Palm Oil Monitor Weekly Update – 15th April 2019

Memo from Brussels

Delegations from Malaysia and Indonesia visited Brussels last week in order to make their positions clearer on the ban of palm oil from the European Union’s Renewable Energy Directive (RED).

The delegations were led by Indonesia’s Economic Coordinating Minister Darmin Nasution and Malaysian Secretary General for the Ministry of Primary Industries Dato’ Dr Tan Yew Chong.

Indonesia appeared to be much more aggressive at a press conference held in Brussels.

Minister Darmin Nasution stated unequivocally that it would challenge implementation of the Delegated Act at the WTO, citing its victory against EU antidumping duties on biodiesel.

Malaysia was much more conciliatory. Secretary General Dr Tan Yew Chong stated that “Malaysia will not retaliate hastily. We’re urging the EU to let vegetable oils trade be market driven. Let’s work together to let free and healthy competition prevail.”

This was, however, just a press conference. There were two other key moments: a letter from Prime Minister Mahathir Mohamad and President Jokowi, and the bilateral meetings themselves, which were much more revealing.

The letter followed a similar line to the one Malaysia presented to Norway and France earlier this year. But this paragraph stood out:

“Should this Delegated Regulation enter into force, our Governments shall review our relationship with the European Union as a whole, as well as its Member States. This may include the reviewing of our partnership negotiations, procurement contracts and key imports from the EU”.

What’s notable is that the Governments have said they will review the relationships, and they’ll do it together.  This isn’t far off saying that ASEAN is going to unilaterally review its relationship with the EU.

The bilateral meetings between the EU and Indonesia were led by President Juncker’s Cabinet.

Indonesia’s aggressive stance yielded some results. Europe offered to broaden the scope of the RED Delegated Act review (due before 2021) to include certification, and particularly ISPO certification.

Europe asked Indonesia to remove any new barriers to alcohol importation; Indonesia responded by saying that any import clearances were undertaken on a ‘case by case basis’.

It appears that currently the Europeans did not offer similar bilateral talks with Malaysia – probably as Malaysia has not (yet) implemented any trade actions.

On certification, there is a broader backdrop. One of the key recommendations of the EU’s final Sustainability Impact Assessment of an Indonesia-EU FTA – released coincidentally last week — was for the EU to give greater support to certification schemes.  It stated:

“in parallel to the FTA the Parties should consider cooperating in strengthening the RSPO certification scheme and the Indonesia Sustainable Palm Oil certification scheme’s protection of human rights, including the customary land rights of indigenous people.”

A question that Indonesian trade officials might ask is whether the EU was offering them anything new at all.

Although Juncker’s cabinet members are experienced, its composition indicates that Southeast Asia is not a major priority. No cabinet members appear to have significant experience or knowledge of the region.  It’s also worth noting that Juncker does not appear to have visited ASEAN during his Presidency.

What does this mean? Malaysia and Indonesia need to compete for attention in the European trade policy space. Much of that space is currently being occupied by the United States, and to a lesser extent China.

The clearest evidence of this is US lobbying for greater soybean purchases via the RED, with the EU capitulating first on certification, and then on making soybean a low-ILUC risk feedstock. The EU did this in order to stop the US imposing steel and auto tariffs.

But in doing so, they gave Malaysia and Indonesia the clear message that they are ‘second class’.

The talks will no doubt continue, but the next few weeks are critical as the EU’s various arms decide whether they should or shouldn’t support the revised Delegated Act.


Will the EU reconsider soybean in its DA review?

Perhaps by coincidence, new deforestation figures for soybean also emerged last week from Brazil’s environment ministry. The data shows that 220,000km2 of deforestation took place in Brazil’s Amazon and Cerrado regions between 2006 and 2017.

Further, modelling by Stockholm University’s Trase program reckons that 22,000km2 – 2,200,000ha — was used for growing soy. It’s worth noting that the EU’s ‘scientific report’ for the Delegated Act reckoned that only 1.2 million ha of deforestation over a similar period was a result of soybean expansion globally, not just in Brazil.

The general understanding among Indonesian and Malaysian officials now is that soybean deforestation has been glossed over in the RED to keep the EU’s relationship with the US intact (see above). This has been underlined by the political deal between President Juncker and President Trump for the purchase of more US soybeans.


WWF opposes palm oil divestment

Norway’s sovereign wealth fund recently gained some attention for divesting from a number of palm oil firms.

Divestment also gained headlines last month when a number of US Democrat Senators wrote a joint letter to institutional investors asking them to explain their stance on palm oil. That initiative was led by Hawaii Senator Brian Schatz, a long-time colleague of former Congressman and anti-palm campaigner Henry Waxman.

However, it’s worth noting that WWF last week stated that it generally opposed palm oil divestment. WWF notes that when divestment takes place:

“the most committed financial institutions lose their considerable ability to influence and improve the sector’s sustainability. There is a high likelihood that divested companies become clients or portfolio companies of financial institutions with less stringent sustainability policies and criteria. As a result, divestment could lead to the erosion of sustainability in the sector, thereby enabling continued deforestation, peat degradation and abuses of human, labour and community rights”.

“Instead, WWF believes that financial institutions should not divest from palm oil, but instead remain engaged with their clients and portfolio companies in the sector to improve sustainability. Divestment should be a last resort, used when all avenues of engagement have been exhausted, and a company has demonstrably and consistently failed to progress against clear expectations for sustainability. WWF encourages financial institutions to disclose the process leading to such divestments”.

This is a particularly sensible approach. This is often already used by a number of financial institutions when requiring that new project finance adhere to sustainability certification or other lending criteria.

Despite this, it’s unlikely to cut any ice with those who continue to pressure investors to get out of the sector entirely.

Divestment as a strategy doesn’t make much financial sense to begin with. If an investor sells out of a plantation company that is profitable and low risk, any subsequent change to the share price will mean that the investment is underpriced – and therefore waiting to be snapped up by an investor that doesn’t have a divestment policy in place.


Palm Oil Monitor Weekly Update – 8th April 2019

RED gets even hotter

Just when we thought it wasn’t possible for the RED issue to gain more traction, it has done precisely that.

The Indonesian actions against imports of alcohol have caused major ructions in Brussels (more details on the measures themselves below). But, sources are telling us the following.

First, President Juncker is personally concerned by the prospects of a trade battle with ASEAN being one of the last things his Presidency is remembered for.

This is understandable. Under Juncker’s watch, trade agreements with Singapore and Vietnam have both been (more-or-less) completed, as was the agreement with Japan.

A trade war with Indonesia – the world’s fourth-most populous country – as well as general disagreements with the US on trade, plus an increasingly distant Turkey, are not the things he would like to be remembered for.

Second, and similarly, Cecilia Malmström, who has managed to distance herself from the EU’s worst protectionist impulses, will not want this to get any worse.  Our understanding is that from now, DG Trade and her Cabinet will be leading the discussions on this issue.

This also stands to reason.  We had persistently heard that DG Trade was unhappy with the way RED II had evolved under DG Energy. Observers of trade policy (and we include DG Trade in this) would have been aware that this would end in a hot mess – which is precisely what has happened.

Third, although Europe will frame Indonesia as the aggressor, the EU is acutely aware that it is the aggressor, and if or when Malaysia piles on to any action, it will be particularly problematic for the Commission. Indonesia is a frequent user of the WTO system and of non-tariff measures more broadly. Malaysia, on the other hand, is shy. This is most likely because Malaysia has a much greater dependence on exports.


What are the Indonesian actions?

One of the problems with the Indonesian actions at this point is that they haven’t appeared as a regulation or decree from any agencies – they haven’t even been confirmed to the media by Indonesian officials.

So what’s actually happening?

First, there are definitely disruptions. SpiritsEUROPE, which is the EU’s leading body for alcohol exporters, is apparently already encouraging some form of action against Indonesia, potentially via the WTO.

