Palm Oil Industry Pain Points
Some of the pain points and issues facing palm oil traders in the light of sustainability pressures include increased scrutiny and bans on palm biofuel and smallholders' certification/accreditation challenges.
Increased Scrutiny and Ban on Palm Biofuel
- According to USDA, two Southeast Asian countries, Malaysia and Indonesia, produce 84% and export 90% of palm oil worldwide. However, increasing concerns that the production of palm oil is causing massive deforestation and contributing to global carbon emissions has put the palm oil industry in Indonesia and Malaysia under intense international scrutiny.
- As a result, the European Union has approved measures to phase out palm oil from renewable resources for biofuel by 2030. This means that the European Union member states can import and use palm oil as biodiesel, but it will not be considered a renewable fuel or be eligible for the generous subsidies under the EU’s Renewable Energy Directive.
- This move poses a significant threat to the international oil palm trade since the demand for palm biofuel in the European Union has continuously increased over the years. European Union is the second-largest market for palm oil from Malaysia and Indonesia. In 2016, EU member states imported 4.37 million tons of palm oil from Indonesia and 2.06 million tons from Malaysia. More recently, the EU imported 2.09 million tonnes of palm oil from Malaysia in 2019, up from 1.91 million tonnes in 2018. Over 50% of the palm oil imported into the EU, i.e., nearly 4 million tons, was used to make biodiesel in 2017, indicating that the phasing out plan will have drastic effects on the palm oil industry in both Malaysia and Indonesia.
- The European Union announced some exceptions to the phasing out rule under which palm oil cultivated on unused, abandoned, or severely degraded land, palm oil produced by smallholders, and palm oil derived from improved yields will still be considered as a renewable energy resource. However, many environmental groups continue to advocate against these exemptions.
- Pressure from international environmental groups has also increased the likelihood of other importing countries imposing similar restrictions, where "only certified sustainable and traceable palm oil would be purchased for use in their country."
- Palm oil traders can deal with these restrictions and bans by sourcing certified sustainable palm oil that is traceable across the supply chain.
- Traceability across the supply chain can be achieved by keeping sustainably produced palm oil that has met Roundtable on Sustainable Palm Oil (RSPO) or Malaysian Sustainable Palm Oil (MSPO) standards "physically separate from non-certified produced palm oil from the point of production to the port and until the stage it reaches consumers."
- However, this solution restricts traders to complex, rigorous, and expensive palm oil trading options including RSPO Identity Preserved (IP) and RSPO Segregated (SG). These trading models require complete separation of certified palm oil from conventional oil throughout the supply chain.
- Traders and distributors can further use RSPO PalmTrace, RSPO’s traceability system for certified oil palm products, to ensure they are sourcing certified sustainable palm oil.
Smallholders' Certification/Accreditation Challenges
- Smallholders contribute nearly half of the palm oil traded globally. In Indonesia, smallholder oil palm plantations accounted for 41% of the total oil palm plantations in 2019.
- However, most smallholders have "limited expertise, capacity, and resources to produce palm oil sustainably". In addition, smallholders have a limited understanding of the RSPO certification and rely on external support from NGOs to get their RSPO certification.
- The increasing focus on certified sustainable palm oil is a potential pain point among traders who fail to fully disclose the extent and locations of smallholders within their supply chain.
- One potential solution for this issue is the Book and Claim trading model, where smallholders can "sell credits for the palm (kernel) oil that could be extracted from their certified Fresh Fruit Bunches." This credit trading facilitates direct and on-demand trading and supports the sustainable production of palm oil across the globe. Traders can buy RSPO credits from smallholders via the RSPO PalmTrace marketplace.