Why Malaysia Must Focus on Brussels
Brussels is the regulatory capital of the European Union – and, some would say, the regulatory capital of the world. Whether that is a source of pride or not depends upon your political view. For palm oil producing countries, what is most relevant is to remember that Brussels is where most European decisions on palm oil take place.
There are regular media and political campaigns elsewhere – Nutella Taxes in France; NGO campaigning in the Netherlands; media criticism in Italy; etc. These are all important, and must be addressed. The effects, though, are small when compared to the potential effects of Brussels regulation on palm oil. When it comes to palm oil’s use in biodiesel, in particular, Brussels is where we must focus.
Biodiesel now forms a significant percentage of Malaysian Palm Oil exports to the EU market. Any biofuels regulation therefore can have a significant impact on future revenues for Malaysian exporters. Biofuels regulations are drafted and decided in Brussels.
The Renewable Energy Directive (RED) is being revised right now in Brussels. Regulations negatively impacting Malaysian Palm Oil exports could be decided in the next six to twelve months. It is important to understand the background of the RED, first, before addressing the current challenges.
The RED first entered into force on June 25, 2009, and since then it has been the main regulatory tool used by Brussels to regulate biofuel use. The Directive sets targets for each Member State on renewable energy use. For example, as part of the 20% overall renewable energy target, a minimum 10% use of renewable energy was required for the transport sector. Almost all of this 10% comes from biofuels – and a large percentage has come from palm oil biodiesel. This element in the RED has driven stronger exports from Malaysia to the EU: palm oil biodiesel is the renewable transport fuel of choice for many across Europe.
However, the original RED from 2009 did not make life easy for palm oil. Under RED, different biofuel source were given ‘default values’ – numbers based on how much Green-House-Gas emissions (GHG) the EU calculated that each feedstock would save. These calculations claimed that rapeseed and sunflower (both originating in the EU) saved more GHG compared to palm oil. These EU statistics were vigorously opposed by Malaysia as biased and inaccurate. Multiple scientific researchers, including from Europe, also questioned the EU’s figures. In short, the EU was using the RED to protect the local oilseed producers – in this case by gerrymandering the default values.
According to the USDA Report, rapeseed oil remains the most important biodiesel feedstock in the EU, accounting for 46 percent of total production in 2016. But this share has decreased over the years. For example in 2008, rapeseed oil had a share of 72 percent in the feedstock mix. The import of palm oil – a better-priced, more versatile alternative – has given Europeans more options. They are turning away from uncompetitive rapeseed. This has provided huge benefits for European consumers: lowering costs, increasing choice and improving competition.
When local oilseeds are unable to compete with cheaper imports, regulations such as the Renewable Energy Directive (RED) are used by the EU to either cap or restrict the import of competing oilseeds. And so it came to pass when the RED was revised in 2014 in Brussels.
Attempts were made to add Indirect Land Use Change (ILUC) factors into the RED, which would have increased the discrimination against palm oil biodiesel. The term ILUC is used to imply that due to the demand for biofuels, land that is meant to grow food crops is now used for non-food needs, resulting in an indirect land use change and increased CO2 emissions through displaced deforestation. Scientists have dismissed the ILUC theory as unmeasurable and flawed. Other efforts were made to discriminate against palm oil, including removing palm oil feedstocks from approved lists.
Now, the RED is being debated for a third time. The draft report from the ENVI Committee in the European Parliament calls for a reduction of the share of first-generation biofuels used in transport from its current 7% to a limit of 3.8% and elimination of all EU subsidy for food-based biofuel feedstocks after 2020. This would mean palm oil-based biofuels would be far less attractive to EU customers after 2020: that is only three years away.
Elimination of subsidy, and reduction of quotas are the subtle method of discriminating against palm oil in Brussels – but a more obvious method is also being planned. Namely, to explicitly allow any EU Government to unilaterally discriminate against some feedstocks while promoting others (in other words, France would be able to restrict oilseeds, and possibly palm oil specifically, while continuing to promote other biofuels). This blatant discrimination is not allowed under the current RED, but this could all change in the next 6-12 months in Brussels.