Second, any changes to Indonesian regulations may not necessarily be published on a website or gazetted immediately.

The Indonesian Government directly controls – and has absolute discretion over – which beverages might come into the country and who can sell them via a 2006 regulation. There are quotas for different types of alcoholic beverages that are set every year. These quotas are determined every year on April 1.

So, the problem for the Europeans is that alcohol is regional. Scotch whisky comes from the EU. But rye whiskey comes from Canada or the US. They are not the same product, and they have different codes under the world’s customs system to reflect this.

Third, proving that this flouts WTO rules may be difficult.

Indonesia is a Muslim country. Let’s say Indonesia decided to flatten alcohol quotas, i.e. allow the same amount of different hard liquors from different countries, rather than allowing more Scotch than Rye whiskey.

It could permit the equal amounts of Scotch, brandy, rye whiskey and rum, but overall have a lower amount of liquor going into the country, even though these quotas don’t necessarily reflect the market demand for liquor going into the country.

This isn’t exactly discriminatory. And could easily fall within the WTO’s moral exceptions.

It is very different to an early WTO case that covered Japanese taxation on imported whiskey and brandy. The Japanese levied a lower tax on ‘shochu’ whiskey and a higher tax in brandies, cognacs and Scotch. Japan lost the case, because the WTO determined that these are like products and that they do actually compete.

But that might not be the point.

One thing many countries do – and something that Indonesia is very good at – is disrupt each other’s trade to get leverage, or just get listened to.

Realistically, if the EU was to raise this at the WTO, they’d have to see what the published measure is, request consultations, then call for a dispute panel to be convened, then wait for the panel report, and then that might go to the WTO Appellate Body, which is currently not functioning.

But the fact that European industry lobby groups are calling on the Commission to take action already indicates that this strategy has been successful on the part of the Indonesians.


What are the options?

As we noted last week, the EU is likely to offer Indonesia and Malaysia a review of the Delegated Act within the next six months (well in advance of the 2021 deadline currently foreseen), in exchange for some form of de-escalation.

Both countries should be wary.

In six months’ time, all three EU institutions could look very different. The Council of the EU, the Commission, and the Parliament could all be led by entirely different political leaders.

It is possible that the incoming Commissioners and Member State governments will be even less sympathetic to palm oil.  A review of the Delegated Act guarantees nothing other than a review of the Delegated Act – unless it comes with guarantees.


Japanese renewable energy policy allows National Schemes, RSPO

Japan has delayed introduction of a mandate that requires the use of certified palm oil for its biomass power plants.

Japan’s trade ministry (MITI) originally issued a requirement that all biomass power plants must use RSPO-certified biomass beginning March 31 this year.

The requirement was introduced last year, but Japan has agreed to delay the requirement for a further two years as Indonesia and Japan review their economic relationship.

MITI also stated that it will allow the use of biomass from other certification schemes, including national schemes such as ISPO and MSPO.

The move by Japan’s authorities should be watched closely by European regulators. They might learn a thing or two.


Palm Oil Monitor Exclusive: Indonesia Blocks Imports, EU Scrambles

Indonesia blocks imports from the EU

In a dramatic escalation in the war over palm oil, Indonesia has upped the stakes and this week tightened imports of European spirits as a direct response to the Renewable Energy Directive Delegated Act.

According to various sources inside and outside government in Jakarta, Brussels and London, EU countries have been denied quotas, while other exporters from Asia, Australia and the US have had their quotas approved.

Indonesian officials have been reasonably clear in letting Brussels know that this is all about the Delegated Act.

Sources in Brussels indicate that this has left EU officials scrambling, with a flurry of phone calls and emails travelling between officials in Jakarta, London, Brussels and elsewhere.

The move comes after Indonesia excluded the EU from the high-level Indo Pacific Cooperation meeting two weeks ago, which was led by Indonesian Foreign Minister Retno Marsudi, according to our sources.

EU countries are attempting to formulate a response.

Ambassadors to Indonesia from the EU’s major economies have forwarded a strategy paper and sent this to DG Trade in Brussels.

According to sources, they are acutely aware of:

  • EU attitudes to palm oil being raised as an election issue;
  • Anger of small farmer groups across the country;
  • The favouritism displayed to the US in the Juncker-Trump soy deal;
  • That this may impact prospects for trade deals with Indonesia, Malaysia and ASEAN.

More importantly, they are also expecting that the Delegated Act will cause serious diplomatic harm to the EU across the ASEAN region, and that these risks have been grossly underestimated.

 The EU’s strategy

EU diplomats and officials are considering several options to deescalate the situation.

  • First, they are considering to ask the Commission to conduct an immediate review of the Delegated Act, with consultation and input from Indonesia and Malaysia. This review is well in advance of the original 2021 review date. This indicates how serious the problem is.
  • Second, there is to be a high-level visit by Coordinating Economic Affairs Minister Narsution to Brussels next week. The EU is hoping that they are able to give Narsution some policy ‘wins’. This, in their view, will de-escalate some of the tension and effectively buy Indonesia off for the time being.
  • Third, they are further hoping that EU financial support for ISPO will ameliorate the situation.

In addition, they have called for immediate progress on the palm oil working group that was announced at the EU-ASEAN Summit.

The view from Indonesia: The EU is insulting the region

All three of the measures outlined above are flawed. They are designed to do one thing: Keep Indonesia and Malaysia quiet.

On consultation and review, it should be remembered that as the Delegated Act was being drafted, input from Malaysia and Indonesia was completely ignored, as were the protestations made at the WTO. Moreover, this is just another step in more than ten years of EU policymakers denigrating and financing a campaign against palm oil. The question for palm oil producers – when will Europe table the same deal as they gave to the Americans?

On the high-level mission, this is viewed in Indonesia and other palm oil producing countries as if the EU displaying its worst tendencies.  The idea that Indonesia can be ‘bought off’ with anything less than the same treatment given to the United States is seen as an insult to Indonesia, the region and Minister Narsution.

On ISPO, it’s worth remembering that UKAID is already working with NGO Kehati on a ‘Revamping ISPO’ program and handed over IDR 22 billion (GBP 1.2 million) for ‘Revamping ISPO.’ This was part of a GBP 40 million program to reduce emissions. It had nothing to do with increasing trade. The Indonesian Government shouldn’t be satisfied with anything less than recognition of ISPO as sustainable.

Finally, the Palm Oil Working Group needs to seriously be questioned. The Working Group was convened nearly two months ago as the Delegated Act was in train. Brussels would have been acutely aware of the timeline for the Delegated Act. If the EU was negotiating in good faith, why wasn’t it sharing information on the Delegated Act?

 This is likely to heat up in the next week, with a visit from the UK Trade Envoy to the region and a joint mission from Indonesia and Malaysia heading to Brussels. We’ll have more updates as they come; keep an eye on our Twitter and your inbox.


Palm Oil Monitor Weekly Update – 2nd April 2019

Malaysia, Indonesia respond to the palm oil ban

Both Malaysia and Indonesia have responded aggressively to the final version of the RED Delegated Act. This response isn’t surprising given that palm oil is ASEAN’s largest agricultural export, and Indonesia’s largest export across the board.

The latest intel circulating in KL and Jakarta is that:

  • PM Mahathir Mohamad and President Jokowi will write a joint letter to the heads of the European Commission and Parliament;
  • Both are likely to collaborate on a WTO action;
  • Both will engage in diplomatic missions to Europe;
  • Trade retaliation against European exports to the region remains on the table.

Here’s a rundown of the actions that have taken place so far.

Indonesia has said it is reviewing its trade agreement with the EU.  Indonesia’s Director General of Trade, Iman Pambagyo, has said that Indonesia will undertake a thorough review of the Indonesia-EU Agreement, which has been triggered by the Delegated Act. Pak Iman made the comments following the most recent round of negotiations between the two countries, which ran from March 13 to 16 in Brussels. Pak Iman stated that “There is one amazingly difficult chapter, namely trade and sustainable development in which there is an issue of vegetable oil,” noting that the EU does not accept Indonesia’s conceptual approach to sustainability.

