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:

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.