LeeLaneJOPE1

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Journal of Oil Palm &The EnvironmentAn official publication of the Malaysian Palm Oil Council (MPOC)

Journal of Oil Palm & The Environment 2012, 3:1 - 8 doi:10.5366/jope.2012.01

Economic growth, climate change, confusion and rent seeking: The case of palm oilLee Lane*

Abstract

Greenhouse gas emissions contribute toharmful climate change. Yet curbing emissionsis not the only way to limit harm from climatechange and it may not even be the best way.Much of the risk from climate change arisesfrom its effects on less developed countries.Growth of the palm oil sector has proven to bea potent engine for economic progress. It hasconferred gains on both producers and

consumers. Policy-makers should assess palmoil as both a source of emissions and a sourceof development. Instead, U.S. and EU climatepolicy has viewed the palm oil sector almostentirely within the narrow framework of theirbiofuels programs. Their policies stand onweak data, flawed theories, hidden motives,and subjective standards.

Key wordsclimate change, greenhouse gas emissions,Ronald Coase, climate change mitigation,climate change adaptation, reciprocalproblems, economic development, palm oil,

Malaysia, EU biofuels, RFS2, EISA.JOPE 2012, 3:1 - 8

1. Introduction

Palm oil production has proven to be a potentengine of economic growth. In recent years,though, some environmental non-governmental organizations (NGOs) havemade it a target for criticism. Among theircharges, the most troubling is that palm oilcontributes to climate change. Palm oilproducers and consumers have objected, andthe debate has at t imes been heated.

Much of the resulting controversy has been asconfused as it is rancorous. One source ofconfusion is, I shall suggest here, a tendencyby the greens to frame the climate problem inoverly narrow terms. When the issue is viewedin a broader framework, it becomes apparent

that the NGOs have turned a blind eye to palmoils value as a climate solution.

A second major source of both confusion andrancor is that palm oil has become part of theangry disputes about biofuels. Biofuelsproponents have claimed climate benefits as amajor part of the rationale for the EU and U.S.programs. In fact, though, the two agriculturalsectors have captured these programs assources of economic rents. Green NGOs

oppose this outcome. They want to restructurethe programs in ways that would hurt the farmsectors but promote climate goals. Palm oil is,comparatively, a low cost biofuel feedstock. Itsuse as a feedstock does not, however,comport with the goals of either of thecontending lobbies. Much of palm oils imageproblem stems from its being caught in thecrossfire of these two clashing biofuels lobbies.

Seeing the political economy of palm oil andclimate change more clearly will not quiet theclash of interests. Nor will it obviate the needto make trade-offs in the use of the scarceresources available for coping with climatechange. It may, however, help us to see thosetrade-offs more clearly.

Email: Lee Lane ([email protected])

Visiting Fellow, Hudson Institute

Published: 09 March 2012

Received: 22 December 2011

Accepted: 1 February 2012

Review Open Access


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2. A Coasean view of the climate change

The dispute about palm oil and climatechange, I suggest, is being conducted onterms that are too narrow. The green NGOsrightly perceive world greenhouse gasemissions as a root cause of much climatechange. Oxford economist Paul Colliercautions, though, Typically in an attempt tofind a solution to a problem people look to itscauses, or yet more fatuously, to its rootcause. However, there need be no logicalconnection between the cause of a problemand appropriate or even feasible solutions.

1.

Collier, therefore, is warning us; we must notconfuse eliminating what appears to be aproblems root cause with the best way to cureit. It may be, but it may not. In the case ofclimate change, I shall argue here, making themain effort an attack on the root cause is, atleast for now, a bad mistake.

2.1 Climate change as a reciprocalproblem

Nobel laureate Ronald Coase has suggested asound way of looking at problems like climatechange. His thoughts presaged Collierswarning about root causes. Coases ideas leadto using a different framework in judging whatto do about palm oil.

Coase observed that nuisances, arisebecause many useful and valued actions raisecosts elsewhere in the economy. Further,those harmed by a nuisance can often takesteps to lessen their own costs. Coase cited asimple illustration. Restricting flight operationscan lessen harm from airport noise, but the

owners of the property affected by the noisecan also take action. They can for instance,lower those costs by insulating buildingsagainst sound.