Malaysia has publicly stated that Malaysia-EU trade talks will remain on hold.  Deputy Trade Minister Ong stated that “We have not decided whether to continue with the discussion or not … But this is a very important platform for Malaysia, which provides an opportunity for us to show our stand in the ongoing issue with palm oil [in the EU] … Malaysia has submitted a proposal to the EU to introduce a new appendix on vegetable oils and fat in the Malaysia-EU FTA. This is to ensure Malaysia’s right is protected especially on oil palm-related issues that are actively highlighted in Europe presently.”

Prime Minister Mahathir has written to all EU heads of state directly. He told reporters that “We have pointed out to them that we will need to retaliate if they continue with this unfair discrimination against palm oil.”  He is also reported as saying that Malaysia “should be more aggressive” in its response to the European Union’s effective ban on palm oil-based biofuels.

Indonesia has declared that it will commence a case at the World Trade Organization if the Act is adopted.  Indonesian Coordinating Minister Darmin Nasution, Trade Minister Lukita Enggartiasto and Director General of Trade Iman Pambagyo convened a special meeting with the country’s key palm oil stakeholders to plot a path forward on WTO action, telling reporters that legal representatives “have been appointed”.

PM Mahathir has stated Malaysia will consider boycotting EU-built fighter jets. Malaysia is currently considering upgrading its fighter jet squadron with two EU-built models.  However, Mahathir stated that “If they keep on taking action against us, we will think of buying airplanes from China or any other country …If we have to buy fighter jets, we will consider these China-made jets.” Shortly thereafter, a senior Russian official made a not-very-transparent statement that Russia is ready support the purchase of additional palm oil, as part of a wider trade package that could include defence procurement (Malaysia already uses MiG and Sukhoi aircraft). There is a growing sense that the EU’s approach to palm oil has created an opportunity for others.

Broader trade retaliation

There has been talk of trade retaliation from Malaysia and Indonesia. But what could it look like?

Among the biggest exports from the European Union to Malaysia and Indonesia are aircraft. Both countries have leveraged this before.  Two years ago, when the European Parliament tabled a motion calling for a general phase-out of palm oil, both countries made clear that future military procurement deals could be affected, particularly the purchase of Airbus aircraft and Thales electrical systems.

But this only works when procurement is in the pipeline – as is potentially the case for Malaysia.

But it is also possible for countries to isolate and target particular products that are coming from a particular trade partner without falling afoul of WTO rules.

Germany, for example, exports large numbers of cars to Malaysia. These cars have a relatively high price point that could be targeted with a ‘luxury car tax’.

It may be possible to apply such a tax that will not irritate other trade partners by identifying a higher taxation threshold. The tax could also support revenue collection, as well as the local car industry, which has long been a personal favourite of Malaysia’s Prime Minister.

Another possibility is isolating European products that are applied at lower than agreed WTO tariff rates (known as ‘applied rates’) and raising them where possible to ‘bound rates’.  This is a perfectly legal action and used by countries such as India quite often.

The products chosen would either have to come almost exclusively from Europe, and there would have to be a country from which an alternative supply is available that has a preferential trade agreement with Indonesia or Malaysia. In the case of Malaysia, most of its whey powder comes from Europe. Malaysia could consider sourcing from Australia or New Zealand – both have additional bilateral or multilateral arrangements with Malaysia.

Other products, such as whiskies and brandies from the United Kingdom and France are an obvious target for either changes in tariffs or limiting of quotas.

In both cases, consultation with local industry would be required.

WTO Action

WTO action will not take place straight away. The law has to be adopted in its final form before in can be objected to in the multilateral forum.

However, it is not surprising that Indonesia is taking the lead. Indonesia recently emerged victorious from a protracted antidumping battle with the European Union.

The EU was applying illegal antidumping tariffs on Indonesian (and Argentinean) biodiesel exports.

The exporters carried the day, but the mechanics of the case are instructive.

The case commenced in 2013, but took almost five years to resolve. Once it was completed, the EU launched a countervailing duties investigation against Indonesian palm oil.

At roughly the same time, Argentina lodged a complaint against the first version of RED in 2013, which resulted in Argentinean soy-based biodiesel being excluded from the RED. At that time, the issue was the ‘default values’ ascribed to different biodiesel feedstocks.

The complaint gives an indication of the complexity of the case; it’s not just a matter of the Directive or the Act, but also any implementing regulation.

As with the dumping action – or any other WTO settlement – the process could take years to resolve.

It’s worth noting that when it comes to blocking palm oil, the EU never gives up. Although it’s the revised RED now, in a few years it will be another measure. WTO action is just another bout.

A longer view: ASEAN realignment

Could the procurement of military hardware from Russia signal a pivot away from Europe by ASEAN, particularly Malaysia and Indonesia? This is entirely plausible.

EU officials are acutely aware that they were caught off guard by China’s rise. This has had considerable economic and security impacts; China now outweighs the EU’s economic and military influence globally.

EU officials should not make same mistake in ASEAN – but this appears to be happening.

The EU’s population is flat at just over 500 million people. ASEAN’s is already in excess of 600 million and will hit 700 million in around five years. Indonesia’s GDP already matches that of Germany by one measure.

The EU needs to wake up to this significant demographic and economic change if it is to participate in the region’s growth and avoid repeating its China mistake.  And that participation should be of mutual benefit.

Indonesia is open to China’s One Belt infrastructure projects. Japanese development loans funded Jakarta’s new MRT system. EU aid contributes to education and health programs, but the EU’s highest-profile aid contributions have been for stopping deforestation – which are read by many as a way of curbing palm exports.

On palm oil, last month, China agreed it would increase its palm oil purchases from Malaysia by 50 per cent.  Russia is now also signalling that it will increase purchases of palm oil. This was at almost exactly the same time that the EU singled out and banned palm oil — ASEAN’s largest agricultural export — under the RED. Indonesian palm biofuel exports have been hit by wave after wave of EU measures.

It is perfectly reasonable for Malaysia and Indonesia to ask why they should display any ‘loyalty’ to Brussels at all when it comes to military hardware — or anything else. The region’s trade agreements — RCEP and CPTPP — are progressing or completed. At this point in history, Tokyo, Beijing and perhaps even Moscow seem like more reliable trade partners. This should induce significant reflection in Brussels – because a core element to this is European leaders not understanding what is actually important to their ASEAN partners, both economically and politically. It appears that both Russia and China have figured out what the EU could not: that palm exports are fundamental. They are now looking to press home their advantage, and encourage a wider re-alignment in southeast Asia, away from the historic ties with Europe.

Iceland tries to ‘dig upwards’ on sustainability

Iceland CEO Richard Walker has made the news again for his statements on sustainability and palm oil.

Walker came under fire for instituting a boycott of palm oil in his company’s supply chain, and launching a widely viewed joint PR campaign with Greenpeace.

Walker stated that the move “did nothing for sales”, and that “If I were the boss of Tesco, I’d be sacked because I’m loading up millions of pounds of cost into our business.”

It’s well understood by more qualified sustainability experts that boycotting palm oil will do nothing to stop deforestation – and arguably it will make it worse. It’s also understood that around 35 per cent of palm oil is produced by smallholders around the globe.

Despite the fact that this move has done nothing for sales, nothing for the environment and nothing for people in developing countries,  Walker states that “we genuinely feel it’s the right thing do, and we have quite a long history of being a corporate activist.”

Which is odd; we “genuinely felt” Iceland was a business, rather than an activist group.


Palm Oil Monitor Weekly Update – 21st March 2019

Analysing the Final Delegated Act: the Commission Doubles Down

The European Commission has published its final version of the Delegated Act for the Renewable Energy Directive, as was expected.

