Category: Blog

The EU’s Version of Cooperation on Palm Oil

The European Commission launched its Indonesian ‘Blue Book’ – a broader strategy on bilateral development cooperation – earlier this month. The launch is generally a time of EU self-congratulation.

This year, however, it was overshadowed by the Renewable Energy Directive (RED).

The Blue Book generally makes broad claims about the contribution of its programs to sustainable development in Indonesia. This year the Chargé d’Affaires of the EU Delegation to Indonesia, Charles-Michel Geurts, had to play it defensively. Geurts claimed that the EU did not have ‘an obsession’ with imports of palm oil. He said:

Indonesia wants to produce sustainable palm oil and has a whole set of policies to do that, while the EU wants to consume sustainable palm oil, so our paths are bound to meet between sustainable palm oil production and sustainable palm oil consumption.

For the moment, we fully understand the worries and concerns or even the indignation of our Indonesian friends because when you talk about palm oil you talk about 17 million people who directly or indirectly depended on palm oil, the commodity that has been a driver to get out of poverty.

Geurts happily insisted that the Commission’s assessment of drivers of Indirect Land Use Change (ILUC) from palm oil are correct. He also stated that:

We don’t want as the EU to promote deforestation and to promote degradation of peat lands by subsidizing and by heavily supporting biofuels, like we have in the past by creating this huge market.

So, the EU will support and subsidize the significantly larger quantities of deforestation that come from soybean – and its associated biofuels.

Finally, Geurts also asserted that the EU and Indonesia would meet halfway on sustainable production and consumption of palm oil.

However, this is simply not reflected in the EU’s activities. The only mention of palm oil in the Blue Book is support for Indonesia Sustainable Palm Oil (ISPO) certification. Yet, the EU supported program is an NGO-driven program to completely redefine ISPO. It would make more sense for the EU to strengthen the existing system as a standard that can be endorsed by Indonesia’s national standards body – along the lines of Malaysia’s MSPO.

This year’s Blue Book – and Geurts’ comments – underline that the EU’s contradictions on palm oil and Indonesia are firmly in place. They can be interpreted as follows: we’ll cooperate on economic development, but only on European terms. This is not genuine cooperation.

 

The EU Election Fallout Continues

 The ‘Green Wave’ from the EU elections mentioned in last week’s issue has continued to underline the broader threats to palm oil in the European market. The election results appear to have – within just a few days – emboldened the EU’s Green parties.

First, Spain’s Socialist Party has written to the Commission requesting a substantial discussion on the introduction of carbon border taxes. The idea behind carbon border taxes is that if goods are produced under conditions where more carbon is emitted, a levy is introduced. The discussion thus far has pointed towards steel, but the RED has also been used as an example.

Spanish Energy Minister Teresa Ribera and Budget Minister Maria Jesus Montero wrote:

“If Europe ends up importing goods produced under lower climate standards, the emissions we avoid will be counterbalanced, or even overcome, by those generated in countries where goods are manufactured.”

A scenario that commodity and food exporters need to consider is if this kind of levy will be applied to vegetable oils, oleochemicals or other goods, based on a deforestation profile.

Second, the Financial Times recently profiled a high-profile French socialist civil servant – who at one point worked in the office of former President Francois Hollande – who switched his vote to France’s green candidates. The article also pointed out that the Greens’ leader Yannick Jadot is now one of France’s most popular politicians. Jadot was previously a campaign leader for Greenpeace in Europe between 2002 and 2008.

It’s also worth noting that there may be new battlefronts between MEPs and the Commission on RED implementation. The design and implementation of RED assurance schemes is the responsibility of the member states, with some suggestions that there will be greater possibility of fraud in some states. Politico this week reported a Commission official stating that “the member states are for instance responsible for the design of support schemes, which may affect the risk of fraud, and the supervision of certification bodies that are conducting independent auditing under the voluntary schemes”.

 

French Activists Chase Bolloré

France-based activist group Sherpa has filed a civil lawsuit against the Bolloré Group in France. Sherpa believes that the Bolloré group has a substantial influence on Socapalm, a plantation operation in Cameroon in the absence of a significant shareholding

Sherpa is arguing that the Bolloré Group has a legal obligation to force Socapalm to uphold an action plan it put in place in 2013 to support local communities. The action plan was put in place following a complaint against Bolloré by the same NGO group.

This complaint refers to a so-called agreement between Sherpa – and its NGO partners — and the Bolloré Group.

The agreement was made after the NGO complained to France’s National Contact Point (NCP) for the OECD in 2010. The complaint argued that Bollore had breached the OECD Guidelines for Multinational Enterprises.

In 2013, France’s NCP mediated an agreement between Bollore, the local communities and the NGOs involved, which it followed up until 2016, noting delays to implementation. Part of the problem was that Bolloré – although a major shareholder of the Socfin holding – couldn’t actually force its subsidiaries to undertake any management action at all.

The case was then handed to Belgium’s NCP.

The Belgian NCP halted its role in following up in 2017, noting Socfin’s progress on the ground.  More recently, Socfin has become a member of the Earthworm Foundation – formerly TFT. It’s also worth noting that Socfin has made a strong commitment to RSPO.

In our view, Sherpa went after the wrong target. It effectively argued that Bolloré was ‘competent’, i.e. it could make changes at Socfin. But our understanding is that:

• Bollore is a 38% shareholder in the Socfin Group
• Socfin Group owns 59% of Socfinaf
• Socfinaf owns 63% of Socapalm.

That does not mean that Bolloré can force the hand of management at Socapalm, particularly given that it is not a majority shareholder in Socfin. A major shareholder or managing director from one company may sit on the board of another, but that does not mean that they are able to out-vote other shareholders. Indeed, some major shareholders – even majority shareholders – don’t take up the number of board seats they are able to.

It’s worth noting that some of the actions in the action plan needed to be implemented with the shared responsibility of the Cameroonian government.