Faced with such a reciprocal problem, thebest outcome would be to make that set ofchanges that yields the greatest net benefit

2.

Reaching that goal will often mean inducingboth parties to take measures to lower harmone by controlling the source, the other byavoiding harmful effects. But eithergovernment or the market will incur transactioncosts in the process of inducing the steps

needed to lessen the nuisance. Such costscan be high enough to affect the choice ofwhat actions to take. Indeed, they can be highenough, compared to the size of the avoidednuisance, to imply that inaction may be thebest course

3.

Harm from climate change follows this samelogic. GHG emissions can alter the climate.Climate change imposes costs on someactivities and on some countries. Yet proposedsolutions like rationing the use of fossil fuels,halting the felling of tropical forests, orshrinking livestock herds are themselvescostly. There is another option. Hardening theactivities or countries affected by climatechange against harm also offers a means toreducing harm from climate change.

In the case of climate change, it turns out thatone way of hardening the threatened activitiesis plain old economic growth. ThomasSchelling, another Nobel laureate economist,explained the point. As countries becomericher, they acquire the resources needed toadapt to climate change; then too, with growth,their dependence on climate-sensitive sectorsdeclines; also, growth brings many gainsunrelated to climate.

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Economic development is, in this sense, aclimate policy analogue to adding soundinsulation to the buildings near airports.

2.2 A central dilemma of climate policy

The insights of Coase and Schelling help bringinto focus a central dilemma of policies that tryto reduce harm from climate change. On theone hand, all else being equal, a strategy offostering economic growth lessens the harmthat countries will endure from any givenamount of climate change. On the other hand,such growth can raise global GHG emissions.In doing so, it speeds up climate change.

A strategy of trying to limit harm from climatechange by curbing GHG emissions takes theopposite tack. Yet, it is caught in the samedilemma. Taking steps to curb emissions mayretard the pace of climate change. Yet GHGcontrol is costly; hence, it slows economicgrowth. By doing so, it renders the countriesthat adopt GHG controls more vulnerable toharm from whatever climate change doeshappen.

If the country is already developed and itsclimate is temperate, the threat from climatechange is likely to be small in the first place. In

such cases, more wealth may do relatively littleto lower climate risk. If the country is poorerand its climate is tropical, added nationalwealth may make a great difference.

Most governments of poor and middle-incomestates see this dilemma. Both China and India,


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Figure 1

Source: MPOC & APOC, Palm Oil Development and Performance in Malaysia (February 2010)

for instance, have made it plain that they willnot sacrifice their economic growth rates onthe altar of GHG control.

5Stocks of capital and

of natural resources, in effect, wealth, arerequired for a country to adapt to climatechange.

6The countries that choose economic

growth over GHG control are, therefore,behaving rationally.

In contrast to this view, many climate scientistsand green NGOs remain badly confused. Their

whole mind set works against heeding theinsights of Collier, Coase, and Schelling.Instead, they focus on pollution as a moralfailing.7

This framing of the issue prompts them toassume that extirpating emissions, the rootcause, is the only valid means of solving theclimate problem; hence, they miss theproblems reciprocal nature. They see thatdevelopment can add to global emissions; theyignore its effect in lowering the harm fromclimate change. This one-sided view hasdistorted the larger debate about climate

policy. And that larger distortion has warpedsome thinking about palm oil.

3. Palm oil production as an engine ofdevelopment

When economic development is viewed in amore balanced way, a new dimension is addedto the palm oil debate. On the one hand,economic growth can contribute to climatechange. On the other hand, it is also true thatdevelopment lessens the harm that climatechange may cause. A fair judgment mustbalance both factors.

Without doubt, the oil palm has been anengine for economic development. For somedeveloping countries, palm oil production andprocessing has become a growth industry anda valued source of export earnings. For others,it provides a source of affordable food imports.In both roles, it advances global economicgrowth.

The growth of palm oil production is, in part,anchored in larger global trends. Growingworld population and wealth have caused theglobal demand for food to boom. As part of this

broader trend, demand for edible oils and fatshas risen. In response, between 2003 and2008, palm oil production grew at a rate of11.1 percent per year.