The text will now go to the Council of the EU and to the European Parliament. They have two months to consider the Act and how to proceed, but they can also request an extension.

Both the Parliament and Council can ask the Commission to redraft the legislation. They can also remove the Commission’s authority in this area, in extremis.

As noted previously, the approval period may bleed into the EU Parliament’s elections, which commence on May 23.

There are some small changes to the Act and they are clearly aimed at palm oil. But they are also changes that appear to have been forced by pressure from Green MEPs. On March 18, the Commission’s Director General for Energy Dominique Ristori presented the final Delegated Act to MEPs in the Industry, Research and Energy (ITRE) Committee members in the European Parliament. He confirmed that the changes had been made following discussions with MEPs.

Just so we’re clear, this version doesn’t pull back from keeping palm oil out of the European market; it doubles down. Here are the key changes:

  • Revision of the definition of smallholders from ‘2 to 5 hectares’ to less than 2 hectares. The only group objecting to this definition was European greens. They saw this as a ‘loophole’ for the nucleus estate model;
  • The definitions required for smallholder exemptions were narrowed to only include abandoned and degraded land, excluding ‘unused’ land;
  • The percentage share of palm oil’s expansion into high carbon stock (HCS) areas increased from 18% to 23%.

The increase from 18% to 23% has no justification within the EU text; there is no new data that explains the increase.

But the revisions to the smallholder definition are clearly alarming and display a clear disregard for the Sustainable Development Goals.

Ristori misquotes FAO smallholder definitions, ignores SDGs

Mr. Ristori justified the change in definition for smallholders by stating that it falls into line with the Food and Agriculture Organization definition of smallholders.

Let’s be clear: no such definition exists.

In fact, the FAO does quite the opposite – it encourages governments to develop their own workable definitions of smallholders based on the relevant economic and agricultural context. It also discourages relevant authorities from using an area-based definition.

This has all been laid out clearly in a working paper published by the FAO in 2017.

Even when it comes to collecting data for non-regulatory purposes, the FAO is non-prescriptive. Its flagship publication, the World Census for Agriculture, lays out its concepts and definitions and says that countries should determine their own thresholds for smallholders and agricultural holdings more broadly.

This is because the land area of a farm on its own does not indicate anything about the labour inputs, output, and profitability of the land holding. It is highly dependent upon context, including the crop type, land type and weather conditions.

A thorough analysis of 122 countries using smallholder definitions shows that:

  • 71 countries use an area-based definition;
  • Of these, 31 use a definition of less than 2ha and 40 use a definition over 2ha;

The FAO has also recommended against a regional definition for smallholders, let alone a global definition.

So where did Ristori get his definition? We suspect it is this study from the FAO in 2015, which uses 2 ha as a starting point. But this document points out that a 2 ha definition is woefully inadequate:

“The 2 hectares threshold does not provide any meaningful information for an analysis across countries.”

The FAO points out that the renewed focus on smallholder definitions is because of the Sustainable Development Goals.

SDG 2.3 seeks to double:

the agricultural productivity and incomes of small-scale food producers, in particular women, indigenous peoples, family farmers, pastoralists and fishers, including through secure and equal access to land, other productive resources and inputs, knowledge, financial services, markets and opportunities for value addition and non-farm employment.

There are two indicators, which measure smallholder productivity and income. The SDGs note that there is no methodology for measurement, and that the “The main reason for this  … is the lack of a universally-accepted international definition of “smallholder”.”

Officials from the region have been wondering whether the SDGs might be used as supporting material for a possible WTO case against the EU. This disregard of FAO methodologies and the SDGs looks like a clear entry point.

… And ignores the EU’s own definitions

What may further trip up the Commission and the European Union when it comes to international legal action – is that this new definition diverges completely from the EU’s own definition of small farmers.

The European Commission notes that a definition based on area is of very limited utility and the EU bases its definition of small farms on gross margin rather than area.

The EU defines a ‘small farm’ as being less than 8 ESU or ‘European Size Units’. ESUs are calculated by taking gross margin and dividing this number by EUR1200.

In the same way, the US Department of Agriculture uses a definition based on margin, rather than size, for small farms.

In Malaysia, a definition for smallholders is 40 ha. For palm oil specifically, the only definition is put forward by RSPO, which is 50ha.

For palm oil, a rule of thumb is one family member can work full time on 5 hectares, without the need to engage an additional worker or family members. With less than 5 ha, smallholders will find difficult to earn a decent and living wage and would look for another job. The EU has clearly not even bothered to check what ‘works’ in the sector.

But the question is this: why didn’t the EU use its own definition?

Because it would simply be too inclusive. There is a broad range of gross margins for palm oil. A CIRAD project noted that margin for Indonesian smallholders can range from IDR2000000/ha (EUR125) to 15000000/ha (EUR930).

A 5ha holding at the lower end would imply a gross margin of EUR625, roughly translating to 0.5 ESU. Using a low margin, a ‘small’ farm would be up to 80ha if calculated using ESUs.

… And casts ASEAN concerns aside

The changes to the Delegated Act have raised the ire of Malaysia and Indonesia. Both countries expended considerable resources demonstrating to the EU the problems with the Delegated Act. Both countries were ignored. Moreover, the classification of soybean as low risk has raised ire further, particularly given its higher deforestation footprint.

Ristori was asked to justify why soy was exempted and not palm oil. Without getting into details, Mr. Ristori just implied that their scientific evidence was “reliable”. Clearly, he’s towing the line for Juncker’s deal with President Trump. He also indicated that Malaysia was committed to protecting forests and sustainability. Then why ban palm oil?

Pundits are predicting a broader trade battle. The producing countries certainly seem prepared.

Malaysian Minister of Primary Industries Ms. Teresa Kok issued a statement saying, “This is totally unacceptable, and it is discriminatory and insulting to smallholders in the palm oil producing countries.”

Malaysian Minister of Foreign Affairs Saifuddin Abdullah stated “…if this Delegated Act is passed into law, that Malaysia would look to WTO for recourse. This discriminatory Delegated Act undermines the EU’s credibility as a proponent of the WTO-led rules-based system”.

Indonesia has now publicly stated that it will mount a WTO action. Trade Minister Lukita Enggartiasto said that “The decision [to take the issue to the WTO] was just made at a meeting yesterday. It is now being drafted. We will send the letter to the WTO and assign a lawyer.”

This doesn’t bode well for the EU’s trade ambitions in the region.

The EU has caved on soy in order to placate the Trump Administration’s proposed tariffs on cars. This will come at a cost for the EU’s trade plan in Indonesia, Malaysia and the rest of ASEAN.


Palm Oil Monitor Exclusive: Analysing the EU’s Scientific Report on Biofuels

Accompanying the Renewable Energy Directive (RED) draft Delegated Act released on 8th February 2019, the European Commission released its scientific report that attempted to determine which crops could be considered ‘high ILUC risk fuel’ feedstocks.

The report isolates palm oil as the only feedstock crop that can be considered as presenting a high risk of indirect land use change.

This is odd, given the EU’s previous pointing to soybean and maize as significant drivers of deforestation. Industry observers should therefore be sceptical, particularly as the EU has agreed to a political deal to buy more soybeans from the US – a deal made just before the scientific report was published.

In sum, this report is shoddy and unusual for a body that prides itself on producing accurate scientific data. Unfortunately, it reads like a press release-report from Transport and Environment (T&E) funded by a left-wing foundation or the Norwegian government. This is a sad decline in the intellectual rigour of the European Commission.

General observations

First, it appears to have been quite rushed. We are aware from our sources in Brussels that the scientific report didn’t look like it was anywhere near completion as late as Christmas last year.

This is supported by the fact that there are a number of spelling errors throughout the report. This might be a minor quibble, but if you’re preparing something for publication and you don’t have time to run it through a spell check, you’re clearly pressed for time.

