Cologne, April 17, 2018

Winners and losers from the proposed ban on palm oil

In January the European Parliament (EP) has voted to ban the use of palm oil for the
production of biofuels in the European Union (EU) by 2020. The arguments brought forward
concern the deforestation of rainforests in mainly Indonesia and Malaysia that is driven by the
increased use of palm oil in European biodiesel production. The report of the EP also
mentions the violation of social standards and the exploitation of indigenous people by large
corporations in large palm plantations. There is no doubt that the alleged practices have been
taking place and can still be observed. For years, Indonesia was competing with Brazil for
being the country with the largest emissions from land use change, i.e. mainly deforestation. It
is also clear that clearing rainforests for the production of biofuels does not contribute to
mitigating climate change nor does it contribute to sustainable development in these countries,
neither with respect to ecologic nor to social sustainability.

However, the question is: Does a ban of palm oil in European biodiesel reduce deforestation?
Can it stop the exploitation of local communities? Will it improve the climate friendliness of
biofuels? To answer this question, it is necessary to look at the likely impact of a palm oil ban.
This will reveal who will win and who will loose from it, both in terms of economic gain and in
terms of ecologic impacts.

Roughly one third of the palm oil imported in the EU goes into biodiesel production, the rest
predominantly to the food and chemical industry. The world production of palm oil is
dominated by Indonesia and Malaysia, both together supplying about 85 percent of all palm oil
of which between 10 and 15 percent are exported to the EU. Taking this together, less than
four percent of global palm oil production would be subject to a palm oil ban. So, how would
the likely effects of a palm oil ban work out?

First of all, the exports of palm oil will go down a little bit 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. Does it slow
deforestation or protect workers and local communities? Very unlikely!

• Lower palm oil prices will widen the wedge of palm oil to other vegetable oils which are
more expensive currently. Palm oil users outside the European biofuel sector will have
an increased incentive to substitute other vegetable oils by palm oil thus increasing
palm oil demand. Again, a reduced palm oil production and the intended reduction in
palm oil demand is quite unlikely. And so is the avoidance of deforestation.

• What about the effects on local production? All producers supplying palm oil to the
European biofuel market will need to have their plantation certified according to the EU
Renewable Energy Directive (RED). While certification systems under the RED strictly
enforce the deforestation ban, there are other schemes for e.g. the food market
allowing deforestation. As a consequence, those producers who have avoided
 deforestation and are certified by a credible system will lose their market while the
producers of palm oil which goes to non-EU biofuel markets and to other palm oil uses
– predominantly in the food industry – can still export without being certified and
without being controlled for their potential deforestation activities. Nor are they under
the obligation to prove their social sustainability.

• Even worse, a palm oil producer who has failed a certification and now supplies other
non- certification markets is not subject to the ban but the certified and – hopefully –
deforestation-free producers lose the market. Strange incentives for more sustainable
production practices!

• What will happen in the European biofuel market? Demand for biodiesel will not
change drastically. Instead, other vegetable oils will serve as feedstock for Biodiesel.
Soy, canola, rapeseed, and other oils will increase their market share and serve the
biodiesel market. Whether this additional supply will be offered with fewer ecologic
damages can be questioned, especially if one looks at the expansion of soy areas in
many parts of the world, most notably in South America.

• And the additional supply of non-palm oils to the biodiesel market will in turn raise
prices of these oils, thus increasing the likelihood that palm oil will increase its share in
the non-energy markets.

So, where are the winners and where are the losers located? Let us look at consumers,
producers, and the environment including climate protection.

European biofuel consumers will feel little impact and European food consumption will be only
slightly affected. The substitution among vegetable oils will balance the interruption of markets
through the palm oil ban. Some more palm oil will be used in the food market and vegetable oil
prices will be slightly higher. 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 specializing 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 producing – on average – more sustainably than their competitors supplying other
markets. So, the import ban penalizes 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.
Honi soit qui mal y pense.

The proposed palm oil ban’s main objective is to limit or even stop deforestation for palm oil
plantations. Since less than four percent of globally produced palm oil end up as European
biodiesel production – and a significant part of it consists of processing residues without a
2
potential use as a food product, the impact of a ban on palm oil would have a very limited
effect on production conditions in the exporting countries. On top of that, it sends a clear signal
to producers that a more sustainable production is not honored by the EU. The sustainability
certification has had a wide-spread positive impact. On the larger scale of the industry and of
companies, it has put social and ecologic aspects higher on the agenda, thus inducing
technical progress in processes for lowering the GHG-footprint, increasing awareness about
social conditions, and at the end promoting investment for modernizing the palm oil value
chain. The auditing for the certification on the ground has also induced many little
improvements in processes that sum up to a much improved palm oil value chain.

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, a small part of global palm oil production will need
to find other uses, thus potentially competing with uncertified and often less sustainably
produced palm oil. Although theoretically possible but hardly recognizable 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 protecting a tiny fraction of forests in
danger of being deforested, the requirements for consuming only sustainable palm oil should
be expanded. Extending the sustainability requirements to all vegetable oils and possibly to all
biomass production would increase the incentives and the dynamics of transforming the
agricultural sector towards sustainability. 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.

Chairman of the ISCC Board
Kiel Institute for the World Economy
Vice Chair German Climate Consortium (DKK)
Chair of Scientific Advisory Board of
Helmholtz Centre for Environmental Research (UFZ)