Indonesia and Malaysia are looking to shore up demand domestically and in China, with the EU having changed course away from biofuels.
Back in 2003, the European Union ruled that biofuels must make up 5.75% of the bloc’s transport fuel by the year 2010 – a goal that was updated in 2009 to 10% by 2020. Intended to help tackle climate change, the move had the opposite effect. Emissions resulting from changing tropical landscapes to grow biofuel crops were three times higher than from the fossil fuels they replaced, according to a 2015 report.
Biofuels – liquids or gases made from plant products including oil crops such as palm, soy, corn, coconut and rapeseed – are not the sound green alternative to petrol and diesel they were once thought to be. Europe has recently amended regulations to limit future imports of palm oil for biofuels. But rising demand in Indonesia, Malaysia and China could make up for this market shift in Southeast Asia, where roughly 90% of the world’s palm oil is produced. There are concerns that palm oil for biofuels could replace growing the crop for food and cosmetics as the key driver of deforestation.
Unscrupulous producers could be let off the hook by a lack of sustainability certification schemes for palm oil destined to become biofuel, as well as of communication between those that do exist and similar certification schemes covering palm oil for food.
“Biofuels create an outlet for really the worst of the worst rogue actors,” said Deborah Lapidus, senior campaign director at Mighty Earth, an environmental NGO that engages companies to conserve threatened landscapes like tropical forests. “It is one of the biggest remaining sustainability concerns in the palm oil space.”
From innovation to villain
Around the time the EU delivered its 2003 ruling, US demand for palm oil was growing for use in processed foods and cosmetics. Its popularity had to do with the oil’s relative cheapness to alternatives like soy and rapeseed oil.
Imports of biofuel-designated palm oil from Southeast Asia to Europe grew nearly 400% between 2008 and 2018, according to data from the International Council on Clean Transportation. In 2014, it overtook palm oil imported for food and cosmetics. The NGO Transport and Environment estimates that 65% of all the palm oil imported into the EU in 2018 was used as biofuel for vehicles or electricity generation, a record high.
As the industry grew, so too did evidence of the negative environmental and social impacts of palm oil plantations. Thanks to campaign efforts from groups such as Greenpeace and WWF, consumers were waking up to the widespread deforestation of tropical rainforest and carbon-rich peatland – key habitats for species such as orangutans, tigers and rhinos. In response to calls for greater transparency and outrage over impacts, companies began to step up efforts to ensure palm oil was being produced sustainably.
The first certification organisation set up to promote the growth and use of ethical palm oil was the Roundtable on Sustainable Palm Oil (RSPO), which features stakeholders including WWF and Unilever. Its goal was not to ward brands and consumers off palm oil, but to shift them towards sustainably grown varieties that respected forests and biodiversity. Research showed that alternative vegetable oil crops could result in more deforestation and biodiversity loss because they need more land.
“It is important to consider the net consequence of replacing this ingredient and a move to an alternative oil, which will require more land and water, thus failing to reduce the carbon footprint,” said Dan Strechay, interim director of outreach and engagement at RSPO. Considering its full lifecycle, Transport and Environment estimate palm oil biofuel produces three times the emissions of fossil diesel, and significantly more than rapeseed or soy, its two main European competitors. “We see that an increased promotion of biofuels … was becoming one of the major threats against rainforests,” said Nils Hermann Ranum, Rainforest Foundation Norway, who were active in efforts to change Europe’s biofuels policies.
Emissions from palm oil production vary greatly depending on where plantations are located. Peatlands, for example, store huge quantities of carbon that is released when they are drained for oil palms.
In 2017, these issues led the European parliament to increase the minimum sustainability criteria and enhance anti-deforestation standards for palm oil imports destined to become biofuel. That was followed up by a revision of the EU Renewable Energy Directive in 2018, which comes into force this year. It aims to phase out the use of palm oil by 2030, along with most first-generation biofuels that use food. It drew a fierce response from Southeast Asia.
“Malaysia joined Indonesia in claiming that the EU directive is protectionist, and called it a ban, even though it’s not a ban,” said Martin Baker, director of strategy at Traction Energy Asia.
The initial impact is likely to be fewer exports to Europe. Some Malaysian palm oil, grown under stricter sustainability standards, could still be eligible for export to Europe. Indonesia, however has instead reacted by threatening trade retaliation, including a potential case at the World Trade Organization.
“Palm oil is now a very sensitive subject in Indonesia,” said Tommy Pratama, director of Traction Energy Asia. “Any questioning of the palm oil biodiesel policy is met defensively, with claims that palm oil is the most efficient crop, that it helps farmers, balances the trade deficit, etc.”
“Those demand increases do blunt the effect of demand reductions in Europe and elsewhere,” said Chris Malins, an expert in biofuels and clean fuels policy who runs the consultancy Cerulogy. “Indonesia, in particular has been successful in pushing more palm oil-based biofuels into the global market.”
