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Ibu Musdhalifah

Indonesia and Europe - An Equitable Path Forward

Any discussion around the sustainability of palm oil will incorporate economic and social concerns and the broader relative environmental footprint of all vegetable oils – not just a narrow frame of palm oil and deforestation.

Indonesia is at the center of many of the major global debates on environment and sustainability currently taking place. It is one of the world’s most-forested countries, with ancient tropical rainforest stretching over thousands of islands; it has endemic and iconic species of flora and fauna that are the focus of major conservation efforts; and it sits at the intersection of a fundamental question: how to ensure economic and social development alongside environmental protection? Indonesia is also the world’s largest producer of sustainable palm oil, which is the world’s most-certified and most-efficient oilseed, raising millions out of poverty.

Each of these issues – forest protection, biodiversity, trade and economic development – are key to the global debate and will be a focus of COP26 later this year. The European Union has also recognised the importance of these questions and is deepening relations with Indonesia and the wider region – not only on environmental cooperation but on much broader issues as well. On December 1st 2020, ASEAN and the European Union formally elevated their relationship from a Dialogue Partnership to a Strategic Partnership. 

This is a significant event for two of the world’s largest trading blocs, and it is particularly significant for Indonesia.

There were two key elements to the event. The first was the upgrading of the second relationship itself, and the second was that ASEAN and the European Union forged a new path on palm oil.

At the 2019 meeting, ASEAN and EU ministers had reached an impasse on the issue of palm oil and deforestation. At this year’s meeting, a new path was forged.

First, the ministers agreed that any discussion should not just include palm oil, but all vegetable oils. Second, the ministers broadened to scope of the discussion to include sustainability within the context of the UN Sustainable Development Goals, and a ‘holistic’ approach to the environment. This means that any discussion around the sustainability of palm oil will incorporate economic and social concerns and the broader relative environmental footprint of all vegetable oils – not just a narrow frame of palm oil and deforestation.

Any discussion can and should include, inter alia, the importance of trade and sustainable development, poverty, hunger, health, renewable energy and economic development. Importantly, in line with the SDGs, the discussion must be oriented towards national sustainable development strategies.

This is particularly important for Indonesia and its relationship with the European Union.  Economic relations between Indonesia and the EU have and continue to be strong, and they are moving further away from a development assistance approach to a trade and economic cooperation approach.

Any discussion around the sustainability of palm oil will incorporate economic and social concerns and the broader relative environmental footprint of all vegetable oils – not just a narrow frame of palm oil and deforestation.

Indonesia and the European Union are well advanced in negotiating the Indonesia-European Union Comprehensive Economic Partnership Agreement (IE-CEPA).

A completed agreement will follow signing of the Indonesia-EFTA Comprehensive Economic Partnership Agreement, and Indonesia’s key leadership role in the negotiation of the Regional Comprehensive Economic Partnership (RCEP).

These developments underline the significance of Indonesia as ASEAN’s largest economy, and why it has become a focus for Western economies for trade relations in Southeast Asian region.

In simpler terms: It has a population larger than Germany, France and Italy combined, and a larger GDP than Turkey or the Netherlands. Its young population will near 300 million by the end of the decade and will continue to grow.

The importance of Indonesia-EU trade

The EU, as a bloc, is Indonesia’s third-largest trading partner. This trade is largely distributed between Germany, Netherlands, Spain, France and Italy; Indonesia’s exports to the EU represent around EUR14 billion – just under 10 per cent of its total exports, which is similar to the value of exports to Japan and the US.  This is around half of the value of Indonesia’s intra-ASEAN export trade.

Why is this significant? Because trade between Indonesia and the European Union remains underdone. Indonesia’s exports to the EU are largely raw materials; the EU’s exports to Indonesia are dominated by manufactured goods.

What we are yet to see between the two countries is greater levels of investment and the development of value chains, so that investors are better able to access the dynamism of one of the world’s fastest-growing countries.

The mutual benefits are simple: Indonesia is seeking inward investment; the EU is seeking better access to the largest market in ASEAN.

How can this relationship be made better?

From an Indonesian perspective, there appears to be a great deal of antagonism from European stakeholders over Indonesia’s forests and its palm oil exports. In our view, this is misguided.

