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EU Palm Oil Alternatives

Context

  • Indonesia and Malaysia claim the EU’s palm oil restrictions are unfair and “discriminatory,” and they are hoping for a WTO resolution.
  • Meanwhile, the EU has imposed new restrictions on the use of palm oil as a fuel.

Relevance

  • GS Paper 2: Effect of policies and politics of developed and developing countries on India’s interests
  • GS Paper 3: Agricultural Resources, Food Security, Government Policies & Interventions

Mains Question

Palm oil easily accounts for more than two-thirds of India’s burgeoning vegetable oil imports, and the sustainability of the palm oil industry in India faces numerous challenges. Analyse (150 Words)


The Import and the complaint

  • According to Indonesian government data, EU imports from Indonesia increased by 9 percent last year compared to 2020.
  • The World Trade Organization (WTO) may soon rule on two cases filed against the European Union in connection with its decision to phase out the import of unsustainable palm oil by 2030.
  • The complaints were lodged by Indonesia and Malaysia, the world’s two largest palm oil producers, who denounced Brussels’ Renewable Energy Directive II as unfair and “discriminatory.”

EU’s Objection

  • On the contentious issue, the EU has sent mixed signals.
  • On the one hand, its officials have stated unequivocally that oil production is a major cause of deforestation and thus cannot meet renewable energy targets.
  • There is also the issue of pollution: palm oil diesel emits up to three times the amount of pollution as traditional petroleum-based fuel.
  • The Ukraine war, which began in February of this year, increased pressure on Brussels to secure its fuel supply.

ReFuelEU Initiative

  • Early in July, EU lawmakers approved draught rules for the ReFuelEU initiative, which would require that 85 percent of all used aviation fuel be “sustainable” by 2050. Byproducts of palm oil would be unacceptable.
  • The European Parliament is now discussing bringing forward the final phase-out date for palm oil imports, which is currently set at 2030.
  • Simultaneously, Brussels has attempted to engage with palm oil exporters in recent months, including at the ASEAN-EU Joint Cooperation Committee meeting in Jakarta in late June.

EU’s Import Data

  • And since the Renewable Energy Directive II was introduced in 2018, the EU’s imports of palm oil have actually increased.
  • In 2021, the EU imported €6.3 billion ($6.4 billion) worth of palm oil and palm oil products, most used for biofuels.
  • Indonesia and Malaysia accounted for 44.6% and 25.2% of those imports, respectively.
  • EU imports from Indonesia were up 9% last year, compared to 2020, according to Indonesian government data.

Malaysia decries ‘crop apartheid’

  • The Malaysian and Indonesian governments have also tried to keep their options open in the EU row.
  • Earlier this year, Malaysian Minister of Plantation Industries and Commodities Zuraida Kamaruddin slammed what she called “crop apartheid.”
  • And with the dispute ongoing, the Malaysian government is busy finding new markets.

China’s View

  • During his visit to Kuala Lumpur this month, China’s Foreign Minister Wang Yi vowed that Beijing would increase imports of palm oil from the country.
  • China is currently the world’s second-largest importer of the product, after India.

What if the WTO rules against the EU?

  • The WTO decision seems to be drawing near.
  • The panel to decide Indonesia’s case was formed in November 2020.
  • A panel of the same members was formed for Malaysia’s case in July 2021. Both are chaired by Manzoor Ahmad, Pakistan’s former permanent representative to the WTO. Members are Sarah Paterson, of New Zealand, and Arie Reich, of Israel.
  • If the WTO panels were to rule against in favor of Indonesia and Malaysia, Brussels has three options
    • First, the EU could appeal against the panel report. But that could set back a final ruling by years, as any decision would have to come after new members are appointed to the WTO’s Appellate Body. The body is currently not functioning due to the US blocking new appointees.
    • The second option, Mayr noted, would be for the EU to comply with the WTO ruling and adapt the environmental policies established by the Renewable Energy Directive II. Whether the EU could make cosmetic changes to its palm oil phase-out, while keeping the essence of the policy, is unclear.
    • Lastly, the EU could simply carry on regardless and accept any retaliatory measures imposed by Indonesia and Malaysia.
  • This last option, however, doesn’t seem too likely.

Geopolitics and palm oil

  • If the EU was to ignore the ruling, Indonesia and Malaysia would struggle to retaliate economically, analysts reckon. According to European Commission data, Malaysia is only the EU’s 20th largest trading partner in goods; Indonesia is 31st.
  • Because of the energy crisis caused by the Ukraine war, the official also expects EU imports of palm oil to continue growing in the coming years.
  • Moreover, Jakarta has one more card to play — it could limit the export of raw materials necessary for the production of stainless steel. (The EU brought a case against Indonesia to the WTO regarding this in November 2019.)

Palm Oil and Its Uses

  • Palm oil is an edible vegetable oil derived from the mesocarp (reddish pulp) of oil palm fruit.
  • It is used as a cooking oil as well as in cosmetics, processed foods, cakes, chocolates, spreads, soaps, shampoo, and cleaning products, as well as biofuel.
  • The use of crude palm oil in the production of biodiesel is dubbed “green diesel.”
  • Indonesia and Malaysia account for nearly 90 percent of global palm oil production, with Indonesia producing the most, with over 45 million tonnes in 2021.
  • The oil palm industry has come under fire for allegedly unsustainable production practises that lead to deforestation, as well as exploitative labour practises carried over from the colonial era.
  • However, many people prefer palm oil because it is cheap, and oil palms produce more oil per hectare than other vegetable oil plants like soybean.

What Role Does Palm Oil Play in Global Supply Chains?

  • According to the United States Department of Agriculture, palm oil is the world’s most widely used vegetable oil, with a global production of over 73 Million Tonnes (MT) in 2020. (USDA).
  • It is expected to be 77 MT for the fiscal year 2022-23.
  • Reuters reports that palm oil accounts for 40% of the global supply of the four most widely used edible oils: palm, soybean, rapeseed (canola), and sunflower oil.
  • Indonesia accounts for 60 percent of the global supply of palm oil.

Why are edible oil prices rising?

  • India is the world’s largest importer of palm oil. Palm oil prices rose this year as demand increased due to a scarcity of alternative vegetable oils.
  • Soybean oil production, the second most-produced oil, is expected to fall this year due to a poor soybean season in major producer Argentina.
  • Drought harmed canola oil production in Canada last year, and the ongoing conflict has harmed supplies of sunflower oil, 80-90 percent of which is produced by Russia and Ukraine.
  • Global edible oil prices have risen significantly since the end of last year, owing to pandemic-induced labour shortages and global food inflation linked to the pandemic and the Ukraine crisis.

What Will It Mean for India?

  • India is the largest importer of palm oil, accounting for 40% of its vegetable oil consumption.
  • India imports half of its annual requirement of 8.3 MT of palm oil from Indonesia.
  • This would exacerbate those already dealing with record-high wholesale inflation.
  • It is also worth noting that the Centre launched the National Mission on Edible Oil-Oil Palm last year in order to increase India’s domestic palm oil production.

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