RESPONSE TO THE EU’S ANTI-DEFORESTATION POLICY ON PALM OIL 2023

Abstract

The European Union Parliament recently issued an anti-deforestation policy (deforestation-free) on several agricultural and livestock commodities related to deforestation that enter the country’s regional market. Palm oil and its derivative products are included in the commodities targeted in the policy. The policy is not based on a comprehensive Regulatory Impact Assessment analysis beforehand. Thus, creating many uncertainties would harm palm oil exporting countries and the EU’s palm oil consuming industry and community. The Indonesian government needs to make mitigation efforts through diplomacy. In addition, anticipatory actions are required to increase the absorption/consumption of the domestic market, such as the mandatory expansion of biodiesel from B30 to B40.

Introduction

The EU’s anti-deforestation policy prohibits all commodities and their derivative products linked to deforestation (forest risk commodities) from entering the EU’s market. Apart from palm oil and its derivative products, other commodities and products subject to anti-deforestation policies include soybean oil, beef, cocoa, coffee, wood products, and pulp for domestic and imported commodities and products.

If, in the RED-II ILUC policy for the 2020–2030 period, the EU gradually phases out palm oil only for biofuels, the EU’s anti-deforestation policy targets palm oil and all its processed products for food, oleochemicals, and biofuels.

For Indonesia, although other commodities are also important, the impact of anti-deforestation policies, especially on palm oil and its derivatives, requires more serious attention. Apart from the EU being one of the traditional markets for Indonesian palm oil, it is also feared that a similar policy will spread to other palm oil importing countries.

This article will discuss new risks that must be anticipated when trading palm oil into the EU market. This is followed by a discussion regarding the impact of this policy on Indonesia and strategies for mitigating it.

UNCERTAINTY IN ANTI-DEFORESTATION POLICIES

The tradition of formulating EU vegetable oil trade policies, especially palm oil, is always accompanied by controversial issues. The formulation of the EU’s palm oil import policy prioritizes political issues and NGO pressure compared to the rational basis of the objective interests of their country. The origins of the anti-deforestation policy recently adopted by the EU are pressured by anti-palm oil NGO pressure, which collaborates with politicians in the EU parliament. The policy was issued not based on comprehensive Regulatory Impact Assessment. The results not only produce raw policies, but also create many uncertainties.

In its implementation, the EU’s anti-deforestation policy will be based on due diligence and the traceability principle. Exporting countries that sell palm oil to the EU market will be classified into three categories: low-risk, standard-risk, and high-risk, so that a priori, the EU has ensured that all commodity-exporting countries are related to deforestation. Anti-deforestation policies also include legal, illegal, and forest degradation.

This policy increases uncertainty in the palm oil trade. First, the anti-deforestation policy is related to the definitions of “forest” and “deforestation” used. There are hundreds of definitions of forest and deforestation adopted by countries in the world, which are a combination of tree density, tree height, land use, legal status, and ecological function (Schucket al., 2002; Lund, 2013; FAO, 2018; PASPI Monitor, 2022^a).

Lund’s study (2013) found that the definition of forest differs from administrative aspects such as land cover, land use, and land capability, as well as finding nearly 1,600 definitions of “forest” and 240 definitions of “trees” in various countries in the world at the local, national, and global levels. The definition of “forest” also differs between EU countries. Schuck’s et al. (2002) study revealed that there are also variations in the term and definition of “forest” that was adopted in each European country.

The question is: which definition of forest to use in implementing the anti-deforestation policy? Different definitions of forest used will lead to lawsuits, trade tensions, and trade uncertainty.

Second, the EU’s anti-deforestation policy is related to legal deforestation, illegal deforestation, and forest degradation that occur domestically and other countries (internationally).Uncertainty in the definition of the forest also leads to uncertainty in the deforestation definitions. Which definition of deforestation will be used to determine whether a land use change is called deforestation or not? Likewise, by the definition of “forest degradation”, how much forest damage is categorized as “forest degradation”? Are deforestation and forest degradation occurring within EU member countries, are they the same as the definitions used globally? And what agency has the authority to verify deforestation and forest degradation occurring in each of the EU member states?

Third, when is deforestation calculated? Since the dawn of human civilization on Earth, global deforestation has occurred. European and North America experienced deforestation first, and only then did it occur in other parts of the world. When is the starting point of deforestation calculated? According to available data, deforestation has been calculated since 2020. If so, is the origin of existing oil palm plantations in 2020 no longer being questioned in the same way that the origin of land in the past has been? So that the policy only questions the origin of the oil palm plantations that were built after 2020?

Fourth, why are anti-deforestation policies only applied to palm oil and soybean oil? Has it been confirmed that rapeseed oil and sunflower oil, produced by the European Union and other countries outside the EU, are not linked to deforestation? Such discriminatory treatment can be categorized as crop apartheid in the global vegetable oils trade.

Fifth, vegetable oil that enters the EU market consists of various types, originating from various countries, and from various ecosystems or lands. In the design of the EU’s anti-deforestation policy, due diligence has created categories of low-risk, standard-risk, and high-risk deforestation. Related to this, how does the EU conduct due diligence on complex things?