Sherpa is following a reasonably straightforward pattern established by NGOs in the United States, where the success or failure of the suit is actually irrelevant; the publicity gained from the suit contributes to a campaign narrative – and may yield document discovery on the way.

 

Musim Mas Announces POIG Compliance

Musim Mas has announced that it is the first company in Southeast Asia to have implemented the Palm Oil Innovations Group (POIG) standards.

The POIG standards – which are best described as a tougher version of RSPO – first rose to prominence when NGO groups were attempting to have tougher standards on new planting and high carbon stock brought into RSPO.

But after RSPO introduced HCS and a broader suite of obligations at last year’s General Assembly, does this mean POIG is irrelevant?

Not quite. One of the other key differences between RSPO and POIG is that POIG allows greater levels of scrutiny by POIG members – particularly the NGOs themselves – on member operations. It will, therefore, always be standard of choice for NGOs even if the standards are almost identical.

POIG did previously have broader support from plantation companies in the region, but this also appears to have fallen away since HCS was adopted in RSPO.

So what explains Musim Mas’ ongoing involvement?

Musim Mas has always been ahead of the green curve in relation to other Indonesian companies. It has a high degree of vertical integration and is therefore able to segregate its supply chains. This means it can produce CPO, oleochemicals and other derivative products along that supply chain. For companies that are highly sensitive to criticism in Western markets – such as L’Oreal, also a POIG member – this kind of assurance is significant.

For Musim Mas and its clients, this ability to market their products so far along the supply chain is a good hedge against NGO attacks. For NGOs, it can be used as a self-serving example: they can claim that greater NGO scrutiny creates better results.

The European Parliamentary Elections: Implications for the Industry

The European elections took place last week (23^rd to 26^th May), and the new makeup of the European Parliament announces change. This will have serious implications for the attitude towards palm oil going forward – both within the Parliament itself and, by association, within the European Commission.

A change in the Parliament means a change to the Commission – and therefore the approach to palm oil.  The workings between the Parliament, the Commission and the Council of the EU are difficult terrain to navigate for most people outside of Brussels.  The Commission President leads Commission programs. The President – on paper – is endorsed by the European Council, but the Council is supposed to take account of the wishes of the European Parliament. The Parliament’s two largest blocs – the centre right European People’s Party (EPP) and the centre left Socialists (S&D) – have lost their absolute majority in the Parliament, paving the way for Liberals, Greens, and various populists to gain power as potential ‘kingmakers’ in the negotiations. There will now be a protracted period of horse-trading between parties – including the Greens – to determine who can or should nominate the ‘lead candidate’ for Commission President.

The ‘Green Wave’ is real. The Greens bloc (known as Greens/EFA) increased its representation from 52 seats to 69 in the 751-seat Parliament. This is a negative for palm oil. But that is not all. The new ALDE group (liberals) campaigned promoting more ‘green’ policies and so did the Socialists. That is a big shift towards environmentalism, as pointed out by the Commission’s Secretary General Martin Selmayr, who emphasised that this Green ‘wave’ will have a strong impact on the next Commission’s program. And let’s not discard the fact that the Greens/EFA lead candidate Bas Eickhout MEP has been a vocal opponent of palm oil. Earlier this year he stated the following on the Renewable Energy Directive:

The good news is that after years of the Greens/EFA group fighting against the incredibly damaging effects of mass palm oil production on forests, animal habitats and the environment, the European Commission finally acknowledges that palm oil is not a sustainable biofuel.

The bad news is that the loopholes in the proposal are too big and will allow the big producers of palm oil to continue to wreak destruction. Exemptions, such as for ‘unused’ land which might serve other important purposes and those for small-holders, while size is no guarantee for good practices, need to be revisited in order to make this proposal strong enough to protect forests, the communities that depend on them and the animals that live there.

But it wasn’t a uniform swing to the Greens. The Greens/EFA gained ground in Germany, France and the UK. However, they gained little or no ground in southern or eastern member states. In Italy and Poland, for example, they failed to win any seats, and went backwards in countries such as Austria and Sweden.  What’s also notable is that the GUE/NGL (European United Left / Nordic Green Left) – the more radical of the Left wing parties, aligned with the communist parties – went backwards in most instances, going from 52 seats to 38. It’s worth remembering the GUE/NGL is home to MEP Katerina Konecna, who led the charge in the European Parliament against palm oil, sponsoring major actions against palm oil. For Konecna, the GUE/NGL representation from the Czech Republic has gone from three seats down to one, leaving her clinging on by her fingernails.

 

EU Consultation on Deforestation Regulation Skewers Palm

The Commission has published the results of its Public Consultation on ‘Stepping up EU Action against Deforestation and Forest Degradation’. The consultation is part of the EU’s longer-term work on deforestation, which will likely see the introduction of a deforestation regulation, i.e. a rule that limits imported commodities that have links to deforestation.

The consultation asked respondents to nominate which commodities should be addressed by the regulation. More than 80 per cent nominated palm oil, well ahead of meat (54 per cent) and soy (52 per cent). This is a striking indication of how skewed the deforestation and anti-palm debates in the EU have become. It is particularly striking given that EU research has clearly demonstrated the deforestation footprints of meat and soy outstrip that of palm by as much as 500 per cent.

Just as important is the means by which respondents think the EU should achieve goals ‘against’ deforestation. An overwhelming majority think that demand-side measures should be taken by the EU – over and above voluntary mechanisms. In other words, regulation that will impact trade.

An incoming green-leaning Commissioner will clearly take a tougher line on imports of palm oil – and a deforestation regulation will be the tool.

 

Sustainable Sourcing: Should Retailers Step Up?

British sustainable sourcing consultant Penny Coates has given a good overview of what UK retailers are seeking from suppliers when it comes to deforestation, and in turn, what consumers are demanding from retailers.  Overall, it’s a dismal situation.

