The EU Communication on Deforestation: Worse Than It Seems

The Renewable Energy Directive’s planned ban on palm oil has taken its toll on the industry, but the battle is far from over as both Malaysia and Indonesia seek to take the EU to the WTO and rally support against EU regulations in the region.

However, the EU has now opened a new and arguably more dangerous front in its attempts to restrict palm oil exports to Europe.

Last Tuesday, the European Commission published its ‘Communication on Deforestation’.

The Communication is the culmination of work on deforestation by the EU that has been taking place in one form or another for more than a decade (FLEGT, the European Commission’s ‘Clean Planet for All’; the European Consensus on Development, and others).

The Communication is significant in that it takes technical work completed by the Commission over this time and distils it into actions for the next Commission to undertake from November onwards.

There’s been a political shift here. The Commission has re-named “EU Action Against Deforestation and Forest Degradation” to “EU Action to Protect and Restore the World’s Forests”. This is stylistic, but there’s also a notable attempt to soften the language.

Palm oil is mentioned more than other commodities, but the Commission hides the fact that its deforestation footprint is lower in a footnote from the Feasibility study 2018 – part I – table 4-3:

EU’s share of imported embodied deforestation (1990-2008) amounts to:

Soy 4.45 million ha (Mha) – 39%
Cocoa 0.6 Mha – 27%
Coffee 0.3 Mha – 27%
Palm Oil 0.9 Mha – 17%

The Commission omitted the percentages from the body of the report, and buried them in the footnotes. Why could this be? Perhaps because the data show that palm oil is not the most significant driver of deforestation, compared to soy, cocoa and coffee. The data severely undermine any case the Commission or Parliament may want to make that palm oil should be the primary target for any EU action.

But let’s look at what the main part of the document actually says. The EU lays out five priority areas in relation to deforestation. These are:

  • Reducing consumption of products with embedded deforestation;
  • Work with exporter countries to reduce pressure on forests;
  • Strengthen international cooperation on forests;
  • Encourage sustainable finance;
  • Support forest information sharing.

Seems pretty benign, right? None of these stand out as particularly deleterious to the palm oil sector or objectionable. But there are some potential problems. These are likely to be the result of: a) the makeup of the new European Commission; b) what the European Commission has said it will do; and c) the previous form of both the EU and NGOs on this.

 

The New European Commission

 As we’ve explored in recent weeks, the European Parliamentary elections brought a ‘Green Wave’ of policy promises and Parliamentary seats to the Greens, Renew Europe and other parties focused on environmental campaigning.

This, in turn, skewed the policy ambitions of the prospective Commission President towards Green issues. Ursula von der Leyen, who was elected with a reasonably thin margin, promised a ‘Climate Plan’ to significantly reduce emissions, as well as a carbon border tax.

The latter would require product exports to the EU to meet certain conditions on carbon emissions or face tariffs.

Although the latter is aimed at steel importers, there’s no reason it couldn’t be introduced on other products, such as processed agricultural products – and here we’re thinking of palm oil.

This would not be the first time that EU policy moved towards punishing developing world exporters rather than forcing EU countries themselves to reduce their own emissions.

While details remain unclear on either the tax or palm oil, it’s reasonably safe to say that von der Leyen will be pushing a green line in order to have a pragmatic relationship with the new, much-greener Parliament. In a fractured, fractious European political scene, one of the few elements that could unite the disparate political forces would be protectionist actions targeted at so-called ‘deforestation-linked commodities’. Palm oil producers would inevitably find themselves very high up such a target list.

 

The actions

The EU lays out a series of actions in the Communication. As with the priority areas, these are not novel – they were always part of the Commission’s Action Plan on Deforestation.

The difference is that if this Communication is adopted, the Commission has a mandate to implement some of these actions, pending an endorsement by the European Parliament and Council.  This is almost a sure thing.

Here are the standouts:

“Encourage the strengthening of standards and certification schemes that help to identify and promote deforestation-free commodities through, among other things, studies on their benefits and shortcomings and by developing guidance, including assessment based on certain criteria to demonstrate the credibility and solidity of different standards and schemes.”

