Trade War Looms Over EU Curbs On Palm Oil Use For Biofuels, Impact Likely On India

One hundred and eighty years ago, the Dutch and British decided to import seeds of oil palm trees into their colonies in Indonesia and Malaysia respectively from West Africa. It took nearly the start of the twentieth century for oil palm cultivation to catch up in the South-East Asian nations.

Back then, the decision-makers would have seldom thought that this could lead to a trade war between their own governments in Europe and the South-East Asian countries. That, however, is the reality facing global merchandise trade today.

Palm oil, an affordable cooking oil for the economically weaker section of India, is now in the eye of a trade storm between the European Union and producer countries like Indonesia and Malaysia.

At the centre of the storm is a move by the European Union on 12 March to restrict biofuels produced from palm oil as part of the EU’s renewable energy targets. A new criteria on biofuels issued by EU says palm oil cultivation results in excessive deforestation and its use in transport fuel should be phased out.

Palm oil, used for producing biodiesel, will no longer be certified as meeting the renewable energy goals, as per the latest EU recommendations.

The EU renewable energy law recommended last year to the EU to set sustainability criteria for palm oil. It said the use of unsustainable food and feed crop-based biofuels should be limited from 2019 with a gradual phaseout that will lead to a total ban by 2030.

The EU plans to cut its greenhouse gas emissions by 40 per cent compared with 1990 before 2030.

The renewable energy law proposal also required the EU to develop a certification system for biofuels based on their impact on indirect land-use change. The change will be based on how crop-based biofuels displace food production or lead to deforestation. These are seen as leading to higher emission of greenhouse gases.

Brussels-based non-governmental organisation (NGO) Transport and Environment has claimed that palm oil based biodiesel releases thrice the amount of greenhouse gases than fossil fuels like diesel if the land use for cultivating oil palm trees is taken into account.

For over a decade now, NGOs have been carrying out a campaign against cultivation of oil palm claiming it had damaged rainforests in Malaysia and Indonesia. Besides, these organisations have alleged that natural habitats of wild animals like orangutans have been affected by this.

The EU’s new law, however, exempts palm oil produced by small land holdings of less than 2 hectares. Malaysia and Indonesia, which make up 85 per cent of total production in palm oil globally, see the rules as “discriminatory” and have threatened retaliatory measures.

EU imported 7.8 million tonnes of palm oil in 2017-18 and 51 per cent of it went towards producing biodiesel. The Netherlands, Germany, Italy and Spain accounted for 87 per cent of these imports.

Rapeseed oil tops in contribution for biofuel production in the EU. Fifty-five per cent of biodiesel in the EU was produced from rapeseed oil, while palm oil’s contribution was 35 per cent.

Palm oil prices have been on the downswing after having touched $860 a tonne 31 March 2014. Prices then rose as crude oil prices hovered around $100 a barrel. Currently, palm oil is quoted a little lower than $530 a tonne free-on-board Malaysia.

Vegetable oils, particularly palm, soybean and rapeseed oils, are seen as good sources of biodiesels, an alternative for fossil fuels. As crude oil prices have dropped since then, palm oil rates have also cooled.

In the last one year, palm oil prices have declined by nearly 15 per cent. In comparison, crude oil has dropped 9 per cent. European environmental groups still feel there are many loopholes in the energy law and these exempt crops like soyabean which are reportedly cultivated after deforestation in the Amazon region of South America.

The palm oil producers lobby - Council of Palm Oil Producing Countries – has said that the EU law will be challenged. Its primary members – Malaysia, Indonesia and Colombia – have said they would discuss the issue during bilateral talks.

The council also plans to drag the EU to the World Trade Organization (WTO) on the new law, which it says is scientifically flawed. Malaysia, in addition, has said by 2020 all palm oil consignments being sent out of its borders would be certified as sustainable palm oil.

The EU sounds confident in taking on the palm oil producers at the WTO dispute forum, saying its measures are covered by environment and ecological concerns. But palm oil producers says the EU law specifically targets its produce and it is not broader covering all environment concerns.

Indonesia has claimed that any act of EU that will affect its palm oil plantations will impact its efforts to alleviate poverty. The Indonesian government has also pointed out to the EU that it plans to buy 250 aircraft from Airbus Industrie.

EU members have time until 12 May to object to the provisions. If the EU receives no objection, then the measures announced on 12 March will become a law.

There are, however, suspicions on the EU move targeting palm oil. One of the arguments is that being a cheaper source of vegetable oil for biodiesel, it was affecting rapeseed growers in Europe.

However, to meet the demand that palm oil currently fulfils, leading growing nations Germany and France will have to double their acreage under rapeseed. The International Union for Conservation of Nature says, on a global scale palm oil uses only 6.6 per cent of the land under rapeseed cultivation to meet 39 per cent of EU demand.

Another point argued against the curbs on palm oil is why similar campaign or law has not been enacted against soybean that is being cultivated clearing Amazon forests. The question asked is, is the EU scared of taking an action that would affect the US too?

The Yale School of Forestry and Environmental Studies says that soybean cultivation is the major driver of deforestation of the Amazon basin. Environment organisations like Greenpeace have been raising the issue of soybean as well as palm – achieving more success in the case of the latter.

For India, there are two fallout from this. One, falling palm oil prices will encourage higher imports. India imports nearly 15 million tonnes of palm oil annually, making up 60 per cent of the total edible oil demand in the country.

Though India has raised the import duty on palm oil, shipments from Malaysia come at a lower duty in view of a bilateral agreement between both nations. Under ASEAN pact, too, palm oil imports will be levied a lower duty.

Crude palm oil imports from Malaysia are levied 40 per cent duty currently against 44 per cent for other countries, while refined palm oil attracts 45 per cent duty against 55 per cent for other countries. In the case of Indonesia, the duty on refined palm oil is 50 per cent.

As a result, India would still be spending higher than Rs 60,000 crore on cooking oil imports than spending less for the shipments. Higher imports will also mean higher outflow of the dollar from the country.

Higher cooking oil imports can also affect remunerative prices for Indian oilseed farmers. This can impact their income, part of the rural economy and, in the long term, downstream industries.

It will be only fair if the policy makers keep a watch on the developments since it could impact Indian farmers and economy when the affected countries look to other markets for relief.