The European Union will be selective in receiving imported goods to prevent deforestation. What is the impact on Indonesia?
The European Union will be more selective in receiving goods from other countries. They will reject commodities linked to deforestation. The regulatory proposal was already submitted a year ago. As the third region that receives Indonesia’s exports – besides ASEAN and China – We need to know the limitations and restrictions of products that are rejected there.
In addition to the European Union, last year the British government proposed the Environmental Bill to the parliament, which also includes a special provision to conduct due diligence on commodities posing risks to the forest.
The European Union is a region that consists of 27 countries, with a total population of 517 million people. In 2021, even though the Covid-19 pandemic was occurring, Indonesia’s export value to the European Union skyrocketed by 26%, reaching 16.5 billion Euros. This jump was driven, among others, by rising prices of commodities, such as palm oil. Palm oil export to European Union countries increased by 9%.
According to the Ministry of Trade, Indonesia is ranked 22nd as the global food material supplier, with an export market share of 1.05%, or 6.48 billion USD. The types of products or food from Indonesia that are very attractive to the global market are tobacco products (cigarettes), tuna products, prawns, coffee products, fast foods, crabs, snacks (waffles and wafers), pasta, sweet biscuit, and products processed from seaweeds and other algae plants.
For the European Union market, food products from Indonesia are mostly shipped to the Netherlands (34.84 million USD), Italy (26.74 million USD), Germany (26.32 million USD), Belgium (24.92 million USD), England (21.11 million USD), Russia (17.98 million USD), Spain (11.95 million USD), France (6.60 million USD), Turkey (5.91 million USD), and Portugal (5.86 million USD). The types of food products from Indonesia that are very attractive to the European Union market are processed tuna, tobacco, processed pineapple, coconut products, prawns, fast foods, cigarettes, food thickeners from processed vegetables, and black tea.
The European Union Commission created a proposal to reject commodities that are related to deforestation on 17 November 2021. This proposal provided a justification that the main driver for deforestation and forest degradation is the expansion of agricultural lands, which is linked to food production. Therefore, the European Union intends to make sure that the food commodity supply chain is deforestation-free.
On 28 June 2022, The European Union Council agreed to the new legislation. The Council stated that it would adopt its negotiating position (general approach) as a giant step forward in preventing climate crisis and protecting biodiversity.
Some of the proposed European Union legislations may impact Indonesia’s commodities that are exported there. They are:
- Renewable energy/environment legislation, such as Renewable Energy Directive II, which eliminates biofuel as the driver of high-impact land-use change (such as palm oil) in 2030.
- Mandatory due diligence. For example, France’s Vigilance Law becomes the only operational regulation that includes due diligence on the forest commodities’ risks of deforestation under its vast authority.
- Mandatory reporting and disclosure. For example, France will oblige financial institutions to disclose their biodiversity risks.
There are also non-regulatory measures that includes voluntary approaches, such as:
- Reporting and disclosure. For example, the Task Force for Nature Related Disclosures—a market initiative that will develop a framework for finances and companies to report nature-related risks.
- Standards and labels. For example, the Donau Soja and Europe Soya Labels: approval of voluntary certification schemes (such as biofuel labelling, the European Union renewable energy directive).
- Transparency. For example, a platform across the European Union (Europe’s single access point) to provide investors unlimited access to financial and sustainability-related company information under the European Union Capital Market Action Plan.
- Stakeholder dialogues. For example, Amsterdam Declaration Partnership (ADP); COP 26 organizes the Forestry, Agriculture and Commodities Trade (FACT) dialogue.
- Trade agreements. For example, in the Indonesia-EFTA free trade agreement, Switzerland grants tariff deduction on the palm oil import quota provided that it meets the sustainability criteria (possibly guaranteed through certification).
- Green public procurement criteria. For example, France’s Climate and Resilience Law includes a mandatory vegetarian option and public procurement criteria that reduces food demand and promotes local resources.
Which Indonesian export commodities are potentially impacted by this European Union deforestation prevention policy? The answer lies in the four regulatory scopes from the demand side:
- Commodity scope: soybean, palm oil, timber, beef, cocoa, coffee & several derivative products (for example leather, chocolate, furniture). The basis is an impact assessment of which products really contribute to deforestation.
- No discrimination: also applies to products produced in the European Union and imported from outside of its member countries.
- Progressive scope: the scope of products will be expanded in time.
- Cut-off date of 31 December 2020: no commodity is allowed to enter the European Union market if produced on lands suffering from deforestation after this date. This is in line with the commitment to sustainable development goals.
In countries at risk of being fragmented, we have to carefully examine this scope due to how rare it is for environmentally-related concrete laws to emerge in Europe.
It seems that the European Union looked at and learned from the failure of its companies and governments to fulfil the voluntary deforestation commitment until today. Even the European Coalition for Corporate Justice (ECCJ) has recorded that England’s Environmental Bill is specifically focused on commodities posing risks to the loss of forests, mostly emphasizing human rights protection and/or wider environmental damage. Meanwhile, France’s Vigilance Law is the only operational regulation that requires due diligence of deforestation risks by forest commodities, but only in limited circumstances and only for the category of limited corporation actors.
From the notes on the development of the European Union regulation, there are several keys that the Indonesian Government must think about as risk mitigation and strategy to protect commodities produced by export-oriented farmers, namely:
Regulation. The regulation developed by the European Union aims to increase product trading from a “deforestation-free” supply chain, and this will create new standards that are burdensome to the business world. The government of Indonesia needs to think about the following (a) defining “deforestation-free” as a mutual decision between the European Union and Indonesia, with the agreed cut-off date; (b) A Supply Chain Traceability System must be set up in Indonesia in the form of a cross-sectoral platform that ensures the future of export-oriented strategic commodities.
Impact. The European Union Commission will ensure the same impact on suppliers and supply chains in Europe and its partner countries. What is Indonesia’s position and what has to be prepared as a producer country? Fairness is the key, thus a jurisdiction and landscape approach must serve as the basis.
Principle. The European Union regulations are based on the principles of transparency, accountability, and a strong scientific basis and methodology. How can these principles be adopted in Indonesia’s regulations? This will be linked to the increasingly prevalent certification market for exported products and meeting sustainability criteria and supply chain traceability.
By Diah Y. Suradiredja, Senior Advisor for SPOS Indonesia Program-Yayasan KEHATI
This article was also published in Forest Digest Magazine, on July 10, 2022, in Kabar Baru section.