The EU has made no secret of the fact that it generally dislikes MSPO and ISPO. The Parliament, too, has often stated that RSPO is flawed. The Parliament’s preferred option was to have its own standard. Having existing standards meet certain criteria is a ‘backdoor’ way of developing an EU standard. It would be smart policy, too. Simply brushing aside RSPO and MSPO/ISPO is misguided. Also, what would be the role of existing EU efforts – such as the Amsterdam Declaration – here? It’s not clear and will be one of the elements the Commission has to figure out as the Communication is turned into a concrete set of proposals over the coming weeks and months.

“Assess additional demand side regulatory and non-regulatory measures to ensure a level playing field and a common understanding of deforestation-free supply chains, in order to increase supply chain transparency and minimise the risk of deforestation and forest degradation associated with commodity imports in the EU.”

This isn’t a measure per se, but a continuation of the idea that trade in commodities such as palm oil should be regulated by the EU. This may end up recommending certain regulations be adopted further down the track. But in the meantime, it will serve as a platform for kicking around ideas on mandating sustainability standards.

“Build on the already existing monitoring tools, and establish an EU Observatory on deforestation, forest degradation, changes in the world’s forest cover, and associated drivers. The objective of this is to facilitate access to information on supply chains for public entities, consumers and businesses.”

This is potentially a boon for the palm industry as it may end up demonstrating the smaller deforestation footprint of palm oil. However, the problem will be if the Commission hits palm oil first – which is precisely what it did with its special report on palm oil certification.

Rather than underlining that palm oil has more certification coverage than any other commodity, it simply gave anti-palm oil groups a platform for their position.

“Promote trade agreements that include provisions on the conservation and sustainable management of forests and further encourage trade of agricultural and forest-based products not causing deforestation or forest degradation.”

Although this should stand out as particularly egregious, it’s not as bad as it sounds. Most of the EU’s trade agreements include sustainable development chapters, but their resolution mechanisms stand apart from the ‘serious’ parts of the agreement. The problems for the EU in this regard are twofold. First, is it doesn’t necessarily hold the upper hand in trade agreements any more, largely because it is EU exporters (i.e. Germany) seeking access to other markets rather than smaller countries seeking access to Europe. Second, EU demand is sclerotic, and markets are mature. There’s no prospect of high growth any time soon. Partners are well within their rights to walk away from FTA negotiations if the circumstances aren’t right.

Address relevant aspects on renewable energy and biofuels, review all relevant aspects of the report accompanying Commission Delegated Regulation (EU) 2019/807 in 2021 and, if appropriate, revise Delegated Regulation (EU) 2019/807 in 2023.

The RED is not forgotten in this list of actions. This is not new. This was planned in the final RED text which was approved in late 2018 and in the recently approved Delegated Act. How the Commission assesses the new studies, and the latest information available, will be key to how the status of palm oil under the RED Delegated Act will evolve, for better or for worse.

 

The EU’s protectionist pattern

The RED has been a valuable lesson for palm oil exporters around the world, and should be a guiding lesson for other commodity exporters.

The EU has an established history of using environmental – and other — regulations in order to protect their own industries.

In the recent past, this includes the EU Timber Regulation (EUTR), and the Illegal, Unregulated and Unreported (IUU) Fishing Regulation. The EU’s large-scale regulations on chemicals – the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) – is another example.

In the case of the EUTR, there was a clear ambition to keep Indonesian timber and paper products off the European market. Like palm oil, there were a number of antidumping cases run in parallel. In the case of IUU, the Thai fishing industry was the target.

But how these policies are developed – and the response — follows a formula. It can be broken down as follows:

First, the EU will find evidence to suit pre-determined political purposes.

When the EU was unable to shut palm oil out the RED with faulty data in its default greenhouse gas savings values, it blithely used indirect land use change (ILUC) as a way of constructing a new case to target palm oil. When it was declared that ILUC couldn’t be measured, Brussels decided that assessing the ‘risk’ of ILUC could work as a proxy.

See the pattern here? If the evidence doesn’t fit, simply change it, or create new evidence.

One commentator has described this as ‘policy based evidence’.

Second, the EU will concede ground when its own interests are threatened.

As we’ve explained many times before, the EU gave soybean a passing grade on deforestation because of the US. In particular, the US was threatening tariffs on steel and autos coming from the EU. President Juncker intervened personally, and allowed US soybean exports to pass the bloc’s environmental standards with the stroke of a pen.

Third, the EU has moved into gaming the WTO system.

As Indonesia’s trade ministry has pointed out, the EU has moved into new territory with the RED. The EU refused to notify the RED as a technical barrier to trade, which prevented exporter countries from engaging with it via the WTO. Instead, countries such as Malaysia and Indonesia have to go straight to the dispute settlement body. Will the EU do the same with any deforestation measures?

