The Oil Palm

The Oil Palm’s Q&A Series: Interview with Professor Pierre Garello

Pierre Garello is a Professor of Economics at Université Aix-Marseille in France. During the debate on the French Biodiversity Bill in 2016, Professor Garello presented a study on the Economic Facts About Palm Oil Taxation in France, outlining why a new Palm Oil tax was ‘factually and materially wrong’.

Q – French Senators put forward in early 2016 a proposal for an additional tax on Palm Oil. As an economist, what is your reaction to a plan to increase taxes on a food ingredient such as Palm Oil?

A- As a matter of principle I am sceptical of the new trend—in France and elsewhere—that consists in using taxation to change citizens’ behaviour. Many reasons for that. Firstly, economists have traditionally pushed in the opposite direction, namely, they usually advise governments to look for the most “neutral tax”; the tax that changes the decisions made by private economic actors as little as possible. This traditional position taken by economists comes from the fact that it is impossible to predict with a reasonable degree of accuracy the social outcome of specific taxes such as food taxes. Consumers and producers can decide to pay a higher price for the same product (so the behaviour remain unchanged but they buy less of other things), or to switch to another less-taxed good which (1) can be even worst in terms of food habits and (2) means no tax receipts. Secondly, such taxes rely on “scientific” assumptions such as “palm oil is bad for the environment,” “margarine is not as good as butter.” This is problematic because the Parliament is transformed in some sort of an academy of sciences that should decide on complex scientific issues. Needless to say that, in my opinion, our MPs do not have the required competencies. If, on the contrary, they say that each citizen must pay x euros to finance public goods there is no need to enter a tricky and muddled debate. Finally, even if this is not directly linked to economics, I see some danger in using taxes (and therefore coercion) to bring individuals’ behaviour towards what a majority of citizens judges “proper behaviour”. This is not my understanding of a democracy.

Q – As the debate was ongoing in the French Parliament over the Palm Oil tax proposal, you provided a report on the Economic Facts about Palm Oil taxation in France. Can you explain to us your findings and methodology?

A- The proposed amendment created an additional contribution on palm oil set at 30 Euros per ton in 2017, 50 Euros in 2018, 70 Euros in 2019 and 90 Euros in 2020. This rate would have then increased on January 1 of each year starting 1 January 2021, depending on the forecasted evolution for consumer prices. The tax was to be applied to palm oil only and not competing oils. This proposal for a new palm oil tax was backed with various arguments that were dubious or plainly wrong. My report focuses on the Parliamentarians’ claim regarding the “tax advantage” that the present regulation would be giving to Palm oil. According to them, Palm oil would presently benefit from a  favourable tax treatment than almost any other vegetable oil. This statement is plainly wrong. The mistake (whether or not it is a voluntary one is an open question) comes from the fact that the Senators use so-called “excise duty tables” to compare the taxes on different oils. Now, excise duties are traditionally given in euros per ton and if you look at those tables you note indeed that olive oil is taxed twice more heavily than rapeseed and almost twice as much as palm oil. But do those comparisons have any economic meaning? The answer is a resounding “no”. From an economic point of view what makes sense is not the duties paid per ton of vegetable oil but instead the relative weight of taxation in the market price of those oils. When you buy a Ferrari you don’t inquire about the tax per ton; what is economically meaningful is the sales tax (or VAT tax). What would appear unfair to many would precisely be to tax all cars according to their weight since the owner of a Ferrari would in that case pay probably less tax than the owner of a poor quality car. So what I did in the report is simply to translate this excise duties table where taxes are given in euros per ton into the equivalent ad valorem rates that have a clear economic meaning. And the results are completely at the opposite of what the Senators claimed: Palm oil is already taxed much more heavily than most of its competitors. Let me be more precise. Because the market price of olive oil is extremely high (3,852 euros per ton) an excise duty of 189 euros per ton means that the economic rate at which olive oil is taxed is as low as 4.9%. Let us compare with Palm oil. The excise duty on palm oil is at 103 euros per ton but the market price for one ton of Palm oil is 478 euros (December 2015). So, the economic rate at which palm oil is taxed is 23.64%. Between four and five times more than olive oil! So, where is the unfair tax advantage given to palm oil by French law? There is clearly no such advantage and if the amendment had been voted the situation would have been worst with Palm oil taxed up to 209.7% by 2020.

