Palm Oil Monitor Weekly Update – 2nd March 2020

RI Visit Shows EU Contradictions

As reported last week, Indonesian ministers and ministerial staff travelled to Geneva last week to open consultations with the European Union at the WTO over the revised Renewable Energy Directive (RED II).

The leaders of the delegation were Vice-Minister for Trade, Pak Jerry Sambuaga and Deputy Minister for Food and Agriculture Coordinating Ministry of Economic Affairs, Ibu Musdhalifah Machmud.

The visit received extensive coverage in Indonesian media, with most major Indonesian language news outlets reporting on the visit. Local legislators also made a point of highlighting the visit to a domestic audience.

Their visit also received extensive coverage in some European media outlets.

However, what was surprising was the muted reaction that European officials gave to the visit. Trade Commissioner Phil Hogan’s office didn’t appear to mark the visit at all.

This seems unusual given that Indonesia is ASEAN’s largest economy and the world’s 7th-largest economy on a purchasing parity power (PPP) basis.

So, what explains the low-key response? In our view it comes down to two things.

First, embarrassment. The current impasse over the IE-CEPA negotiations and the new suits at the WTO have created a headache for Hogan. Highlighting the issue without a coherent response would simply create pressure from his own European stakeholders.

Second, no coherent response. The EU’s ‘Green Deal’ document proposed that the EU step up sustainability enforcement in any future trade deals with a ‘Chief Trade Enforcement Officer’. By many accounts Malaysia has called off negotiating with the EU because its demands are simply too great on environmental standards.

What many in ASEAN also see is an inherent contradiction on EU trade policy, i.e. the rules are bent to suit EU purposes. For example, the EU will ratify an agreement with Vietnam (a one-party state), but then claim trade agreements must support human rights. Similarly, it will claim that trade agreements must support sustainable development, but will block the imports from millions of palm oil farmers across Indonesia and Malaysia.

The Deforestation Regulation is Here

Earlier this month EU Commission announced a feedback period for “Minimising the risk of deforestation and forest degradation associated with products placed on the EU market.”

This is the next step on the Commission’s ‘Communication on Stepping Up EU Action to Protect and Restore the World’s Forests’.

This is something that Palm Oil Monitor has been alluding to for years, and it seems as though the legislative train has finally left the station.

The Communication has gone through more than a decade of iterations since 2008. Back then, on the back of the UNFCCC conferences in Bali, Poznan and Copenhagen, the EU was seeking ways it could address global deforestation.

The current feedback period will move towards a larger stakeholder consultation on a new regulation that aims to prevent European consumption ‘causing’ deforestation, particularly in tropical forests.

It is likely that this consultation will generally ignore the comments from non-EU stakeholders, and not consider any trade implications for commodities such as palm oil – this is precisely what took place with the consultations on the revised RED and Delegated Act.

The consultation is a follow up from the EU Council conclusions in December 2019. The Council asked the Commission to specifically:

  • Undertake an assessment of additional demand-side regulatory and non-regulatory measures and produces the respective proposals;
  • Consider in the context of potential supply-side support for producing countries how the experience of preparing and implementing Voluntary Partnership Agreements can be applicable to commodities other than timber;
  • 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.
  • Report on the follow-up of the Communication, its actions and on the progress made in putting into practice the Communication and the recommendations of the Council on a regular basis to the Council;

The Council has skipped over a number of other recommendations on the original communication. This includes strengthening existing certification schemes. It would therefore appear that the EU is aiming directly for regulatory measures to curb imports.

What’s probably more interesting is that the consultation is going to in tandem with a ‘fitness check’ of the EU-FLEGT scheme.

Those who have watched the debate over timber over the past two decades will be well aware of the EU’s efforts to restrict imports of illegally logged timber from any number of countries, including Indonesia.

This culminated in the development of a complicated regulatory system – EU-FLEGT (Forest Law Enforcement, Governance and Trade).

EU-FLEGT had two parts. The first was the imposition of a due diligence regime in the EU, under which EU importers have to undertake assessments of whether timber is ‘legal’, and face penalties if they don’t. The second was the completion of Voluntary Partnership Agreements (VPAs) with partner countries exporting to the EU. The VPAs were a complex combination of legality assurance and export licensing.

There has been talk of trying to replicate this kind of system for commodities, such as palm oil, and using sustainability rather than ‘legality’.

The problem for the VPAs right now is that there is quite a lot of anecdotal evidence out there that VPAs – such as those in Ghana – are being used to ‘launder’ timber products from other countries. This is because the legality assurance systems generally don’t contain traceability systems.

There have been numerous other problems that have been pointed out with the EU-FLEGT scheme, including an enormous cost.

That said, anyone in palm oil – or beef, soybean, or any other commodity – should be particularly worried.

California, Here We Come

Last year we covered potential new legislation in the State of California, which aimed at preventing ‘deforestation-linked’ goods from being a part of public procurement in the state of California.

The bill as it was proposed last year didn’t get past the committee stage in the state’s legislature. However, a new version of the Bill is back.

The California Deforestation-Free Procurement Act seeks to add a layer deforestation-free certification to government procurement processes in California. It will seek to ensure that goods used in California’s government procurement processes – construction, food, fuel – cannot be “grown, derived, harvested, reared, or produced on land where tropical deforestation occurred on or after January 1, 2021.”

As we pointed out las time, the size of Californian state government spending was around USD225 billion in 2017 — similar to the GDP of countries like Portugal, Greece or Vietnam.

As we also pointed out, California has a tendency to be a ‘first mover’ when it comes to regulations in the US; states like New York, Oregon and Washington might follow.

IN BRIEF

Indonesia’s environment ministry has said its open to working with WWF again after the Indonesian government tore up a MOU. The spat was originally caused by negative comments made by WWF ambassadors towards the Indonesian government, combined with WWF’s Bukit Tigapuluh conservation project being subject to burning during the last haze event in 2019.

India has allocated import licenses for 1.1 million tonnes of palm olein for Indonesian exporters, following the trade spat between India and Malaysia. The announcement came at the same time Indonesia changed its regulations on sugar imports, which has opened the gates for Indian sugar imports. Indonesia is the world’s largest sugar importer.

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