2023) to give European producers enough time to get their houses and certification schemes in order.

It will also give European some farmers time to introduce “Yield increases in agricultural sectors through improved agricultural practises, investments into better machinery and knowledge transfer” that “mitigate indirect land-use change”.

  • Third, the RED compromise text also calls for the Commission to establish “A European database … to ensure transparency and traceability of renewable fuels … in order to ensure instant data transfers and harmonisation of data flows”.

Exporting countries – particularly developing countries – will face more difficulty in terms of the cost of certification, any implementation, and providing data to EU regulators.

While certified palm oil may eventually find its way back into the RED – along with rapeseed and other biofuel feedstocks – the damage may well have been done. EU producers are more likely to be certified as ‘low risk’ first. The result will be a major disruption to trade in palm oil to the EU.

Past experiences with different commodities – dairy and other agricultural products, energy and resources – have shown on many occasions the protectionist function that non-tariff barriers can serve. It’s not about keeping a particular import out for good; it’s about disrupting trade frequently enough to add a considerable cost to competitors and strengthen domestic incumbents.

For example, if competition from imported energy is too harsh, authorities will alter the testing regime. If meat products are threatening local players, authorities will change quarantine requirements or announce a contamination threat.

It can take a long time for disruptions to get resolved at a local level or through international channels.

The EU doesn’t misuse these mechanisms the way some countries do, but they – like everyone else – are not immune to looking after the narrow interests of their own farmer groups.

Brussels’ Trojan Palm Oil Horse

There’s a final leg to this, and it relates to the Deforestation Criteria. This is Europe’s Trojan Horse strategy for palm oil.

Once the Deforestation Criteria are established for feed- and food-based biofuels, it is completely reasonable to assume that they will be applied to feed and food crops. After all, the ILUC risk assessment will probably not just assess the risk of their end use, but of their broader consumption.

The Commission has already been tasked with assessing the feasibility of policy options for reducing the EU’s imported deforestation footprint under the Deforestation Action Plan.

A push to use these Deforestation Criteria in a broader instrument, i.e. not just biofuels, is not just convenient, it’s logical.

If this sounds far-fetched, it’s worth remembering that this push to limit market access for imported biofuel feedstocks has been going on for more than a decade. It has gone through the EU’s energy regulations and its trade defence systems at the EU-wide level, with national and sub-national governments putting in their own measures against palm oil.

It’s also worth remembering that Brussels doesn’t know how to wind back regulations; what it’s good at is increasing them. Really good.

For now, this is only about biofuels. But after February, this is going to get a whole lot bigger.

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