Palm Oil Monitor Special Edition: Analysis of Europe’s Delegated Act

The EU’s draft Delegated Act for the Renewable Energy Directive (RED) was released last week after a flurry of activity in Brussels.

The draft was released at the end of a week in which EU Commission President Jean-Claude Juncker was drawn into the impasse between the EU’s Commissioners and directorates, following an intense discussion during the College of Commissioners’ meeting.

The draft was accompanied by an announcement of a four-week consultation period, allowing individuals, industry, NGOs and governments the opportunity to provide feedback.

So what does it say?

The Delegated Act implements everything that the RED compromise stated it would: a commencement in 2019, a freeze on biofuels until 2023, and then a reduction to zero on biofuels considered as having a ‘high risk’ of indirect land use change (ILUC).

But most importantly, it sets out the parameters of which fuels will be considered as having ‘high risk’ of ILUC.  This is based on the expansion of production area of crops since 2008, and whether the bulk of this has been in ‘high carbon stock’ areas.

According to the Delegated Act’s Annex, for palm oil, it says 45 per cent of this expansion has been in forested areas, and around 18 per cent of this area has been in wetlands. For soybean, it puts forested area expansion at 8 per cent.  It also sets a draft threshold of 10 per cent for the expansion of any crops into HCS areas.

Finally, it establishes minimum criteria for certification and also exemptions under the rules.

The way the Delegated Act is currently drafted poses a number of questions.

First is the clear barring of palm oil from the RED, which has been a political goal for many in Brussels for a long period of time.

The source material, from which the deforestation figures are based, simply isn’t provided. It is understood that this scientific report is a literature review.

All reports over recent years (including from the EU itself) have indicated that soybean-linked deforestation is higher than that of palm oil – but this isn’t recognised anywhere in the Delegated Act.

The Draft also states that “this proposal could not be supported by an impact assessment.”

So, the EU has neither conducted a new study, and nor has it completed an impact assessment. Despite this, it underlines the importance of using the ‘latest scientific evidence’.

It’s probably worth remembering at this point that the RED was originally intended to give EU oilseed farmers financial support; it didn’t foresee the potential of more efficient exporters making a significant dent in the EU biodiesel market. An instructive example of what often happens with regulation is not properly thought-through. This Delegated Act may provide another example, in time.

Second, the Delegated Act allows for an exemption for smallholders.

The exemption takes place under ‘additionality’ requirements. It also requires reasonably strong certification, down to the sourcing area, but allows for mass balance certification, i.e. it does not require a separate supply chain.

European environmental groups already see this as a loophole for palm oil exports to make it into the RED. This is because around 40 per cent of the world’s palm production area is held by smallholders, and around 35 per cent of global production comes from smallholders.

But it also needs to be remembered that only a fraction of those are certified under voluntary schemes such as the RSPO. More will come online as national schemes such as MSPO are subject to mandatory implementation, with the Malaysian Government providing financial assistance to smallholders to adopt the requirements.

Similarly, certification is still a considerable imposition, and it’s not entirely clear whether some certifications will be accepted.

Third, all the criticisms of ILUC remain. The EU’s first report on ILUC stated:

“Estimating the greenhouse gas impact due to indirect land-use change requires projecting impacts into the future, which is inherently uncertain, since future developments will not necessarily follow trends of the past. Moreover, the estimated land-use change can never be validated, as indirect land-use change is a phenomenon that is impossible to directly observe or measure.”

This simply has not changed. ILUC cannot be observed; it can only be modelled.

Fourth, and finally, is how WTO-consistent any ILUC measures are going to be. As one legal scholar has put it:

“…it is an extremely indirect approach, as it does not have anything to do with the biofuels that are actually being imported into the EU. It is debatable whether these biofuels can be seen as responsible for ILUC, when their producers may have no ability to influence the ILUC for which their biofuels are purportedly responsible.”

Both Indonesia and Malaysia have stated publicly that they will challenge the regulation at the WTO, and have also put the EU-ASEAN relationship on ice because of the regulation. In addition, the measure appears to be contributing to an impasse in the EU-Indonesia FTA negotiations, which are mostly completed with the exception of the Trade and Sustainable Development chapter.

Fifth, the favourable treatment of soybean in the draft adds to the theory that the EU is creating a trade environment that is more hospitable to the United States – in order to stave off US tariffs on steel and autos – than to Asian trading partners.

The Commission is acutely aware that the response of trading partners is critical to what they do next.

The EU has effectively bought off the US by declaring soybean biofuels sustainable – something that European NGOs are already protesting.

The question is whether the EU can avoid a full-blown trade battle with its ASEAN partners.

The word coming from both Jakarta and Kuala Lumpur is that they both understand how critical the next four weeks are in terms of getting the attention of President Jean-Claude Juncker and European Commissioner for Trade Cecilia Malmström.

The most recent rumour from Brussels is that there was to be an off-the-record meeting between the Commission and the MEPs responsible for the trilogue compromise last Thursday – which was cancelled. However, the Commission will present the Delegated Act to the Parliament’s ITRE (Industry, Transport and Energy) Committee on Tuesday. Unless, of course, that meeting is cancelled at the last minute as well… we shall see.

Opposition to the Delegated Act is coming from both sides. Centre right parties in the Parliament are generally opposed to the unscientific nature of ILUC on principle; they also care about the threat to EU exports. Green and leftist parties see too many loopholes – soybean is one, and smallholder palm is another.

The EU is currently stuck in a trap of its own making. How it gets out will become evident in March, when the feedback period ends and the Commission really has to make a final decision.

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ICYMI Euractiv: Europe’s Palm Oil Strategy Is Fading

Last week, Euractiv published an opinion piece by agronomist and environmental expert, and Palm Oil Monitor co-author Pierre Bois d’Enghien. Following France’s decision to ban palm oil biofuels earlier this year, and the ongoing debate in the EU about whether or not to label palm oil as “High Risk” or “Risky”, Governments from Indonesia, Malaysia and Colombia have made it known that they would take up the issue at WTO level and warned about possible trade retaliation facing France and the EU, would they decide to ban palm oil biofuels.

“Malaysian Prime Minister Dr. Mahathir Mohamad indicated that any attempt to try to exclude palm oil biofuels in France would lead to “negative consequences for the future of Malaysia’s trading relationship with France”. Many jobs and exports (Airbus, Rafale) are on hold”.

“Moreover, it is highly possible that this issue may be the object of a complaint at WTO level, if it is confirmed that the French exclusion is not in line with EU rules and International laws”.

The EU Renewable Energy Directive (RED) Deforestation Criteria debate is waging on, following last week’s College of Commissioners’ meeting and the release of the RED Delegated Act. The situation appears to be in a deadlock as pressure, from palm oil producing countries, is mounting on the EU.

Read the full piece in Euractiv, and also available in French here.

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Palm Oil Monitor Weekly Update – 11th February 2019

RED: A week on the edge

The situation on the Renewable Energy Directive (RED) in Brussels last week reached something of a fever pitch.

As noted in last week’s edition, there is significant tension within Brussels as to how to deal with the Delegated Act – the implementing regulation for the RED.

The tension is between the narrow desire of the European Commission to fulfil the mandate given to it by the Parliament, Council and Commission in the form of the ‘RED Compromise’ of last year, and the broader understanding among the EU’s wiser heads that discriminating against trusted trading partners will have bigger consequences for the EU’s trade and foreign policy agenda.

Here’s how it unfolded:

January 21 – A briefing for the MEPs on the RED Delegated Act is cancelled.  This briefing was supposed to unveil the Delegated Act to MEPs. As we noted last week, one of the reasons it wasn’t completed was because Commissioner Canete and Director-General Dominique Ristori (DG ENER) were at odds over the Act’s objectives and conflicts with trade policy and WTO compliance.

February 1 – Commissioner Canete hosts a ‘crisis cabinet meeting’ over the Delegated Act. One week later and the crisis isn’t resolved. Commissioner Canete held a cabinet meeting of his top advisors in an attempt to resolve the impasse. 

February 4 – Juncker chairs an internal Commission meeting.  The lack of resolution prompts the involvement of Commission President Jean-Claude Juncker, but with no result. 