Indonesia Environmental Policies to Protect its Forests

Indonesia is currently going through what is known as a ‘forest transition’. As countries become wealthier, they manage their forests better for conservation and increase their forest areas. Forest transition has taken place in wealthy Western countries and is now happening in emerging economies – such as Indonesia.

Indonesia has now put in place measures to protect the environment, biodiversity and sustainability. Deforestation for oil palm in Indonesia peaked more than 10 years ago.

In 2018, the President of the Republic of Indonesia, Joko Widodo, renewed the moratorium on new licenses for oil palm expansion for another three years, a major environmental commitment. In September 2019, this moratorium was made permanent. Oil palm plantation expansion in Indonesia has stopped.

Major plantation companies have also made zero-deforestation commitments.

Let it be known that Indonesia has the largest forest area in Southeast Asia; the total forest area is almost twice the size of Spain.

Indonesia’s total protection and conservation forest area is 51.8 million ha, covering 27 per cent of the country’s land area.

Indonesia’s land reserved as forest area is, compared to other countries, according to the official World Bank statistics:

  • Netherlands 11.17%
  • France 31.23%
  • Germany 32.69%
  • Indonesia 49.86%

Much of the criticism levelled at Indonesia has been because of the rate of deforestation that has taken place in Indonesia, particularly over the past two decades.

These levels of deforestation should be understood – as with all sustainability considerations – in a broader economic context.

All Western and wealthy nations have undergone ‘forest transition’. As countries develop and undergo agricultural development, followed by urbanisation and industrialisation, levels of deforestation will increase and then decline accordingly.

For example, between 1700 and 1920 approximately 82 million ha of forest was lost across North America. Cropland area grew significantly, from 3 million ha to 179 million ha in the same period.

European industrialisation took place much earlier. Approximately 25 million ha of forest was lost between 1700 and 1850, while cropland doubled from 67 million ha to 132 million ha.

These cases are significant: the deforestation rate was higher than current FAO estimates of deforestation in Indonesia.

There is, therefore, a question of equitable outcomes in development.

In the United Nations Framework Convention on Climate Change, for example, ‘technological transfer’ – where low-carbon technologies are given a mechanism to transfer to less developed economies – is embedded within the convention.

Why? Because it is understood that some countries simply do not have the means to access or produce low-carbon technologies.

Similarly, having better outcomes for forests and land-use change requires an understanding of the development context.

Indonesia, for example, has worked closely with global donor agencies to reduce deforestation levels and improve forest governance. It has successfully received payments from the Government of Norway for its deforestation efforts and meeting targets and landmarks for better forest protection.

In both cases this has been the result of the implementation of stronger forest laws, and better enforcement. The clearest example is the case of the introduction and implementation of the forest moratorium by successive Indonesian presidents. Both have gone a significant way to protecting Indonesia’s primary forests.

Protecting Biodiversity – a key pillar to Indonesia’s sustainable future

Indonesia is committed to the conservation of biodiversity and wildlife. Indonesia has set aside 21 million ha of forest for biodiversity conservation and protection. These are distributed across more than 500 conservation areas.

The Indonesian palm oil community supports a number of conservation programmes that have been developed to with major NGOs and research institutions.

Indonesia has more orang-utans than any country on Earth, and is committed to protecting this iconic species. Indonesia has strong laws against the trafficking and illegal capture of wildlife such as the orang-utan. Penalties for trafficking are as high as ten years in prison and fines of up to USD790,000. The Indonesian palm oil community, working in collaboration with the government and national / international NGOs, has made the protection of the orangutan a key pillar in its commitment to a sustainable future.

Orangutans are protected under Indonesian law, and conservation programs mean that population numbers are stable. Over 100,000 orangutans live in Indonesia’s Kalimantan state alone.

Indonesian Palm Oil and the European Union

Palm oil and its derivatives are Indonesia’s largest agricultural export and often its largest export overall.  It is also ASEAN’s largest agricultural export.

Estimates of its contribution to GDP are around 6 per cent. The Indonesian Ministry of Agriculture estimates that the palm oil sub-sector’s contribution to GDP in terms of gross value added is approximately 17 per cent.

Literally millions of people -- around 8 million according to one estimate – are directly dependent on palm oil for employment, with another 16 million jobs indirectly supported.

Its production has brought millions of people out of poverty and produced positive health and social outcomes for a country seeking to achieve sustainable development.