Second, if this is the case, it’s a bit of a mystery as to how they’ve reached firm conclusions so quickly. Accurately linking deforestation by crop type is something that has eluded researchers for years, particularly in the satellite imaging field.  However, if the report is to be accepted as robust, we are also supposed to believe that the study managed to construct a robust methodology without producing any new data sets, in record time.

Third, this issue of the timeline is not incidental: it’s fundamental to how the Delegated Act was conceived. MEPs demanded such a fast timeline, to benefit their political positioning ahead of the EU elections in May. Such politicisation of a scientific and technical process is highly irresponsible. The EU Commission admits privately that this timeline was never sufficient for the job at hand – and even in public meetings before the EU Parliament, Commission officials have hinted strongly that the timeline was irresponsible.

Problem 1: Can ILUC risk even be assessed?

Indirect land use change (ILUC) as a concept has been criticised many times before. The doubts around it are encapsulated in one simple statement: “ILUC cannot be observed or measured. Modelling is required to estimate the potential impacts.”

The problems with ILUC have been gone over again and again. The last time the EU undertook a review exercise was in 2017. It stated then:

Results of recent ILUC studies are far from consistent in their approaches and outcomes. After 2012, no further convergence in results is presented in the literature.

It also noted that palm oil had a lower mean and median ILUC factors than sunflower, and a lower median than soybean.

That 2017 report also assessed if or how low-ILUC risk certification could take place, and critically examined certification pathways and whether low-risk ILUC was in fact possible given the complexities of the market, and substitutions between crops.

Isolating particular feedstocks was not one of the recommendations. In fact, some of the key recommendations of that report were as follows:

The analysis of the evidence on the different components of ILUC shows that for most ILUC components the scientific evidence is extremely poor …

Datasets on biofuel crop production must be collected, synthesized and standardized to common data formats. Analysis of historical information on agricultural production, trade, prices and yield, as well as land use changes may require further attendance in order to get a better understanding of the fundamental parameters that generate ILUC. Increased data availability and convergence of data formats and transparency, could also potentially help for validation of models and increase the use of empirical models. Satellite monitoring can support this development for different purposes, including ILUC research.

Finally, on methodologies for ILUC risk, it stated:

these need further refinement, particularly regarding: (1) the prove of additionality through calculation of trend line baseline yields, (2) availability of reliable data in all potential sourcing regions in the world, and (3) risk for unsustainable increases in irrigation water consumption needed to increase yields in arid regions. Also, the evaluation of unused land status and the duration of certification of 10 years, still has many open ends which need to be evaluated further.

This begs the question as to how the Commission moved from accepting that ILUC risk was close to impossible to stating in the scientific report that:

‘[ILUC] modelling has a number of limitations, but nevertheless, it is robust enough to show the risk of ILUC associated with conventional biofuels.’

Moreover, how does the Commission find it acceptable that isolating feedstocks where expansion on high carbon stock areas is high can somehow operate as a proxy for ILUC risk?

This is the critical jump in logic that the Commission is attempting to make. And it doesn’t even explain how this ‘trick’ is done.

Problem 2: Smashing together the data

The second problem in the scientific study is how the various datasets are meshed together.

As stated above, the EU is attempting to quantify how much deforestation can be attributed to the expansion of a particular crop. According to the EU’s logic, the greater this expansion for a single crop, the greater the risk of ILUC.

The scientific report has come up with some figures despite the fact that this calculation of a highly complex and essentially unmeasurable figure has been eluding researchers for decades.

There are three datasets that are drawn heavily upon. All of them are robust for their own purposes. The question is whether they should be used for different purposes, which is what the EU seems to have done.

The first is by Curtis et al (2018). This study uses satellite monitoring data to determine whether forest loss is likely to be deforestation, and then whether that deforestation was for commodity production, urbanization, shifting agriculture, etc.  The study does not attempt to determine which commodity crops (or trees) were grown following the deforestation, and it also only determines one factor to a particular area. In other words, the study does not say if deforestation was caused by oil palm or fibre plantations or soybean or cattle.

The second is a dataset produced by IIASA and IFPRI in 2015. This dataset is an estimate of which crops are grown where and how much of each crop is grown within a particular area. It is based on 5-square kilometre blocks, and isn’t directly derived from satellite data. Rather, the data is crowdsourced via user input. There are, therefore, some major quirks in the data. According to the maps, there’s quite a lot of oil palm grown in downtown Petaling Jaya, as well as some Arabica coffee (which only grows above 1000m). There’s also some wheat being grown in the south-eastern suburbs of Melbourne.

The thinking behind the dataset was to use it as a tool for crop land use decisions. It wasn’t designed to produce granular data to attribute precise areas to particular crops – although this is improving.

As the study says, “globally consistent maps showing the expansion of all individual biofuel crops through time are not available.”

However, the EU consultants overlaid the two datasets and assessed which ‘commodity driven deforestation’ lined up with the IFPRI/IIASA datasets, therefore coming up with an amount of deforestation that can be attributed to a particular, single crop. There are two caveats here that the consultants note: first, they are attributing all tree cover loss in a ‘commodity driven deforestation’ area to agriculture, and second, that they can attribute this deforestation proportionally to a single crop based on IFPRI data.

The third dataset is FAO data on harvested areas for particular crops, which can be used to assess the total expansion of a particular crop over a particular time period. This data is based on country reports given to the FAO.

So, these three datasets: satellite, user and country-level reports are very simply smashed together, with no harmonisation of the data and no verification – and what seems like a lot of guesswork.

Here are some examples of problems.

Problem 1: crop area expansion. The study bases its cropland expansion area on USDA and FAO reports. It says that between 2008 and 2015, global oil palm plantation area increased by 7.8 million ha. USDA bases its harvested and production area analyses on seed sales and trade data.

Do these figures square with other data? According to statistics from MPOB, oil palm planted area in Malaysia increased by around 1.2 million ha in 2008-2015. Much of this was attributed to conversion of old rubber plantations. This is also the data used by the FAO.

According to Indonesia’s statistics agency, oil palm planted area increased by around 2.1 million ha over the same period, which was partly driven by a decline in smallholder palm areas.

This totals 3.3 million ha. Did the rest of the world really stack on another 4.4 million ha of oil palm plantations? This seems unlikely, if not impossible, given the dominance of Malaysia and Indonesia over the palm oil sector during that time period.

Much of the discrepancy is in the FAO and USDA data. The data used by the FAO on Indonesia’s planted area is an ‘unofficial figure’. Both say the Indonesian industry expanded by around 4 million ha in this time. But these estimates are only as good as the data they have on trade and seeds.

The point is that using estimated crop expansion data based on trade and seed data, then combining that with satellite deforestation data, and adding that to estimates of cropland, mean that you end up with data that simply isn’t accurate.

Problem 2: crop area expansion (redux). The only truly comprehensive study of oil palm plantation mapping based on remote sensing data was undertaken by Cheng et al (2018). It’s worth noting that this study wasn’t cited in the EU’s literature review.

This study doesn’t look at changes in area over time. But it does compare satellite estimates with other sources for 2016. It looks like this:

ASEAN 23.80 12.80 14.82
Africa 4.59 4.28 3.80
ROW 1.10 1.06 1.26


This isn’t a small gap – it’s around 10 million ha. Unfortunately, it doesn’t establish the original 2008 baseline.

And this begs the question: do we really know what the 2008 baseline is? Neither the 2008 palm oil area or the final 2015 figure used in the study are based on satellite mapping. But the supposed amount of deforestation for palm oil is.

Problem 3: disaggregation of palm oil from other tree crops and plantations. One of the problems that has plagued interpretation of satellite data in the tropics has been identifying and disaggregating oil palm expansion from fiber plantations and other crops.