February 6 – College of Commissioners meeting. The College comprises all 28 Commissioners, one from each country and each with a different portfolio. Again, on the RED there is no resolution and no result. According to news reports, some Commissioners considered the regulation ‘too light’.

However, the College has a next step: An Inter-Services Consultation.

This is a four-week process in which all Commissioners provide their input on the Delegated Act. It starts immediately.

The Commission published a draft version of the Delegated Act before the weekend for consultation. We’ll have our analysis in the coming days.

What does this mean?

At the very least, it means the process will drag further. It also means that European lobbies – agricultural, environmental, transport – will be doing their best to get their input into the process, whether via their portfolios or national representatives. COPA-COGECA, the EU’s largest agricultural lobby group, is already on the front foot, calling for tougher rules on imported feedstocks, specifically soy and palm.

For exporters of palm oil – or even Argentinean soy-based biodiesel – this is a critical window for making representations to Commissioners, particularly Trade Commissioner Cecilia Malmstrom, and Commissioner for Foreign Affairs Federica Mogherini. The consultation process concludes at the beginning of March.

Malmstrom has previously been sympathetic to keeping trade open. Green NGOs are publicly calling her out, stating that she doesn’t want this to be an issue in trade negotiations – they’re probably right.

Again, this prompts questions about the EU’s overall trade strategy. The EU – particularly Germany – needs to find new export markets, and ASEAN has great potential. But are the bloc’s bureaucrats prepared to sacrifice that strategy in order to keep a small number of European farmers happy? Malaysia and Indonesia vetoed an EU strategic cooperation announcement last month because of palm oil; they will be prepared to do much more.

For those with an eye on the calendar, the next WTO Technical Barriers to Trade meeting is on March 6, the next round of Indonesia-EU negotiations is scheduled for March 11 (in Brussels) and the next Mercosur-EU round hasn’t been scheduled.

 

Where is the sustainability lobby?

A notable absence from the RED debate has been the ‘sustainability lobby’ in both Europe and elsewhere. This has been noticeable since the debate stepped up around 12 months ago, but the ‘sustainability alliances’ in Europe have generally remained silent on RED through its history.

This changed last week, with the EPOA tweeting: “Calling for a ban on palm oil won’t stop deforestation and won’t help to improve livelihoods of farmers. We in Europe, as 2nd largest global importer of palm oil, need to be ensuring 100% of the palm oil in the products is sustainable.”

Although the sentiments are absolutely correct, it’s increasingly likely they misread what is happening in Brussels.

Here’s why.

EPOA is an advocacy group for uptake of certified sustainable palm oil. Certification is, at its heart, a business-to-business arrangement. Producers and purchasers (and their stakeholders) are all working towards the same goal: the purchase of palm oil that they consider to be sustainable.  Achieving that goal depends upon mutually determining what sustainability is, and requires an agreement between those parties. Both sides have leverage.

RED and the political processes around it are fundamentally different. RED is a political arrangement. The arrangement is one of politicians (Brussels) giving financial support to their constituents (farmers). RED’s original political goal was support for European farmers. RED II follows that same goal but now that support depends upon removing support for imported feedstocks.  In this setting, ‘sustainability’ becomes arbitrary. The leverage is between politicians and their constituents.

The problem for the Alliances in the RED debate is twofold.

First, they have little leverage. Private certification is good for commercial arrangements. But when it comes to RED II, politicians and their constituents are seeking to regulate biofuels in a way that makes private certification irrelevant: ‘indirect land use change means palm oil bad, even when it’s certified.’ There is no compromise position here. This is one reason some European Parliamentarians have concentrated on the failings of certification.

Second, this idea is contagious and will spread beyond biofuels. The argument will be as follows: If no palm oil is good enough for biofuels, no palm oil should be good enough for our food.

The EPOA and other like-minded groups have been reluctant to defend palm oil as a whole. This is understandable; it’s not their job.  Their job is to support palm certification and uptake of certified palm oil. But if those certifications do not assist with RED compliance – or newer regulations – their broader relevance in the European market is under threat.

RED has produced a new environment where regulation of palm oil may not distinguish between certified and uncertified palm oil. Let’s see what happens.

 

Palm becomes an election issue across ASEAN

Forthcoming elections in Indonesia and Thailand are likely to make palm oil and agriculture a major policy issue across ASEAN’s two largest economies.

The Indonesian elections are set for April. A setback for President Jokowi thus far has been the slow progress in the country’s palm replanting scheme. The scheme aimed to replant around 20 per cent of the country’s smallholder area, but only 15,000 ha has been planted so far.

Jokowi’s current main challenger at the election is Prabowo Subianto. Prabowo is running on a populist platform, with tax cuts and reform as its main policy push. However, Prabowo is also seeking to cut the country’s reliance on palm for biofuels, and instead increase areas for ethanol production. This is a sop to the country’s agriculture sector. The sugar industry in Indonesia has been opened up over the past 12 months, which has resulted in soaring imports and plummeting local prices.

Thailand’s elections are set for late March. General Prayuth, leader of the military junta, plans to introduce handouts for the country’s oil palm farmers. According to one report, Prayuth is establishing a $32 million fund to stabilize palm oil prices and hand out cash to 14.5 million Thai farmers.

This will be welcome news for Thailand’s palm farmers, who have lower productivity and higher production costs than their counterparts across ASEAN. The government also sets a floor price for FFBs and a maximum price for refined oil, which protect the industry – at a cost to the economy.

Neither case will likely have a significant impact on global prices. However, they do indicate that agriculture and palm oil remain a political driver across the region.

The big question for many observers is whether the EU trade spat will eventually become an election issue in the Indonesian campaign – and to a lesser extent, Thailand’s.

 

RSPO’s recognition problem

A new article in Environmental Research Letters points out a glaring problem with RSPO: few people know what it is. The article surveyed around 1,700 UK consumers and their awareness of ecolabelling. Around 77 per cent of consumers knew what palm oil was; around 41 per cent considered it to be ‘environmentally unfriendly.’ But just 5 per cent knew what RSPO was. This compares with 90 per cent recognition for FairTrade and 54 per cent recognition for the Forest Stewardship Council (FSC).

While it is reasonable to attribute some low recognition to palm oil being an invisible and specialised agreement, the broad lack of recognition should be of concern. If 41 per cent of consumers consider palm oil as ‘bad’, but only 5 per cent know that sustainable palm oil production is possible, this is a clear signal that the negative campaign has been winning what has been an ugly and protracted war.

Although RSPO can be commended in some respects, it has some questions to answer, too. The first of these is simple: why did it tolerate the absolute denigration of palm oil from its own members for so long?

 

CIFOR: “Much is uncertain” on palm and deforestation

CIFOR has given deforestation researchers a solid lesson when it comes to drawing conclusions on deforestation drivers. A new paper from the organisation’s veteran researchers closely examined deforestation – i.e. natural forest loss – patterns between 2001 and 2017 across Malaysian and Indonesian Borneo.

There were two key takeaways.

First, conversion from forest cover areas to plantations has been falling in Malaysian Borneo since 2008, and in Indonesia since 2012. Second, forest conversion to plantations is not the sole driver of deforestation.

But the key thing to note is that when attempting to explain the changes in dynamics, the researchers don’t try to pinpoint it on a single cause.

Much remains uncertain. The overall impact of past initiatives to regulate expansion of plantations into forests are unknown. For example, although comparative studies indicate that RSPO obligations have had little impact in certified concessions—these concessions tend to be older with little forest and we don’t know how these company obligations have influenced the development of new concessions. Similarly, though No Deforestation commitments have had little obvious effect so far—the proportion of plantation expansion that involves direct conversion of forest has not noticeably declined—they may influence longer term investment choices.

More importantly, the researchers really point to the government policy environment – rather than the role of the private sector – as a key driver.

Regulations and commitments are necessary but insufficient to halt forest loss. Companies alone cannot prevent all significant losses such as that due to fires and smallholder expansion that arise inside, let alone outside, their concessions. Good policies and strong enforcement remain crucial.

One of the connections researchers tried to pick up on was any correlation between palm prices and deforestation rates. There was a link, but it wasn’t necessarily conclusive. This isn’t at all surprising. It has been documented that the Asian Financial Crisis of the late 90s resulted in higher rates of deforestation and illegal logging. Farmers and families – in difficult financial situations – deforested and grew crops in order to improve their situation.