Existing global sustainability certification schemes such as the RSPO do not currently include biofuels. “The RSPO does not track how much certified material enters the biofuel market as it is not a specific supply chain or a specific product under our certification product tree,” said Strechay.
Other entities working on certifying biofuels, such as the Roundtable on Sustainable Biofuels and the International Sustainable and Carbon Certification, are nascent and currently doing negligible work in the palm oil sector. Lack of communication between the two sectors is hindering progress towards sustainability milestones, which concerns Malins.
“The reality with certification is that, while they can provide assurance on certain questions, [they] only cover a minority of the market, so it is possible to cherry pick certified material for markets that want certification, and send uncertified materials to markets, like domestic biofuels, that do not demand certification,” said Malins. “That’s why, for the systemic question for things like deforestation, certification is simply not an answer at the moment.”
Biofuels is already the market of choice for unsustainable companies. In late 2018, Korindo, a Korean–Indonesian oil palm conglomerate, was found to be illegally burning and clearing land for palm oil plantations in the Indonesian provinces of North Maluku and Papua. Around 50,000 hectares of rainforest were cleared using false permits, with community farms and forests destroyed.
The exposure of Korindo’s practices has led many buyers, including Nestle, Wilmar International and Musim Mas, to cancel contracts or exclude its palm oil from their supply chains. So the company announced in 2019 that it was looking at business opportunities in the biofuels market, including working with GF Oil and Sejong Technology to open a biofuel plant on the Indonesian island of Bintan, near Singapore. That means that palm oil harvested from illegally deforested land could end up at this facility, or others.
“Instead of deciding to comply and have access to international markets globally, they [want to] continue business as usual and have turned to the biofuels market as their only remaining outlet,” said Lapidus.
Other companies are doing the same. PT Bio Inti Agrindo, an Indonesian company that has received money from the Chinese National Overseas Oil Corporation (CNOOC), is also implicated in deforestation, and has also stated in its plans an expectation to produce for the biofuels industry. According to Mighty Earth, its plantations are located right alongside Korindo’s in Papua, and there is evidence that illegal deforestation has taken place there too.
“The environmental consequences of palm oil have started to come to light and there’s been reactions to adjust policy accordingly, but the market doesn’t want to die,” said Lapidus. “So it’s finding new outlets for growth all the time, such as biofuels.”
Other companies connected to illegal deforestation who have explored palm oil biofuels include Tunas Baru Lampung, Best Group and Permata Hijau.
For these companies, domestic biofuels are a lifeline. But alone they are not enough to make up for the loss of the European market, or boost prices. So biodiesel exports are also a key part of Indonesia and Malaysia’s strategies.
Tunas Baru Lampung has stated in its most recent financial report the key role that export demand for biodiesel will play. It is building a second biodiesel plant, which should begin operation later this year. Chinese demand is mentioned as a growth market, and exports from Indonesia to China hit 40,000 tonnes in 2019.
Indonesia built nine new biorefineries between 2010 and 2019, bringing its total to 31. Actual output is currently 70% of capacity in Indonesia and 73.5% in Malaysia, giving plenty of room for increases in production to meet rising demand.
Biofuels already make up a significant portion of Malaysia and Indonesia’s palm oil exports. In 2019, Malaysia’s biodiesel production hit a record level. Exports rose to 650,000 tonnes, with Europe and China the top markets. Indonesian figures for 2019 are not yet available, but in 2018 exports hit 1.77 million tonnes, with half going to Europe and 750,000 tonnes to China.
China’s move in August 2019 to remove import quotas on crude palm oil could also lead to more imports, according to Chain Reaction Research. Malaysia, too, has seen growing demand for palm methyl ester, a type of palm oil biodiesel, from China.
In order to grow both domestic and foreign demand, there are plans to grow processing capacity further. The Indonesian national oil company, Pertamina, is converting two old crude oil refineries into biofuels refineries. Other planned projects include a biodiesel plant being built by Louis Dreyfus in Lampung, Indonesia and one under construction by a subsidiary of Wilmar International in Riau, Indonesia. Electricity generation could play a role in increasing biofuel demand. Indonesia’s national electricity company, PLN (Perusahaan Listrik Negara) wants to operate four power plants with biofuels by the end of this year
The demand for transport fuels is likely to grow too. Indonesia is aiming to rapidly increase palm oil biodiesel blends, pushing for a 40% mix by next year and 50% soon after. This would mean that growth would fall under a high biofuels scenario in the 2018 “Driving Deforestation” report. The majority of growth in global palm oil consumption between now and 2030 would be for biofuels, and the result could be 4.5 million hectares of additional forest loss, including 2.9 million hectares of peatland, the landscape that has the highest level of greenhouse gas emissions.
“What you have seen so far is that increased demand for palm oil has led to deforestation,” said Nils Hermann Ranum from Rainforest Foundation Norway, noting that a lot of land that is still forested has been given to palm oil companies already. “The number of concessions that are established but not yet active is a major concern.”
This article published on China Dialogue with title: As palm oil for biofuel rises in Southeast Asia, tropical ecosystems shrink