Q – What is your opinion on the arguments that were put forward by Green Senators to justify such a tax on Palm Oil?

A- My report leaves largely aside the questions of the impact of the Palm Oil industry on the environment and of palm oil consumption on health. For having worked some years ago on similar issues I am, however, very skeptical about many claims put forward by the Senators on those questions. What is remarkable anyway in this story is that their claim that “palm oil’s competitive advantage is based only on the fact that the cost of health and environmental damage it causes is outsourced and supported by the community” is backed by absolutely no reference to any study or research. We (at least the Parliamentarians who have to vote the amendment) are asked to take their claim as an obvious truth; as something beyond any doubt. Hence, potentially, an industry—palm oil—will be destroyed or at least badly damaged without the authors of the amendment and Parliamentarians in general providing any solid justification for their decision. As I said, don’t ask Parliamentarians to replace the academy of sciences otherwise you will face troubles! A serious argumentation would for instance tell us—or at least try to evaluate—what will replace palm oil if palm oil production were to fall; where would it be produced, how much land that would require, etc. But none of that is offered.

Q – After many months of intense debate, the French Palm Oil tax was withdrawn by the Government. Do you agree with this decision?

A – Yes, I think it was a wise decision. I also remember that during some of the discussions they were refining somehow their approach by starting to distinguish between various types of culture. This was going in the right direction in the sense that it shows some awareness of the fact that it is very difficult to assess the global impact of any economic activity on the environment.

It’s important to realise that this is not the end of the discussion. The plans to tax palm oil are still underway in Paris, and they will come back in a different form. Unfortunately, the same lack of proper economic and scientific understanding may also be present.

Q – On 23 June 2016, during the National Assembly plenary debate on the Biodiversity Bill and while discussing the Palm Oil tax, MPs Hammadi and Louwagie informed the audience that they had finalised a report on the taxation of food products. Moreover, the French Government has decided to review taxation on all vegetable oils in the next 6 months. How do you see this going forward?

A – This is what I referred to about the tax coming back in a different form. Revising vegetable oils taxation is a good idea, as long as it is fair and just. However it seems the new proposal would be discriminatory from an economic perspective towards palm oil. It is very likely that the revision will have a chapter on oils that don’t respond to certain sustainability criteria will be subject to a tax. But, as I said, the question of sustainability is a complex one and it is to be feared that the outcome will be justified with weak scientific evidence, disproportionate, discriminatory and therefore unfair. This would lead to horrible consequences. First of all, it will potentially lead to price rises on food products for human consumption. These price rises are regressive and will hurt consumers all over France. Secondly, such a proposal will widen the gap with domestic oils that will be favoured even more by the tax system. This is a violation of both WTO and EU rules.

Moreover, the suggested approach from the MPs Louwagie and Hammadi report claims to be ‘simplifying the system’ by suppressing all taxation on vegetable oils. This will be compensated financially by a raise of the tax on sugary drinks and products. Vegetable oils taxation is complex and outdated, however, suppressing all vegetable oils will favour oils such as olive and rapeseed oils that are currently the lesser taxed oils on the market and are not used in the production of sugary drinks. The French government has indicated that it will set up International Sustainability standards for vegetable oils and will very likely tax those who don’t fit those ‘sustainable criteria’, which have yet to be defined. This will mark further regulation and protectionism for imported vegetable oils on the French market.

In any case, this shows that the industry and civil society should remain vigilant for this stubborn attempt to discriminate against palm oil. This approach could hurt everyone, from industry to consumers, and it will not necessarily be good news for the environment.

This new report and the proposed revision of the vegetable oils taxation will need to be watched very closely.