Indeed, oil palm has now supplanted soybeansas the worlds single biggest source of edible


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oils and fats (see figure 1). Globally, palm oiloutput is spreading, but it remains quiteconcentrated. Malaysia and Indonesia are thetwo main producers. Between them, these twocountries accounted for over 85 percent ofglobal output in 2008.

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Factors beyond rising wealth and populationhave added impetus to the growth in palm oiloutput. The palm oil sector has conducted avigorous R&D effort. Partly as a result, duringthe last two decades, new uses have appearedfor both palm oil and its by-products. Uses nowinclude many food and grocery products,cosmetics, surfactants, diverse industrialproducts, and biofuels. In fact, 50 percent of allpackaged products sold in grocery sold todaycontain palm oil.

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Output is likely to continue to rise. On thedemand side, global population and wealth willclimb. On the supply side, output per hectarealso seems likely to go on climbing. Therefore,by about 2050, total production may be roughlydouble that of today. In the future, otherequatorial regions, like Latin America andAfrica, may also become more importantgrowers.

Table 1

Source : MPOC & APOC, Palm Oil Development and

Performance in Malaysia (February 2010)

These trends have already provided asubstantial boost to the Malaysian andIndonesian economies. The sector as a wholeaccounts for about 7-8 percent of Malaysiastotal GDP.10In Indonesia, palm oil plantationscontribute about 1.6 percent of GDP.11

For both of these countries, the sector is amajor source of export earnings:The palm oil sector has been a majorcontributor to the export earnings of the

producer countries. In Malaysia, the exportvalue of palm oil and its derivatives rose fromRM 2.98 billion (USD 903 million) or 6.1percent of national total in 1980 to RM45.61billion (USD 13.8 billion) in 2007. During theAsian financial crisis during 1997/98, palm oilwas the top foreign exchange earner,exceeding the revenue derived from crudepetroleum and petroleum products and forestryby a wide margin. According to Prof. K.S.Jomo (Jakiah Koya 2009) of the UNDepartment of Economic and Social Affairs, itwas the palm oil industry that saved Malaysiaduring the economic crisis by spurringeconomic growth. The palm oil sector is also amajor export earner in Indonesia, contributingabout USD 7.9 billion in 2007.

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China, India, Pakistan, and Bangladesh havebecome major importers. The market is,though, world wide. The EU, the United States,Japan, and the rest of the world are all largeimporters.

In both countries palm oil providesemployment. In Malaysia in 2009, total sectoralemployment amounted to 860,000; inIndonesia the sector employed roughly3,000,00013 In both countries, the oil palmsector has been a boon to many small-holders.The fact that some other plantation crops,notably rubber, have been in decline, hasmade the rise of palm oil all the morewelcome.

Thus, the producers and consumers of palm oilboth benefit from its economic rise. Further,the writings of Coase and Schelling, in effect,counsel that some of the benefits of palm oil

production will decrease vulnerability to climatechange among some of the countries that aremost at risk. It is understandable, though, thatinterests that compete with the oil palm wouldview matters in a different light. This conflict ofinterest groups has emerged most stronglywith regard to the tussle for shares in the EUand U.S. biofuels markets. In the resultingpublic discourse, worries about climate changehave been conflated with what is bestdescribed as eco-protectionism.

4. Palm oil and bio-fuels

Parts of domestic agriculture and the greenNGOs have supported biofuels programs.These two interests are, however, at odds intheir preferences over how such programsshould be structured. Farm interests want theprograms to promote existing crops. Thosegreen NGOs that still support the concept want


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programs to promote advanced biofuels. Theresulting disputes have sparked a demand forstudies that purport to attribute GHG emissionlevels to particular feedstocks. In truth, though,the tools for making such measurements arebadly flawed, and the standards are arbitrary.The result has been to throw a veil of pseudo-science over what is in fact a highly politicalprocess.

4.1 The goals and structu re of biofu elsprograms

The EU and U.S. biofuels programs differ inmany major details; however, their goals andbasic structure are broadly similar. Both aredesigned to transfer income to domesticagriculture. Both claim to justify these transfersas means of bolstering energy security. Andboth purport to lower GHG emissions.