This report has not been picked up on international media. Its assertions are well founded, but they point to many factors, not just one. Compare this with the furore around the comparison of the palm industry to the tobacco industry, which was based on close to nothing.

What does this mean? Probably that anti-palm oil stories, no matter how extreme, are clickbait. Good research, on the other hand, goes unnoticed.

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Palm Oil Monitor Weekly Update – 4th February 2019

What is Happening to the EU-ASEAN Relationship? 

The discontent between palm oil producers and the EU – which has been bubbling now for several years – has now broken into the open, with ASEAN allies lining up alongside Malaysia and Indonesia. Several events and news reports from recent days support the theory that recent EU moves against palm oil are being seen in Jakarta and Kuala Lumpur as a bridge too far.

Sources in Brussels confirm that some within the EU hierarchy now recognise the scale of the problem – and that significant action will be needed to prevent a major breach in the trading and political relationship. It is now suffering an internal deadlock.

Is the EU prepared to back down on its Deforestation Criteria, for example? Will Malaysia and Indonesia demand the same deal for palm oil as Trump secured for U.S. soya under RED? All of this remains unknown, but must surely be considered as an option if Brussels is looking to de-escalate the situation.

How has the EU found itself here? After failing for a long period of time to recognise the seriousness of ASEAN concerns around palm oil regulation, the EU will be in no doubt after the events of recent days. Here are the events that have led us to where we are now:

 

EU-ASEAN Ministerial Ends in Acrimony

The international impact of the RED became apparent last week when the EU suffered a rebuff on palm oil this week at the EU-ASEAN Ministerial. As late as December last year it was being reported that Malaysia and the EU would sign a Partnership and Cooperation Agreement (PCA) in January. The EU-ASEAN Ministerial was also supposed to be the occasion for the signing of a EU-ASEAN Strategic Partnership Agreement.

But this didn’t happen. And it was because of palm oil, at the behest of Malaysia and Indonesia.

Instead, what came out of the meeting was a joint working group on palm oil.

The EU got rolled.

According to EU High Representative Federica Mogherini,

“our [ASEAN] partners today have heard a very firm and strong commitment from the European Union side to work with them on the sensitive issue of palm oil. We will establish an European Union-ASEAN Working Group to look at all the related issues in depth. We all have a common interest in addressing the possible negative environmental and social impacts of the production of palm oil, by ensuring that it takes place in a sustainable manner.”

Compare this to the statement from Indonesia’s deputy Foreign Minister Fachir:

“Palm oil is a strategic commodity for Indonesia, especially for small farmers. About 20 million people in Southeast Asia depend on their lives for palm oil industry and more than 5 million small farmers in Indonesia, Thailand, as well as the Philippines rely on oil palm … Refusing palm oil is the same as rejecting the SDGs, which is a global agreement.”

Further, last week Indonesia’s Foreign Ministry released details of a letter it had sent to ASEAN nations asking them to reject the EU-ASEAN Strategic Partnership. Mahendra Siregar – head of CPOPC (the Council of Palm Oil Producing Countries) – noted to the press that Indonesia would challenge any EU action at the WTO; although Indonesia’s own trade officials have been foreshadowing this for months.

The response from the EU Ambassador in Jakarta was simple: “The EU considers the RED II to be in line with the EU’s international commitments, including its WTO obligations.”

False; the EU is struggling internally with the measure (see below).

How is it that the EU could misread the ASEAN position so badly?

The EU has been working completely unilaterally on palm oil with no regard for the concerns of exporting nations, and ASEAN countries have had enough – to the point where they’ll put other concerns on hold.

Does the EU get it? Note that Mogherini doesn’t say the EU will address the trade barriers it is erecting; she is simply saying that they will continue to address supply-side issues, i.e. whether products are ‘sustainable’ or not.

It seems that the EU’s best response is more talk-fests.

 

Internal EU Deadlock Over Palm Oil Delegated Act

The most recent rumours coming from Brussels on the revised Renewable Energy Directive (RED II) are that the Directorate-General for Energy (DG ENER) and the Commission’s political leaders (the Commissioners) are at odds over how the RED should be handled.

DG ENER believes it should follow the desire of the European Parliament – expressed clumsily in the three-way compromise in the RED last year – and insert an effective ban on palm oil imports for biodiesel – via the RED Delegated Act’s ‘deforestation criteria’. The Commissioners, however, are particularly worried about the international trade implications, particularly action in the WTO – which any number of palm oil exporting nations, including Indonesia, Malaysia and Colombia have been foreshadowing.

The Commission has also been talking of ‘phasing out’ biofuels such as palm and soy, rather than a ‘no ban’ situation. Yet a phase out is unlikely to satisfy palm exporters: unequal treatment is unequal treatment, particularly under international trade rules. It’s therefore unlikely to allay any concerns from Commissioners.

Last week this came to a head. The Commission had to postpone its meeting with the European Parliament until it could sort out the differences between DG ENER and the Commissioners themselves. The Commissioners know they must somehow appease the Parliament, but also avert significant trade problems.

The EU also has bigger trade worries. The Delegated Act could put the EU’s entire trade agenda at risk. The EU has been attempting to complete a trade agreement with Indonesia and also get a cooperation agreement signed with Malaysia. In addition, the EU is also seeking an agreement with Mercosur, the trade bloc comprising Brazil, Argentina, Paraguay and Uruguay. Brazil is one of the world’s largest soybean exporters, and Argentina’s biodiesel has been a consistent target of trade actions by the EU.

 

Malaysia Escalates France Case

The EU-ASEAN difficulties are not related only to the EU institutions in Brussels – and EU leaders will now be aware that actions in their own capitals do not take place in a vacuum.

Malaysian Prime Minister Dr. Mahathir Mohamad has taken the step of writing to his French counterpart, President Emmanuel Macron, to protest the country’s recent move to ‘declassify’ palm oil in its renewable energy scheme, as noted in a Palm Oil Monitor exclusive last week.

It is worth noting that the French approach to banning palm oil biofuels is not hugely dissimilar to the approach taken by the EU Delegated Act – which was probably a factor in stirring the ire of Mahathir.

The Ministry of Foreign Affairs released a statement saying that the letter had been handed directly to France’s Ambassador to Malaysia.

The statement also said:

“Malaysia calls on our European Union partner countries to treat us and our people as it would want themselves to be treated. Our nations and people have been close friends and partners in diplomacy, trade and security for many decades. Our strong ties are underpinned by our common values of justice, fairness and trust. In this context, such a discriminatory measure would undermine these values and only by working together will make fair solutions for all stakeholders involved, including the earth’s ecosystem.”

The letter and statement follow an aggressive letter earlier in the year from Minister of Primary Industries Teresa Kok.  But the letter from the PM is a big deal; world leaders don’t write to each other unless it’s serious, and they certainly don’t publicise it unless they want to make a strong point.  Moreover, the PM taking this step means all other ministries – Foreign Ministry, Primary Industries, Trade, Land and Climate Change – will now follow suit and take on board the new robust approach towards Europe’s palm oil stance.

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Palm Oil Monitor Special Edition Exclusive: PM Mahathir’s letter to Macron

Two weeks ago, Malaysian Prime Minister Mahathir took the step of writing directly to French President Emmanuel Macron to protest the National Assembly’s Finance Bill – and the President signing it into law.

The new law ‘declassifies’ palm oil under the country’s renewable energy scheme, meaning it will no longer receive a renewable energy subsidy. This will make the palm-based biodiesel around 30 to 40 per cent more expensive than other biodiesels.

POM has obtained a copy of PM Mahathir’s letter.

There some vital aspects to the letter.

First is that PM Mahathir has taken the step of writing to a fellow world leader. In diplomatic circles, this is a significant escalation.

Matters are normally handled by the bureaucracy. If matters can’t be resolved, they might go to an elected official such as a Minister. When they go via country’s leaders, this is a massive step.

Second, PM Mahathir is a heavyweight in global terms. He has more than two decades of leadership experience under his belt. By way of comparison, when Mahathir took office, Macron was just four years old.  This isn’t a new leader in a small developing country asking France to drop it; this is a highly respected elder statesman with global support flexing his muscle.