According to Coates, retailers are increasingly demanding both sustainability and traceability from suppliers. And consumers want to be reassured that their product is sustainable or traceable, but they don’t want that decision to be made complex. This latter point about consumer information is very much in line with health labelling, where there is some evidence that more labelling information on fat content, for example, has hindered health campaigns.

In other words: consumers want a broad reassurance from brands and retailers that their products are sustainable, but they don’t want specifics.

This is problematic – because sustainability is complex. Coates uses the example of RSPO as a common point on sustainability for palm oil, but as has been pointed out many times before, barriers to smallholder certification remain high.

NGOs and some retailers – specifically Iceland and Selfridges – have not made communicating the sustainability of palm oil any easier. Why? Because they have simplified sustainability to meaning nothing more than being ‘deforestation free’ or ‘palm oil free’.

Despite the claims by Greenpeace and Iceland, palm oil certification standards are strong.

There are some useful lessons to be learned from the paper certification wars that took place in the 2000s. There was significant pressure on major companies from NGOs to only use FSC certified paper. But many companies were adhering to PEFC certification. The default position for purchasers eventually became that they would purchase FSC-certified where possible, and failing that, PEFC-certified.

This position helped break the ‘paper is destroying rainforests’ argument that was common at that time and – ironically– saw a bigger shift to plastic packaging. The choices on certification assured retailers, and retailers were then able to assure consumers.

This is a workable solution for palm oil. RSPO, MSPO and ISPO can be the choices for retailers. There is no excuse for retailers not to buy certified palm. What they need to do now is let consumers know that palm oil – like paper – is ok.

RSPO Smallholder Standard: Consultation Closing

RSPO’s third round of consultations for its smallholder standard is about to close – on June 8. The consultation represents the end of another stage of what has been a particularly long road in the implementation of its smallholder strategy.

Since its inception, RSPO had a difficult relationship with smallholders. This is not unique; it reflects two tensions present in implementing any environmental standard. Smallholders generally operate with lower standards and have the slimmest margins; higher standards cost money and erode margins if there is no price premium. The other tension is between increasing breadth of uptake to include smallholders without sacrificing stringency or integrity.

In 2005, RSPO introduced the Taskforce on Smallholders (TFS), which later evolved into TFS 2 and the Working Group on Smallholder Finance in 2010. The latter had limited success in having smallholders adopt RSPO standards.

The most recent strategic iteration — the Smallholder Strategy – was introduced in 2015. This was a broader recognition that an ad hoc approach to smallholders simply wasn’t working.

So, why did it take nearly 10 years for RSPO to get it together on smallholders, and why the push for completion now?

In our view there are three reasons.

First is that demand growth for RSPO is flattening as demand for vegetable oils in Europe flattens. The standard was completed at what is best described as a complex time for RSPO. The introduction of the ‘no deforestation’ requirements in the standard means there is greater scrutiny on the standard and a bar to new entrants. Supply growth has to come from somewhere, and the only way for RSPO to increase its revenue base is to increase certified volumes.

Second, and this is related to the above, some mills in Indonesia in particular are looking to certify more of their supply chain – including smallholders. As has been pointed out many times before, Western procurement standards have a habit of excluding smallholders from supply chains. This was particularly the case for Unilever in Indonesia.

Third, Malaysia has introduced a mandatory MSPO standard for smallholders, for which the government is providing financial support for certification and audits. Similarly, ISPO, although not as well resourced, provides Indonesian smallholders an alternative with a lower level of compliance. Purchasers in European markets may view a smallholder with MSPO certification as meeting sustainability procurement requirements. It would be difficult to argue with from a broader sustainability perspective.

Pressure has grown for RSPO to take a more inclusive approach to smallholders from all sectors. But it has been these most recent commercial pushes – particularly the prospect of being crowded out by other standards – that appear to have given it the final shove.

The completion of the smallholder standard is well overdue, but very welcome. It will provide a certification pathway for farmers supplying major mills selling into Europe in particular.

This is, however, provided that the standard does not get shot down by overzealous NGOs within the RSPO membership. At last year’s Roundtable there were numerous objections to any loosening of standards for smallholders. But here’s the problem: if it’s not accessible, it won’t get used. This is something for those contributing to the consultation to keep in mind.

FAO: Oilseeds Outlook 2020

The United Nations Food and Agriculture Organization (UN FAO) has issued its oilseeds outlook for the next financial year, and there are some highlights for palm growers.

But the front-and-centre question for many growers is whether the US-China trade spat will provide any relief from low prices.

When the US and China engaged in their first round of tit-for-tat tariffs, there were some analysts that argued palm could gain – if soybean demand fell in China for crushing, palm oil could take up the slack.

This didn’t eventuate. The lack of demand for soybean in China brought down vegetable oil prices across the board as inventories were depleted.

There is some concern this will happen again. The current round of tariffs hasn’t done a lot for prices – though there have been some gains over the past week – but the FAO paints an interesting picture for oils, particularly palm.  Here’s their take:

Stimulated by low international prices, global oils/fats consumption is forecast to expand by about 4–4.5 percent year-on-year. Growth is expected to be driven by palm oil and, to a lesser extent, soybean oil, resulting in palm oil further increasing its share in total oils/fats uptake.

Meanwhile, rapeseed oil consumption could fall on the back of reduced availabilities. As a group, developing nations in Asia would continue to drive the expansion in global oils/fats uptake. While consumption growth could decelerate in China, mirroring slower economic growth, stable growth is envisaged in India. At the same time, a marked acceleration in uptake is expected in Indonesia, which could account for one-third of global consumption growth. Sizeable gains are also anticipated in Brazil and the United States of America, whereas consumption may contract in the EU.

In other words, the production-utilisation gap for oils and fats appears to be narrowing right now. This is a good sign for farmers.

Beef is getting the palm treatment, but there’s a catch

European NGOs have launched a campaign against EU supermarket chains for using beef from Brazil’s JBS, the world’s largest beef producer. According to ‘Illegal Deforestation Monitor’:

Sainsbury’s, Asda, Lidl and Carrefour are among the international brands potentially fuelling illegal deforestation in Brazil’s cattle industry as they continue to stock corned beef from a firm implicated in numerous environmental and human rights abuses.

