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.