Days After Defeat, Europe Renews Its Campaign Against Palm Oil

Today, the European Parliament Development Committee (DEVE) will vote on a report entitled Transparent and Accountable Management of Natural Resources in Developing Countries: The Case of Forests.

The report essentially claims that Palm Oil is the scourge of the world’s problems, and the single largest driver of deforestation.  This is despite the European Commission’s own research consistently proving that this claim is inaccurate.

The vote today in the DEVE Committee is the opening salvo in the latest effort by the EU to ban Palm Oil from the European marketplace. It comes only days after the EU’s plans to ban Palm Oil biofuels were finally rejected. The DEVE Report also serves as the impetus for action by the European Commission to pursue the regulation of Palm Oil based on production methods and claims over supposed links to deforestation.

Understanding the scale of the EU’s ambition to ban Palm Oil is crucial to assessing why this debate is far more wide-ranging and profound than the possible ban of Palm Oil biofuels under RED would have been.

 

What does the DEVE Committee Want?

MEPs on the European Parliament’s DEVE Committee are putting down a marker on the EU Action Plan on Deforestation, and any future regulatory measure for Palm Oil.

The motion seeks to have the EU introduce:

  • mandatory reporting for all financial investments linked to ‘forest risk commodities’;
  • mandatory due diligence for investments on environmental issues;
  • regulation for imports of all forest risk commodities, similar to the EU Timber Regulation and the Conflict Mineral Regulation, which includes mandatory ‘deforestation-free’ and sustainability criteria, as well as traceability requirements;
  • parallel requirements in the EU’s Common Agricultural Policy in order to lower imports of animal feed; and
  • more Commission action as a follow-up to the EU Action Plan on Deforestation and the study on Palm Oil & Deforestation (see below).

It is important to understand the context of the DEVE report. It provides an insight into where the EU is going with its regulatory plans based on the Action Plan on Deforestation.

When it comes to trade and imports, the EU has demonstrated that it seeks to regulate global supply chains. This is a key goal of EU regulatory policy.

It has done this in various policy instruments for different products. These include: the FLEGT (Forest Law Enforcement Governance and Trade) Action Plan and the EU Timber Regulation for timber; the Conflict Mineral Regulation for mined products; legislation on illegal, unreported and unregulated fishing (IUU) for fish products. It is also present in its REACH (Registration, Evaluation, Authentication & Restriction of Chemicals) regulation for chemicals.

So, if the EU can regulate supply chains for chemicals, minerals, forest products and fish, it can surely regulate agricultural commodities.

 

The Action Plan on Deforestation

These aren’t new ideas. Plans to block Palm Oil across the board have been underway for some time.

In March of this year, the European Commission released the COWI report, Feasibility study on options to step up EU action against deforestation, which reviewed various policy options available to the EU for combating global deforestation, and secondly, the LMC report, Study on the environmental impact of palm oil consumption and on existing sustainability standards, which looked specifically at the role that Palm Oil plays in deforestation. Collectively, they are known in Brussels as part of the “Action Plan on Deforestation”, which was first conceived in 2014.

With the RED, Malaysia’s position was simple. Any ban or unequal treatment for Palm Oil was unacceptable. The EU’s Deforestation activity is more complex.

The difference is that policymakers will seek to curb all Palm Oil imports, not just banning it from the bloc’s renewable programs. This is far more dangerous.

At the very least it would impact crude palm oil (CPO) exports. At the most, it would hit all products containing Palm Oil and its derivatives.

In addition to crude and refined Palm Oil, it could mean all oleochemicals, too.

If this seems far-fetched, consider the following. When the EU and other countries introduced illegal logging regulations, there was an assumption it would only hit log or rough timber exports. However, it is applied to building materials, furniture, exercise books, and even toilet paper.

In other words, it could mean that it’s not only the plantation and refining sector that’s impacted; all downstream processing could feel the pinch.

 

What Could the EU Trade Regulations Look Like?

The FLEGT Model

A number of commentators have pointed to FLEGT as a model. FLEGT has two policy legs.

  • The first leg requires EU importers of timber products to undertake ‘due diligence’ to ensure that imported timber products have been produced legally. Due diligence can take a number of forms, including the use of sustainability certification or chain-of-custody certification.
  • The second leg is an environmental trade agreement (a voluntary partnership agreement – VPA) and the development of a ‘legality standard’ for exporting countries. Timber products won’t be exported unless they meet that standard. These products get a ‘green light’ when exported to the EU.

In Indonesia, which is the only country where the FLEGT/VPA system has been introduced, there have been ongoing problems for smallholders gaining access to FLEGT export licenses.

Could such a system be feasible for agricultural commodities, or as the EU calls them, Forest Risk Commodities?

Traceability systems could definitely play a part. The MSPO, for example, is completing its chain-of-custody standard.

Indonesia has pushed the ISPO standard in their negotiations with the EU as part of their free trade agreement or any possible voluntary partnership agreement. This was raised again during negotiations in a special negotiation session devoted entirely to palm oil in February. APINDO, the country’s employer association and one of the most powerful business groups, has made it a key part of its lobbying position.

But feasibility questions remain.

First, the original FLEGT was about illegal logging activity. The DEVE and Action Plan approaches are about deforestation and sustainability.

This is a fundamental difference.

FLEGT has had buy-in from developing countries because it has assisted forestry reforms and regulatory compliance in those countries, and helped recover lost revenue from illegal logging.

These questions do not apply to Palm Oil, especially in countries like Malaysia, which have in place a robust regulatory and compliance system not to mention the addition of MSPO.

