Delegated Act: Indonesia and Malaysia steps up to the plate with higher domestic biodiesel mandates – Part 1

Levelling the playing field for trade in palm biofuels in the European Union now looks a longshot.

Challenges continue to unfurl from the European Union with the most recent being imports of biodiesel from Indonesia.

All these red flags have been placing the oil palm grower community as well as the rest in the palm oil industry and trade with the EU at a disadvantage with the narrowing entry space.

Leading two palm oil producers Indonesia and Malaysia are stepping up to the plate and both are now increasing the domestic biodiesel mandates.

Indonesia, which plans to bring the grievance to the World Trade Organisation (WTO), also realises that it can be a major palm oil consumer by driving up demand. After all, Indonesia is   projected to be the fifth most populous nation by 2050 with 321 million people from the current 271 million.

Oil World, the independent global market report, estimates that domestic consumption totaled 12 million tonnes in Indonesia last year. That number is estimated to increase to more than 14 million tonnes as a substantial amount of palm oil will be diverted to the biodiesel sector.

This will help to offset the declining demand from the EU due to restrictions imposed on palm biodiesel under the Delegated Act.

Under the Delegated Act, only palm biodiesel was categorised as high risk.

The Delegated Act which came into force on 10 July 2019 would gradually limit and phase out palm biodiesel usage by 2030.

Bolstering domestic investments would not only assist to stabilise the price of the commodity but also provide sustainable growth and create jobs, all of which will boost the economy.

Developing countries that need to spur growth in their domestic markets rather than rely on exports resort to such measures due to unfair regulations imposed to protect competing oilseeds.

Domestic biodiesel mandates and consumption creates less dependency on the EU market for both these palm oil producing countries.

Biodiesel mandates

Indonesian President Jokowi who just started his second term in office after the recent general elections, announced on August 12 that there are plans to increase the usage from the current B20 to B30, starting January 2020. This will be increased to B50 by the end of the year.

By doing so, Indonesia’s palm oil consumption could also increase to 8.4 million and 13.9 million tonnes in 2020 and 2021, respectively, according to a CIMB Bank analyst.

RED & protectionism

Two recent developments have accelerated Indonesia’s decision to increase the local biodiesel mandate. Firstly, it is the palm biofuels ban by 2030 for transportation fuel under RED 11 and the recent announcement by the EU that countervailing duties of between 8% and 18% will be imposed on Indonesian biodiesel imports due to claims of unfair subsidies.

Palm  oil has been on a bumpy ride in the EU since 2009 when strict sustainability criteria was imposed for biofuels to be counted towards renewable energy targets to be eligible for incentives made available by EU member states.

According to the OECD, agricultural commodities become an important feedstock in the transportation fuel sector since the early 2000s when national policies began mandating the use of biofuels in Brazil, the European Union and the United States, where a significant share of maize, sugarcane and vegetable oil are now utilised for the production of renewable fuels.

To understand the biofuels mandate, it is important to reflect on the historical perspective of the Renewable Energy Directive (RED) which established an overall policy for the promotion of energy from renewable sources when it was first debated from 2008–2009.

The RED came into force in 2010 and this included a 10% target for the use of biofuels in transport in the EU. To be eligible, biofuels must generate at least 35% less greenhouse gas emissions (GHG) than fossil fuels.

Palm biodiesel was accorded an unfavourable low ‘default’ GHG savings of 19%, which was below the 35 % threshold, while the ‘default’ GHG savings for biodiesel produced from rapeseed was 38 %.

Malaysia had then disputed the low ‘default values’ which clearly discriminated against palm oil.

Economists Gernot Pehnelt and Christoph Vietze of GlobEcon, argued that the European Commission’s calculations of the sustainability of rapeseed oil biodiesels were incorrect. Using the same data quoted by the Commission, the economists could not replicate the findings and questioned whether the emissions savings from using rapeseed oil as a biodiesel are being overstated.

According to the authors:  “We are not able to reproduce the greenhouse gas emissions saving values published in the annex of RED. Therefore, the emissions saving values of rapeseed biodiesel stated by the EU are more than questionable.” This is particularly pertinent as 80 percent of biofuels produced within the European Union are currently derived from rapeseed oil.

The discrimination against palm biodiesel continued when in January 2018, the European Parliament adopted a resolution that called for a ban on palm oil biofuels under the RED which would start in 2021.

A compromise was later agreed by the EU Parliament in the form of a Delegated Act.

This is premised on the claim that palm oil cultivation contributes to deforestation which leads to GHG emissions.

Belvinder Sron is the Deputy CEO of MPOC.