Third, Malaysia took the step of publicising the letter via its foreign minister, escalating the matter further. This means that this isn’t simply a matter of sending the letter and hoping for the best; this is now a public battle that the PM will want to win.

Fourth, the content of the letter lays out the Malaysia’s position, and sends volleys across France’s bow.

These are straightforward, and have already been expressed in no uncertain terms by Primary Industries Minister Theresa Kok:

  • The action will breach WTO rules; and
  • Other commodities – such as soy and beef – have a bigger deforestation footprint.

But there are two new points made by Mahathir. He makes an explicit threat to suspend any free trade negotiations, and undertake retaliatory action on France’s sizeable exports to Malaysia.

The kicker, though, right from the outset is that he calls out the French action for what it is: an unfair, politically motivated attack on palm oil:

“We can agree that the motivation and the effect is to make biofuels uneconomical, excluded from the national renewable energy and mandate, and therefore aims to discontinue palm oil’s future use in France.”

PM Mahathir’s letter is not an endpoint; it’s the beginning.  Malaysia and the palm oil producer countries have optionality here; old Europe does not.

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Palm Oil Monitor Weekly Update – 18 January 2019

Darell takes swing at EU

Malaysia’s Trade Minister, Datuk Darell Leiking, has taken a swing at the EU’s broader approach to both palm oil and its trade partners in ASEAN.

At an industry meeting last week, Darell said that “If [EU policymakers] keep on attacking our palm oil industry that means their intention is not as pure as they claimed to be.”

The comments come after several new developments related to biofuel developments in the EU.  Although the EU has undertaken supposedly good faith negotiations with Malaysia and other trading partners in relation to the revised renewable energy directive, other actors within the EU seem to have deliberately sought to undermine any progress.

The most obvious example of this was the French Parliament’s decision to effectively remove palm oil from its renewable fuel credits program, which will push its price in the EU market up by around 35 per cent according to one source, rendering it uncompetitive.

At the same time, the European Commission has provided assurances to the US that its soybean certification scheme will meet European sustainability benchmarks going forward.

Darell’s comments come at a critical moment for regional and global trade, and are aimed at shoring up the broader palm ‘ecosystem’ – downstream processing, logistics, as well as upstream agriculture – in the face of global trade headwinds.

“We need to start protecting our basic products which are creating jobs, especially in the manufacturing sector,” he said.

Finally, the comments are yet another signal from the government of Dr Mahathir that its waking up to the fact that policies like no further expansion may win you applause from some, but in reality, it won’t stop Walker, the European Commission or the NGOs from attacking you nor will it stop RSPO from introducing more regulations.  Stopping these actors will require more stick than carrot.

The WHO takes on palm oil?

Arguably the biggest palm oil policy story in a relatively slow week was the publication of an article in the World Health Organization’s monthly bulletin, which argues that the palm oil industry is using similar communications tactics to tobacco and alcohol lobbies. The basis for the claim is as follows:

  • There is generally no conclusive evidence of negative impacts of palm oil from current and recent studies;
  • There are nine studies that show positive health impacts of palm oil, and four of these were published by the Malaysian Palm Oil Board (MPOB);
  • Therefore the MPOB is running public affairs strategies similar to the alcohol and tobacco industries.

Malaysia’s Primary Industries Minister Teresa Kok described the report as ‘ irresponsible and unprofessional’, stating that “this is a tactic to discredit palm oil’s image … and support the EU in its campaign to halt the entry of palm oil into their markets.”

This WHO article’s logic is nothing short of bizarre for two reasons.

First, health agencies like the WHO and US Food and Drug Administration have been actively calling for removal of trans fats in partially hydrogenated oils (PHOs) in food because of their contribution to heart disease. The FDA took the step last year of banning the use of PHOs and revoking their ‘generally recognised as safe’ (GRAS) designation. One of the key replacements has been palm oil. Similarly, the WHO has called for the global elimination of trans fats by 2023. In other words, the WHO has (albeit indirectly) has now become a major supporter of the use of palm oil.

Second, and this is related to the above, the increased switch to foods high in trans fats – particularly in the US – was precipitated by a public health campaign to move diets away from saturated fats and towards partially hydrogenated oils, containing trans fats. This campaign was supported by the American Soybean Association (ASA), which waged a public affairs campaign against what it called ‘tropical oils’, including palm oil throughout the 1980s and 1990s.

Third, industries and organizations generally defend their own interests and products or services. The global dairy industry — in the form of the US Dairy Council, Dairy UK, the European Milk Board — publishes reams of information and supports studies on the health benefits of dairy products —  and they are indeed beneficial. At the same time, cheese is generally recognised as a contributor to any number of health problems. This isn’t a tobacco-style conspiracy; this is industry-funded research and marketing.  There is no conclusive evidence that palm oil has negative health impacts. So why would the industry that supports palm oil go out of its way to find it? There’s a significant difference between attempting to promote health benefits and outright discrediting negative findings.

The WHO has been under significant scrutiny for nearly a decade. This is in part because it has been accused of being unable to carry out the mission it was founded upon: preventing the spread of infectious diseases. It has also been accused of ‘mission creep’, i.e. trying to do too much. This includes attempting to tackle environmental problems or focus on non-communicable diseases, which are the generally the brief of domestic health agencies. Critics have said that it should pull back, shrink, and stick to its core mission.

The WHO’s defenders argue that it needs larger budgets and more staff.  The WHO, like any other organisation, is out there to defend its interests and justify its existence.

The important question now is if Malaysia will escalate the situation. The WHO has lost a great deal of credibility over the past few years. In 2017 the organization appointed Robert Mugabe as a goodwill ambassador. Neither Malaysia – nor Indonesia – would have much to lose by taking further steps calling for the organisation to be censured.

Iceland Palm Ban Controversy Continues

The UK’s Iceland Foods has responded to a fiery critique of its palm oil policies by Nigerian think-tank chief Thompson Ayodele.

Ayodele’s thoughts on Iceland appeared in Malaysian media; the key criticism of Iceland’s ban on palm oil products is its intent. Iceland Foods and CEO Richard Walker continue to state that its objective is stopping deforestation and that sustainable palm oil isn’t possible.

Ayodele quite rightly points out that there are bigger causes of deforestation, e.g. beef, soybean, and maize, and these aren’t being taken out of Iceland’s supply chain.

Yet Walker’s statement, “we are not against palm oil itself, but against deforestation”, is problematic. Why isn’t Iceland tackling demand for other deforestation-related commodities? A counter-argument might be that sourcing British or Australian beef, or US soybean, avoids contributing to beef-related deforestation in Brazil.

But that counter-argument can be applied to no-deforestation palm oil from Costa Rica or Peninsular Malaysia.

The Iceland talking points are remarkably similar to those that are regularly trotted out by Greenpeace, which run along the lines of “We’re not against palm oil – we just hate companies that have anything to do with it.”

However, Iceland’s big public affairs problem this week has been created by a potential UKP 21 million fine from the UK’s revenue and customs office (HMRC), which has called out its employer Christmas saving program. The HMRC alleges the savings program resulted in paying below the minimum wage.  Iceland chair Malcolm Walker stated that he recently spoke to UK PM Theresa May when he recently sat next to her at dinner.

This prompted two thoughts on Iceland’s CSR approach.

First, it seems Iceland’s policies are full of good intentions, but require more polish when it comes to execution. Iceland is a relatively small player and is growing its market share. If it wants to be taken seriously in the public policy debate, it needs to take more care developing and implementing its policies – and do some research. Unilever’s well-publicised error on cutting smallholder suppliers when it went to a traceable palm oil supply chain is a good case study.

Second, Iceland’s leadership team should probably get out more. The UK is going through its largest political change in a generation, and the company pressed the PM on a matter of employee wages. In the case of palm oil, it would seem Iceland has let a narrow, European notion of conservation get in the way of a global picture of sustainability.

Malaysia Should Emulate Gabon?

An opinion piece arguing that the Malaysian palm oil industry should emulate Gabon’s approach to palm cultivation appeared in the Malaysian media this week.  According to the author, this would mollify European concerns about Malaysian palm oil. The proposal hinges on the idea that Gabon’s national land use plan – as reported in National Geographic – is an appropriate model to copy. The Gabonese approach has been supported by a number of international agencies as well as Singapore’s Olam.

