Winners and losers from the EU’s proposed ban on palm oil

The proclaimed aim of the EU’s palm oil ban is to halt deforestation, but by refusing to honour producers that have switched to sustainable agricultural practices, the EU risks doing more harm than good, argues Prof Gernot Klepper.

In January, the European Parliament (EP) voted to ban the use of palm oil for the production of biofuels in the European Union (EU) by 2020, with the proclaimed aim to stop the deforestation of rainforests in mainly Indonesia and Malaysia.

It is clear that clearing rainforests for the production of biofuels contributes neither to mitigating climate change nor  sustainable development in these countries, when one considers ecologic or social sustainability.

However, the question is: does a ban of palm oil in European biodiesel reduce deforestation? 

Roughly one-third of the palm oil imported into the EU goes into biodiesel production, and the rest predominantly to the food and chemical industries. Global production of palm oil is dominated by Indonesia and Malaysia, both together supplying about 85 per cent of all palm oil, of which between 10 and 15 per cent are exported to the EU. Taking this together, less than four per cent of global palm oil production would be subject to a palm oil ban. So, what would be the likely effects of a palm oil ban?

First of all, the exports of palm oil will go down somewhat and so will prices. This will induce a number of reactions:

  • Lower prices will raise palm oil demand from outside the EU, hence a large part of the palm oil not exported to the EU will be exported somewhere else. It is unlikely that it slows deforestation or protects workers and local communities!
  • Lower palm oil prices will widen the wedge between other vegetable oils. Palm oil users outside the European biofuel sector will have an increased incentive to substitute other vegetable oils with palm oil, thus increasing palm oil demand. Deforestation is not reduced as production moves towards other uses.
  • What about the local effects? Producers supplying palm oil to the European biofuel market are certified according to the RED. As a consequence, producers who have avoided deforestation and are certified by a credible system will lose their market while other oils can still be export despite similar deforestation threats. 
  • A palm oil producer who has failed certification and now supplies other markets is not subject to the ban, but the certified and deforestation-free producers lose their market. Strange incentives for more sustainable production practices!
  • In the European biofuel market, demand for biodiesel will not change. Instead, soy, canola, rapeseed, and other vegetable oils will serve as feedstock for biodiesel increasing their market share.

So, who are the winners and who are the losers?

European biofuel consumers will feel little impact. The substitution of vegetable oils will balance the interruption of markets brought about by the palm oil ban. Palm oil consumers in the rest of the world will gain from lower palm oil prices, depending on the degree of the price drop. 

Palm oil producers specialising in exporting to the European biodiesel market will be most hurt. Incidentally, these are the producers who have been certified according to the RED and are more sustainable than their competitors supplying to other markets. So, the import ban penalises those producers that are most unlikely to contribute to deforestation!

Producers of other vegetable oils could enter the market niche that the import ban would be offering, and they will most likely use that chance. And there is the danger that these new market opportunities will induce them to expand acreage for biofuel feedstocks; possibly inducing land use change at the expense of forests and grasslands. In the EU, where the options for expanding acreage are limited, the increasing demand for non-palm biodiesel could
make producers of rapeseed and other oils better off as prices for their feedstock may rise.

The proposed palm oil ban’s main objective is to limit or even stop deforestation for palm oil plantations. Since less than four per cent of globally produced palm oil ends up in European biodiesel, the ban would have a very limited effect on production conditions in exporting countries.

It sends a clear signal to producers that a more sustainable production is not honoured by the EU. Sustainability certification has had a widespread positive impact by putting social and ecologic aspects higher on the agenda of companies, thus inducing technical progress in processes for lowering the greenhousse gas footprint, increasing awareness about social conditions, and at the end promoting investment for modernising the palm oil value chain.

The most likely losers of the proposed palm oil ban would be social conditions, forests, biodiversity, and the climate as most incentives for a sustainable palm oil production will disappear.

So, would the palm oil ban reduce deforestation? Surely not directly since in the European market for bioenergy there is no palm oil from deforested plantations supplying feedstock for biofuels and other energy uses.

Indirectly, the banned part of palm oil exports will need to find other uses, thus potentially competing with palm oil from deforested areas. Although theoretically possible, but hardly recognisable in practice, there may be a tiny bit of natural forest area not converted into palm oil plantations.

But the collateral damage to the process of moving towards a responsible and sustainable palm oil production is most likely much larger. Sustainable palm will eventually lose its competitive advantage against unsustainable palm activities. So, it is sustainable producers and the emerging paradigm for sustainable palm oil production that will be losing. And this means, in the end, the most likely losers of the proposed palm oil ban would be social conditions, forests, biodiversity, and the climate as most incentives for a sustainable palm oil production will disappear.

What is the alternative to the palm oil ban? Instead of banning palm oil in biofuels, the sustainability requirements for all palm oil should be extended to all vegetable oils and possibly to all biomass production. Banning palm oil for energy uses offers no contribution to the fundamental objective of moving towards a sustainable agriculture. The RED’s sustainability certification requirement has provided a first entry point; it should be expanded and not be
replaced by a crude measure.

Prof. Gernot Klepper Ph.D is Chairman of the ISCC Board, Kiel Institute for the World Economy, Vice Chair German Climate Consortium (DKK), and Chair of Scientific Advisory Board o Helmholtz Centre for Environmental Research (UFZ).

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