European oilseed farmers produce oilseed, but this is processed into two products: meals and oils. Meals are used for animal feed. Oils are used in food, industrial applications and biodiesel. The price that is paid to farmers – and therefore planting decisions – is dependent upon global prices for vegetable oils and feed. 

When palm oil enters the EU at a lower price – because it is a cheaper and more efficient oil – it pushes down the price of European oils, primarily rapeseed. This can depress the price paid to farmers, which can change planting decisions, and potentially push up the price of European animal feed. If European feed prices go up, it can encourage greater animal feed imports from countries such as Brazil or the US.

Palm oil, deforestation and EU policy

Is palm oil responsible for deforestation in Indonesia?

The most recent figures indicate that oil palm plantations only contribute around 15 per cent of Indonesia’s deforestation. This is significantly below other drivers such as small-scale agriculture, other tree plantations, conversion to grassland and even logging roads and other uses.

The contribution of palm oil to deforestation in Indonesia has been steadily declining since 2008-2009, when it was arguably at its highest.

The concerns around deforestation have generated a different, but nonetheless related, set of policy responses in Europe.

The most recent of these is proposed due diligence requirements from firms in the EU and UK. Under these requirements, firms that import certain commodities – including palm oil, soybean, beef and cocoa – would have to take due diligence to determine that the goods were produced in a particular way.

The UK at this stage is opting for an approach that is oriented towards legal standards. Some EU policymakers are pushing for an approach that is oriented towards either deforestation free or sustainable.

The Indonesian government and palm oil community are committed to producing 100% sustainable palm oil under the Indonesian Sustainable Palm Oil (ISPO) initiative, which will be the world’s largest-ever sustainability scheme.

This EU approach has its own risks. As mentioned earlier, the development of agriculture – and therefore agricultural exports – necessitates deforestation in many countries. Requiring that no deforestation takes place – or providing evidence of no deforestation -- for imports could mean that African cocoa farmers or Papua New Guinean coffee growers are simply blocked from the European market.

Similarly, reaching consensus on sustainability is potentially difficult. The global consensus on sustainability is the United Nation’s Sustainable Development Goals. This may not be enough for some EU policymakers when determining sustainability criteria. Similarly, there is at times a conflict between goals towards reducing deforestation and producing more food.

Legality, ISPO and Due Diligence

Palm oil producers, for their part, have been attempting to provide solutions for both deforestation and sustainability for more than 15 years. Indonesia’s largest plantation companies were the first movers on introducing zero deforestation commitments. Indonesia’s largest companies have also committed to voluntary sustainability certification systems that are considered an acceptable verification of sustainability under the ‘Amsterdam Declaration’, a declaration by a number of EU Member States to commit to sustainable palm oil imports.

The Indonesian government and palm oil community are committed to producing 100% sustainable palm oil under the Indonesian Sustainable Palm Oil (ISPO) initiative, which will be the world’s largest-ever sustainability scheme. ISPO includes requirements on social responsibility, health, safety and employment conditions, as well as protections in place for the environment, natural resources, biodiversity and protected species.

The Indonesian government has also developed and implemented a comprehensive policy response. ISPO is a certification system that was first launched by the Ministry of Agriculture in 2011. ISPO was introduced to provide verification of adherence to all relevant Indonesian laws – and therefore improve the sustainability of the Indonesian industry. In its first iteration, the certification scheme covered more than 200 Indonesian laws and regulations. This included the first moratorium on plantation development introduced by President Yudhoyono. It was compulsory for plantation companies, but voluntary for smallholders.

In 2016, a revision of ISPO commenced. This revision process was referred to as ‘Strengthening ISPO’.

The key objective was to improve the system overall and to underline the system’s overall credibility, particularly for international markets.

This involved a revision of the principles and criteria, and particularly criteria in relation to plantation development. But it also involved improving the procedures for firms undertaking certification, particularly around land disputes and community consultations. But there were also institutional reforms. These included the establishment of an accreditation body for the accreditation of certifiers, giving greater independence and arms’ length separation between the standard-setting body and the accreditation body – in line with international standard-setting practices. Further, there was an upgrade of the regulation underpinning ISPO from the Ministerial level to the Presidential level.

Finally, the mandatory nature of the scheme was expanded to all operators, with no exception. And alongside this, new sanctions were introduced for non-compliance.