However, to anyone who has actually studied this sector would know a direct comparison is hardly appropriate because of vastly different social and economic contexts. Gabon’s population is around 2 million people; its population density is around 8 people per km2. Malaysia’s population of 31 million people has a population density of around 95 people per km2.  Malaysia supports a vast number of smallholder farmers that have private property rights; Gabon’s population are largely considered as landless peasants in a country where government ownership of land is high.

The real clincher for Gabon, however, is that because a vast proportion of its GDP comes from petroleum rents, it has become one of the richer countries in Sub-Saharan Africa; at the same time this has meant that the small population places relatively low pressures on its environment.

It is true that Gabon has made strides in sustainable palm production and environmental management. But when it is noted that the environmental pressures are low to begin with, it hardly seems like an achievement.

Finally, the Malaysian model has actually been replicated throughout Africa.  The Gabon system has not.  So here’s the bigger question: what is this author’s real agenda?

US-Canada trade deal: A surprise on palm

The US and Canada trade deal has yielded a small surprise for palm oil growers. The agreement gives sees the gradual elimination of tariffs on margarine over the next five years. But the surprise is that the tariff cut will also apply to margarine that uses non-originating palm oil, i.e. palm oil imported from other countries.

Bilateral and multilateral trade agreements generally have complicated ‘rules of origin’ chapters that place limits on how much content from outside of the free trade area can be used, and still have access to tariff cuts. Farmers and margarine producers could not export to each other tariff free, because they would generally use palm oil in their formulations. This particularly irked Canadian canola farmers and margarine producers; US exporters didn’t necessarily see the Canadian market as being important. This should, however, provide a small boost in demand in the US market.

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Palm Oil Monitor Weekly Update – 9 January 2019

A New Year Exclusive

One week into 2019, palm oil policy is heating up. Two major policy developments took place in the days leading up to Christmas. First, France instituted a new ban on palm oil; second, the EU set up a RED approval for US soybean, potentially squeezing out palm oil. We look at both developments below, with an exclusive look at the first response to France’s actions, which has come from the Malaysian Government.

France hits palm, Mahathir government belatedly recognises the threat

POM has gained exclusive access to a blistering letter from Malaysia’s Minister of Primary Industries Teresa Kok, sent to France’s Environment Minister and Environment Secretary, calling for them to reject the French Parliament’s latest attack on palm oil.

The letter to the French government, written at the end of 2018, has never been released publicly either by the French or Malaysian Governments.

What prompted the letter? On December 20, the French National Assembly passed its Finance Bill. The Bill included a provision to remove a renewables subsidy that is applied to vegetable oils. But it was only removed from palm oil.

The removal of the subsidy will increase the cost of palm oil for biofuels in France by around 30 to 40 per cent, according to the amendment’s author, French MP Bruno Millienne. The Bill has been signed into law on 28 December by President Macron. The price change is scheduled to happen from January 1, 2020 – nearly 12 months from now.

Minister Kok calls the Finance Bill amendment what it is: a ban. It would make it essentially impossible for palm oil biofuels to continue in France.

But the gravity of the situation is shown in Minister Kok’s letter as follows:

It is my duty to convey the urgency and importance of the issue to Malaysia. Any ban on palm oil biofuels would harm millions of Malaysians dependent on the sector, and would therefore necessarily cause disruption to France-Malaysia and EU-Malaysia relations. The ban could lead to regrettable economic and trade consequences for both Malaysian exporters of palm oil, and French exporters of other products.

This is no veiled threat. Malaysia has previous form in tying purchases of European Airbus planes to bans on palm oil. This isn’t any different.

There are also rumours coming out of Jakarta that the Indonesian government is considering a suspension of Airbus purchases, as well as tax audits of European cars and fashion brands, in response to the French ban.

Why have France’s lawmakers done this?

First, the circumstances are right. The recent ‘yellow vest’ movement in France has brought many parts of the country to a standstill; Macron’s approval rating has dived. The current government is clearly vulnerable.

Second, the amendment to the Finance Bill for palm oil was a recommendation made by France’s ‘Sustainability Commission’ from the middle of 2016.  These recommendations were taken up by France’s former Environment Minister Nicolas Hulot, who, like many French politicians, is unashamedly antipathetic towards palm oil. French energy company Total has been under political pressure to reduce the use of palm oil in its biodiesel production and was also subject to protests by farmers.

EU farmers remain in an anti-palm oil frame of mind. In mid-December, the Commission launched an anti-subsidy investigation into palm biodiesel exports from Indonesia, at the behest of the European Biodiesel Board. This is just months after the WTO ruled that the EU’s antidumping tariffs on Indonesian biodiesel were illegal.

Third, France’s politicians are sending a clear message to the European Commission (EC). The EC is currently finalising its revisions to the Renewable Energy Directive, which will almost certainly single out imported biodiesel feedstocks (palm oil most prominent among them) as ‘unsustainable’, effectively banning them from the EU’s renewable subsidy scheme. By removing its own taxation subsidy for palm oil, France is telling the EC that it should follow suit.

What will happen next is up to the European Commission, France, and palm oil exporting countries.

The National Assembly’s new legislation will more than likely violate World Trade Organization (WTO) rules, as well as the single market rules of the European Union. The European Commission will – if pressed — provide an opinion to lawmakers in France that states that the palm oil element in the Finance Bill is not consistent with EU law, and the EU’s WTO commitments.

However, this might take some time. What could happen in the meantime?

Palm oil exporting countries do have options.

The WTO is the most obvious venue to raise objections to France’s new rules. Both Minister Kok and Indonesian officials have already flagged this, although any resolution will take some time.

The signing of an agreement between the EU and Malaysia – a Partnership and Cooperation Agreement (PCA) – had been slated for January. This could be called off. Indonesia could also consider suspending its FTA negotiations with the EU. Again, this has been threatened before, when previous Malaysian and Indonesian Ministers took strong stances against EU attempts to ban palm oil.

At the very least, this letter is the first signal that the new Mahathir Government is finally taking the threat seriously. The previous positions held (when in opposition) such as supporting the No Deforestation campaign, have limited utility and value in the real-world if you don’t stop the EU from taking legislative and regulatory actions that will ban your exports – particularly when the motivation is blatantly political. Let’s see what happens.

A RED approval for US soybean; Nothing stopping palm oil from demanding the same treatment

The EU has already drafted regulations for US-certified soybeans to be considered as ‘sustainable’ under the revised Renewable Energy Directive (RED). The draft was published on December 21, with a consultation period open until mid-January.

This is clearly an attempt to appease President Trump, as part of the broader EU effort to prevent tariffs being applied to German car exports to America.

The draft proposes that the certification scheme – the US Soybean Sustainability Assurance Protocol (SSAP) – meet the RED’s sustainability criteria.

The SSAP is unusual when compared with other certification schemes such as ISCC and RSPO. The key difference is that it uses a mass balance system for the entire US soybean industry and uses FDA audits as a basis for determining the quantity of soybean that can be considered ‘sustainable’.

It’s a world away from the increasingly strict traceability requirements of systems that exist currently in the space of palm oil such as RSPO and even ISPO or MSPO, which has introduced a chain of custody component.

But the EU’s decision raises more questions than it answers.

First, how is it possible for anyone to know whether the scheme meets any new criteria? The draft – known as an ‘implementing decision’ – has been drafted without the relevant Delegated Act for the revised RED being completed. This clearly smacks of political expediency rather than anything to do with the sustainability of biofuels.

Second, what are the implications here for international trade rules? The governments of both Malaysia and Indonesia have already mentioned the possibility of action in the WTO, specifically citing technical barriers to trade. The drafting of the approval will add to the concerns of Malaysia, Indonesia and other palm oil producing countries.

Third, where are EU and US green groups on this topic? Green groups have been vocal throughout the revision process on the exclusion on food or feed crops, and demanded that the bar be set high for any exclusions. Soybean has a deforestation footprint that is double that of oil palm. According to the NGO logic, using more US soybean in EU biofuels programs will increase demand for soybean globally, and cause deforestation in countries such as Brazil. That, naturally, should mean Greenpeace and others are up in arms about this new deal. So far, strangely, they have been silent.