As Curtis states, the problem is:

Forest plantations in Southeast Asia contained patterns of loss and regrowth similar to those seen with the expansion of new agricultural oil palm plantations categorized within the commodity-driven deforestation class. This was particularly true for small-scale palm plantations that are planted and grown at roughly the same spatial and temporal scale as short-rotation wood fiber plantations.

This is accounted for in the methodology used by Curtis et al, by lowering the confidence interval in the final result, which is a landscape-wide quantification of deforestation due to commodities. The question is whether the IFPRI/IIASA datasets do this – and it doesn’t appear to be any way that the crowdsourced data makes this distinction.

There are some reasonably obvious spots in Sumatra that have converted from natural forest to eucalyptus and pine plantations, but these appear to be included in the ‘commodity’ class rather than palm oil in both the Curtis and IFPRI datasets.

Problem 4: Regrowth and replanting. Finally, replanting and regrowth doesn’t appear to be fully accounted for. Areas around Jengka in Malaysia, which had plantations established decades ago and replanted at least once, if not twice, appear in GFW data as ‘commodity driven deforestation’. This doesn’t appear to have been resolved in the Curtis data – and therefore replanting will be considered as ‘deforestation-based expansion’. This could potentially skew both the aggregate numbers and the geographic bias of the report; more importantly it highlights again how simple errors creep in when different datasets are hurriedly layered on top of one another.


The problems with the EU study are can be summarised as follows:

  • There’s a considerable leap from the existing state of ILUC-risk knowledge to simply equating it with commodity-specific deforestation;
  • There’s no accurate, satellite-based figure of palm crop expansion between 2008 and 2015;
  • Data for commodity-based deforestation based on satellite data does not appear to adequately disaggregate palm oil from other commodities or account for replanting;
  • Lining up ‘commodity based deforestation’ data with existing cropland map datasets is novel, but requires verification.

The EU is attempting to do something that has never previously been achieved: align deforestation data with crop data. There’s a reason this hasn’t been done previously: it’s a very difficult thing to do.

If this was a research project, it would require months, possibly years of refining and improving existing data and analytical techniques.

These conclusions are supposed to be informing a regulation that will have far-reaching implications for global vegetable oil markets and for millions of farmers.

The EU needs to take it more seriously. In fairness, this is not necessarily the Commission’s fault: the rushed timeline was a political gambit by the EU Parliament. Unfortunately neither the Commission nor the Member States appear to have the backbone to explain to the MEPs that their timeline was impossible and would lead to a flawed and indefensible outcome. Which is what has happened.

We hear that the Commission’s recent Stakeholder Expert Group meeting highlighted the lack of a proper impact assessment. EU officials at that meeting hinted that there will be a thorough re-assessment before the RED is fully transposed in the 28 EU Member States (the RED foresees a review of the Delegated Act in 2021 in any case). There is a lot of room for improvement.

In 2010, the LSE published a paper that described the Renewable Energy Directive as an example of ‘policy based evidence gathering’. Nearly a decade later, not much has changed.


Palm Oil Monitor Weekly Update – 11th March 2019

A Big Week in Brussels

Last week was particularly busy for anyone dealing with the politics of palm oil in Brussels. Here’s an overview.

The RED Delegated Act consultation closed

The open consultation process for the RED Delegated Act closed. At last count, there were more than 60,000 submissions made in the process. Around 52,000 of these submissions were pre-formatted copy-and-paste letters submitted via the ‘Not in my Tank’ portal put together by Transport and Environment and other NGOs.

There were not a significant number of responses from outside of the EU that objected to the methodology used by the European Union.

Both Indonesia and Malaysia were engaged in consultations directly with the EU on the RED. According to news reports, Malaysia said that:

The draft delegated regulation has been found to be lacking in transparency, scientific credibility and many of the assumptions therein fail to reflect the actual sustainable practices in the industry … Furthermore, it is biased against palm oil biofuels compared with the other crop-based biofuels. We therefore concluded that overall, palm oil has been unfairly labeled as a high ILUC risk among the eight feedstocks cited in the draft regulation

A Delegation of Malaysian officials was in Brussels this week to meet with EU officials ahead of the final adoption of the Delegated Act.

EU Commission Expert Group Meeting

This past Wednesday, the European Commission organised a stakeholder listening session.  The European Commission announced the final Delegated Act will be submitted on March 14, 2019 to the European Parliament and Council of the EU who will then have up to 2 months to either accept or to object to it.

There has been a steady uptick in demands from the European Parliament and NGOs that MEPs should object to the Delegated Act. This could force the Commission to withdraw it, replace it, or junk the idea entirely.

Focus Switches to MEPs and Member States

The Commission’s expert meeting this past week really served as a final roll of the dice for DG Energy: once the Delegated Act is published it is then sent to the EU Parliament and to the Council. The buck will be passed, and the final decision on whether to proceed with the Delegated Act lies with MEPs and with the Member State representatives.

Our sources in Brussels say there remain serious discussions in the EU Parliament’s Environment Committee (ENVI), and that it’s possible the Committee could formally object to the Delegated Act. However, with elections in the offing and the chance to restrict palm oil imports, the smart money surely is on MEPs swallowing their pride and settling for the text as it is.

A more interesting question concerns the Council.  Why? Because the governments in Paris, London, Berlin, etc, will understand the consequences of allowing the Delegated Act to proceed. Indonesia, Malaysia, and others have made repeated statements about WTO action and potential trade retaliation. For a period of time, Member States have been able to hide behind the Commission when it comes to the Delegated Act’s provisions against palm oil. No longer. If the Council chooses to approve the Delegated Act then the Member States themselves will be responsible for the decision, and the potential consequences. It’s probably no coincidence that reports suggest Indonesia and Malaysia will be sending Ministerial representatives to European capitals in the coming weeks.

A final point worth noting is the trade narrative emerging in some sections of the European press & political world. MEPs have accused palm oil producing countries of issuing aggressive trade threats, and European media has dutifully reported this as fact. Brussels in fact needs to take a step back and realise that neither Indonesia nor Malaysia has implemented a Delegated Act that bans European products … in other words, the EU is the aggressor here in trade terms and the producers are simply responding.

A TBT Meeting at WTO

A Technical Barriers to Trade meeting took place at the WTO in Geneva. This was the first formal meeting of the TBT Committee since the EU published its draft RED Delegated Act, and the first since France decided to remove tax benefits for palm-based biofuels in its finance bill.

The last time the Committee met, Indonesia, Malaysia and other palm oil producing countries took the EU to task for not releasing details of the RED sooner, and for singling out palm oil at various points in its legislative processes.

EU-Indonesia FTA negotiations

On March 11, the EU and Indonesia also had planned to commence the 7th Round of FTA negotiations in Brussels. Rumours from Jakarta was that the agreement was effectively on hold because of the palm oil issue. But it should be noted that this is likely to be in the context of the agreement – not because of the TBT discussion.

Norway’s ‘Circle of Virtue’

Norwegian officials visited Malaysia this week, with direct visits to both Trade Minister Darrell Leiking and Minister of Primary Industries Minister Teresa Kok.

The meetings were notable because of a statement from Norway’s Trade Minister Torbjorn Isaksen, who said, “There has never been a proposition either from the Norwegian government or the Norwegian parliament to ban palm oil.”

To recap, Norway’s parliament called on the government to ban palm oil from accessing its renewables programs. Isaksen’s language is precisely the same as the EU’s when its parliament called for a renewables ban.

According to news reports, Norway is looking for a trade deal that will include sustainable palm oil. Will this mean that MSPO gets recognition under the deal? Could that be a template for other palm oil producing countries as well, to secure recognition for their own sustainability efforts?

The following day it was reported that Norway’s Government Pension Fund Global, the world’s largest sovereign wealth fund, had divested from several companies due to deforestation concerns – three because of palm oil. Rainforest Foundation Norway (RFN) cheered the move against Sime Darby, Olam, Sipef and Halcyon Agri. Olam and Sime Darby have been the targets of RFN for some time; RFN has called for GPFG to divest from companies associated with palm oil.

