Palm Oil Monitor Weekly Update – 25th February 2019

EXCLUSIVE: PM Mahathir’s letter on eve of Norway visit

Norway’s Minister of Trade and Industry, together with EU officials, will be in Kuala Lumpur this week for a series of meetings with their Malaysian counterparts to discuss their countries’ recent measures to ban palm oil from its renewables programs.

POM has obtained an exclusive copy of Prime Minister Mahathir’s blistering letter to his Norwegian counterpart Erma Solberg, regarding the country’s decision to ban palm oil from its renewable’s programs. This follows Malaysian Prime Minister Mohamed Mahathir’s letters to France and the EU.

To recap: In December, Norway’s parliament voted to request that the government develop a biofuel policy that will “exclude biofuels with high deforestation risk” in its biofuels programs.  The Parliament has requested that the policy be introduced from January 2020.

Adding fuel to the fire last week, Foreign Minister Saifuddin Abdullah released a statement echoing PM Mahathir’s letter. He stated:

The Government and people of Malaysia strongly oppose the proposed ban on palm oil biofuels. This ban is discriminatory and unfair, and would negatively affect 650.000 small rural farmers across Malaysia and adversely impact the earnings and wellbeing of nearly 2 million Malaysians who are dependent on the palm oil industry for their livelihood.

Is the Norwegian visit genuine or window-dressing? The only real outcome that will satisfy Malaysia or for that matter any palm oil producing country will be for Norway to include palm in its renewables programs.

PM Mahathir’s letter is highly critical of the ban, pointing out that any move in that direction may violate WTO rules, and will disproportionately impact 650,000 small farmers and 2 million people dependent on palm oil.

But the stinger for Norway is here:

The Norwegian vote to ban palm oil was based on the presumption that our oil palm cultivation is a proven driver of tropical deforestation. This assumption has no proven justification whatsoever. We therefore request your personal intervention in this matter which should be treated in a fair and non-discriminatory manner by Norway, with equal treatment and access for Malaysian Palm Oil, alongside with other sustainable biofuel feedstocks [our emphasis].

As POM has noted before, it’s one thing for governments to write to each other; it’s another for country leaders to write to each other.

PM Mahathir also brought up the prospect of strained trade relations between Malaysia, Norway and European Free Trade Association (comprising Norway, Switzerland, Liechtenstein and Iceland). The bilateral relationship between the two countries isn’t enormous; two-way trade is worth around USD800 million annually.

The irony, of course, is that Norway’s largest export to Malaysia is petroleum, and that Norway’s entire economy is built on fossil fuels.

A history lesson

Some industry participants have questioned the significance of the EU RED to global palm oil markets – and therefore PM Mahathir’s focus upon the RED and other renewable programs.

It’s worth remembering PM Mahathir’s history when it comes to natural resources and international negotiations.

During the early 1990s, there was a push on by both the US and EU to establish a binding international forest convention. This came to a head at the Rio Conference in 1992 (UNCED). Malaysia, with the support of Brazil, pushed back to make a case for an agreement that considered more equitable economic and social outcomes. This was a true victory for PM Mahathir on the world stage.

A year after the Rio Conference in 1993, PM Mahathir addressed the Commonwealth Forestry Conference at the KL Shangrila on Jalan Sultan Ismail. He noted that there was only one set of internationally agreed forest timber standards – those of the International Tropical Timber Organization.  He said:

What bothers us most is that non-tropical forests and timbers which compete with tropical timber in the same international timber market are not being subjected at all to any internationally agreed standards and commitment to sustainability… Yet we know that the practice of clear felling of miles and miles of temperate forests causes more environmental damage than the controlled selective logging practised in tropical forests.

This is a glaring case of double standards and a clear contradiction to the decisions of UNCED. It requires immediate redress…  [Tropical timber] Producer members have proposed the expansion of the scope of the agreement to cover all timbers, so that non-tropical timbers can be subjected to the same sustainability criteria and all problems of discrimination and double standards can be effectively eliminated. Not surprisingly, this proposal has been rejected by consumers of the North.

Does this sound familiar?