Further, ‘sustainable agriculture’ has no internationally accepted definition. But a national standard for sustainability should be acceptable (see below).

Second, if traceability were to apply to all forest risk commodities, would this apply to manufactured goods as well as raw materials?

Third, for this to be consistent with international trade rules, and Europe’s commitment to the WTO, it would require that EU producers also adhere to traceability rules, placing an additional administrative burden on European farmers. It would also need to apply to all oilseeds and commodities – not just Palm Oil. Given that Palm Oil is a relatively small contributor to deforestation – behind beef, maize and soy among others – the EU will need to incorporate all of these ‘forest risk commodities’ into its policies, including its own farmers, Latin American soya and beef producers, American soya and beef producers, Australian beef producers, African Palm Oil producers and so forth.  The list is endless.  In the world of global trading norms and rules, this is called ‘equal treatment.’

 

The REACH Model

The EU’s regulation on chemicals – REACH – may be another model.

REACH is, as the name states, a regulation that requires the registration, evaluation and authorisation of chemical substances in Europe, their use, and their users and importers. This is upwards of 143,000 different chemicals. It includes registration of use of chemicals by companies that do not appear in the end product. It was introduced in 2000 and passed into law in 2007. Users and manufacturers of chemicals – including those exporting to the EU – are required to comply with any number of bureaucratic requirements that have added considerable expense to many manufacturing operations.

When it was introduced it was highly controversial; it was considered overly expensive by producers, exporters and importers. It was raised no less than 15 times at WTO meetings by the EU’s major trade partners.

The costs on European business appear to be of little concern. One official review stated:

  • “REACH compliance costs also appear to have had a negative impact on rates of return on investment, while uncertainties about actual costs and their timing in the case of new substances/ uses have not helped financing decision-making in general … the issues around compliance and related costs and constraints make some non-EU locations more attractive for undertaking innovative activities. It appears that some delocalisation of innovation has occurred, but REACH has not always been the only or main driver.”

The American Chamber of Commerce to the EU (AmCham EU) more recently stated:

  • “REACH has created very expensive regulatory market barriers with no equivalent in the world. While this obstacle does not discriminate between substances manufactured in Europe and imported ones, REACH compliance costs are often too high for small and medium enterprises (SMEs), which are critical to EU innovation clusters, or for new chemical substances in small volumes which may not be able to provide a return on this initial investment.”

There has been little in the way of evidence that REACH has provided any significant social and environmental benefits to the EU’s citizens.

The conclusion to be drawn is that when it comes to environmental regulation, EU lawmakers appear to have very little concern for the costs on European business or the potential impacts on their trading partners.

The idea, then, of having all importers and users of ‘forest risk commodities’ in the European Union register themselves, the ingredients they use and having them undertake an assessment of ‘forest risk’ or ‘sustainability risk’ is not inconceivable.

Nonetheless, it would be difficult for the EU to justify internationally. This is not chemicals, but agriculture, which is the most sensitive trade negotiation issue of all. Agriculture can be considered the reason that the Doha Round in the WTO was never completed.  Europe’s trade and agriculture negotiators know this. But do the rest of the Commission directorates fully appreciate this?

 

Palm Oil Producer Response

There are three core elements of a response.

First is the place of certification, and more specifically national standards. Europe must accept the MSPO standard.  The MSPO standard defines sustainability for Palm Oil in the Malaysian context. MSPO has been developed according to ISO (International Standards Organization) practices. The EU will need to recognise anything that is certified by MSPO as sustainable.

Second is fighting discrimination. Any action by the European Union should not single out Palm Oil. If the EU’s objective is reducing global deforestation, it must ensure that it is tackling the main drivers of deforestation.  The EU’s own research shows that Palm Oil comes well behind other commodities – beef, maize, soybean, among others – in terms of being a contributor to deforestation.

Third is defining ‘forest risk’. The EU uses the term ‘forest risk commodities.’ There is no accepted international definition for FRCs. ‘Forest risk’ is about countries, not commodities. For example, beef from Brazil could be a ‘forest risk commodity’, but beef from the US – or the UK – is not. This is a slippery slope for the European Commission, especially the Trade and Agriculture directorates.

Fourth is the commitment to free trade. The proposals by the EU will run into problems with WTO rules. The General Agreement on Tariffs and Trade (GATT) allows some environmental protection exceptions, but with major caveats. They include that any trade measure introduced must be necessary, i.e. there must be no better alternatives to solve the problem.  In addition, the environmental protection exceptions are for the most part about solving domestic problems, not international ones. For example, the EU could block imports of a product if that product put the EU’s forests at risk. Key to this is Europe’s leadership role in global trade: it can either adopt an imitation of Trump’s trade strategy or be the beacon of free trade. This will be a big test for Brussels.

 

Looking Beyond the DEVE Committee

Pressure has been building on the Commission to take further action on deforestation for nearly four years. The DEVE Committee is adding to this pressure. The Motion will likely be passed.

Individual Member States will add to this in the future. At an EU deforestation meeting last year, the German Agriculture Ministry called on the EU to move forward with the Action Plan.

The Commission has a feasibility study on the Action Plan for Deforestation. The next step will be an impact assessment of the options – which is what the DEVE Committee is calling for. This could be launched before the end of the year. Green MEPs and activists will use this as a platform to bolster their case ahead of Spring 2019 elections.  Within two years – at the beginning of 2020 – we could see draft legislation. This would coincide with the implementation of the new Renewable Energy Directive.

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