This will all sound very familiar to those in the palm oil industry. And to some, not a moment too soon. The industry has gone to great lengths to point out that the deforestation footprint of livestock is around 10 times that of palm oil.

But there’s a catch. Campaigners appear to be using the JBS story to push greater levels of regulation on imports of forest risk commodities across the board.

A long history of examples such as this one has led campaigners and parliamentarians across Europe to conclude that the only way to prevent EU consumers from unwittingly contributing to overseas deforestation – including illegal deforestation – is through government regulation. An EU law already exists which requires importers of timber to ensure their wood is legally sourced, and there are growing calls for similar legislation to be enacted for other ‘forest risk commodities’ like beef.

So, although this would be an opportune moment for the palm oil industry to pile on to an anti-beef campaign, the goal here is more regulation for beef, soy, palm – and anything else that gets imported to the European Union. And for those who are keeping track, this campaign has been supported by the UK’s aid agency.

Demarty: WTO reform necessary to prevent ‘law of jungle’

Jean-Luc Demarty, Director General of the European Commission’s Trade Directorate, has told reporters that a WTO reform should be a priority for the next European Parliament and Commission:

The major issue in trade policy for the next Commission just at the beginning of its mandate, and also for the new European Parliament, is not necessarily swiftly developing new agreements … but preserving the WTO system and reforming it … If we are not able to do it, the stakes will be enormous … The status quo is not sustainable … If there is no reform to the WTO system, in particular on the rulebook and subsidies, the WTO system will be no longer relevant … It would become the law of the jungle.

To anyone outside of Brussels, this might seem strange. The EU is often more than happy to push and flaunt WTO rules to their absolute limit. The RED is a perfect example. But for the EU, the WTO is a bureaucratic and legalistic system that provides adjudication when it pushes the limits: it is the bloc’s shield in trade matters.

If that shield falls apart – and it is currently being threatened by the China-US trade spat and potential bilateral resolution – then the EU may find itself subject to any number of unadjudicated retaliatory actions, which will be particularly damaging for an economy like Germany.

Adding to this, the nature of the EU agreements means that trade policy is handled out of Brussels; this generally means that trade actions must be negotiated among the EU members before action can be taken. This makes nimble and agile action – similar to US unilateralism – particularly difficult.

If the EU wants to get greater buy-in from the ASEAN region, it should probably consider being a more reliable trading partner.

EU recyclables are now Malaysia’s problem

POM does not often heap praise upon Greenpeace, but the NGO’s most recent advocacy efforts have highlighted the glaring hypocrisy in the EU’s management of environmental waste.

Since China introduced a ban on the importation of recyclable waste last year, there has been a flood of exports of post-consumer recyclables from the EU to Southeast Asian countries, such as Malaysia, Thailand and Vietnam. Some countries have introduced stricter import licensing measures, though their effectiveness is yet to be seen.

The resultant problem – unmanaged piles of European rubbish in semi-urban areas – is a health and environmental problem.

It also underlines that much of European sustainability policy can be considered virtue signalling with no positive outcome. Very few Westerners know – or care — that recyclables are simply exported. Or that banning palm oil has a negative impact on Indonesian and Malaysian farmers …

There are a couple of signals here.

First, Europeans don’t want to pay. European companies and consumers have little appetite for a premium on CSPO. They also don’t want to pay to manage their own recycling and waste problems.

Second, Europeans think environmental problems don’t need managing in Southeast Asia if they create them. Deforestation for food production and exports is a big problem for Europeans, apparently. But burning piles of exported European recyclables near major urban areas in Kuala Lumpur, Hanoï and Bangkok? Not Europe’s problem.

RED update

The Renewable Energy Directive’s Delegated Act has now moved past its approval date of May 13^th. So what is actually happening? Here’s a summary of what we’re hearing on the ground.

Neither the EU Parliament nor the Member States have objected: so the Delegated Act will become a reality. It will take effect in 2021 … but a lot could happen before then.

This week on May 22, DG Energy is set to meet with Member State representatives to discuss the Delegated Act.

It’s highly likely that this meeting is being pushed by the Member States in order to wring some concessions out of Brussels – and therefore salvage the relationships with ASEAN. This is important for a number of reasons.

• There are member states that stand to lose from the Delegated Act. A country like the Netherlands will see its traded volumes of palm oil drop significantly, harming transport and logistics. Countries that don’t produce rapeseed will have to contend with simply paying more for renewable fuels – with no real economic gains.
• Some member states don’t want to see a trade war with ASEAN escalate. The EU’s foreign and trade policies are a little at sea at the moment. The US is threatening auto tariffs, and its relationship with China is fragmented. Declining relations with ASEAN will add to this mix. ‘
• Member states are also fearful of direct action, as delays to liquor shipments in Indonesia have shown. According to our sources, Indonesian vice-president Jusuf Kalla told EU officials in his bilateral that Airbus purchases and dairy purchases could be next on the disruption list.

There are three other wildcards in the mix right now.

First is the European Parliamentary elections, which take place this week. Latest polling indicates that the EU’s Green Party (Greens EFA) is set to gain, as is the Alliance for Liberals and Democrats for Europe (ALDE). Greens EFA is a clearly anti-palm party, and ALDE, although somewhat centrist, has demonstrated antipathy towards palm oil. It supported the European Parliament’s proposed ban on palm oil last year.

Second is different efforts by ASEAN countries to garner EU support. Indonesia recently hosted a study tour of plantations in Riau, with officials from Belgium, Spain, Finland, Ireland, Sweden, Hungary, the Netherlands and the United Kingdom, plus a representative from the Food and Agriculture Organization. The objective was to underline the possibility of using ISPO as a guarantee against land use change.