This is particularly ironic, as the EU has spent much of the past few years berating the Trump Administration for undermining the ‘rules-based international system’. And yet here is the EU gaming the system to undermine how the WTO is supposed to work.

Finally, prolonging the debate gives domestic industries a voice.

By accident or design, a communication like this has the effect of prolonging the debate. But the prolonging allows domestic constituents – particularly farmers and activists – to conduct more lobbying and build a louder political case.

Exporting countries simply can’t compete with this in Brussels. They are outgunned at every turn, despite what media commentators might say about the ‘palm oil lobby’.

The RED debate might be drawing to a close, but the Deforestation Communication battle is about to begin.

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Palm Oil Monitor Weekly Update – 22nd July 2019

Palm at the WTO shifts gears

Reuters has reported that Malaysia will put forward its World Trade Organization (WTO) case on the EU’s revised Renewable Energy Directive (RED II) and palm oil sooner rather than later. Reuters reports that Primary Industries Minister Teresa Kok said that: “the documents are with the attorney general chambers now… They are assisting us… [and] helping us identify experts who can argue the case in the WTO.”

It is also understood that Indonesian President Jokowi has asked the Indonesian trade ministry to pursue Indonesia’s WTO case as soon as possible.

Malaysia and Indonesia also discussed joint action at a Council of Palm Oil Producing Countries meeting.

Malaysia, Indonesia and a number of other palm oil exporting countries have previously raised the RED II at WTO Technical Barriers to Trade (TBT) Committee meetings.

The EU is yet to put in a notification to the TBT Committee — standard practice when introducing a technical regulation that may impact the import of certain goods.

There’s a reason for this: The EU considers that the RED II falls outside of the TBT. This point was made in a letter sent by the EU in early May.

Indonesia’s response – made at the WTO at the beginning of this month – was furious:

“We beg to differ with the EU on this important issue. The requirements stipulated in the delegated regulation are technical regulations to a product and or group of products which are clearly fall under the TBT agreement … The structure, design, and expected operation of this standard are expected to discriminate biodiesels generated from palm oil against other biodiesel products produced within EU members countries, such as rapeseed and sunflower.”

Indonesia also makes that point that EU actions are “alarming” and “threaten the credibility of TBT Committee.” The point Indonesia makes is that by arguing that this is not a technical regulation, the EU can regulate as it pleases, and simply wait for the WTO to resolve a case via the WTO’s Dispute Settlement Body – a process that can take years.

It’s not surprising that a group of countries including Malaysia, the US, Brazil, Canada and Australia issued a joint statement at the WTO last week, taking the EU to task for its abuse of non-tariff barriers on agricultural products. Although it relates specifically to the safe use of pesticides, the statement gives a good indication of how the EU thinks in relation to agricultural protectionism:

“Despite repeated requests in the TBT and SPS (Sanitary and phytosanitary measures) Committees over the past four years, the EU has not identified either the level of protection being sought or the specific pathways of exposure or risks that it seeks to mitigate, to justify the trade impact of these restrictions. The EU has not taken into consideration the comments of other WTO Members on draft regulations. “

What does this mean? Combined, it means that the EU is taking what is best described as a harsh approach when it comes to keeping palm oil – and other commodities – out of the EU market. Anyone thinking that the negative palm campaign will end with biodiesel needs to think again.

 

EU Ambassador to Malaysia Speaks to Smallholders; Disputes Their Campaign of EU Ban

On a related note, the EU’s Ambassador to Malaysia, H.E. Maria Castillo Fernandez, appears to be courting controversy by telling Malaysia’s smallholders that the EU’s ban on palm-based biofuels will not affect them. This seems to be a direct counter to the claims of smallholders the EU is banning palm oil biofuels.

According to Malaysian Insight, Fernandez told groups of smallholders in Perak that the ban would not affect them because: products for palm-based biofuels only make up 1.4 per cent of Malaysia’s total exports; palm oil exports make up 4.4 per cent of the country’s total exports; and most smallholders aren’t certified.

There are some flaws in Fernandez’s reasoning.

First, splitting between exports of biodiesel (e.g. exports of fatty acid methyl ester) and exports of crude palm oil (CPO) isn’t an accurate way of measuring the amount of palm used for biodiesel in the EU. CPO can be refined in HVO (hydrated vegetable oil) plants in Europe.

