Palm Oil Monitor Exclusive: UK Rethinking its ILUC Mistake

Palm Oil Monitor has learned that the UK’s Department for Transport has been looking into introducing new ILUC restrictions on palm oil biofuels. An internal discussion, including consultation with other UK government departments, is already underway, but there has been some push back from other voices within the UK Government, who are (rightly) concerned at the negative trade impact an ILUC measure would have.

Any ILUC restrictions in London would have been modelled on the much-despised EU RED II model – known as ‘high ILUC risk’ – that effectively banned palm oil biofuels from the EU market, with the phase-out beginning in 2024.

If ILUC was introduced by the UK this would be a significant development and would stymie the UK’s efforts to build a closer relationship with ASEAN and CPTPP nations. The UK’s ASEAN trade partners have, to date, probably been pleasantly surprised by the post-Brexit approach taken by the UK government to the region, including in relation to palm oil. The introduction of high-risk ILUC would be seen in Jakarta and elsewhere as a highly antagonistic move.

Any ILUC proposal, if it ever does see the light of day, would be part of the Renewable Transport Fuels Obligation (RTFO). As POM understands from our sources, palm oil is the only commodity that was previously being considered for ‘high risk’ status: this would be the very definition of targeted and discriminatory. Sounds similar to how Brussels went about proposing the palm oil biofuels ban in RED II.

Any UK effort to introduce such an ILUC factor would be bizarre for two primary reasons: firstly, that the whole point of the UK leaving the EU was to free itself from EU rules – copying and pasting one of the most-unpopular Directives seems to defeat the point entirely. Secondly, that the RED II ILUC measures caused such a major rift in relations between the EU and ASEAN and would clearly have a similar effect on the U.K.

Our sources point to London becoming acutely aware of the damage this measure could cause with ASEAN partners – including Indonesia. As a result there is an effort to walk back from the precipice.

To recap how the EU’s approach was greeted: following the designation of palm oil as high-risk ILUC, Indonesia filed a case against the EU at the WTO: other palm oil producing countries have joined in support. The EU’s efforts to uplift to Strategic Partner status within ASEAN were thwarted initially in 2019 due to Indonesian and Malaysian frustration at the EU’s palm oil stance. Some European products saw difficulties with exporting, licence renewals and other trade-related questions: alcohol producers and milk product exporters were the most-affected. Finally, the FTA/CEPA negotiations between the EU and Jakarta/Kuala Lumpur were stalled.

All of this is to highlight the potential risks for the UK government in pursuing an ILUC-based restriction on palm oil biofuels – and other restrictions on palm oil that discriminate unfairly. The UK has a series of strategic goals that are not too different from those that the EU struggled with. London has made clear the importance of Dialogue Partner status in ASEAN, despite the moratorium on new Dialogue Partners that has been in place since 1999; Trade Secretary Elizabeth Truss has stated publicly she wants the UK to accede to CPTPP; and bilateral trade deals (or, in the case of Indonesia, a Joint Trade Review) are also being prepared. Not to mention that the UK exports significant amounts of alcohol to ASEAN, including Scotch whisky.

But there are two further risks of which some within the UK government now appear to be aware. 

First is the legal risk. The introduction of a measure against palm oil – following the EU model – would immediately expose the UK to exactly the same WTO cases being run by both Indonesia and Malaysia against the EU.  Defending a measure is time-consuming and potentially expensive, and the UK has zero current experience in defending its actions at the WTO. The latter is likely a more significant consideration than the former.

Second is the reputational risk. The optics of this for the Johnson government – and its aspirations to be a champion of global free trade – would be awful. It would be a poor diplomatic start for a government seeking to extend its free trade credentials into the Asia-Pacific region, to find itself immediately defending a WTO suit caused by discriminating against Asian exports.

Perhaps the most interesting question is, as ever, why this was even considered in the first place. The UK uses very little currently: less than 3% of UK renewable energy use is linked to palm biofuels, and the RTFO already has caps in place for first-generation fuels. It’s not clear why there is a motivation to ‘solve’ a problem that doesn’t really exist, especially when the action taken opens up a whole catalogue of new risks on the trade front.

If anything, it was likely symbolism to placate green lobbies in the lead up to the UK’s hosting of COP26 later this year. The UK’s most-recent foray into palm-related legislation was the Due Diligence proposal that is still being considered in the House of Commons. This was well-received in southeast Asian capitals, both in terms of the content and in the transparent outreach that was conducted to ensure the views of producing countries were taken into account.

It is to be hoped that the UK Government has realized – albeit at the last minute – that trade and diplomatic cooperation is too important to be thrown under the symbolism bus. If ILUC has been consigned to the waste-paper bin, then it is not a moment too soon.