The central role of promoting domesticagriculture is clear in the results of the EUprogram.

There is general consensus thatin theabsence of subsidiespalm oil is by farthe most competitive vegetable oil for theproduction of biodiesel. The reason forthe dominant role of rapeseed oilarelatively high priced feedstockis to befound in the high level of public supportprovided in EU countries where rapeseedoil from domestic sources represents themain feedstock for biofuel production. Infact, in the absence of public support,rapeseed based biodiesel should not becompetitive, even on a long term basis.

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U.S. policies have displayed a similarprotectionist impulse. There the main effect ofcurrent policies has been to promote corn-based ethanol over imported sugar.

The structures of the EU and U.S. programsalso have a good deal in common. Bothmandate that a portion of all transportation fueluse must be supplied by biofuel. However,only those biofuels that conform to governmentstandards count toward meeting this quota.Both programs also subsidize those biofuelsthat government certifies as being in line withits standards. To qualify for these favors from

government, a biofuel must lower GHGemissions by a certain amount. Over time, theboth programs GHG reduction standards arescheduled to become more stringent.

In the EU, these policies have effectively shutpalm oil-based biodiesel out of the market.15

The EU has decreed that such fuel does notmeet the standard for GHG reduction. (In theUnited States, where, diesel fuel has a smallermarket share than in Europe, governmentseem to be moving toward a similar decision.)

The motive behind the EU decision, though,seems to have more to do with supportingEuropes farmers than it does with protectingthe climate. EU documents state that thebiofuels policy is intended in part to prop up itsagricultural sector; this intent is surely a factorin the policys treatment of imports; if so, theEUs Renewable Energy Directive violates thestandards of the World Trade Organization.

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Further, the process of estimating the GHGemissions caused by a given biofuel feedstockis, as it turns out, open to great doubt.

4.2 Estimating GHG emission s

Scientists and economists have lavished greateffort on estimating the GHG footprints ofbiofuel produced from varied feedstocks. Theupshot is that their efforts have failed.Estimates abound, but there is a stark dearthof agreement among them.

Comparisons of the GHG footprint of variousfeedstocks produce wildly divergent answers.For palm oil-based biodiesel, recent studieshave found savings compared to fossil fuel thatrange from 19 percent to 71 percent. The EUfound soy-based biodiesel achieved a savingof 31 percent. The U.S. government reportedlyinitially found that it was 22 percent. Then itrevised its results to 57 percent.

Agreement about relative rankings is as scarce

as it is about the absolute numbers. Onerecent study found that palm oil surpasses thesaving from European rapeseed.

17 Another

one, launched by the European Commissionno less, found that, For biodiesel, palm oilremains as efficient as rapeseed oil, even ifpeatland emissions are taken into account.

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These findings are, of course, the exactopposite of those reached by the studies thatsupport the Commissions official rulings. TheCommission and the U.S. EnvironmentalProtection Agency (EPA) aver that theirstandards are science based. Even were weto take such claims at face value, it is patent

that the science is question is far too primitiveto serve as a valid basis for policy.

Consider what is involved in making suchestimates. Prior land use, production practices,and local circumstances all affect emissions.These factors vary widely from case to case.


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Small differences in assumptions about what istypical can make large differences in thestudy findings. For instance, one recent studyshowed that palm oil-based biodiesel,depending on prior land use, can eitherproduce net GHG reductions almostimmediately, or that it can take hundreds ofyears to do so.

19 Further, the world is not

static; markets, institutions, and infrastructureare all changing. They do so in ways thatscientists find hard to measure and economistsfind impossible to predict.

Accounting for Indirect land use change (ILUC)is especially vexing. Producing biofuel cancause emissions as new land is opened toreplace the crops diverted from food to fuel.Palm oils high yield per hectare means that itis likely to have a smaller ILUC effect thanother oil seed feedstocks. Also, the oil palm isoften grown on soils unsuited to other crops.20This feature is a plus in comparing its ILUCeffects.

