The European Union (EU) has launched numerous significant steps in recent years to address deforestation and environmental concerns. The primary initiative under its umbrella is the EU Deforestation-Free Regulation (EUDR). This rule focuses mainly on palm oil production and outlines a dedicated scheme to phase out palm oil-based biofuels by the year 2030.
In response to this regulation, Malaysia signed a deal to double its yearly palm oil exports to China. This strategic move aims to offset any potential revenue losses that may stem from the EU’s ban on commodities directly or indirectly linked to deforestation. Here is a more in-depth look at the regulation and its possible consequences.
EU Deforestation-Free Regulation and its Impact
The EU Deforestation-Free Regulation was established with the sole aim of weeding out deforestation from the supply chains of everyday items in the EU. Adopted in Brussels in 2023, the regulation imposes administrative bottlenecks on palm oil exporters seeking to sell in the EU. It also requires companies to ensure that their exported products to the EU have been grown on land that was not deforested after December 31, 2020. However, it’s worth noting that the EUDR is not compatible with the World Trade Organization (WTO) standards, which classifies it as a non-tariff barrier.
Malaysia and Indonesia’s Reactions to the EU’s Regulation
Both Malaysia and Indonesia have largely opposed the legislation due to its perceived European protectionism. They suggest that it could foster an overreliance on China for exports, potentially negating any environmental benefit realized. The implications for the EU are extensive, and Chinese markets could significantly gain from these regulatory shifts.
An Overview of Palm Oil and its Numerous Applications
Palm oil is an edible vegetable oil sourced from the mesocarp (reddish pulp) of the fruit of oil palms. It is widely used in cooking and can be found in various everyday items from cosmetics and processed foods to soaps, shampoos, cleaning products, and biofuel. Indonesia and Malaysia are responsible for almost 90% of the worldwide palm oil production. Despite the industry’s negative reputation regarding deforestation and exploitative labor practices, palm oil is favored for its affordability and high yield per hectare.
The Significance of Palm Oil in Global Supply Chains
Beyond its typical uses, palm oil is the most widely used vegetable oil on a global scale. In 2020, over 73 million tones (MT) of palm oil were produced, as reported by the United States Department of Agriculture (USDA). This figure is expected to rise to 77 MT for FY 2022-23. Indonesia alone is responsible for 60% of global palm oil supplies, emphasizing the oil’s prominence in the world’s supply chains.
India’s Position in Palm Oil Imports
India is the world’s largest importer of palm oil, accounting for 40% of its overall vegetable oil consumption. Half of India’s annual requirement of 8.3 MT of palm oil is met by Indonesia. To increase domestic palm oil production, India launched the National Mission on Edible Oil-Oil Palm in 2021. Given the advantages of palm oil for India’s cooking needs, it is crucial to incentivize Indian farmers to expand their oil palm cultivation areas and enhance palm oil production within the country. Furthermore, India should also aim to diversify its procurement sources and requirements to ensure a steady supply.