These uncertainties in the anti-deforestation policy will lead to uncertainty in the palm oil trade policy to the EU market. The anti-deforestation policy has become a new form of non-tariff trade barrier for palm oil in the EU market. This will further distance the principle of fairness trade from the EU market.

The uncertainty created by the anti-deforestation policy will eventually become a new burden for both EU vegetable oil consumers and global vegetable oil producers. Supply and price instability will become a new risk for vegetable oil consumers and producers.

RESPONSE TO THE ANTI-DEFORESTATION POLICY 

During this time, the use of palm oil in the EU has changed. Until 2008, nearly 80 percent of the palm oil imported by the EU was used to fulfill the needs of the food, feed, and toiletries industries. Meanwhile, the use of palm oil for energy is only about 20 percent. Ten years later, the use of palm oil in the EU has changed drastically. In 2018, approximately 65 percent of the total was used for energy products, including biodiesel and power plants. And the remaining 35 percent is used for the food, feed, and toiletries industries (Transport and Environment, 2019).

Since 2015, the volume of EU palm oil imports has tended to decline (PASPI Monitor, 2022^b). The volume of EU palm oil imports in 2015 was around 7.4 million tons, then decreased to 6.9 million tons in 2021. The EU’s share of total palm oil imports also shows a downward trend, from around 17 percent to 14 percent in the same period. Fern (2022) and Chain Reaction Research (2022) estimate that with the RED II policy, the volume of EU palm oil imports will decrease to around 4 million tons in 2030.

The EU market is one of Indonesia’s palm oil export markets, which is also experiencing a downward trend in volume and share. The volume of Indonesian palm oil exports to the EU in 2017 was still around 5 million tons, then decreased to 4.6 million tons in 2021. Compared to the total volume of Indonesian palm oil exports during this period, the EU’s share decreased from 16 percent to 13 percent. It seems that the various trade barriers imposed by the EU on Indonesian palm oil have made Indonesia less dependent on the EU market.

If the EU applies the anti-deforestation policy, the decline in palm oil exports from Indonesia to the EU is expected to accelerate. Even though Indonesia’s palm oil exports are less dependent on the EU market, the Indonesian government needs to respond to these EU policies, namely by:

First, the Indonesian government with the palm oil producing countries (CPOPC members and non-members), protested the EU’s anti-deforestation policy, which contains many uncertainties, discrimination, crop apartheid, and forms a new style of trade protectionism that has potentially triggered a global trade war. Second, Indonesia also needs to carry out a trade retaliation policy threat against EU export products to Indonesia. Third, countries producing/exporting palm oil, soybean oil, coffee, and cocoa, filed a lawsuit with the WTO.

Fourth, this policy can be used as a momentum for Indonesia to implement the principles embodied in greenhouse gases for the EU, specifically by linking GHG emissions produced by the EU with their products exported to Indonesia (Pigouvian Tax).As is known, the European Union’s GHG emissions are far higher than Indonesia’s GHG emissions (PASPI Monitor, 2021^b). Therefore, every product produced in the mainland EU is a product that has higher GHG emissions compared to Indonesia, so with the Polluter Pays Principle, all EU products exported to Indonesia can be subject to a Pigouvian Tax.

Fifth, Indonesia needs to immediately prepare for the switching export market of palm oil from the EU to other regions or countries and/or increase domestic consumption through the mandatory expansion of biodiesel from B30 to B35/B40. The mandatory expansion of biodiesel will increase the absorption of domestic palm oil by around 3.5 million metric tons per year. Suppose the EU implements an anti-deforestation policy and causes a reduction or even cessation exports of palm oil to the EU market, the Indonesian palm oil industry will have a market to absorb its palm oil.

Indonesia successfully carried out such anticipatory efforts in the 2015-2020 period, when the EU reduced palm oil imports, but this did not have a negatively impact on the national palm oil industry. The policy’s combination of export market diversification and increasing domestic absorption has proven to improve Indonesia’s palm oil export performance in terms of volume and value. In addition, with the mandatory expansion of biodiesel from B10 to B30 during 2015–2021, it has also succeeded in saving diesel import foreign exchange (PASPI Monitor, 2021^a).

Conclusion

The EU’s anti-deforestation policy could create various uncertainties in the palm oil trade in the EU market. The uncertainty in question originates from the uncertainty of variations in the definition of forest which then also has implications for variations in the definition of deforestation and forest degradation, as well as the methodology of due diligence and basis of classification of low, mid, and high-risk deforestation used. This uncertainty will harm palm oil exporting countries and the EU’s palm oil consuming industry and community.

Responding to the anti-deforestation policy, the Indonesian government must make diplomatic and anticipatory efforts. Together with palm oil producing countries (as well as other commodity or product producing countries that are the target of the policy), make efforts to protest, sue, and retaliate against the policy. While taking anticipatory steps, Indonesia needs to switch the export market of palm oil from the EU to other countries or regions and/or increase domestic consumption. The mandatory expansion of biodiesel from B30 to B40 is expected to reduce the impact of the EU’s anti-deforestation policy on the national palm oil industry.

References

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