Palm Oil

Palm oil is one of most traded and cheapest vegetable oils. The production and consumption of palm oil over the past 30 years have expanded significantly. Especially in Malaysia and Indonesia – the 2 countries providing 85 % of the world supply – the production has risen by 15 respectively 25 times compared to their beginning in the 1980s. This expansion is partly due to the increased use of palm oil in the food industry, since palm oil has very favorable processing properties, as well as due to the increased use in the production of biodiesel (FAME) and HVO.

However, palm oil production in sub-tropical regions often takes place in huge monocultural plantations, part of which are displacing rain forests or smallholders. Thus, for social and for ecological reasons, there are concerns over the expansion of palm oil use. In the public discussion in Europe, fired by NGO campaigns, the use of palm oil especially for transport fuels is seen very critically, while in palm oil producing countries public acceptance is much higher, since it provides employment and income. While the EU has reacted to the concerns over palm oil use by including specific provisions on high ILUC-risk biofuels in the revision of the Renewable Energy Directive, the producing countries have organized in initiatives such as the Roundtable of Sustainable Palm Oil and have developed certification systems to ensure social and ecological sustainability of “sustainable” palm oil.

Legislation in Europe and reactions

The revised Renewable Energy Directive (RED II) introduced a new approach to address the issue of the ILUC effect. It sets limits on high ILUC-risk biofuels, bioliquids and biomass fuels which pose a high risk of indirect land-use change and are therefore associated with significant GHG emissions. These limits will affect the amount of these fuels that Member States can count towards their national targets when calculating the overall national share of renewables and the share of renewables in transport. Member states will still be able to use (and import) fuels covered by these limits, but they will not be able to include these volumes when calculating the extent to which they have fulfilled their renewable targets. Thus, the measure is principally origin-neutral and does not impose an import ban on the biofuels covered. The limits consist of a freeze at 2019 levels for the period 2021-2023, which will gradually decrease from the end of 2023 to zero by 2030. The Directive also introduces an exemption from these limits for biofuels, bioliquids and biomass fuels certified as low ILUC-risk. As required by the directive, the Commission has adopted the Delegated Regulation (EU) 2019/807 of March 2019. This delegated act sets out specific criteria for determining high ILUC-risk feedstock for which a significant expansion of the production area into land with high carbon stock is observed and for certifying low ILUC-risk biofuels, bioliquids and biomass fuels.

Indonesia—the world’s largest palm oil producer and exporter— thus pushed ahead with proceedings at the World Trade Organization (WTO) targeting the new EU rules on biofuels in March 2020. Indonesia does not only question the effectiveness of the new EU legislation in terms of sustainability but also argues that it unfairly singles out palm oil and thus violates WTO law. Other palm-oil-producing countries, like Malaysia, Colombia or Costa Rica, have expressed similar concerns and have joined the proceedings as third parties. (Mayr et al 2020, Biofuel Obs. 2020)

In answer to the Indonesian attempt the delegation of the European Union to Indonesia stated in a press release in March 2019 that

RED II and the delegated act are WTO compatible since

• REDII establishes sustainability criteria for biofuels and biomass that are global, objective and non-discriminatory. These sustainability criteria do not single out any specific biofuel or feedstock.
• The REDII sustainability criteria identify sustainable biofuels that are eligible for public support or accounted against the EU and national renewable energy targets. They do not limit the market access of imported biofuels to the EU.

Sustainability

The EC has released a fact sheet on the current sustainability criteria for biofuels in 2019.

The “Study on the environmental impact of palm oil consumption and on existing sustainability standards” by Barthel et al. (2018) summarizes the implications of palm oil cultivation and consumption as follows:

• Clear evidence for resulting deforestation, biodiversity loss and net greenhouse gas (GHG) emissions
• In some instances, expansion onto land traditionally used by indigenous and local communities
• Labour abuses, including child and forced labour, are reported on a regular basis, but the evidence on how commonplace such practices are remains incomplete

On the other hand, oil palm cultivation often provides

• a higher income for smallholders than other livelihoods
• and thus, contributes to the development of rural economies and to the overall economy of producing countries

These economic benefits must be set against potential conflicts and the loss of ecosystem benefits, such as non-timber forest products. 

Organisations like the Global Bioenergy Partnership (GBEP) or the Round Table on Sustainable Palm Oil (RSPO) elaborate the controversial arguments and contribute to more sustainable bioenergy approaches also through e.g. certification schemes.

Among certification schemes, the ISCC (EU) certification system generally addresses the environmental objectives of a range of EU and UN policies, principally because of its stringent definition of High Carbon Stock forests. The RSPO certification system addresses to the largest extent policy objectives relating to human, land, and labour rights. The current ISPO standard least addresses the policy objectives under consideration in this study, with limited protection for forest, and MSPO occupies an intermediate position. The governance and transparency of those four schemes, hence their level of independence vis-à-vis relevant interest groups, also vary.

Market Situation

Asia Pacific countries such as Malaysia and Indonesia are still accounting for more than 80% of the global production. Other regions such as North America and Europe are highly dependent on

imports from those countries (Barthel et al. 2018). Estimates on future vegetable oil demands by end use and by crop are shown in the tables below.

Table World forecast of vegetable oil demand (million tonnes, Source: Barthel et al. 2018)

Table World forecast of demand for major vegetable oils (million tonnes, Source: Barthel et al. 2018)

According to the USDA the global palm oil production in 2021 will be ca. 75 Mio t, which is about 2.5 Mio t more than in 2019/2020. The global consumption seems to reach a similar level. About 7 Mio. t are imported by the EU – mainly used for the conversion to HVO.

Europe remains the leading market for sustainably sourced palm oil, but progress on the growing number of voluntary initiatives and commitments has been slow. There is limited penetration of sustainable palm oil in India and China (Barthel et al. 2018).

Despite the fact that the phase out is more than a decade away in 2030, its impacts can already be felt at all levels of the palm oil industry. The Indonesian and Malaysian governments have been accelerating regulations to reduce its dependency on overseas markets by increasing the mandate for domestic biodiesel. In 2020, the Indonesian government advanced the biodiesel programme from B20 (20 percent palm oil, 80 percent diesel) to B30; Malaysia will follow by 2025. This will raise demand for palm oil domestically.

As a result of the future restrictions related to the use of palm oil for biofuels companies like e.g. ENI have announced to stop using palm oil by 2023.