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.