The European Union move to phase out the use of palm-oil based biofuel in its renewable energy targets, citing alleged excessive deforestation, may result in a regression in sustainability practices and more deforestation, the latest report issued by the Singapore Institute for International Affairs (SIIA) said.

The report, issued in May 2019 titled “Palm Oil and Biofuel, Surveying the sustainability landscape in Europe, China and India,” said the revised EU Renewable Energy Directive (RED II) would become a disincentive to progress in sustainability.

“The momentum to advance sustainable production has now come under threat,” it said, adding that “The directive may not substantially progress efforts to address sustainability in the sector”.

According to SIIA, the palm oil industry needed to continue on its path of sustainability, which has undeniably come a long way. It said that Indonesia and Malaysia, the world’s top two palm oil producers that account for some 85 percent of world supply, were both committed to sustainability in the commodity.

It enumerated three reasons behind the counter-productive nature of the European directive, the first being that it could send “a negative signal to other consumer markets regarding the use of palm oil. This could shift demand to other vegetable oils which are less efficient and require more land to cultivate.

Efforts to promote sustainable methods of production abound, alongside calls for higher demand and sustainable consumption and with the European Union being the largest buyer of certified sustainable palm oil, the impact would be felt in the palm oil market.

The move could also be seen as discrediting existing sustainability efforts by palm oil producing countries and thus dis-incentivize further progress. It may prompt a shift from the European market to China and India, the two world’s largest palm oil consumer markets were both still in the early stages in their understanding of sustainability. Concerns would, therefore, arise that their palm oil supplies may not be produced to the highest sustainability standards, the report said.

The report also pointed out that the EU move, which it labeled as “questionable in terms of its conformity with trade rules” may unfairly undermine an industry that is important to Indonesia and Malaysia in terms of export earnings, and the livelihoods of millions of smallholders. The two countries both recognize the importance of continuous improvement in their sustainability standards and practices.

SIIA pointed at the EU’s Indirect Land-Use Change (ILUC) criteria under REDII which has been at the center of the debate around excluding palm oil unless it satisfies “low risk” requirements and/or is in an exempt category, including small and independent smallholders.

“While it is critical for producing countries to clean up their supply chain, the controversy around ILUC highlights how important it is for major consumer markets to develop a common understanding with producing countries regarding what sustainability entails in practice, and avoid a case of shifting goalposts,” the report said.

The Cost of Sustainability

Despite the varying standards of sustainability across producer and consumer markets, the palm oil industry needs to continue on its path of sustainability, it said. Besides the issue of sustainability certification, another current debate concerning palm oil revolved around who should bear the costs, as undertaking more sustainable practices came with a cost.

Some believe that consumers – who demand higher sustainability standards – ought to bear this cost by paying a higher price for certified sustainable products in the market. Others believe producers should bear the costs so as to enjoy wider market access.

“It seems that certification is at an important crossroads: there are little premiums for certificates as price-sensitive markets like China and India will not pay more,” the report said adding that at the same time, palm oil companies were facing criticisms for not doing enough for sustainability.

Smallholders account for more than 40 percent of palm oil output but they have remained largely excluded from the certification process because it was not only costly but also complicated.

“More support is needed to help these small-scale farmers attain certification while ensuring that certification is similarly valued by major consumer markets in China and India through campaigns and educational efforts” the report said, adding that intermediate steps that do not explicitly focus on certification, such as Verified Sourcing Areas, are currently underway to assist small and mid-sized players to adopt more sustainable practices and be recognized by major buyers for their efforts.

SIIA concluded that future research needs to be conducted, including a stock-take on the disparate actions and impacts on Europe, other major consumer markets as well as the palm oil producing countries and industry.

“This will help identify areas for further collective effort towards palm oil sustainability,” it said.

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