Yet the models used by the EuropeanCommission take no account of ILUC.21 TheCommission has proclaimed that it intendseventually to account for ILUC effects in itsstandards, but it has postponed any doing sountil 2016. The EPA has taken the oppositetack. Indeed, EPA rightly states that it couldnot validly certify that a biofuel meets theemission standards without calculating theindirect land use impacts. That the effects areuncertain, it notes, does not imply that theywere unimportant.22

It is, therefore, useful to juxtapose the claimsof the two regulators. The EPA can strongly

support its claim that GHG measurements thatignore ILUC are of little value. The EuropeanCommission can strongly back its claim thatILUC is as yet too poorly understood forestimates based on it to carry much weight.Each agencys defense of its own approacheffectively indicts that of the other. The onlyhonest conclusion is that neither regulatoractually has a valid basis for its policies.

4.3. A quest ion of standards

Further, the regulatory standards appear to beas arbitrary at the measurements that they

are used to judge. Take for instance the EUsstandard.

From a legal point of view, the 35%criterion is chosen arbitrarily. There is nospecific scientific consensus saying itshould be 35% rather than 30% or 40%.

The 35% threshold, however, ensuresthat domestic rapeseed oil will qualify witha small margin but that the defaultgreenhouse gas saving of palm oilbiodiesel and soybean biodieselthemain foreign competitors to domesticrapeseed biodiesel will not. This is oneprincipal effect of the directive: iteffectively closes future market expansionfor the main biodiesel competitors.

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The same point can be made about the EUs50 percent standard for 2017. It applies just aswell to the new U.S. standard, which is also 50percent. The rationale for any of thesenumbers seems to rest on thin air.

True, EPA claims to find benefits from GHGemission abatement that range from $0.6 to$12 billion yearly.24 On closer inspection,though, the study on which EPA rests thisclaim is deeply flawed. Two errors in it areeasy to spot.

First, the analysis is likely to haveunderestimated the costs of switching toadvanced renewable fuels. A recent study ofthe National Research Council found that therapid commercialization of advanced biofuelsis unlikely to occur.

25By inference, the costs of

meeting the current standard may very wellexceed those assumed by EPA. So far, EPAhas been shown to be overly optimistic aboutthe pace of progress in this area.

Second, EPA has admitted to basing itsbenefits for GHG abatement on estimates ofavoided global harm from climate change.

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The United States, though, as discussed

above, is a highly developed country with atemperate climate. As such, it is much lessexposed to harm from climate change thanmost other countries around the globe. EvenCass Sunstein, now a senior official in theOffice of Management and Budget, concedesthis point.

27Therefore, a U.S. analysis should

use the correct U.S.-specific damageestimates. Had EPA done this, it would havefound far smaller benefits than it did. In anycase, the programs GHG standards arethemselves grossly arbitrary. EPAs studyseems at first blush to suggest otherwise. Yetthat study contains major errors likely to

conceal the possibility that the standards mayare causing net losses in economic welfare.

5. Concluding thoughts

In large measure, the discord between what Ihave referred to as a Coasean approach and


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that of the green NGOs lies at the root ofarguments about palm oil and climate change.The former view regards economicdevelopment as a valid response to the threat.The latter insist that only GHG controls candeal with the problems root cause. Twentyyears of failed UN climate talks cast a deepshadow of doubt over the realism of GHGcontrol schemes.

Nowhere does the palm oil and climate debaterage more hotly than over biofuels. The truthis, though, that these programs are wracked byinner contradictions. They purport to promoteagriculture, lower GHG emissions, andenhance energy security. The first goal putsthe world trade regime at risk. The currentstate of the art is economics cannot measureprogress toward the second. And the programstructures seem to have sacrificed the thirdgoal to the first two. Whether palm oil can finda niche in markets that are so politicizedremains to be seen.

References

1. Paul Collier, The Plundered Planet: WhyWe Must and How We Can ManageNature for Global Prosperity (New York:Oxford University Press, 2010), 209.

2. Ronald Coase, The Problem of SocialCost, in The Firm, the Market, and theLaw(Chicago: The University of ChicagoPress, 1988), 96.

3. Coase, The Problem of Social Cost,118.

4. Thomas C. Schelling, What MakesGreenhouse Sense? Time to Rethink theKyoto Protocol, Foreign Affairs, 81 (3),

(2002): 3.5. CENTRA Technology, Inc., and Scitor

Corporation, China: The Impact ofClimate Change to 2030, NationalIntelligence Council Conference ReportCR 2009-09, June 2009, 4; CENTRATechnology, Inc., and Scitor Corporation,India: The Impact of Climate Change to2030, National Intelligence CouncilConference Report CR 2009-07, May2009, 3.