Second, basic economics.  Prices are affected by demand. If demand for a commodity goes down, prices are likely to go down. Reducing the demand for palm oil – as is the case with EU policies – will likely push prices down, whether it’s going to be used for biofuels or for food and other products.

Third, the idea that ‘most smallholders aren’t certified’ is a bit of a red herring. Many FELDA operations – comprising many smallholders – are certified to ISCC standards specifically to participate in the existing RED scheme.

The price for fresh fruit bunches (FFBs) is impacted by myriad global factors in a complex market. Prices have been at historical lows. Farmers – of any commodity – will blame whatever is nearby. There were reports that Sumatran farmers were blaming President Jokowi’s moratorium for low prices, for example. However, saying that EU policies won’t impact smallholders simply isn’t true. It will affect the industry, and smallholders are part of that industry.

As President Jokowi recently said of the RED, “For me, if there is discrimination like that, I will fight because of the 16 million farmers and workers in this business.”

 

WWF: Orang-utan populations stable in Sabah

New research funded by WWF indicates that orang-utan populations in Sabah are stable – underlining that a balanced and sustainable approach to palm oil production is possible.

The WWF research showed that in Dermakot and Ulu Segama in Sabah orang-utan numbers increased from 5,376 to 5,933 individuals between 2002 and 2017.

WWF’s lead researcher, Donna Simon, said that “Sabah is on track to conserve this critically endangered species.”

However, the report also stated that there were population declines of 15 and 30 per cent in two separate oil palm plantation areas. This isn’t entirely surprising; plantations aren’t the orangutan’s natural habitat.

However, this is in line with Sabah’s overall conservation strategy of establishing forest corridors and connectivity between forest areas within a mixed landscape of forest and plantation.

According to Sabah Wildlife Department’s Augustine Tuuga, “This connectivity, through wildlife corridors that link patches of forest, is key to orangutan survival at oil palm plantation landscapes, especially in the lowlands of Sabah.”

The Sabah approach is a clear indication that sustainable palm oil that allies with genuine protection of orang utan is truly possible – policymakers, purchasers and consumers should take note.

The only bad news in the report was the misleading headline from Reuters.

 

CIRAD: Don’t Ban Palm Oil

A leading scientist from the French Agricultural Research Centre for International Development (CIRAD) has argued that banning palm oil will lead to more deforestation.

Jean-Marc Roda, forester and senior scientist with CIRAD, highlights that future demand for vegetable oils – partly driven by a switch away from animal fats and growing populations – is ultimately leading to more land being required for cultivation. Roda argues that palm oil is the solution, not the problem:

We know that consumers around the world will eventually demand around 250 to 350 million tonnes per year more vegetable oil than today. Soybean development in Brazil and palm plantation development everywhere else will continue because the main demand is not in the countries having interests in opposing their development.

Without palm oil, the future demand for vegetable oils would require cultivation land areas almost as large as the Australian continent.

Roda also highlights the falling levels of deforestation in both Malaysia and Indonesia, to the point where links between oil palm expansion and deforestation are no longer readily apparent:

Some palm plantations were established in lands that were previously forested, but the real share of deforestation caused by palm oil plantations peaked in the 1990s and has decreased consistently since. It is now almost non-existent in Malaysia (below 1%). In Indonesia, the peak was between 2000 and 2008, and has now decreased to 5%.

It’s also worth remembering that the European Commission stated expansion for palm oil was only responsible for around 11 to 16 per cent of deforestation in Indonesia between 1990 and 2010.

This goes some way to explaining why a large number of actors in both Malaysia and Indonesia have given behind-the-scenes support to the Amsterdam Declaration. In their view, much of the palm oil going to Europe is already sustainable and – depending which country or jurisdiction they’re in – doesn’t contribute to deforestation.

 

And finally … a housekeeping note from Palm Oil Monitor: There is likely to be some accusations in the coming days that Palm Oil Monitor is part of some kind of industry lobbying initiative. This is completely untrue: the platform is ours, and we publish stories that interest us, including information passed to us by our contacts in government, companies, NGOs, around the world. Since we started the site, we have benefited from support from various sources (including industry), which helps us to keep the newsletter going; we’re grateful for that, but we don’t lobby or cheerlead for anyone. We took a break over June and July following the EU elections, but we’re resuming normal service this week.

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