Fourth, what does this mean for other certification schemes? If the US and the EU can broker a deal for US-grown soybean certification, the EU must surely be open to putting together something similar for palm oil producing countries in the form of RSPO, or Malaysia’s MSPO system.

It’s reasonable to speculate that the soybean draft has been put into play by the EU in order to placate the US.  The US and the EU avoided a trade spat in July by agreeing to eliminate non-tariff barriers on a range of goods. A self-imposed November deadline passed with no result. USTR Robert Lighthizer and Trade Commissioner Cecilia Malmström meet on January 9. Malmström will clearly be putting the soybean deal on the table.

Malmström clearly thinks that having US soybean squeeze out palm oil in EU biodiesel markets is acceptable – and any harm to Malaysia and Indonesia can be considered acceptable ‘collateral damage’.

The EU talks a lot about the significance of its relationships in the ASEAN region. But it’s just talk: the EU is apparently willing to sacrifice ASEAN to save its US relationships. The move on soybean again demonstrates clearly that for all the stakeholder consultations, technical research and regulation, it is politics that is driving the EU’s attitudes on palm oil.

The question for palm oil producing countries to ponder is whether they are prepared to stand by quietly and allow the EU to impose Deforestation Criteria that will harm palm oil exports – or will they collectively put a formal position to President Juncker backed up by a public campaign demanding equal treatment that the EU is giving to President Trump and the American soybean industry under existing RED criteria?

EU launches deforestation roadmap consultation

The European Commission has opened a consultation on its ‘deforestation roadmap’. The roadmap is not legislative or regulatory at this stage – the idea is to put together a ‘coherent policy framework’ for the EU’s contribution to tropical deforestation and if or how the EU can intervene. The consultation is the next step in the EU’s attempts to block imports of any products it considers to be contributing directly (or indirectly) to deforestation. It follows the publication in March 2018 of possible regulatory or policy options for the EU to pursue the same objective.

The roadmap is being pushed by the Directorate General for the Environment (DG-ENVI). The agency’s track record on both trade and economic development is best described as woeful. Unsurprisingly, the roadmap mentions very little in the way of social and economic development, and, as usual, mentions many of the legislative and parliamentary proposals on palm oil. The highlight is that it mentions the significant contributions of other commodities that the EU imports to tropical deforestation, including beef and soy.

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Is Brussels Preparing to Delay Palm Oil Delegated Act?

As the EU institutions return from their extended Christmas and New Year holiday, our Brussels sources inform us that the controversy around palm oil in 2018 looks to continue well into 2019.

The EU’s progress on its Delegated Act on biofuels (including palm oil) continues, although not without difficulty, especially on the timeline. The Delegated Act was requested as part of the EU’s compromise deal on the Renewable Energy Directive (RED), which dates back to July: specifically, the Commission was tasked to determine which biofuels should be designated as “high risk” and therefore phased out of use in the EU market.

Our sources inform us that DG Energy has made the decision to classify palm oil as ‘high risk’ by default. New EU ‘Deforestation Criteria’ would then be applied to determine whether or not the ‘high risk’ designation is retained, or whether a new ‘low risk’ designation is applied instead. If this were the case, the freeze/phase-out applied to high-risk biofuels would not apply for low-risk biofuels.

The core question here is how are the Deforestation Criteria determined and applied? The Commission is, according to our information, considering a jurisdictional or quasi-jurisdictional approach whereby countries or other legal jurisdictions would be certified as ‘low risk’ if they met the criteria. This raises the possibility that the same feedstock would be treated differently dependent on its origin – leading to potential WTO questions.

Finally, the accompanying scientific report, requested by the EU Parliament alongside Delegated Act, is proving to be a major headache. There is a simple solution, which would be for DG Energy to simply disregard the unachievable and artificial timeline imposed by the MEPs. Extending the timeline beyond February would allow time for proper work to be completed, with the added advantage that MEPs, distracted by electioneering, would no longer be driving the process.

All of these developments come at the same time as 20 environmental NGOs leaned in on EU Commissioner Miguel Arias Canete in an attempt to influence the drafting of the EU’s Delegated Act on ‘High Risk’ biofuels.

The NGOs’ demand was that palm oil be subject to high-risk status, and that generally a tougher line be taken by the Commission against certain biofuel feedstocks.

Clearly, the NGOs have an agenda of their own. What should be the approach taken by the Commission, though, when considering the relevant facts?

A WTO-Compliant Delegated Act

First on the list must be working to ensure compliance with WTO. As noted on several occasions, Malaysia, Indonesia and several other countries have been quite aggressive towards the EU at World Trade Organization meetings because of lack of detail around the RED.

The WTO Agreements are there to prevent countries from distorting trade. The RED is likely to violate the following principles within the WTO:

Most favored nation (MFN) and National Treatment (NT). MFN is the principle that all countries must be treated the same, and that there should be no discrimination between products that are essentially the same – even if they have come from different countries or ecosystems. The problem with ILUC in the RED is that by singling out palm, it is singling out a crop that only grows in tropical climates, and implying that emissions from tropical biomass and soils are higher than in non-tropical climates. It’s therefore possible to argue that there is a degree of discrimination against tropical countries.  National treatment also stipulates that exporting countries must be afforded the same treatment as goods produced domestically; given that the EU has no tropical climates, the requirements extending to non-EU countries will be tougher.

Technical Barriers to Trade (TBT).  The TBT Agreement requires that any technical measure be necessary for its proposed objective, it not be more trade-restrictive than necessary, and that any technical barriers be based on available scientific and technical information. All of these points are contestable. The available scientific information does not present a consensus on ILUC. And it’s arguable that if the objective is to reduce greenhouse emissions then discriminating against palm oil will have no impact at all – producers can just sell to other markets or use the fuel domestically.

The EU had a similar problem with WTO rules when it introduced rules on illegally-imported timber. It undertook two regulatory paths.

First, the EU couldn’t stop timber based on the idea that it was harvested illegally elsewhere. However, it could place an onus on importers to undertake ‘due diligence’ to ensure that imported timber was harvested legally. Clearly it would be harder for those importing from developing countries to undertake those inquiries.  ‘Due diligence’ for palm oil sustainability would be close to impossible; sustainability is not like legality and would require a bilateral or multilateral consensus on what sustainable production is.  But, this could happen via standards such as MSPO.

Second, the EU negotiated ‘voluntary partnership agreements’ (VPAs) with some exporting countries to give a ‘green light’ to their exports. The first VPA was with Indonesia. Developing the VPA required the development of a legality standard for Indonesia and an export licensing system. This was in part because of the many complications of the Indonesian legal system; defining legal production was difficult, necessitating a legality standard. But, given that MSPO is mandated in Malaysia and based on both sustainability and legal criteria, would a VPA for Malaysia be necessary for palm oil?

High Risk Designation

The question also arises of what mechanism will exist to deal with the ‘high risk’ designation – or other proscriptive elements – contained within the Delegated Act, when the EU signs bilateral, multilateral or international deals. This could be anything from a Treaty, to a Free Trade Agreement, a sector-specific deal (such as a FLEGT) or a cooperation agreement such as a DCA or a VPA. Typically, for many such deals domestic regulation must be put on the table as part of the negotiations – and the possibility of mutual recognition of standards or regulations is common. The Commission therefore should explicitly acknowledge that future bilateral or other agreements could supersede the ‘high risk’ designation, and other elements of this Delegated Act. This may have the unintended – but probably positive – consequence of encouraging third countries to continue to negotiate such deals (the EU is in FTA or VPA discussions with several palm oil producing countries and regions at present, including Mercosur, Malaysia and Indonesia).

Could such an approach eventually lead to mutual recognition of sustainability certification from other jurisdictions – such as MSPO or ISPO? It seems unlikely at present, in this iteration of the Deforestation Criteria. But future bilateral deals and/or politically-driven recognition remains a significant possibility if palm oil producing countries are willing to prioritise that ask in future negotiations with the EU.

Focusing on the Science

Perhaps the trickiest part of the Commission’s work is to balance science against politics. It’s essential that officials come down on the side of science. As a first order of business, the EU Parliament’s political clamour for particular outcomes – without first acquiring the evidence to support those outcomes – should be disregarded.

