Is the EU Regulation on Deforestation-free products already showing its first effects in Southeast Asia? Indonesia’s actions against forest palm oil plantations and key take-aways for Malaysia

Regulation (EU) 2023/1115 of the European Parliament and of the Council of 31 May 2023 – a piece of legislation passed in the EU last year sounds inconspicuous. The full name of the said Regulation, however – Regulation (EU) 2023/1115 of the European Parliament and of the Council of 31 May 2023 on the making available on the Union market and the export from the Union of certain commodities and products associated with deforestation and forest degradation and repealing Regulation (EU) No 995/2010 (the “Regulation”) – reveals the true scope of the regulation, and has caused uproar in Malaysia recently.

As the EU explains on its website, the Regulation is part of a broader plan to tackle deforestation and forest degradation first outlined in the 2019 Commission Communication on Stepping up EU Action to Protect and Restore the World’s Forests. This commitment was later confirmed by the European Green Deal, the EU Biodiversity Strategy for 2030 and the Farm to Fork Strategy.

Why did the EU pass the Regulation?

The idea behind the Regulation is simple: the expansion of agricultural land that is linked to the production of commodities like cattle, wood, cocoa, soy, palm oil, coffee, rubber, and some products derived from them, such as leather, chocolate, tyres, or furniture, should be stopped. After thorough investigation, the EU came to the conclusion that these “products” are the foremost driver of deforestation globally and clearly ought to be targeted.

In targeting these products. the EU thus fully recognizes its responsibility as one of the world’s largest consumers of these commodities and wants to be part of the solution rather than part of the problem.

In brief, the new rules aim to:  

• avoid that the products mentioned above that Europeans buy, use and consume contribute to deforestation and forest degradation in the EU and globally;

• reduce carbon emissions caused by EU consumption and production of the relevant commodities by at least 32 million metric tonnes a year; and

• address all deforestation driven by agricultural expansion to produce the commodities in the scope of the regulation, as well as forest degradation.

According to the Regulation, individuals or businesses involved in placing these commodities on the EU market or exporting them must demonstrate that the products did not originate from recently deforested land and did not contribute to forest degradation.

What is Malaysia unhappy about?

It would be an understatement to say that Malaysia is unhappy about this. Malaysia, being a major exporter of commodities like palm oil and timber, raised objections to various aspects of the Regulation. Above all, Malaysia takes the view that the Regulation unfairly targets specific commodities (such as palm oil). Malaysia takes the view that there should be equitable treatment for all commodities in terms of sustainability standards.

This criticism fails to understand the whole purpose of the Regulation: it is not aimed, broadly speaking, at finding the most sustainable product. The Regulation aims to ensure that deforestation is reduced. “Equitable treatment” should thus be approached from this perspective only.  

There are also concerns whether small palm oil producers (smallholders) will be able to show that their land was not recently deforested as showing just that simply costs too much money. Smallholders will thus either have to find new markets or go out of business.

These concerns are arguably very legitimate: if smallholders lose the EU as a lucrative market, they may need to deforest more land and plant palm oil there in order to make up for the losses. If that were to happen, the Regulation would have the opposite effect of what was intended. The EU has understood that smallholders need to be treated differently and is much more lenient, but it remains to be seen whether this will be enough.

When will the Regulation enter into force?

The Regulation entered into force on 29 June 2023. From that day, operators and traders will have 18 months – and thus until the end of 2024 – to implement the new rules. As mentioned above, the EU has understood that different rules should apply to smallholders and as a result, micro and small enterprises will enjoy a longer adaptation period, as well as other specific provisions.

Will we have to wait until the end of December 2024 to see changes then?

Arguably not. As Reuters reported just before Christmas 2023, Indonesia announced that it would impose fines amounting to a total of 4.8 trillion Indonesian Rupiah ($310.1 million) on palm oil companies operating within forest areas. Indonesia further made it clear that more than 475 billion rupiah ($30.7 million) in fines have been issued so far and that it had identified some 200,000 hectares (494,210 acres) of oil palm plantations in areas designated as forests, which are expected to be returned to the state to be converted back into forests.

Much work needs to be done: while 3.3 million hectares (8.1 million acres) of Indonesia’s nearly 17 million hectares of palm plantation have been found in forests, only owners of plantations with a combined size of 1.67 million hectares have been identified. However, the fact that Indonesia is issuing hundreds of millions in fines is a very positive development.

It is not clear why Indonesia is taking stronger action now after it issued rules in 2020 already to sort out the legality of plantations operating in areas that are supposed to be forests. However, it is undisputed that the Regulation at least raised awareness in Indonesia (as well as other countries) that the EU wants to take responsibility and not sit by idle and watch.

The EU is taking responsibility in reducing deforestation

As is often forgotten, this has direct impacts on European consumers, for whom many products will become more expensive: someone needs to pay for the costs of showing that there was no deforestation and arguably, consumers will have to take at least some share of these costs. However, as one of the richest regions on earth, Europa shares a greater responsibility and should consequently take on a greater burden also.

This is not to say that everything the EU does in respect of deforestation reduction is correct; however, considering the rise in global warming, some of which has been said to be irreversible, we should see the glass as half-full rather than half-empty, and look at the positives that a reduction in deforestation will bring. Hopefully, other parts of the world will understand how the EU’s efforts are helpful and follow suit.

What should the take-aways be for Malaysia?

Malaysia’s approach to the Regulation has initially been inactivity and (when it was too late, i.e., once the text of the Regulation had already been finalized) strong opposition and protest. This included an envoy to the EU earlier this year.

With respect, this is not the best approach. Malaysia must understand the background of the Regulation and ensure that deforestation in Malaysia – which, despite denials, has been shown to still happen – ends. This would improve the reputation of palm oil as a sustainable commodity and thus help the industry overall, likely leading to greater export revenues from the sale of the same. It would also improve Malaysia’s global image and contribute to the preservation of Malaysia’s lush, beautiful and diverse forests.

This article was written by Prof. Dr. Harald Sippel and only contains general information. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. Prof. Dr. Harald Sippel is admitted to the Austrian Bar as Rechtsanwalt and to the Malaysian Bar as a Foreign Lawyer. He regularly provides advice to European and Malaysian companies on matters of ESG.