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.