Third is the EU’s relationship with the US. POM readers will remember that the US and EU brokered a deal on soybean purchases. The EU fast-tracked soybean certification into the RED mix, and gave soybean a green light for indirect land-use change (ILUC) risks under the Delegated Act. It is understood that this was done in order to hold off tariffs on EU auto exports. The deadline for those tariffs was last Friday, but President Trump has now extended that deadline by six months. It is possible that the EU will renege on the soybean deal if Trump eventually pulls the auto tariffs trigger.

Malaysia stops pulling punches, calls out EU’s ‘trade war’

Malaysia’s Minister of Primary Industries Ms Teresa Kok has called the EU’s Renewable Energy Directive (RED) “a form of trade war”, as she visited European capitals to press the case for palm oil in the region last week.

According to news reports the Minister said:

We see this as a form of trade war by the EU against Malaysia and Indonesia as palm oil-producing countries … We will definitely look at what are the trade items that we import from Europe and we will look at other countries (to source them).

The comments echo those made by Prime Minister Dr Mahathir Mohamad last month when speaking of the RED as a protectionist instrument for EU farmers:

To do that kind of thing to win a trade war is unfair … Trade wars are not something we like to promote but on the other hand it is grossly unfair for rich people to try and impoverish poor people.

The Minister’s statements represent something of an escalation for Malaysia in the ongoing RED debate. Up until this point, Indonesia has been the more politically aggressive of the two, imposing quotas on EU spirits and confirming preparatory stages of filing a WTO complaint.  But, as the dust settles from the Indonesian election, Malaysia is now doing some of the punching.

Franky Widjaja: The EU will Get Their Karma

Franky Widjaja, the head of Golden Agri Resources (GAR), has also thrown his weight into the ring.

Last week Widjaja told Reuters journalists, “I believe in karma, and I think [the EU] will get their karma,” in relation to the RED.

Widjaja believes that some sort of compromise solution is forthcoming: “At the end of the day you need to sit down, after you fight and you are tired, and you compromise … Everything is like that in the world.”

GAR has had a particularly tough road in terms of altering its environmental management practices – and image — for its palm oil operations. Sinar Mas negotiated confidently with Greenpeace for both its palm and pulp/fiber operations.

Although Greenpeace might agree to a negotiated solution, EU legislators and regulators may not have the same goals in mind. As we’ve pointed out many times before, EU politicians and farmers really are seeking to limit palm’s access to the EU market. Unlike a feud with Greenpeace, a ‘trade war’ over vegetable oil may never end.

Mixed signals from Germany

To add to the current confusion over the RED, Germany’s Ambassador to Malaysia Nikolaus Graf Lambsdorff has made some odd comments to the New Straits Times in relation to palm oil. See as follows:

“Germany is not going to ban the palm oil trade from countries like Malaysia …However, other European countries have been talking about reducing and maybe stop using the natural resource.”

The German Government may not ban palm oil, but the European Union is doing a very good job of doing so, and Germany has been part of every EU conversation on this issue. Thus far we haven’t seen any evidence of German officials in Brussels taking the side of palm oil. So, Germany has been complicit in the banning of palm oil biofuels.

“We need the palm oil as it cheap and sustainable.”

Adding to the above: why is the German Ambassador prepared to call palm oil sustainable in a radio interview, but not advocate it as sustainable within European energy policy? Germany has not objected as palm oil has just been damned as “High Risk” in the Delegated Act.

“Malaysia should also reduce the dependency on palm oil and maybe should stop using it in the few years to come as many other European countries are following suit.”

Finally, this comment speaks to broader knowledge of economic development – or lack of. Palm oil is the country’s main agricultural crop. As a country develops, agriculture’s share of GDP for that country drops.  Malaysia’s current GDP share for agriculture is a little above 7 per cent, on par with neighbouring Thailand or economies of similar size and stage of development such as Colombia.

Saying Malaysia should “reduce the dependency” is a little like saying the country “should become richer”.  It is possible that he’s suggesting that Malaysia should diversify its agricultural mix; however, there are no other crops that provide such high returns to land, labour and capital.

Any Europeans undertaking business – or diplomacy – in Malaysia should probably get a handle on Prime Minister Mahathir’s thoughts on the West. He said the following almost 20 years ago in Jakarta:

“Europeans have an infinite capacity to convince themselves that, whatever it is that they are doing at the moment, it is right, proper and just … Oppressive pressures are now less direct  … But the effect is the same. The ex-colonies or the South must submit to the North, to rules and regulations and policies devised in the North for the North.”

The German Ambassador would be well-advised to take note of this, and reflect.

Selfridges boycotts palm oil, Greenpeace piles on

Just as Minister Kok was visiting London, ‘one percent’ UK retailer Selfridges has stated that it will stop using palm oil in its private label products.

Selfridges appears to have followed the same model – and possibly taken the same advice as UK low-end retail chain Iceland. Like Iceland, Selfridges has stated that it is of the opinion that purchasing ‘deforestation free’ and ‘sustainable’ palm oil is not actually possible.

A Greenpeace spokesperson said that “This war against nature has to stop. Selfridges has sent a shot across the bow of an industry that urgently needs to change if it wants to remain in business.”

Yet we’re not quite sure where Greenpeace and Selfridges are coming from in this regard. RSPO adopted Greenpeace’s preferred ‘zero deforestation’ model in November. RSPO’s fully segregated palm remains unpurchased on the market.

In our view, both retailers are playing a double game.

Selfridges – like Iceland Foods — gains a point of difference as it attempts to distinguish its private label from other brands. This was a tactic that was employed by French retailers in an attempt to distinguish their private label chocolate products from Italian behemoth Ferrero.

The Selfridges-Greenpeace announcement was timed particularly well for the NGO, just as Malaysia’s primary industry minister was meeting with officials and other retailers in the region. Greenpeace has never shied away from intimidation as a negotiating strategy. It does appear to be moving into a more extreme ‘boycott palm oil’ phase.