RFN, for its part, receives considerable financial support from the Norwegian Government’s development agency, Norad. In 2015, it received more than USD10 million in funding.

Given all of the above, it’s unclear exactly how the Norwegian government can claim to be pro-palm oil. Or, more importantly, it’s unclear why anyone in a producing country would believe that claim.

Indofood Exits RSPO

Indofood, Indonesia’s largest food producer (and the world’s largest maker of instant noodles), and RSPO have parted ways. Indofood withdrew from the organisation in late January; their formal expulsion letter was sent from RSPO at the end of February.

The complaint against the Indofood division – London Sumatra Plantations — that sparked the withdrawal took place in mid-2016.  It was launched by the US-based Rainforest Action Network. Its target was Pepsi, and specifically its joint venture with Indofood.

The complaint was protracted. Despite verification audits and meeting complainant expectations, RAN continued to appeal, place quite unreasonable demands on the company and effectively refuse to settle. One example: RAN refused to reveal the locations of the rule breaches for several months.

This placed a considerable financial and resource burden on the company. Our understanding from talking to people familiar with the matter was that it was simply not worth Indofood’s time to maintain its RSPO membership and compliance.

This should be an eye-opener for RSPO. For voluntary schemes such as RSPO, part of the sales pitch is that certification – not just better practices, but compliance and certification – gives value to companies. If that becomes a burden rather than a benefit, the business case is gone.

It’s worth noting that Indofood’s plantations division has been under some financial pressure, posting a loss last quarter. But does this also mean that some companies will see certification as an unaffordable extra when times are tough?

Add to this the elephant in the room for Europe: around 26 per cent of palm oil going into the EU remains uncertified, according to a new report by IDH. This is despite a commitment by a number of EU countries to make their supply chain 100 per cent sustainable by 2020.

IDH noted that there was little demand for certified products in Italy, Spain and Poland. IDH stated that “To meet the 100-per cent target by 2020 is going to be very difficult because now we move into these markets where there is no consumer pressure or awareness.”


Palm Oil Monitor Weekly Update – 7th March 2019

POM Insight: Delegated Act Scientific Report

The EU is attempting to do two things in the Delegated Act’s scientific report.

First, it’s trying to provide the basis for ‘low-ILUC risk’ classification of biofuels.  In its previous assessments of whether low-ILUC certification was possible in 2017, its consultants referred to them as being in their infancy.

So, without any strong scientific basis, it simply seeks to use deforestation by individual commodities as a proxy for ‘high ILUC risk’.

There’s no underlining how incorrect this is. The same 2017 report pointed out that ILUC factors for palm were lower than sunflower oil.

Second, it’s trying to do something that has never been achieved, despite decades of research into deforestation and satellite imaging: perfectly align deforestation data with crop or land-use data.

There’s a reason this hasn’t been done previously: it’s a very difficult thing to do.

Nonetheless, the European Commission attempts to do this by putting together three unrelated and unharmonised sets of data on cropland expansion, cropland area and commodity-driven deforestation.

The problems can be summarised as follows:

  • There’s no accurate, satellite-based figure of palm crop expansion between 2008 and 2015;
  • Data for commodity-based deforestation based on satellite data does not appear to adequately disaggregate palm oil from other commodities or account for replanting;
  • Lining up ‘commodity based deforestation’ data with existing cropland map datasets is novel, but requires verification.

In 2017, the EU’s consultants stated:

  • Datasets on biofuel crop production must be collected, synthesized and standardized to common data formats.
  • Analysis of historical information on agricultural production, trade, prices and yield, as well as land use changes may require further attendance in order to get a better understanding of the fundamental parameters that generate ILUC.
  • Increased data availability and convergence of data formats and transparency, could also potentially help for validation of models and increase the use of empirical models. Satellite monitoring can support this development for different purposes, including ILUC research.

None of these things were done for the current scientific study.

This report is supposed to be informing a regulation that will have far-reaching implications for global vegetable oil markets and for millions of farmers.

The EU needs to take it more seriously.

In 2010, the LSE published a paper that described the Renewable Energy Directive as an example of ‘policy based evidence gathering’. Nearly a decade later, not much has changed.

This is an example of why the global community is losing faith in the European Commission’s policy-making capacity.

What US Soya Deal May Mean for Palm

One of the questions being thrown around in Jakarta and Kuala Lumpur since the release of the EU’s RED Delegated Act is whether there will be a ‘low ILUC risk’ certification pathway for palm oil going forward.

More attention has been given to this since the approval of the US soybean sustainability standard, which gives US soybeans easier access to the EU biodiesel market.

Our sources indicate some palm oil officials doubt the genius of the US approach here, or how it will work if it only applies to the US and not Brazil and/or Argentine soya.

Here’s the takeaway: the approval happened quickly; it was clearly a political sop to the US, which was threatening tariffs on any number of EU exports, but particularly steel products and the German automobile industry.

Now there are two questions for palm oil producers. First, is a political deal on certification achievable for palm oil? Second, what would a certification deal look like?

A deal is without doubt achievable. As stated last week, Malaysian Prime Minister Dr Mahathir Mohamad is an experienced international player.  Part of this is his ability to marshal troops. This has been on display at the EU-ASEAN Summit, where the EU was rebuffed on its cooperation overtures, with Malaysian Foreign Affairs Minister Saifuddin Abdullah confirming Malaysia and other ASEAN countries won’t support upgrading EU-ASEAN to a ‘Strategic Partnership’.

But there’s also a greater political weight when Indonesia is in the room. It is the fourth-most populous country in the world, and the largest economy in ASEAN – and palm oil is its largest agricultural export. When Indonesia speaks, other countries tend to listen, particularly when supported by ASEAN’s other major economies Malaysia and Thailand.

In other words, the political leverage is there.

The deal for US soybeans as a biofuel going forward has two parts.

The first is the EU’s approval of the US soybean standard. This was clearly political. There are any number of problems with the US standard meeting the EU’s sustainability criteria. The biggest one is that it technically doesn’t certify whether land was forested before the EU’s 2008 cutoff date.  That this doesn’t matter in the eyes of EU regulators speaks volumes about what they’re prepared to accept.

But this ‘deal’ only lasts until the introduction of the revised RED.

The second part is the greenlighting of soybean as being ‘low ILUC risk’ in the new Delegated Act.  This relies on the idea that soybean expansion in Latin America has had a very small impact on forests. This is despite the fact that according to the EU’s data sources for the Delegated Act, commodity-based deforestation in Latin America is double that of Southeast Asia, and the increase in soybean harvested area between 2008 and 2015 is more than ten times that of palm oil.

So, is there a low-ILUC risk certification pathway for palm? The scientific report left that pathway open, where it states:

“To ensure robust and harmonised implementation, the Commission will set out further technical details regarding concrete verification and auditing approaches in an Implementing Act in line with Article 30(8) of the REDII. The Commission will adopt this implementing act by 30 June 2021 at the latest. Voluntary schemes can certify low-ILUC risk fuels, developing their own standards individually, as they do for the purpose of certifying compliance with the sustainability criteria and the Commission can recognise such schemes in line with the provisions set out in REDII”.

In other words, there are 18 months for a case to be made for low-ILUC risk palm certification. Technical data on its own will not convince the EU that the pathway should be open. Robust technical data supporting palm’s emissions savings has been in place for years – but that didn’t stop palm being locked out going forward.  The political case is essential.


Palm Oil Monitor Weekly Update – 25th February 2019

EXCLUSIVE: PM Mahathir’s letter on eve of Norway visit

Norway’s Minister of Trade and Industry, together with EU officials, will be in Kuala Lumpur this week for a series of meetings with their Malaysian counterparts to discuss their countries’ recent measures to ban palm oil from its renewables programs.