Some EU Governments are pushing hard. On 6th July, the French Environment Minister Nicholas Hulot mentioned that France will take measures to” restrict the use of palm oil” in the production of biofuels with the aim of reducing indirect deforestation. In his wider plan to fight climate change he said “we will close a window that was giving the possibility to incorporate palm oil in biofuels”. The only way Minister Hulot can achieve his aim is if the EU forces through the new RED rules in Brussels.
This is not the first attempt by the French to impose restrictions on palm oil. Since 2002, several bills have been tabled in Parliament to impose a tax on palm oil which have been defeated.
According to Reuters, Avril, Europe’s largest biodiesel producer, welcomed the comments from the French Minister as the company has reduced output of biodiesel several times in the past, citing competition from cheaper imports that use palm oil as one of the main problems.
Similarly, the Norwegian Parliament voted in June to ban palm oil-based biofuels in public procurement of fuels and public transport. Again, this would only be achievable in practice if the EU changes the RED rules.
How does this all affect palm oil, and what should producing countries do?
There are opportunities to prevent the RED changes. The strong signals indicate that Malaysia will take the necessary measures to protect its prized commodity and exports.
The Malaysian Minister of Plantation Industries and Commodities, Mah Siew Keong, said Malaysia will consider restricting the purchase of French products if the country proceeds with attacking the palm oil industry. This strong response has been proven to work before.
During the 30th ASEAN Summit held in Manila in April this year, a statement was issued that addressed the EU’s recent Resolution on Palm Oil, which also called for a ban on palm oil biodiesel. Working together with other ASEAN countries – and indeed palm oil producers outside Asia – is another sound strategy.
The primary argument used in the Resolution is the claim that palm oil is a cause of deforestation. Nevertheless, based on the 2012 European Commission study which looked at the impacts of various commodities on deforestation, it was clear that the largest source is soy (5.4 per cent), followed by maize (3.3 per cent ) and then oil palm (2.5 per cent ).
Recently on 13th July, when both Malaysian and Indonesian Trade Ministers met in Sarawak during the 3rd Malaysia –Indonesia Joint Trade and Investment Committee meeting, it was reported that both countries will consider taking the issue to the WTO, if the Resolution becomes an EU directive and discriminatory in nature.
Minister Mah Siew Keong added that an FTA is unlikely if Europe discriminates against Palm Oil. “Malaysia’s free trade agreement talks with the European Union (EU) is not likely to conclude if Palm Oil continues to be discriminated with tariff and technical trade barriers”.
“If the EU continues to discriminate against Palm Oil, I think it would be very difficult to conclude the free trade agreement. We don’t want trade barriers to work against our Palm Oil exports. If we need to proceed to the WTO, we will because the livelihoods of some five million smallholders cultivating oil palms, in this region, is at stake.”
Changes may be needed at home, also. For countries producing palm biodiesel, the EU’s plans may signal the need to increase local biodiesel mandates or even focus on markets that are much closer such as South East Asia (SEA) where there could be substantial demand for clean biofuels. After all, SEA is home to more than 623 million people. For Malaysia, it is an opportunity to increase the use of palm biodiesel from B10 to B15 and meet its own clean energy targets.
The EU’s plans are not law, yet. There is a window to defeat the plans of the French and Norwegians, and if palm oil producers renew their focus on Brussels, it can be done.
Instead of preaching free trade, Europe is moving towards protecting its local industry, and harming its consumers.
Palm oil provides an unrivalled product – both as a biodiesel and as a food product. It also has lifted millions of small farmers out of poverty. This should be celebrated. Instead it is the victim of discrimination. The EU should understand that.
The starting point for both countries will be the EU- Malaysia FTA where industry players will be keeping a close watch now. We must be reminded that trade is about benefitting all nations, and not making one poorer due to protectionist measures – especially not when it harms so many small farmers.Belvinder Sron is the Deputy CEO of MPOC
Belvinder Sron is the Deputy CEO of MPOC