Despite concerns over worker exploitation, palm oil cultivation has also faced criticism for causing deforestation, emitting greenhouse gases (GHGs), and contributing to climate change. As the industry continues to expand, these issues escalate further and prompt Western countries to campaign against palm oil and occasionally enforce regulatory policies on palm oil imports. In response, Malaysia and Indonesia, the leading producers of palm oil, have been making considerable efforts to demonstrate that they have enhanced the sustainability of their palm oil production and are adhering to regulations through certified sustainable platforms. Indeed, palm oil companies have invested a significant amount of capital expenditures (Capex) to meet these regulations. However, these stringent standards pose a significant challenge for smallholders, who often struggle to meet the demanding sustainability and traceability requirements of the global market. Adding to the complexity, a new European Union regulation against deforestation – (EUDR) is set to take effect by the end of 2025, having initially been proposed for 30 Dec 2024. This regulation will impose stricter requirements, mandating deforestation-free certification and detailed supply chain traceability. As a result, producers are likely to face additional costs, placing a particularly heavy burden on smaller operators who may already be struggling with the financial demands of compliance.

Forest According to EUDR's Definition

As defined in Article 2(4) of the EUDR, a forest is a land spanning more than 0.5 ha with trees higher than 5 meters and a canopy cover of more than 10%, or trees able to reach those thresholds in situ, excluding land that is predominantly under agricultural or urban land use. According to industry players, the definition of forest under the EUDR has received criticism due to its challenges in application, especially in tropical regions. According to industry player, this can be tricky in tropical areas because the fast-growing vegetation can quickly meet these criteria, even on land that was cleared a few years ago. For example, land cleared in 2019 but left to regrow might be considered a ‘forest’ by late 2020. Thus, planting palm oil on such land after this date could be considered deforestation under the EUDR.

What Is Deforestation?

According to The United Nations Office for Disaster Risk Reduction (UNDRR), deforestation is the conversion of forest to other land use independently of whether human-induced or not. Deforestation is also defined as a permanent decrease in tree canopy cover below 10%, including conversion to agriculture, urban areas, and other land uses, but excluding areas expected to regenerate naturally. Deforestation and forest degradation are major contributors to biodiversity loss, with an estimated 420mn ha of forest lost since 1990, despite a decrease in the rate of deforestation from 16mn ha per year in the 1990s to 10mn between 2015 and 2020. Agricultural expansion, especially large-scale commercial agriculture like cattle ranching and the cultivation of soya and oil palm, remains the primary driver of deforestation, accounting for 40% of tropical deforestation between 2000 and 2010, with local subsistence agriculture contributing another 33%.

Source: TA Research - 8 Oct 2024