In 2018, RED II was introduced as an amendment to RED I, which added a target of 14% use of renewable energy in the transport sector. However, EU adopted the Commission Delegated Regulation (EU) 2019/807, which stipulates the criteria for determining high-ILUC risk feedstocks for which a significant expansion of the production area into land with high carbon stocks are observed; and the certification of low-ILUC risk biofuels, bioliquids, and biomass fuels. The Delegated Act identified high-ILUC risk biofuels as:

• Global production area of feedstock has increased annually by more than 1% and 100,000 hectares after 2008.
• More than 10% of such expansion has taken place on land with high carbon stock.

Currently, only palm-based feedstock meets the above criteria. Although it is not technically a total ban on palm oil, EU member states are still able to import CPO as feedstocks for biodiesel, but the volumes imported that are identified high-ILUC risk would not be included in their renewable energy targets, thus discouraging the imports of high-ILUC risk crops.

The EU sets a review period since the introduction of the directive, whereby the commission will render a final decision in September 2023. Until then, the directive implementation would be reviewed based on the best available scientific data. However, certain EU member states have opted for an early implementation, well before the EU Commission would render its final verdict on the directive.

Member States	PO Phased out	Measure
Austria	Yes	Ban of high ILUC biofuels from 2022
Belgium	Yes (Drafted)	Ban of palm and soy from 2022
Denmark	Yes (Ordered by Parliament)	Ban of palm and soy from 2022
France	Yes	Ban of palm since 2020, cap of soy since 2021
Germany	Yes (Drafted)	Phase out of high ILUC biofuels from 2022, effective ban from 2026
Italy	Yes (Drafted)	Ban of palm and soy from 2023
Netherlands	Yes (Drafted)	Ban of high ILUC biofuels from 2022
Portugal	Yes (Ordered  by Parliament)	Ban of palm from 2022

Table 1: RED II EU Member states current status

The above-mentioned countries have taken measures for an early adoption of the RED II, with some countries opt for a total ban on palm and soy, with Austria, Germany, and Netherlands have opt for biofuels import with low-ILUC risk. Other EU member states have yet to indicate clearly on their biofuels policy.

Implementation of RED II

The new element added to the revised directive seeks to ensure that crops used for the production of biofuels are not sourced from recently deforested areas or peatlands – no matter where they are produced, and they have not merely displaced other production to other high-carbon, high-nature value areas, elsewhere either. The regulation defines oil crops as: food and feed crops such as rapeseed, palm, soybeans and sunflower that are not starch rich crops and sugar crops that are commonly used as feedstock for the production of biofuels, bioliquids and biomass fuels. The regulation also included a report that provided data that claims that:

• Palm oil has been associated with the highest level of deforestation, where over the period 2008-2015, 45% of the expansion of palm oil took place in high carbon stock areas.
• Whereas for soybean, the world average fraction of soy expansion onto high-carbon land was estimated at 8%.

Protest by palm oil producing countries

Indonesia and Malaysia, which accounts for around 85% of global palm oil supply have described EU’s decision as discriminatory and protectionist in nature and is designed to support European producers of other types of vegetable oils such as rapeseed and sunflower. According to a media statement by the Malaysian Ministry of Plantation Industries & Commodities, member countries of the Council of Palm Oil Producing Countries (CPOPC) viewed the EU Delegated Act as a ‘political compromise’ aimed at isolating palm oil for the benefit of EU rapeseed oil and other less competitive imported vegetable oils, including through the ‘scientifically flawed’ concept of the ILUC. The member countries argued that the Delegated Act did not characterize soybean from selected sources as high-risk ILUC, despite in-house research by the EU concluding that soybean is responsible for far more ‘imported deforestation’.

Response by EU

In response to Malaysia’s protests that the revised Directive is discriminatory towards palm oil trade, the EU laid out these defenses:

• No discrimination: The European Commission defended the regulation in that no specific biofuel or feedstock is targeted as all vegetable oils are treated equally.
• Exclusion of low ILUC-risk palm oil: Palm oil, that is certified as low ILUC-risk can continue to benefit from incentives. Exemptions include for example planting on unused lands.
• Exclusion of small holders: Noting the importance of smallholders in Indonesia and Malaysia, the delegated regulation has set the threshold for small holders to 2 hectares to ensure that their tenure and independence over land is secured.
• Future Reassessment: The European Commission will reassess the data and if appropriate the methodology in 2021 and will carry out a revision of the Delegated regulation in 2023. It states that any efforts undertaken by Indonesia (such as a revamped ISPO, the moratorium, the one map policy, or the recently adopted national action plan) will be taken into account while reassessing the data.

Low-ILUC Risk Additionality Measures

Low-ILUC risk certification can be achieved if producers can identify through additionality measures:

• They become financially attractive or face no barrier preventing their implementation only because the biofuels, bioliquids, and biomass fuels produced from additional feedstock can be counted towards RED targets.
• Allow for cultivation of food and feed crops on abandoned land or severely degraded land;
• Applied by smallholders

Additionality Measures’ Impact on Palm Oil Trade

There are several points of contention in the additionality measures to be certified as low-ILUC especially for palm-based feedstocks. The first point of contention that needs to be addressed is the smallholder measure in which its definition varies. ISCC defines smallholders as independent growers with a cropland area of under two hectares, while Malaysia defines it as independent or organized farmers with less than 40 hectares of cropland. Moreover, the average cropland that a Malaysian smallholder hold is approximately 4 hectares. Taking into count the ISCC definition, only a small number of smallholders would qualify for the additionality measure, and in turn would affect the supply.

The second point of contention is through financial analysis measure, in which a project with a negative NPV would qualify for the additionality measure. This in turn lead to reliance on premiums in order to offset the negative NPV and this would lead to increased prices. Keeping in view of these factors, it is foreseeable, with the enforcement of RED II would negatively impact consumption of palm-based biofuels in Spain, Italy, Netherlands, Germany, and France as these countries are the largest consumers of palm-based biofuels.

Conclusion

The ongoing dispute between the EU and Malaysia over RED II is complex and multifaceted. The EU claims RED II is a non-discriminatory measure aimed at phasing out potentially environmentally damaging biofuels, while Malaysia and Indonesia argue the revised directive is merely a form of protectionism for European agricultural interests. EU’s policies under its European Union Renewable Energy Directive II (EU RED II) Delegation Regulation is an unreasonable ban on the sustainability efforts being implemented by Malaysia. The delegated regulation is in itself lacks transparency and scientific credibility, with numerous presumptions made to present a wrong image of the sustainability of Malaysia’s oil palm industry.

Prepared by Fazari Radzi and Mohd. Izham Hassan

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