The Oil Palm The Oil Palm

From Timber to Palm: Is FLEGT a Viable Model for Palm Oil?

The recent resolution on Palm Oil by European Parliamentarians put forward a number of policy proposals on Palm Oil imports into Europe. One of them was a ‘FLEGT-style’ (Forest Law Enforcement, Governance and Trade) regulation for Palm Oil.

This regulatory approach isn’t new. It was first floated in 2012 when the European Commission undertook its broad study on the impact of European demand on global deforestation. Last week, the Commissioner for Environment Karmenu Vella stated in an official response that it is “considering the development of a Union action plan on deforestation and forest degradation.” In other words, the Commission is studying a policy proposal such as a FLEGT for Palm Oil.

So what is the FLEGT Regulation?

As it is, it currently applies to certain timber and timber products. There are two parts to the regulation.

At the European end, a ‘due diligence’ regulation has been introduced. Anyone who puts specified timber products (including paper) on to the European market must undertake ‘due diligence’ on the legality of the product.

Legality in this sense means that it has been harvested and processed according to all applicable local laws and regulations, that appropriate taxes have been paid on the products (e.g. border taxes), and that risk of corruption has been minimised.

Companies can choose how they comply with this. They can use legality verification and chain-of-custody systems that are offered by auditing companies, or they can develop their own methods for assessing legality.

There are two components of non-compliance. The first is by not undertaking the due diligence process. The second is if in the event of ‘illegal’ timber the seller decides to put the timber on the market regardless.

The second part of the FLEGT model is assisting exporting developing countries to ensure that their exports are ‘legal’. And this is where things get more complicated.

Exporting countries enter a bilateral agreement with the European Union called a ‘Voluntary Partnership Agreement’ (VPA).

A VPA aims to reform and consolidate forest laws and governance in the harvesting country, and establish an export licensing system for ‘legal’ products entering the EU. These FLEGT licenses constitute a waiver for the due diligence checks.

Has FLEGT been successful?

FLEGT has had limited success. A report issued by the European Court of Auditors in 2015 calculated the cost of the EU program at EUR300 million (around MYR1.4 billion), at which point no FLEGT licensing systems were operational after a 12-year project period.

One of the upsides of the program is that it has hastened forest law reform in many countries. There is an upside for many producer-country governments that may have previously been short-changed on revenue from illegal harvesting activities.

Can FLEGT be applied to other commodities such as Palm Oil, Soybean or Beef?

There are two immediate hurdles.

First is that FLEGT applies to legality, not sustainability. No serious observer would suggest or could claim that there is ‘illegal Palm Oil production’, but unregulated deforestation is possible in many countries – and that deforestation might impact commodities across the board..

Defining a product’s sustainability for export purposes would be particularly difficult as there is no universally accepted definition of either sustainability or sustainable production. Smallholder farmers, for example, cannot meet the same environmental standards as large producers (and they certainly cannot meet standards routinely demanded by Western NGOs and European Governments). But to call smallholder farmers ‘unsustainable’ is absurd given their social and economic significance.

Second, if a broader FLEGT program truly wants to achieve an objective of tackling deforestation and environmental degradation, it would need to be applied to a range of commodities. Why? Focusing on Palm Oil is not the most effective route to combating deforestation. As has been pointed out several times over – by the EU’s own research – the biggest contributor to agricultural deforestation is beef. The biggest contributor to global deforestation from European demand is soybean. Indeed, even Western NGOs have accepted this fact and have resolved to focus less on Palm Oil and more on other commodities.

Hypothetically, if these hurdles were to be overcome, what would a FLEGT model for Palm Oil look like?

Ideally, the due diligence component would require checking that Palm Oil was produced according to a national government-endorsed standard (such as MSPO) or a voluntary standard (RSPO), or a company-based assurance system. The export licensing component would be based on these standards.

Palm Oil would be ahead of the curve in this context; no other industry (with the possible exception of forest products) has the same level of sustainability certification that Palm Oil does. As has been noted by RSPO, there is an excess of certified sustainable Palm Oil, such has been the producer commitment to sustainability.

There are, however, potential hurdles.

Small countries would need to consider whether the compliance costs associated with developing and/or implementing a sustainability system are worth it. The question would be whether the Europeans would be willing to fund the development of national standards in poorer countries.

The other question is whether small countries without a VPA would have a case for arguing that they are effectively being blocked from EU markets, which would potentially clash with WTO rules. This would definitely shape how the EU approaches any agreements, and whether it includes other commodities that are responsible for greater levels of deforestation, such as soybean.

There are broader questions for Malaysia. Malaysia was one of the first countries to start negotiating with the EU on a VPA for timber and has been doing so for ten years. A timber legality assurance scheme (or certification) has been developed. Where the negotiations go from here remains to be seen and there will be lessons to be learned.

However, the following is clear: EU policymakers want to implement this regulation on Palm Oil.

The clear lesson from the FLEGT for timber is that engagement is key. It is a mistake to assume that any of the truths about Malaysian Palm Oil that we take for granted here are known or respected in European capitals.

The broader question for the EU though is how far it is prepared to go down this route.  It will likely be expensive, controversial and potentially have little impact on global deforestation. It will need to be prepared to devote considerable resources over the long term if it is to undertake this exercise and remain on-side with many of its trading partners. The exporting countries remember the timber and paper wars well.

If the current FLEGT process is any guide, this will be a drawn out process.