6. Gary Yohe and Richard S. J. Tol,Indicators for Social and EconomicCoping Capacity Moving Toward a

Working Definition of Adaptive Capacity,Global Environmental Change12 (2002),26.

7. Robert H. Nelson, The New Holy Wars:Economic Religion vs. EnvironmentalReligion in Contemporary America,(University Park, Pennsylvania: The

Pennsylvania State University Press,2010), 117118.

8. Luc Pelkmans, Kris Kessels, and TjasaBole, Induced market disturbancesrelated to biofuels, Elobio, BiofuelPolicies for Dynamics Markets (July2009), Report D2.2 of ELOBIO subtask2.3, 50.

9. Cheng Hai Teoh, Key SustainabilityIssues in the Palm Oil Sector: ADiscussion Paper for Multi-StakeholdersConsultations, The World Bank Group(April 2010): 6.

10. MPOC & APOC, Palm Oil Developmentand Performance in Malaysia,Presentation to USITC, Washington, DC,(February 2010): slide show slide 22;correspondence with Dr. KalyanaSundram, Deputy Chief CEO & Director,Science and Environment, MalaysianPalm Oil Council, Selangor Darul Ehsan;data from Ministry of Plantation Industries& Commodities and Treasury report,Ministry of Finance.

11. Tulus Tambunan, Indonesian CrudePalm Oil: Production, Export,Performance, and Competitiveness(September 2010): 4. www.kadin-indonesia.or.id

12. Teoh, Key Sustainability Issues in thePalm Oil Sector, 8.

13. Teoh, 9.14. P. Thoenes, Biofuels and Commodity

Markets Palm Oil Focus, FAO,Commodities and Trade Division, 5.http://www.fao.org/es/ESC/common/ecg/122/en/full_paper_English.pdf.

15. Fredrik Erixon, Green Protectionism inthe European Union: How EuropesBiofuels Policy and the RenewableEnergy Directive Violate WTOCommitments, ECIPE paper no. 1(2009): 13.

16. Ibid.17. J.M. van Zutphen, R.A. Wijbrans, and

Foo-Yuen Ng, LCI Comparisons of FiveVegetable Oils as Feedstock forBiodiesel, Journal of Oil Palm & theEnvironment, 2 (April 2011): 37.

18. Perrihan Al-Riffai, Betina Dimaranan, andDavid Laborde, Global Trade andEnvironmental Impact Study of the EUBiofuels Mandate, International FoodPolicy Institute, (2010), 11http://www.ifpri.org/sites/default/files/publications/biofuelsreportec.pdf.

19. Gibbs et al., Carbon Payback Times, 4.20. The World Bank, International Finance

Corporation, The World Bank Framework


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and IFC Strategy for Engagement in thePalm Oil Sector, (March 31, 2011), 4.

21. European Commission, Report from theCommission on Indirect Land UseChange Related to Biofuels andBioliquids, Brussels, 22.12.2010 COM(2010) 811 final, 11.

22. U.S. Environmental Protection Agency,40 CFR Part 80 Regulation of Fuels andFuel Additives: Changes to Renewable

Fuel Standard Program; Final RuleFederal Register Vol. 75, No. 58 (March26, 2010) 14679.

23. Erixon, Green Protectionism in theEuropean Union, 29.

24.Assessment and Standards Division,Office of Transportation and Air Quality,U.S. Environmental Protection Agency,EPA-420-R-10-006 Renewable FuelStandard Program (RFS2) RegulatoryImpact Analysis, (February 2010) 955.

25. National Research Council, RenewableFuel Standard: Potential Environmentaland Economic Effects of U.S. Biofuel

Policy (2011) 3.26. Assessment and Standards Division,Office of Transportation and Air Quality,U.S. Environmental Protection Agency,910.

27. Eric A.. Posner and Cass R. Sunstein.Climate Change Justice, GeorgetownLaw Journal, 96: (2008), 1565-1566.

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