The NGO has in the past maintained that it does not support boycotts of palm oil, and that it instead supports sustainable solutions. Greenpeace got all the ‘sustainable’ solutions it campaigned for, but at the same time, radical groups such as ‘Extinction Rebellion’ are taking up Greenpeace’s media time and market share in the UK.

Is a boycott all that’s left for Greenpeace? What happened to its rhetoric on sustainable development?

IPBES: Surprisingly balanced

The International Science-Policy Platform on Biodiversity and EcoSystem Services (IPBES) released its first major report in more than a decade last week to somewhat moderate fanfare.

IPBES is aiming to create an “IPCC report for biodiversity” with the release that will push national governments to introduce a raft of new policies and regulations on biodiversity and ecosystem services, which is a worthy goal.

Given that the report is clearly aimed at conservation objectives, it is surprisingly balanced.

Palm oil is singled out for the Asia-Pacific region as a key deforestation agent, but no more or less so than soybean and cattle are for the Americas.

This is tempered with an understanding of the trade-offs between conservation and poverty reduction. For example:

Expansion and intensification of commercial agriculture is usually driven by poverty of local communities depending on forests and other natural ecosystems … Thus, without any alternative livelihoods and/or incentive to promote sustainable agriculture, protection of natural forests in one area may cause leakage of biodiversity in another …

And similarly, the report notes the ongoing trade-offs between environmental quality and poverty reduction, and that gazetting of protected areas may deprive local peoples of livelihoods.

There are, of course, errors. The most notable of these is as follows:

Although there are laws addressing forest fires in both Malaysia and Indonesia, these have not been a success, with 2015 seeing one of the most severe haze episodes in South East Asia to date with more than 100,000 man-made fires burning 2.6 million hectares of Indonesian land.

Given that Malaysia was the first country to ratify the ASEAN Transboundary Haze Agreement, that Malaysia has very low rates of fire use, and that there was a negligible number of fires in Malaysia in the 2015 event, this is factually wrong.

California: A New Battleground – Part 2

In our last issue POM looked at legislative developments relating to palm oil in California. The first piece of legislation was the ‘Deforestation Free Procurement Act’, which requires verification of deforestation free forest risk commodities for government procurement.

The second piece of legislation is the Child Nutrition: School, Childcare, And Preschool Meals. This bill seems even more benign. It was introduced to ensure that meals provided by school cafeterias and other education bodies are relatively healthy. As it was introduced, it included restrictions of trans-fat content in meals, and limited other aspects of the meals.

But, between its introduction in early February and its amendments in April, one vegetable oil got singled out. See the following. Schools effectively must:

Not sell or serve a food item that, as part of the manufacturing process, has been deep fried, part fried, or flash fried in an oil or fat prohibited by this paragraph. Oils and fats prohibited by this paragraph include, but are not limited to, palm, coconut, palm kernel, and lard, typically solid at room temperature and are known to negatively impact cardiovascular health. Oils permitted by this provision include, but are not limited to, canola, safflower, sunflower, corn, olive, soybean, peanut, or a blend of these oils, typically liquid at room temperature and are known for their positive cardiovascular benefit.

This is nothing less than extraordinary. There is an inordinate amount of confusion around the health of different fats and oils – so much so that POM is often reluctant to discuss it.

However, when it comes to frying and deep frying, one of the most important components to look at is the stability of the fats. When the fats are unstable, they are prone to oxidation and increase their toxicity. The more stable the fat, the healthier it is for frying. Saturated fats – such as those found in palm and coconut — are more stable, and therefore better when heated.

So, how did California’s lawmakers get this so wrong?

The amendments were provided by the Committee on Education staffers. But before jumping to conclusions about whether anyone ‘got to the Committee’, consider the following. California is probably the ‘greenest’ state in the US and there are any number of anti-palm NGOs in the state. The Rainforest Action Network (RAN) is one of America’s louder anti-palm NGOs – it is based in California and it has a brief to tackle palm oil consumption in the US. But also consider that the US was the home of the anti-tropical oils health campaign of the 1990s.

In other words, disinformation about palm oil is now so widespread in some parts of the world, that it’s just assumed it is bad for health and the environment and no justification is needed.

One of the dangers here is anti-palm campaigners can use this as an example. Think of this: “palm oil is so unhealthy that California lawmakers banned it from children’s school meals.”

The other danger is that this is government procurement at the State level. There are no international agreements that exporting countries can rely on. After California, expect New York, Oregon and Washington to follow.

What does this mean? The industry needs to be vigilant across the board. Allowing such a new provision to be enacted, unopposed or unchecked, could have knock-on effects.

Kalla takes on Europe

Indonesian Vice-President has used the Belt and Road Forum (BRF) in Beijing to launch a broadside at the European Union – specifically over palm oil.

In a leaders’ forum hosted by Chinese President Xi Jinping, Kalla stated that the EU’s policies are hampering Indonesia’s ability to achieve the UN Sustainable Development Goals, and that the EU had ‘ignored’ Indonesia’s position.

“Regrettably, the EU ignored the data and continues its discriminatory campaign which has been hampering Indonesia’s effort to achieve the SDGs. For that reason, we have to fight against the discrimination,” Kalla said.

He also said that “This discriminatory measure is conducted under the pretext of sustainability … At the same time, these sustainability issues have been taken seriously by [palm oil] producing countries with data.”

Kalla also called on leaders present at the meeting to fight trade discrimination, particularly against palm and other traded commodities.

The Vice President’s choice of forum to launch such a broadside is significant. The BRF is a high-profile forum featuring 40 world leaders and all ASEAN economies.  It was also attended by European Commission Vice President Maros Sefcovic.

China has stumped up nearly $5 billion for a high-speed rail link between Jakarta and Bandung; construction commenced recently. Malaysia has renegotiated its East Coast Rail Link deal with Beijing, and both have signed an MoU on palm purchases.