Substitute ‘tropical timber’ with ‘palm oil’ and the situation with RED is almost exactly the same: one set of standards for Western commodities, another set for everyone else. All dictated by Europeans.

PM Mahathir has been here before and he understands better than most where this can go. Malaysian timber came under enormous pressure through the 1990s, despite the agreements of UNCED, and the establishment of the Malaysian Timber Certification System.  Palm is not timber, but the global palm industry is more integrated and better organised than timber was in the 1990s.

Mahathir is aware more than most that the RED is just the beginning of the battle. Sure, it’s renewables now, but food and oleochemicals will be next.

Following up with France

PM Mahathir also wrote to France’s President Macron in January to protest the banning of palm oil from that country’s renewables scheme. It was reported last week that Macron is in the process of responding.

Minister of Primary Industries Theresa Kok is set to meet with France’s environment ambassador Yann Wehrling in April as part of a broader dialogue on palm and sustainability, following her meeting last week with France’s Ambassador to Malaysia Mr. Laplanche.

Although the meeting is likely to be cordial, the question for the French minister is whether they are able to rein in the anti-palm forces within the French Parliament.

One of the reasons the Parliament was able to attach the measure to the country’s finance bill was because of Macron’s unpopularity.

The ‘yellow vest’ protests have taken place every weekend for 12 weeks and are now well into their third month. Although recent polls have shown some improvement in Macron’s approval rating, he still has some way to go – and command some authority over France’s legislature.

There’s little doubt Kok will be able to change Wehrling’s mind on palm oil; Macron has already implied he is against the ban. But what Macron really needs is leverage at home.

RED Update: ITRE, ENVI and the scientific report

Last week the European Commission presented the draft RED Delegated Act to the Parliament’s Industry, Research and Energy (ITRE) and Environment (ENVI) Committees.

The response to the draft was generally negative; MEPs have said that they will reject the draft in its current form.

Sadly, this isn’t because the draft unfairly singles out palm oil or because it isn’t likely to be WTO compliant.

MEPs want to reject the draft for two reasons. First, they see the exemptions for smallholder oil palm farmers as a ‘loophole’ that needs to be closed; and second, because soybean is getting an easy ride. The few MEPs who were present echoed this sentiment led by Dutch MEP Bas Eickhout, who was quite virulent.

There was little new information about the Delegated Act in the presentation, and the response from MEPs was expected. But the Commission did invite MEPs to participate to a stakeholder “Expert Group” meeting on 5th March 2019 where the Commission will go over the ongoing Public Consultation on the Delegated Act and will possibly present compromise options.

This “Expert Group” meeting will very likely be dominated by Green NGOs such as Transport & Environment and Friends of the Earth Europe, together with some domestic oilseed interests, aiming to push the Commission to ban palm oil and change its stance on soy.

In terms of next steps, where does this take us? Once the Public Consultation process is over, the Commission will present a revised final version of the Delegated Act. The Parliament can reject it and/or ask for a two-month extension. This may mean that the final Delegated Act will be presented to a new Parliament after the EU Parliamentary elections.

The other key development was the release of the EU’s ‘scientific’ report on ILUC. We’ll provide a full analysis in the next few days.

The scientific study is going to be critical to the final look of the RED. It looks as though there are some clear gaps in the final product. The spelling errors throughout are numerous, which indicates that it was particularly rushed.

Iceland gets the cold shoulder

The Financial Times this week reported that UK supermarket chain Iceland received no boost in sales from its anti-palm oil campaign in the lead-up to Christmas. According to data posted by the company, underlying sales actually fell by 1 per cent.

The campaign provoked the ire of the Government of Indonesia in particular, with one Ambassador clearly trolling Iceland CEO Richard Walker on Twitter.

The associated video that Iceland produced with Greenpeace (and with help from Emma Thompson) apparently clocked up close to 70 million views on Youtube.

Alongside the initial controversy, Iceland faced a backlash from anti-palm oil campaigners, who were somewhat annoyed that the seller hadn’t removed palm oil from all its products, nor other products selling palm oil.

As much as we might disagree with anti-palm consumers, one should never underestimate their intelligence: they can spot a marketing gimmick.

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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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