The process undertaken for these revisions was broad, with a large number of stakeholder consultations that took place across Indonesia. It was led by the Coordinating Ministry of Economic Affairs. This process was considerably different from the process that instigated the first ISPO. ISPO incorporates all aspects of legality and therefore serves as a legality standard. However, the consultation process, which has resulted in the incorporation of additional criteria unrelated to existing regulation means that it serves both as a technical and sustainability standard for palm oil production. Moreover, the sustainable criteria are in line with the expectations of Indonesian stakeholders and in line with Indonesia’s broader sustainable development goals.

Why is this important for forthcoming regulation in the United Kingdom and the European Union? As stated above, both are seeking to introduce due diligence requirements for palm oil.

ISPO’s Mutual Benefit

The Government of Indonesia firmly believes that ISPO can and should be a key pathway for legality verification and sustainability verification for either or both due diligence requirements.

Indonesian stakeholders have worked closely with the UK government to underline the importance of ISPO to Indonesia. Recognition of ISPO by the UK in its due diligence requirements would serve a number of purposes.

First, ISPO could work as a ‘first mover’ for the UK’s Due Diligence system, bolstering the UK’s credentials in international environmental cooperation. This will be of particular significance when the UK is host to the United Nations Framework Conference on Climate Change in 2021. This first mover aspect should prompt other nations to cooperate with the UK on certification recognition.

Second, recognition by the UK can operate as a pathway for the EU Forest Regulation. The EU is seeking to introduce due diligence, but its pathway is not yet clear. A number of EU stakeholders – particularly environmental NGOs funded by the European Commission – are pushing for its due diligence to incorporate criteria unilaterally developed in the European Union. The risks of such an approach are clear; the most obvious is a challenge under the World Trade Organization.

More importantly, such an approach would ignore the lessons of the EU’s Forest Law Enforcement, Governance and Trade (EU-FLEGT) Programme.

Indonesia’s palm oil community is acutely aware of the results of uncontrolled and illegal deforestation. But it is also aware of the gross differences in social and economic development between the poorest regions of rural Southeast Asia and the wealthiest areas of the European Union.

This programme had two components. The EU first introduced a due diligence regulation that required importers to seek assurance on the legal production of timber and timber products. Acceptable forms of assurance included national certification schemes (the timber equivalent of ISPO) and voluntary certification schemes.  Then the EU and major timber trade partners signed bilateral agreements – voluntary partnership agreements (VPAs) – to develop legality standards for forest products. The first of these – and arguably the most successful to date – was the VPA with Indonesia.

These components relied on existing certification schemes and bilateral cooperation respectively in order to engender cooperation and make the program successful.

The UK appears to have learnt its lessons from the EU-FLEGT programme and will likely apply it to its Due Diligence regulation. The EU should do the same.

The certification of commodities such as vegetable oils is arguably much more complicated than the certification of forest products. Their role in the global food supply and international trade makes their economic significance and contribution to the UN Sustainable Development Goals that much more significant.

An Equitable Path Forward

It is therefore why Indonesia is seeking meaningful cooperation with the United Kingdom and the European Union on due diligence going forward.

To do so, the UK and the EU should abide to Indonesia’s principles in regards to environment and sustainability by supporting its existing standard (ISPO), and to follow a legality-based measure. A legality-based approach in Brussels and London would provide a firm foundation for joint Indonesia-EU cooperation on future sustainability issues.

This will ensure that Indonesia’s sovereign right to regulate its domestic palm oil industry, including the future development and evolution of ISPO, is not curtailed.

Indonesia’s palm oil community is acutely aware of the results of uncontrolled and illegal deforestation. But it is also aware of the gross differences in social and economic development between the poorest regions of rural Southeast Asia and the wealthiest areas of the European Union. We believe that Indonesia, the UK and the EU can work together to solve both these problems.

2021 will be a crucial year for conservation, environmental protection and international cooperation. As the world emerges from the COVID pandemic, we policymakers in Indonesia and around the world – including in Brussels – will be able to re-focus on the major global challenges that existed pre-COVID, and still exist today.

Preventing illegal deforestation, protecting biodiversity, and supporting efforts to reduce emissions, are some of those challenges. Indonesia’s government, working with our major agricultural producers such as palm oil exporters, are committed to meeting these challenges. The work is underway, and the success of the Presidential moratorium and other policies is a strong platform on which to build. The COP26 in Glasgow this year will no doubt include discussions on these very points and Indonesia is committed to playing our part.