The EU, for its part, issued a statement by Sefcovic that the EU’s infrastructure plan would be “more sustainable” than China’s, and concentrate on “‘sustainable financing, avoiding debt traps, environmental impact”.  And it is still looking to maintain a palm ban via the recently-released RED Delegated Act.

It is no wonder ASEAN has changed its outlook to ‘look east’ –as Malaysian Prime Minister Mahathir first said back in the 1990s.

Norway’s new contradictions at WTO

Norway has defended ‘special and differentiated’ treatment for developing countries at the World Trade Organization and stated that development is ‘at the heart’ of the WTO system.

The Norwegian statements come at a time when it is pursuing the exact opposite.

The Norwegian Parliament recently voted in favour of a ban of palm oil in biofuels. The country’s sovereign wealth fund has also divested from a large number of plantation firms.

The contradiction is curious. Norway has relied, and continues to rely, heavily upon oil revenue, but seeks to limit agricultural commodity expansion because of climate emissions.

It calls upon for ‘special treatment’ for developing countries within the multilateral trading system, but doesn’t think that any special treatment should be given to on-the-ground agricultural development in poor countries. Its solution in the case of Indonesia is to pay the country not to expand its cropland – a kind of green welfare.

Nestle’s Deforestation Free Supply Chain

Nestle announced this week that it has confirmed that 77 per cent of its palm supply chain is ‘deforestation free’. Nestle has confirmed the figure using Starling, an imaging system developed with Airbus satellite technology.

The system works by analysing images throughout Nestle’s supply chain; algorithms are used to detect when forest loss occurs. Nestle then contacts suppliers to determine the nature of the forest cover loss.

Arguably the most interesting consideration here is the resources required to implement a deforestation free supply chain – that is only three-quarters complete.

When the ‘zero deforestation’ idea was sold to followers of NGOs, there was a clear sales pitch: zero deforestation is easy. This is simply not the case. Greenpeace’s first attacks on Nestle occurred more than a decade ago. Nestle is a particularly risk averse company when it comes to reputation; the company suffered during its baby formula scandal in the 1970s and 1980s, and this has shaped its approach to reputation management.

Costing information on Starling is not publicly available; Airbus states that quotes are available on a per hectare basis. It may be a cost-effective solution for larger operations. But this solution may also make broader voluntary certification commitments redundant, particularly if all the public is interested in is ‘deforestation free’.

ANALYSIS: Is California the next front in the Palm Oil Battle?

The United States has generally not been a big part of palm oil’s trade battles. There are, of course, some exceptions to this – the ‘tropical oils’ health scare that was spread by the US soybean industry in the 1990s is probably the leading example.

There are several reasons.

First, the US imports a relatively small amount of palm oil – around 3 per cent of the global export market. Palm oil makes up around 7 per cent of consumption in the US vegetable oil market.  US farmers are also particularly efficient and competitive.

Second, the policy battleground in the US has been health, rather than environment. The biggest battle has been around trans fats, mainly impacting soybean oil. The absence of trans fats in palm oil has made palm the clear replacement for soybean oil.

The US Food and Drug Administration (FDA) introduced a full trans fats ban last year, after a lengthy phase-in period.  But the phase-in period gave US processors time to develop low-trans-fat oils and products from soy, canola and corn oils.

Third, the US renewable fuel standard has penalised palm oil, but the impact has been smaller because the market for biodiesel in the US is significantly smaller than the EU, and the major renewable fuels used in the US are for gasoline-powered vehicles, which provide a subsidy for corn ethanol producers.

One of the other exceptions in the US has been an anti-palm oil campaign on labour. The motivations here were twofold. There was a push in the US to stop or limit participation in the Trans-Pacific Partnership Agreement; the campaign sought to exaggerate poor labour practices in partner countries. At the same time, new regulation in California on human rights and labour in supply chains required companies to disclose supply chain information and risks.

California is at it again.

Legislators are pushing two pieces of legislation. The first is the California Deforestation Free Procurement Act, which we’ll analyse this week. We’ll look at the second bill, the Child Nutrition: School, Childcare, And Preschool Meals (AB 842), next week. The Deforestation Free Procurement Act (AB 572) will require government contractors and subcontractors to ensure that if they are providing products that might contain a ‘forest risk commodity’ that they must undertake certain actions. They will need to:

• Certify that the products sourced did not come from areas that were deforested from 2019 or later;
• Have a no deforestation, no peat and no exploitation policy in place;
• Make any certification and policy data publicly available.

At first glance, this might seem benign. There are two things to consider.

First is the size of the US procurement market. The US government procurement is around 9 per cent of GDP, i.e. around $1.6 trillion. In terms of magnitude, this is around the size of economies such as South Korea and Russia.

California’s state government spending was around USD225 billion in 2017. This is similar to the GDP of countries like Portugal, Greece or Vietnam.

The sheer size of California should make anyone who thinks Europe is a big market think twice.

Second is that California tends to lead the way in terms of regulation in the United States, especially on the environment. Regulation in California tends to be adopted elsewhere in the US, simply because California is such a large market.

The adoption of a new procurement rule in California could therefore have implications across the US in the longer term.

So, consider the response of producers of palm oil, other commodities and the industry more broadly if a country like Portugal, Vietnam, Korea or Russia decided to unilaterally impose similar reporting requirements.

Just as important is that this is a model that many NGOs will seek to pressure other governments to introduce for their procurement processes or as a legal and regulatory requirement.

This is precisely what the EU’s Deforestation Action Plan was originally aimed at doing: preventing ‘imported deforestation’.

There are other dimensions to this legislation, particularly on school food – and we’ll take a look at those next week.

China, Russia Deal With MY on Palm

Malaysia and China are renegotiating an agreement on the country’s East Coast Rail Link (ECRL). The resumed negotiation process will be indirectly tied to an agreement by China to purchase more palm oil from Malaysia.

China is Malaysia’s third-largest market for palm oil after India and the European Union. China splits its imports between Malaysia and Indonesia, with around one-third coming from Malaysia.

