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Jakarta Post

Trade and climate: Mixed messages for Indonesia

  • Mohammad Fadhil Hasan and Khalil Manaf Hegarty

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Jakarta   /   Sat, December 14, 2019   /   09:22 am
Trade and climate: Mixed messages for Indonesia Harvest time: A worker gathers oil palm fruit bunches at a plantation in Lampung. Indonesia and Malaysia, the world's first- and second-largest palm oil producers, have threatened to challenge the European Union via the World Trade Organization if the EU continues to phase out palm oil from use in transportation fuel. (The Jakarta Post/R. Berto Wedhatama)

Indonesia has made commitments on climate that exceed most wealthy countries, but the European Union seems intent on punishing our exports.

This week many heads of state and senior officials gather in Madrid to continue their negotiations on global climate policy.  The timing of the international conference on climate change, which run until Dec. 13, represents a juncture for Indonesia’s relationship with the EU because of two other critical events around the Madrid meeting.

First, Indonesia is opening consultations at the World Trade Organization with the EU over the bloc’s Renewable Energy Directive (RED) and its exclusion of palm oil. Second, Indonesia and the EU continued their negotiations for an economic partnership agreement, Indonesia-European Free Trade Association - Comprehensive Economic Partnership Agreement (IE-CEPA).

Indonesia’s WTO complaint against the EU’s renewable energy rules is driven by two things. The EU’s rules ban palm-based biodiesel from accessing the EU’s renewables program but allow other sources such as soybean — which has a much higher deforestation footprint. In addition, the EU’s justification for banning palm oil is a loose theory known as “indirect land-use change”.

It is well known that EU farmers and politicians dislike palm oil. Palm oil’s competitiveness has upended the EU’s food, renewables and oleochemicals market. One observer even called palm oil a “disruptive technology”.

But the WTO complaint also has relevance at the Madrid meeting.

EU officials have constructed a vast, unproved methodology to argue that palm’s biodiesel contribution to climate change is worse than other commodities. Article 3.5 of the United Nations Framework Convention on Climate Change (UNFCCC) states the following: “Measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade.”

The RED’s exclusion of palm oil and retention of other feedstocks is nothing less than arbitrary.

This statement in the UNFCCC text is not unusual.

A similar point was made in the UN Commission on Sustainable Development declaration in 2012, known as Rio+20. It stated that any “green economy” measures “Not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade, avoid unilateral actions to deal with environmental challenges outside the jurisdiction of the importing country and ensure that environmental measures addressing transboundary or global environmental problems, as far as possible, are based on international consensus.”

This is significant because it taps directly into what constitutes sustainable development.

The IE-CEPA negotiations have entered their ninth round. It is understood that one of the key sticking points for negotiators is the treatment of palm oil. How palm oil is treated in the negotiation will be determined by the agreement’s sections on trade and sustainable development (TSD) and in the negotiations over market access.

Crude palm oil enters the EU tariff-free. Refined palm oil products have low tariffs, but Indonesia is subject to lower tariffs than other countries because of its development status. 

TSD, however, is another matter. There is considerable pressure from European parliamentarians to guarantee that palm oil entering the EU meets EU-endorsed sustainability standards as part of the IE-CEPA.

Indonesia has been through this process before.

When the RED was first introduced, the EU approved some sustainability standards for biofuels. Indonesian exporters were able to meet these standards. But with the introduction of the revised RED, the EU has changed these standards again.

One element of the revised RED is that it gives and exemption to palm oil smallholder farmers. The exemption threshold is 2 hectares. It was originally 5 ha, but this was pushed down by European parliamentarians.

This threshold is, again, arbitrary. It’s worth noting that the UN Food and Agriculture Organization recommends against using an area-based definition. The EU itself doesn’t use the area to define smallholders — it uses gross economic margins.

What has this got to do with sustainable development?

The UN Sustainable Development Goals seek to double “the agricultural productivity and incomes of small-scale food producers… through secure and equal access to […] markets.”

So what Indonesia is receiving on climate, palm oil, and sustainable development is a set of mixed messages. 

The EU’s policies on palm oil are not encouraging for Indonesia. European officials and NGOs will argue that this is driven by Indonesia’s high historical deforestation levels and recent haze events and their contribution to climate change. EU officials would do well to remember that the EU also has high historical deforestation levels, and that developed countries have agreed to take on greater responsibility when it comes to climate change mitigation — not punish developing one.

Indonesia has made significant commitments to reducing emissions between 2020 and 2030, with a committed reduction of 41 percent with international assistance. This is more than many developed countries — especially those that don’t export palm oil. It’s time the EU took notice of that, too. 

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Mohammad Fadhil Hasan is a senior economist at the Institute for Development of Economics and Finance (Indef); Khalil Manaf Hegarty is a director at ITS Global consultancy and publisher of Palm Oil Monitor.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.