The Malaysian Insight

HOW did the European Union go from being Malaysia’s second-biggest buyer of palm oil to a trade war “enemy”?

The amended European law on renewable energy – which is reported as a ban on palm oil, even though it isn’t – has Malaysia and Indonesia up in arms over what they call an unfair and discriminatory legislation.

The amendment came following the recent European elections, which saw a record number of green party politicians elected.

These developments raise questions as to whether Malaysian palm oil has a future in Europe, which contributes about 6% of the country’s economic output, or gross domestic product.

In 2017, the EU imported about RM11 billion worth of palm oil, a record year for the region.

About a million Malaysians from 650,000 private smallholder families depend on palm oil revenue and so, too, do more than 112,000 Felda families.

The EU’s amended Renewable Energy Directive II (EU RED II), when it comes into force in June 2021, will have more stringent criteria for biofuels the region imports.

According to EU data, about 40% of all palm oil imported to the region is used for biofuels.

How will this affect Malaysia and the rest of the palm oil-producing world?

1) What’s the link between the EU polls and this law?

Basically, there is now greater awareness about climate change and environmental sustainability issues, and this manifested in the way EU citizens voted in the region-wide elections.

According to the bloc’s top envoy to Malaysia, Maria Castillo Fernandez, every EU law that governs member countries, including EU RED II, has to be approved by the European Parliament. In essence, every EU law is a reflection of what ordinary EU citizens want.

“The whole process of coming out with the law involves consulting with stakeholders, such as palm oil producers, civil groups, scientists and the producers of other edible oils,” said Fernandez.

“It has to be approved by the both the EU council of ministers and the European Parliament. This is not a law passed in some dark room by a group of politicians.”

Following the EU elections, the new more lawmakers are likely to push an aggressive environmental agenda.

“There is an awareness about the environment and why politicians are not doing more,” said Fernandez of the EU polls results.

“We will have a parliament that has significant numbers of green party reps, so we will see in the future that the environment, climate change and sustainability will feature more and more in European policies and in our approach to other countries.

“The European public wants it. These will become important issues for Malaysia and other countries because the EU Parliament is going to focus more on these issues.”

2) How did palm oil get a bad rap in Europe?

Ironically, it was Europe that gave the global palm oil industry one its biggest boosts.

When it was first introduced in 2009, the RED legislation was meant to encourage the use of renewable energy in the region as part of its fight against greenhouse gas (GHG) emissions that contribute to climate change.

The use of renewable, plant-based biofuels in the transport sector was promoted, and this included those made using palm oil, as well as soy and corn.

Financial incentives or subsidies were given to encourage European consumers to use biofuel-powered cars, said Fernandez.

As demand for palm oil-based biofuels increased, it led to the extensive expansion of oil palm plantations in Malaysia and Indonesia. Millions of hectares of lush rainforests were cut down for the purpose.

It is estimated that in 2015, Indonesia became the world’s fourth-largest GHG emitter due to fires started to raze virgin forests to make way for oil palm cultivation.

These developments led to the EU law being amended this year. It followed the realisation that the increased use of biofuels failed to curb GHG emissions, and deforestation and land-clearing, too,

were responsible for releasing large amounts of carbon dioxide into the atmosphere.

3) Does EU RED II punish palm oil?

According to Fernandez, EU RED II does not single out any particular biofuel crop.

However, under its supplementary law called the delegated act, EU RED II specifies which crops will continue to get financial incentives, and which will not.

Oil palm will not as its cultivation sees the release of more emissions through indirect land-usage change (ILUC) – one of the criteria specified for sustainable biofuels under the act.

ILUC calculates whether a producer releases more carbon dioxide by converting land to cultivate plants for use in biofuels. So, cutting down rainforests for biofuel crops does not get a favourable ILUC rating.

Only biofuels with a low ILUC rating qualify for the EU’s financial incentives. Currently, palm oil is classified as a “high ILUC” biofuel.

Since EU RED II is up for review before it is enforced in 2021, palm oil producers have a chance to change their practices and prove to the bloc that their crop is “low ILUC” and deserving of incentives.

Fernandez stressed that the directive is not a “ban”, as described by producers.

Palm oil-based biofuels can still be exported to Europe, but they will be more expensive than biofuels classified as sustainable due to the lack of incentives.

According to the Malaysian Palm Oil Board, Europe imported 1.91 million tonnes of crude palm oil last year.

EU data showed that 40% of all palm oil imports comprised biofuels, with the rest used in the food, cosmetics and chemicals industries.

4) Will Europe continue buying palm oil for food and cosmetics?

Yes. And maybe, no.

Fernandez said there are no EU plans specifically targeting palm oil.

However, individual European countries, such as Norway, have passed their own laws to discourage palm oil-based biofuels because of the deforestation the industry has caused.

European food manufacturers, supermarkets and consumers are also turning increasingly hostile to unsustainably produced palm oil.

At present, there are no EU legal restrictions on palm oil used in food and cosmetics, but the results of the bloc’s recent elections could be an indicator that things might change as citizens and lawmakers demand a tougher green agenda. – July 3, 2019.