POM has obtained an exclusive copy of Prime Minister Mahathir’s blistering letter to his Norwegian counterpart Erma Solberg, regarding the country’s decision to ban palm oil from its renewable’s programs. This follows Malaysian Prime Minister Mohamed Mahathir’s letters to France and the EU.

To recap: In December, Norway’s parliament voted to request that the government develop a biofuel policy that will “exclude biofuels with high deforestation risk” in its biofuels programs.  The Parliament has requested that the policy be introduced from January 2020.

Adding fuel to the fire last week, Foreign Minister Saifuddin Abdullah released a statement echoing PM Mahathir’s letter. He stated:

The Government and people of Malaysia strongly oppose the proposed ban on palm oil biofuels. This ban is discriminatory and unfair, and would negatively affect 650.000 small rural farmers across Malaysia and adversely impact the earnings and wellbeing of nearly 2 million Malaysians who are dependent on the palm oil industry for their livelihood.

Is the Norwegian visit genuine or window-dressing? The only real outcome that will satisfy Malaysia or for that matter any palm oil producing country will be for Norway to include palm in its renewables programs.

PM Mahathir’s letter is highly critical of the ban, pointing out that any move in that direction may violate WTO rules, and will disproportionately impact 650,000 small farmers and 2 million people dependent on palm oil.

But the stinger for Norway is here:

The Norwegian vote to ban palm oil was based on the presumption that our oil palm cultivation is a proven driver of tropical deforestation. This assumption has no proven justification whatsoever. We therefore request your personal intervention in this matter which should be treated in a fair and non-discriminatory manner by Norway, with equal treatment and access for Malaysian Palm Oil, alongside with other sustainable biofuel feedstocks [our emphasis].

As POM has noted before, it’s one thing for governments to write to each other; it’s another for country leaders to write to each other.

PM Mahathir also brought up the prospect of strained trade relations between Malaysia, Norway and European Free Trade Association (comprising Norway, Switzerland, Liechtenstein and Iceland). The bilateral relationship between the two countries isn’t enormous; two-way trade is worth around USD800 million annually.

The irony, of course, is that Norway’s largest export to Malaysia is petroleum, and that Norway’s entire economy is built on fossil fuels.

A history lesson

Some industry participants have questioned the significance of the EU RED to global palm oil markets – and therefore PM Mahathir’s focus upon the RED and other renewable programs.

It’s worth remembering PM Mahathir’s history when it comes to natural resources and international negotiations.

During the early 1990s, there was a push on by both the US and EU to establish a binding international forest convention. This came to a head at the Rio Conference in 1992 (UNCED). Malaysia, with the support of Brazil, pushed back to make a case for an agreement that considered more equitable economic and social outcomes. This was a true victory for PM Mahathir on the world stage.

A year after the Rio Conference in 1993, PM Mahathir addressed the Commonwealth Forestry Conference at the KL Shangrila on Jalan Sultan Ismail. He noted that there was only one set of internationally agreed forest timber standards – those of the International Tropical Timber Organization.  He said:

What bothers us most is that non-tropical forests and timbers which compete with tropical timber in the same international timber market are not being subjected at all to any internationally agreed standards and commitment to sustainability… Yet we know that the practice of clear felling of miles and miles of temperate forests causes more environmental damage than the controlled selective logging practised in tropical forests.

This is a glaring case of double standards and a clear contradiction to the decisions of UNCED. It requires immediate redress…  [Tropical timber] Producer members have proposed the expansion of the scope of the agreement to cover all timbers, so that non-tropical timbers can be subjected to the same sustainability criteria and all problems of discrimination and double standards can be effectively eliminated. Not surprisingly, this proposal has been rejected by consumers of the North.

Does this sound familiar?

Substitute ‘tropical timber’ with ‘palm oil’ and the situation with RED is almost exactly the same: one set of standards for Western commodities, another set for everyone else. All dictated by Europeans.

PM Mahathir has been here before and he understands better than most where this can go. Malaysian timber came under enormous pressure through the 1990s, despite the agreements of UNCED, and the establishment of the Malaysian Timber Certification System.  Palm is not timber, but the global palm industry is more integrated and better organised than timber was in the 1990s.

Mahathir is aware more than most that the RED is just the beginning of the battle. Sure, it’s renewables now, but food and oleochemicals will be next.

Following up with France

PM Mahathir also wrote to France’s President Macron in January to protest the banning of palm oil from that country’s renewables scheme. It was reported last week that Macron is in the process of responding.

Minister of Primary Industries Theresa Kok is set to meet with France’s environment ambassador Yann Wehrling in April as part of a broader dialogue on palm and sustainability, following her meeting last week with France’s Ambassador to Malaysia Mr. Laplanche.

Although the meeting is likely to be cordial, the question for the French minister is whether they are able to rein in the anti-palm forces within the French Parliament.

One of the reasons the Parliament was able to attach the measure to the country’s finance bill was because of Macron’s unpopularity.

The ‘yellow vest’ protests have taken place every weekend for 12 weeks and are now well into their third month. Although recent polls have shown some improvement in Macron’s approval rating, he still has some way to go – and command some authority over France’s legislature.

There’s little doubt Kok will be able to change Wehrling’s mind on palm oil; Macron has already implied he is against the ban. But what Macron really needs is leverage at home.

RED Update: ITRE, ENVI and the scientific report

Last week the European Commission presented the draft RED Delegated Act to the Parliament’s Industry, Research and Energy (ITRE) and Environment (ENVI) Committees.

The response to the draft was generally negative; MEPs have said that they will reject the draft in its current form.

Sadly, this isn’t because the draft unfairly singles out palm oil or because it isn’t likely to be WTO compliant.

MEPs want to reject the draft for two reasons. First, they see the exemptions for smallholder oil palm farmers as a ‘loophole’ that needs to be closed; and second, because soybean is getting an easy ride. The few MEPs who were present echoed this sentiment led by Dutch MEP Bas Eickhout, who was quite virulent.

There was little new information about the Delegated Act in the presentation, and the response from MEPs was expected. But the Commission did invite MEPs to participate to a stakeholder “Expert Group” meeting on 5th March 2019 where the Commission will go over the ongoing Public Consultation on the Delegated Act and will possibly present compromise options.

This “Expert Group” meeting will very likely be dominated by Green NGOs such as Transport & Environment and Friends of the Earth Europe, together with some domestic oilseed interests, aiming to push the Commission to ban palm oil and change its stance on soy.

In terms of next steps, where does this take us? Once the Public Consultation process is over, the Commission will present a revised final version of the Delegated Act. The Parliament can reject it and/or ask for a two-month extension. This may mean that the final Delegated Act will be presented to a new Parliament after the EU Parliamentary elections.

The other key development was the release of the EU’s ‘scientific’ report on ILUC. We’ll provide a full analysis in the next few days.

The scientific study is going to be critical to the final look of the RED. It looks as though there are some clear gaps in the final product. The spelling errors throughout are numerous, which indicates that it was particularly rushed.

Iceland gets the cold shoulder

The Financial Times this week reported that UK supermarket chain Iceland received no boost in sales from its anti-palm oil campaign in the lead-up to Christmas. According to data posted by the company, underlying sales actually fell by 1 per cent.

The campaign provoked the ire of the Government of Indonesia in particular, with one Ambassador clearly trolling Iceland CEO Richard Walker on Twitter.

The associated video that Iceland produced with Greenpeace (and with help from Emma Thompson) apparently clocked up close to 70 million views on Youtube.

Alongside the initial controversy, Iceland faced a backlash from anti-palm oil campaigners, who were somewhat annoyed that the seller hadn’t removed palm oil from all its products, nor other products selling palm oil.

As much as we might disagree with anti-palm consumers, one should never underestimate their intelligence: they can spot a marketing gimmick.


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.