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.