Why is EU deforestation law angering Indonesia and Malaysia?

In the last few years, the European Union has taken multiple steps – ranging from setting up an emissions trading system to phasing out coal-fired power plants –as part of its commitment to drastically reduce greenhouse gas emissions by 2030. 

While such mitigation measures focus on internal changes, a new EU regulation wants to take the climate fight to places outside the European continent. And it’s not going to be easy. 

On December 6, the EU agreed in principle to leverage its market power to discourage deforestation by prohibiting the import of half-a-dozen commodities and their byproducts, which are produced in land cleared of their forest covers. 

“Such a measure has not worked directly before because there have always been leakages. But it has worked politically as it encourages countries to stop deforestation due to threat of trade restrictions,” says Gernot Klepper, a climate policy expert at the Kiel Institute, an independent think tank. 

“So far, the deforestation policy has focused on the biofuel market and primarily palm oil.” 

When the regulation is adopted into law this year, it will oblige the EU’s 27 member states to cut imports of commodities which they believe are responsible for the destruction of standing trees, especially rainforests. 

The plan is to stop suppliers from selling palm oil, cattle, soy, coffee, cocoa, timber, rubber and products made from these commodities, such as chocolate, leather and furniture, in the EU markets. 

It is part of a broader EU effort to scale down the bloc’s carbon footprint. The argument goes that these commodities are increasingly being planted on farms, which have encroached onto forested regions. 

But palm oil is emerging as a sticking point. 

The EU is one of the major importers of palm oil, almost all of which comes from Indonesia and Malaysia, which control more than 85 percent of the global market share of the commodity. 

Most of the palm oil imported into the EU is consumed as biofuel in the transport sector as an alternative to fossil fuels. 

The EU deforestation policy has angered Indonesian and Malaysian leaders, who say they will work jointly to counter it. 

Indonesian President Joko Widodo called the EU regulations “discrimination against palm oil” in comments this week. 

But Klepper, who is also the Chairman of the International Sustainability and Carbon Certification Association, says he’s puzzled by the reaction of the Southeast Asian neighbouring countries since they have voluntarily reduced deforestation by a significant measure. 

He adds that the regulations concern palm oil derived from plantations on deforested land from December 2020 onwards. This means a Malaysian or Indonesian farmer harvesting palm oil in a deforested region before the cut-off date wouldn’t need to worry about selling his produce.  

One explanation why Jakarta and Kuala Lumpur are concerned can be related to the cost of verifying where the palm oil comes from.  

Under the new regulations, companies importing the commodities into the EU would have to undertake strict monitoring of the source of their products. 

For instance, the suppliers must collect the precise geographical coordinates of the commodities’ production locations. 

This part is tricky and will likely pile up financial burden on small landholders, says the Malaysian Palm Oil Board.

For a few years now, EU leaders have set their eyes on curbing the import of palm oil and it plans to gradually phase out its consumption as a biofuel and completely ban it by 2030. 

When the proposal first surfaced in 2018, Malaysia criticised it severely, calling it “crop apartheid”. Kuala Lumpur’s angst was not without reason. 

Rapeseed oil, which is produced in Europe, has the highest share in the production of biofuels. But rapeseed oil has been exempted from the strict regulations which target palm oil, raising concerns about the EU’s discrimination. 

On its part, the EU says it has based its decision on the impact of these commodities on deforestation. 

“EU has classified palm oil feedstock as having a high risk to indirect land-use change (ILUC), compared to other vegetable oils like rapeseed and sunflower which are considered a low-risk feedstock,” says a recent study on the impact of the EU import ban. 

The indirect land use happens when financial incentives encourage farmers to grow a particular commodity. As more palm oil goes into biofuels, extra palm oil plantations are needed to cater the food market, which leads to further deforestation, explains Klepper. 

“It doesn’t make sense for biofuels to come from deforested land because, in the end, the greenhouse gas emissions balance from biofuels is negative.”

The latest EU regulations are an improvement over an earlier proposal, which had excluded soy and cattle due to political pressure from the United States and Brazil.

Biofuels will remain in demand for at least 10-15 years because the share of electric vehicles in the transport sector remains minuscule, says Klepper.