A second important step would be to acknowledge where existing science and regulation is fair and workable, and therefore could be applied to the new Delegated Act. This helps with predictability and consistency. A good example in this case would be the cutoff date of 2008 – which exists within the existing RED, and is broadly accepted now by most stakeholders and commentators. Similarly, the existing definition of HCS in the RED has been surprisingly uncontroversial (given the battles elsewhere over that definition), and so there is a strong case for retaining this rather than re-opening Pandora’s box.

Thirdly, the Commission should accept and work within the limitations placed upon it by current scientific conclusions. The most obvious example of this is ILUC. Every serious study undertaken and every serious attempt at regulation has shown that ILUC isn’t definable or measurable to the level required for regulation. It needs to be dropped.

Fourth, the Delegated Act must address the involvement of existing certification schemes under the RED. These – such as the Swiss-based RSPO-RED – have been painstakingly integrated into European and international determinations of sustainability. They are generally considered a success, by industry, NGOs and government. Securing a role for such schemes is eminently sensible: recognition of their certification as grounds for a ‘low risk’ designation, for example, would both reduce complexity and ensure immediate credibility. National certification schemes with strong criteria should also be part of this automatic recognition principle. Currently, Malaysia’s MSPO is the most developed of these, but that is not to discount other schemes. The Commission must take seriously the possibility of integrating MSPO or ISPO into the Delegated Act.

Timing of the Delegated Act

The artificial deadline (set for February 2019) looks too difficult, and even Commission insiders are now admitting this fact. This deadline should now be set aside: such politically-motivated deadlines are not conducive to good regulation.

2019 is also an election year, which offers another tantalizing option for the Commission officials tasked with drafting the Delegated Act – if they are brave enough to take it. Namely, to ignore the deadline of February and to take the time to do a proper piece of work. By the time that is completed, the current Parliament will be dissolved and the Commission will have bought enough time to put a properly-constructed Delegated Act in front of a brand new Parliament later in 2019. The hope, expressed no doubt quietly in the Berlaymont – but more loudly in the offices of biofuel exporters and importers – would be that at least some of the current MEPs involved in the RED negotiations are cast aside by Europe’s voters, leaving the path clear for wiser heads to prevail.

There is another reason for the delay. The Commission has completed a draft implementing action that will permit US soybean certified under the US Soybean Sustainability Protocol to gain access to the RED. This has been drafted without the Delegated Act being completed and is being put on the table to appease aggressive trade policy coming out of Washington.  If approved, that will make the Delegated Act irrelevant under current circumstances. It indicated that the Commission needs to get its house in order and move beyond political expediency.

To summarise, much of Palm Oil Monitor’s analysis and criticism over the Deforestation Criteria and the Delegated Act, is aimed at the EU Commission. In many respects this is slightly unfair and undeserved: the Commission did not put itself in this position. It was placed in this almost-impossible position by an intransigent and politically-motivated EU Parliament, which prioritized a populist demand to attack palm oil ahead of sound science or effective regulation. The MEPs’ action also reflects the intensive lobbying by NGOs and other environmental groups: including many of the 20 organisations who recently wrote to the Commission on this subject.

It is EU Parliamentarians who should bear the blame for the morass of contradictions that EU biofuels policy is becoming. Those Parliamentarians, however, are unlikely to pause for reflection of this fact – because they are too busy electioneering. Recent history suggests that, when the Parliament and other EU institutions reconvene for a new 5-year term late in 2019, MEPs are unlikely to move far from its NGO-driven position. Nevertheless, for both palm oil exporters and the EU Commission, a delay to the Delegated Act may just be the best New Year’s Resolution they can make.

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Palm Oil Monitor Weekly Update – 20 December 2018

Malaysia keeps up the pressure at the WTO

Malaysia has again taken the EU to task at the WTO for its approach on the Renewable Energy Directive (RED).

Malaysian officials circulated a note earlier this month following the last Technical Barriers to Trade (TBT) meeting. The note gets to the heart of the matter in three points.

First, they point out again that: the TBT requires members to provide proposed technical regulations in a timely manner; Indirect Land Use Change (ILUC) has no international standards; the EU is not being particularly transparent in developing its criteria.

Second, they state that “certification of indirect land use change will result in creating unnecessary obstacles to international trade [and] it is more trade restrictive than necessary …”

Third, they also point out that the ILUC certification “will impose additional cost which will be more burdensome for the Malaysian oil palm industry, particularly to the smallholders which accounts for 40% of the planted area.”

The note specifies articles within the TBT Agreement – which is a clear shot across the bow of the Europeans.

The meeting also prompted new notes along similar lines from Colombia and Indonesia.

Is Indonesia calling out Iceland at the WTO?

At the same meeting Indonesia also circulated a new note on palm labelling, which has generally been overlooked since the beginning of the year, with the exception of strong statements by Malaysian PM Dr Mahathir.

Indonesia points out that a large number of EU-based companies are using ‘palm oil free’ labelling in the EU, noting that “EU Regulation No.1169/2011 on Food Information, Chapter V Art. 36.2, which states that voluntary shall not mislead and be ambiguous for consumers and where necessary shall be provided with scientific evidence.”

Bearing in mind that labelling hasn’t been a particularly big issue this year, and that the Iceland ‘palm oil free’ campaign started at the beginning of November, is this a case of Indonesia calling out Iceland through the WTO?

Indonesian officials have had no problem calling out Iceland’s CEO Richard Walker. Indonesia’s Ambassador to Germany Arif Havas Oegroseno has been outright trolling Walker on Twitter.

EU-Indonesia proposals see some light

The European Commission released some text proposals from its recent negotiations with Indonesia. The two proposals were on good regulatory practices and transparency. As with most text proposals published by the European Commission, there’s not a lot of detail; the proposals generally follow a template and are negotiated following that.

The release of the text follows the meeting of the committee for the Indonesia-EU Partnership and Cooperation Agreement (PCA) in mid-December. Once again, Indonesia didn’t hold back on its concern about the use of ILUC in RED. Indonesia wasn’t prepared to let the issue slide, and clearly insisted that their point be made in a joint press statement:

“Indonesia also expressed its concerns about the Renewable Energy Directive (RED) II and its Delegated Act, especially on the use low of Indirect Land-Use Change (ILUC) risk criteria as a basis for the development of new certification for conventional biofuel. Both sides agreed to continue its cooperation on this important and sensitive issue.”

As we’ve noted in previous issues, the last negotiating round took place in November, but the update on the negotiations was quite blank. However, the Commission’s sensitivity on palm in trade negotiations is understandable. Any hint that the Commission will make market access for palm oil easier going forward will raise some red flags among Member States as well as NGOs.

Commission releases Interim EU-Malaysia SIA

The European Commission has also released the draft interim Sustainability Impact Assessment (SIA) of a proposed EU-Malaysia trade agreement. The interim report follows inception reports that were carried out in the middle of the year for Malaysia, Indonesia and the Philippines.

Just to be clear, the ‘sustainability impact assessment’ is very much a social and economic impact assessment, where environmental concerns are incorporated into the assessment.

The headline economic modelling result is a straightforward positive:

“The EU bilateral exports are estimated to increase in a range of €12.16 billion to €15.27 billion, whilst bilateral exports of Malaysia are projected to increase between €3.34 billion and €3.64 billion Furthermore, a future agreement is projected to lead to an overall total increase in total EU exports ranging from €6.92 billion to €8.65 billion.”

The report looks in-depth at the vegetable oils sector and notes:

“… the agreement would lead to a decline in domestic EU production of approximately €300 million (0.53%) … Growth in total imports ranging from €238 million to €252 million is estimated to occur, with bilateral imports from Malaysia estimated to increase by approximately €450 million.”

In other words, EU vegetable oil output would decrease as it is displaced by imports from Malaysia. Imports from Malaysia would also likely divert imports from other countries, hence the larger trade volumes.

The bulk of the information on palm oil reads like a litany of claims against the industry, ranging from its contribution to haze and fires to labour exploitation to deforestation. Yet the evidence provided is contradictory and slim.