Palm oil is China’s largest vegetable oil import, but not the most widely consumed oil. It represents around one-sixth of China’s vegetable oil consumption. This is because soybeans and other oilseeds are imported for both soybean meals and oil.

However, China’s soybean imports are at multi-year lows, due to a combination of tariffs on US soybeans and swine flu impacting China’s herd.  This implies a shortfall in the vegetable oil supply.  Chinese buyers have also switched away from canola supplies from Canada due to new tariffs. Palm oil can substitute for other vegetable oils for some industrial applications.

The rail link will link north-east cities such as Kota Bahru with the eastern port of Kelantan, and then to KL and the major port of Klang. It will effectively link both sides of the Malay Peninsula with China’s Yunnan Province. The ECRL will be further discussed at the Belt and Road Initiative (BRI) Summit on April 25 in Beijing.

It is being speculated that an agreement between China and Malaysia on greater palm purchases will be inked. Similarly, it is being reported that Malaysia and Russia are in talks to discuss a ‘palm for fighter jets’ swap, as Malaysia moves its military procurement away from the EU following the introduction of the Renewable Energy Directive.

Airplanes are France’s largest exports to Malaysia.

Is Europe Getting Further Sidelined?

EU policymakers should be demonstrating some level of concern that two of ASEAN’s largest economies are moving farther away from the EU’s orbit, and lobbying others to join with them. It’s worth noting that one week out from Indonesia’s election, the Jakarta Post ran an editorial that led with the following in relation to palm oil:

We call on ASEAN leaders to form a united front as a regional grouping to demonstrate full support to President Joko “Jokowi” Widodo and Malaysian Prime Minister Mahathir Mohamad … ASEAN should send a strong warning to their trading partners, especially in the Western bloc, to think twice before playing fire with Southeast Asia.

This is a strong message to both Europe and to other ASEAN leaders from a newspaper that is generally centrist, and is read by the diplomatic bubble in Jakarta. As much as European leaders might tell themselves that this is pre-election nationalism, it is not. Whether it’s Malaysian timber, Thai seafood, Indonesian paper or Cambodian garments, ASEAN economies are often in the firing line of EU double standards on protectionism.

The BRI Summit coincides with a meeting between ASEAN Senior Trade Officials and the EU’s Trade Commissioner on April 26.

It’s highly likely that EU Trade Commissioner Malmström will be seeking to placate the situation after last week’s bilateral meetings that saw the EU leave empty-handed.

But the question is whether she will be able to herd the cats in the European Parliament and Council of the EU.

Indonesia’s election, RED and the moratorium

Indonesia headed to the polls this past weekend. At time of writing, the incumbent President Jokowi appeared to be heading for a second term, although results will only be known in a few days.

Palm oil was not a central campaign issue, but both candidates were keen to showcase actions that would alleviate farmer and rural concerns around low prices.

This was particularly evident in areas such as South Sumatra and Riau, where polling indicated that Jokowi had suffered a backlash because of the three-year moratorium on land clearing.

This particular issue has been examined by Indonesian think tank Greenomics, which argues that the introduction of the RED ban on palm oil could result in increased deforestation.

The argument runs as follows.

The RED in its current form punishes Indonesia for deforestation that took place during the term of President Yudhoyono, which is the period covered by the RED’s deforestation data. It takes no account of reduced deforestation that has taken place in the Jokowi era.

Any drops in demand for palm oil as a result of the RED – and lower prices, household incomes and tax collections – may prompt President Jokowi to permit expansion of the sector.

Norway’s first payment to Indonesia this year as part of its ‘payments for deforestation’ agreement was worth around USD24 million for a 60 per cent reduction in deforestation in 2016-2017. By contrast, the government’s export tax on palm oil collected around USD900 million on palm exports for the same period. Although the export tax is triggered by prices, a reduction in exports – precipitated by European policies, e.g. the RED – will have an impact on government revenue.

The debate over RED and ILUC has had constant references to perverse outcomes.  The dropping of the moratorium would fit this description.

EU talks suspended, MPOB advisor hoses down trade talk

Malaysia has reaffirmed that it has suspended talks with the European Union for a free trade agreement, and that it has the support of ASEAN nations in suspending EU-ASEAN talks.

Malaysia’s Deputy Trade Minister Dr Ong Kian Ming said last week that “ASEAN leaders have heard our views and agreed to suspend the elevation of that partnership. We hope the issue can be resolved.

“We do not refute the possibility of taking other measures that will have far reaching implications on the trade relations with some EU countries.”

Despite the clear tough line that Malaysia is taking with the EU and its member states, there appears to be a misunderstanding of the trade dispute’s politics.

Denis Murphy of the University of Cardiff and an advisor to the MPOB has argued that Malaysia is “not big enough to win” and that the country should “Focus on being smart.”

He said that Malaysia should focus on improving yields, partnering with NGOs, and that palm oil should re-brand: “It is premium coffee. There is also traceability of which farm it comes from.”

Although Professor Murphy is clearly an expert of biotechnology, it is vital that industry participants understand the politics of the RED and of the EU’s approach to palm oil.

At this stage, it doesn’t matter how much better yields are, how much NGO support there is, or if traceability is in place: palm oil has been subject to an intense politically motivated campaign that has nothing to do with facts or science. Indirect land-use change is the best example of this and a sign of more to come.

That Colombia’s palm oil – which has been cultivated on non-forested lands — can be treated in the same way as that coming from deforested lands in Indonesia – indicates precisely how politically oriented the policies are.

To draw a similar example, the EU attempted to ban beef products from the US on the basis that hormones used in animal feed posed a risk to health. This ban was slapped down by the WTO. Rather than let the exports in, the EU pays millions of dollars in penalties annually – all to keep the peace with the bloc’s farm sector.

Professor Murphy’s implication is that Malaysia should simply accept the ban and move on.  European authorities have signalled they will take on palm oil with further regulation on deforestation and on health. What should Malaysia do then?

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.

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.

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.