Article Opinion

Author: Zofia Sjeerm, Intern Staff of IGJ (August 2019-January 2020)

The author is studying International Development and Global Studies at Roskilde University, Denmark


In current times, the international scene has been characterised by the intense trade relations between the US and China, but the relationship between the European Union (EU) and Indonesia is also experiencing some issues. As of this year, the EU and Indonesia are stepping into the 10th negotiation round for the Comprehensive Economic Partnership Agreement (CEPA) between the two countries. The negotiations have so far been dominated by the issues surrounding palm oil.

Earlier this year*, the EU imposed stricter restrictions on palm oil in biofuels as a response to the contemporary climate crisis. The EU has slapped countervailing tariffs on imports of subsidized biodiesel from Indonesia, currently of 8% to 18%. As a response to this, Indonesia has threatened to strike back with counter tariffs of 20 % to 25 % on dairy products of the EU.

As expressed by the former trade minister, Enggartiasto Lukita, that if the EU imposes something that is not fair it can be seen as an act of protectionism and trade war, which is something the government cannot be quite about. The European Commission contends that it is not proposing a complete ban on biofuels, but that it has to react to those producers that have destroyed more and more forest for the production of biofuels, and who have thus released large amount of CO2 into the atmosphere.

Indonesia is acting defensive and argues that the norms of sustainability are being obeyed and have actually imposed a pause on the creation of new plantations of palm oil in order to protect our country’s forests. Furthermore, the government argues that the anticipated ban from the EU could lead to the millions of farmers’ livelihoods being killed.

The Council of Palm Oil Producing Countries said that they will cooperatively challenge the bill through bilateral consultations, but also through the World Trade Organization (WTO). The council has claimed that the idea is “scientifically flawed” and critiqued it for only targeting palm oil and not including broader environmental concerns that are linked to other plant oils.

In terms of the WTO, the EU contends that the new measure and the criteria for sustainability set for palm-oil are consistent with the rules of WTO. Raffaele Quarto, the EU’s head of trade for Indonesia, instead points to the fact that retaliation is completely forbidden by WTO regulation, as with the case of Indonesia backfiring with tariffs on dairy products, and further contends that it could end up hurting the Indonesian economy.

Unequal trade relations

The backlashing that Indonesia is intending to do, does not seem productive or effective, and could end up being self-destructive.

This is highly because the two parties do not have a mutually depending trade relationship. Almost 10 % of Indonesia’s goods are exported to the EU, which makes them Indonesia’s third largest trading partner. On the contrary, trade going the other way only comprises of less than 1 % of the EU’s share, ranking Indonesia 31st of the EU’s trading partners. This puts Indonesia in a disadvantageous position if the disagreement were to intensify.

So far Indonesia has only threatened to implement tariffs on a smaller import, which would not have the largest impact on the EU. All in all, the prospects of an actual trade war seem little as there is simply way less at stake for the EU.

 What is wrong with palm oil?

The EU is taking steps to meet the goals of the Paris Agreement, United Nations Framework Convention on Climate Change (UNFCCC), to respond to the current climate crisis that the world is facing. Thus, ithas initiated restrictions on palm oil now in order to reach a phase out of the commodity from transportation fuel from 2023 and a ban from 2030.

51 % of the palm oil exported to the EU is used for cars, which the EU has been subsidising as ”green biofuel”, even though it is seen as three times worse for the environment that normal diesel due to the deforestation that it creates. Along with deforestation, we also see a loss in biodiversity, and the field has for long been characterised by human rights abuses, child labour and killing of climate activists.

The Directive’s war on palm oil

In December 2018 the European Parliament and the Council of Ministers of the European Union adopted the revised Renewable Energy Directive, which established a general policy for promoting and using energy from renewable sources in the EU. This Directive is reinforcing the criteria of sustainability in terms of bioenergy. It examines the negative direct impact of indirect land use change (ILUC).

The production of biofuels normally happens on cropland that has previously been used for other agricultural products, often growing food. The need to produce food continues, so in order to acquire land for the production of palm oil, it is often needed to extent the agricultural land into non-cropland.

This often includes areas like forests, wetlands and peatlands, which have a high carbon stock. This process is identified as indirect land use change (ILUC). In the process of acquiring this land, the burning of soil or cutting down of trees is happening at a large scale, and is releasing the CO2 stored in these. Due to these consequences, the Directive has presented a new approach, which puts limits on the biofuels that include ILUC.

So – what to do?

As of now, there will be a two months period for the EU member states and the European Parliament to reject the regulation, and if there is none it will become a law.

The use of palm oil as a biodiesel has become critically scrutinised, and some studies show that 70 % of the European people are backing this up. It is thus very likely that the rule will be enforced, which leaves Indonesia without the European market as an importer of palm oil. This means that in the long run, relying heavily on the export of palm oil is not sustainable as countries seek other elements for fuel and are working towards disinvesting in the commodity, as a response to the global climate crisis.

Making the production more sustainable and looking for other markets might be a short-term solution, but in the long run all countries will have to take steps towards dealing with climate change. One step that can be taken is regarding the development of renewable energy sources, which Indonesia has been rather slow in doing, even though a lot of natural potential is found within our borders.

With energy demands and electricity consumption on the rise, the need for fuel for these will keep being important. Renewable energy sources thus have the potential to provide off-grid power to tens of millions of people in our country who do not have access to access to this at the moment or have to depend on the expensive diesel generators.

The development of photovoltaic solar energy (PV) has especially been neglected as a form of renewable energy in our country. Due to the location on the equator, Indonesia has strong solar radiation, especially in eastern and southern regions, including East Java, which could be opportune to provide electricity to rural areas. The issues in this area have especially been in regard to the lack of government programmes in subsidising PV installations.

In January 2014, the National Energy Policy, implemented by the House of Representatives, forecasted that by 2025 renewable sources will supply at least 23% of Indonesia’s energy needs. This number is foreseen to increase to 31% by 2050.

Investing in most types of renewable energy sources would also mean diversification of these and lower some of the risks that are connected to the different types. For example in terms of battery storage, as Indonesia is an archipelago, this  type of energy would benefit our country if anything happened to the grid.

If these forecasts are to be met, the government needs to create an environment that enables investments in renewable energy sectors.

Regarding the CEPA the need to review all areas of the agreement and how these affect human rights, economic, social and cultural aspects of people’s lives is vital. The government should not just base the impact assessment solely on palm oil, but should take all issues of trade liberalisation into account. The ones in particularly are intellectual property rights, agriculture, food, health and access to to affordable medicine, education, and digital economy.****