So, for example, the report states that deforestation in Sabah amounted to 1.31 million ha, citing Global Forest Watch (GFW) as a source. But the GFW data is tree cover loss rather than deforestation, i.e. permanent change to land use. The GFW data states quite clearly that 61 per cent of this tree cover loss took place within plantations – which includes oil palm plantations. As we pointed out last week, conflating these two terms is very dangerous, and GFW goes to great lengths to point out that there is a clear distinction between the two.

The report also mentions the contribution of haze and peatland fires to Malaysia’s GHG emissions, as part of slash-and-burn clearing. But no quantitative data is provided. Nor is it mentioned that fire in Malaysia is not a significant problem compared with other countries in the region. Why, then, is it mentioned at all?

There are also claims such as this: “Estimates indicate that approximately forty to fifty-nine per cent of palm oil plantations [sic] have replaced previously forested areas.” But no source is provided, and nor is a timeframe given.

Fortunately, this type of data doesn’t make it into the executive summary. However, this assessment needs some sharpening. This is an official EU-commissioned assessment. It shouldn’t just be a blanket collection of statements and claims.

Indonesia trolls Iceland Supermarket

Indonesia’s Ambassador to Germany Arif Havas Oegroseno has been trolling the Managing Director of Iceland supermarket, Richard Walker. Ambassador Arif is clearly as incensed by Iceland’s actions as most people in the palm oil industry. His newest tactic? Criticising Iceland’s sale of Gouda cheese produced in the Netherlands, and calling Gouda ‘the Dutch equivalent to palm oil.’

Arif has met with a couple of Dutch researchers at the United Nations Framework Convention on Climate Change (UNFCCC) meeting in Poland this week, who have explained the Netherlands’ long history of peat drainage. According to one of the researchers, Hans Joostens, peat drainage has been taking place there for more than 1,000 years.

But why Gouda cheese? Gouda is generally made in the southern part of the Netherlands, where peat drainage has been the most extensive. A presentation by Joostens is available here. He does, indeed, call Gouda the equivalent of palm oil and even calls on EU authorities to consider a ban.

Elsewhere in Poland …

UNFCCC conferences are generally a lightning rod for environmental campaigns, and this year’s meeting has been no exception.

The German Minister for Federal Development, Gerd Muller, said that “the European Union must make certifications for palm oil a standard in free trade agreements” — and also said the same for soybean, stating “Rain forest are burning for your shampoo.”

We’re inclined to agree that sustainability standards should be a part of any negotiation between the EU and any of its prospective partners, such as Malaysia, Indonesia and Brazil. (And given that the deforestation footprint of beef is five times that of palm, perhaps beef should be included also).

But the point is that the standards – and recognition of existing standards – should be part of the negotiation. It shouldn’t – and can’t – simply be a case of the EU saying European standards are the only ones that are acceptable.

Commissioner Cañete gets served by NGOs

Also in Poland, a group of European NGOs has written to the EU’s Commissioner for Climate Action and Energy Miguel Arias Cañete. They are calling on the EU to ban the use of food and feed crops in the Renewable Energy Directive (RED).

Although this is no surprise, the letter from the NGOs demonstrates clearly how problematic indirect land use change (ILUC) is as a concept.

The NGOs (Friends of the Earth, Mighty Earth, Transport & Environment, and others) are supportive of using ILUC and the ‘high risk’ designation because it might keep soy and palm out of the RED. But they’re also wary of ‘low risk’ ILUC, as they’re aware that the increased demand for biofuels from so-called ‘low risk’ crops such as rapeseed may simply end up increasing demand for imported oils in the non-transport sector.

The NGOs try to have it both ways. They call on the EU to introduce strict criteria for ‘low risk’ ILUC, pointing toward the idea of ‘additionality’. Additionality was used in the UN’s Clean Development Mechanism (CDM) program. The idea is that projects should only gain RED credits if they weren’t part of a business as usual scenario. In the CDM, this meant that gaining credits was incredibly difficult, because they were effectively not allowed to be profitable. Perhaps this is the NGOs’ way of aiming for the RED to be shut down completely.

RED won’t shut down, but we understand that additionality is a live option. The latest we’ve heard is that the EU will designate most imported oils as high risk, but will provide pathways for market access for trading partners such as Brazil, Indonesia and Malaysia.

Wilmar negotiates with Aidenvironment

Wilmar has inked a deal with Dutch NGO Aidenvironment, which is likely to end the current campaign against both Mondelez and Wilmar.

In return for peace, Wilmar is going to hand over data on all of its direct suppliers, and its entire supply chain, to an Aidenvironment platform, and also enforce a stricter suspension policy for any infractions of the company’s no peat, no deforestation and no exploitation policies.

We note also that Wilmar is going to be using satellite technology for compliance – and we’re assuming it’s the same ‘Starling’ platform that was announced by Nestlé in September. That solution was met with scepticism by Greenpeace just a few months ago.

Why the change of heart?

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Purdue’s Sub-par Palm Research

A group of researchers from Purdue University published a paper last week that claimed RSPO or sustainability certification for palm oil is no better than non-certified palm oil.

The paper has received some international attention from newspapers such as the UK’s Independent, which went on to imply that all palm oil is bad.

The basis for this claim is that all RSPO concessions record high levels – around 38 per cent – of tree loss. This statement is also made:

In none of the concessions under investigation, both certified and uncertified, did we detect zero tree removal in 15 years.

There are two massive flaws in the paper that allow them to draw such a conclusion.

First is the data they used.

The researchers were using Global Forest Watch (GFW) data as their primary source of information for tree cover loss, which looks at a 15-year period, 2001 to 2016. The GFW dataset is brilliant, but GFW goes to great lengths to point out its limitations: one, it cannot distinguish between tree cover in a plantation (including oil palm) and natural forest; two, that it does not distinguish between tree cover loss in a plantation and tree cover loss in natural forest and; three, that even when a plantation regrows according to a planting cycle, the area is still counted as loss.

On this last point, GFW again goes to great lengths to point out that it’s not possible – using their methodology – to subtract forest gain from forest loss and come up with a ‘net deforestation’.

GFW also points out that ‘tree loss’ and deforestation, i.e. conversion of forest to other uses, are different things.

In other words, all tree loss comes up as tree loss, even if it’s being replanted.

Second is their apparent ignorance of the palm planting cycle.

Most readers would be well aware that palms hit peak productivity between 7 and 18 years of planting. The optimal replanting time is around 25 years, depending on a number of localised environmental factors, but the ability to finance replanting is also a consideration, as well as the price for FFBs.

So, over a 15-year study period, it’s quite reasonable to assume that a large proportion – let’s say 40 per cent – of palms would be cleared and replanted.

It should also be noted that the researchers don’t appear to factor in replanting in their paper; and nor do they acknowledge the limitations of the GFW dataset.

Here’s an example.

The Jengka Triangle plantations were established in the 1980s by FELDA near Temerloh. GFW maps show that there was significant tree loss through 2001 to 2015.

Why would there be tree loss in an area that was established as a palm plantation around 30 years prior?

It is because replanting was taking place. The same GFW data shows significant tree cover gain through the same period. This was because the seedlings grew to maturity in around 3 years or more.

There are several disappointing aspects to this paper.

The paper appears to have been written with a predetermined outcome in mind. The authors conflate ‘tree loss’ with deforestation. In our opinion, doing so is probably either disingenuous or incompetent.

If the researchers have, in fact, somehow managed to distinguish between plantations and natural forests inside or outside plantations, they should probably tell the GFW researchers. This is something they’re keen to do accurately.

Also disappointing is that it was published at all. ‘Science of the Total Environment’ may not be the world’s most highly rated journal, but where are the standards? Purdue is a prestigious university, associated with the respected Big Ten Conference, and known for its great academic credence. This underdeveloped research hasn’t done anything for Purdue’s good name.

In October this year, a group of academics managed to have four hoax papers published in various academic journals. One received a special award. Is this paper that far off?

Finally, the coverage the paper has received in international media indicates that some journalists will happily let shoddy research get headlines – and clicks. Is this fake news? Probably. The Independent has said RSPO is yet to respond with a comment. We’re looking forward to what they have to say.

The public debate about palm oil is full of disinformation. Purdue University and The Independent have just added to it.

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