European ban on palm oil in biofuels upsets Jakarta, KL

They warn of potential trade conflict, impact on livelihood of 6m in Indonesia and Malaysia

JAKARTA/KUALA LUMPUR • Indonesia and Malaysia, which together produce nearly 90 per cent of the world's palm oil, are reeling from a decision by the European Parliament last week to ban the use of the commodity in motor fuels from 2021 to prevent deforestation and meet Europe's more ambitious climate goals.

Political leaders in both South-east Asian countries have warned that the move may lead to a trade conflict as it looks like a protective trade barrier. They also warned that the livelihood of over six million people - comprising mostly farmers with smallholdings and plantation workers - could be badly affected.

Members of the European Parliament last Wednesday voted to amend a draft law on renewable energy that calls for reducing to zero "the contribution from biofuels and bioliquids produced from palm oil" in three years.

Palm oil is widely used as cooking oil and in making products ranging from ice cream to instant noodles and soaps to lipsticks. About half of all packaged products in the supermarket have palm oil, says the World Wildlife Fund on its website.

The commodity has another use - it can be blended with fossil fuels such as diesel to produce biofuels to power up motor engines.

But there is concern that, in order to quickly expand palm plantations in Indonesia and Malaysia, land owners use illegal slash-and-burn methods to clear land. Until two years ago, South-east Asian skies were annually blighted with a choking haze because of these slash-and-burn practices.

"We are disappointed with the decision. We view it as (discriminatory)" Indonesian Foreign Minister Retno Marsudi said last Thursday in response to the ban.

She told reporters that the Bill has not been implemented as the European Parliament must consult the European Council as well as the European Commission.

Malaysian International Trade Minister Mustapa Mohamed said on Monday: "As more and more countries around the world embrace protectionism, many had hoped that the EU would provide the necessary leadership to uphold the principles of free and fair trade."

Oil palm plantations in Indonesia covered 11.7 million ha at the end of last year. In Malaysia, oil palm is planted over more than 4.49 million ha of land.

In contrast, Singapore's land area is about 0.72 million ha.

Indonesia last year exported a total of 28 million tonnes of crude palm oil, valued at US$23 billion (S$30 billion).

Malaysia produced 19.5 million tonnes last year, with export value of RM75 billion (S$25 billion).

For Indonesia, 40 per cent of its palm oil exports to Europe are converted into biofuels.

Europe is Malaysia's second-largest export market for palm oil, with 30 per cent of it used for biodiesel.

At the annual bilateral meeting of Indonesian and Malaysian leaders last November, Malaysian Prime Minister Najib Razak and Indonesian President Joko Widodo asked why Europe was going to single out palm oil, when the production of other vegetable oils "contribute to deforestation" too. The other major vegetable oils are soya bean oil, sunflower oil and rapeseed oil.

Meanwhile, analysts say banning the use of palm oil for biofuels may be easier said than done.

Dr Tungkot Sipayung, executive director at Palm Oil Agribusiness Strategic Policy Institute, said phasing out palm oil would mean Europe would have to find an alternative, likely to be soya bean oil from the United States and South America.

"So they need three million tonnes of additional supply of soya bean a year as replacement, meaning six million ha of tropical forest in Brazil would have to be converted into soya bean plantations to meet this increase in demand," he said.

Industry analyst James Fry said at a seminar in Kuala Lumpur last week that it would be tough for the European Union to cut out palm oil since alternative vegetable oils are costlier.

Research houses in Malaysia have forecast that palm oil demand could plunge if the EU actually bans the commodity.

Maybank Kim Eng expects a 3.3 million tonne decrease in palm biodiesel over the next three years.

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A version of this article appeared in the print edition of The Straits Times on January 24, 2018, with the headline European ban on palm oil in biofuels upsets Jakarta, KL. Subscribe