STRATEGIES FOR INCLUSIVE

IMPLEMENTATION OF THE EU
DEFORESTATION REGULATION
(EUDR) FOR INDONESIAN AND
MALAYSIAN OIL PALM
SMALLHOLDERS

1. INTRODUCTION
At the heart of the global dialogue on environmental conservation and sustainable
agriculture, the EU Deforestation Regulation (EUDR) stands as a testament to Europe's
commitment to preserving our planet's forests. However, for the oil palm smallholders of
Malaysia and Indonesia, this regulation presents a labyrinth of challenges and barriers,
further complicating their access to the European and global markets. On the 31st of
October, 2023, all major oil palm smallholder associations of Malaysia, through their
civil society partner Solidaridad, submitted a memorandum to the Dutch Prime Minister
Mark Rutte during his official visit to the country.
The memorandum does not merely list grievances; it articulates a clarion call for action
in three pivotal areas that could forge a path to inclusivity and sustainability. First, the
establishment of an inclusivity quota, which would secure preferential access to the EU
market for palm oil produced by smallholders, is not just a request but a plea for the
safeguarding of their livelihoods. Second, the alignment of the Malaysian Sustainable
Palm Oil (MSPO) standards with the EUDR requirements is a call for harmonisation that
would enable compliance and market access for these smallholders. Lastly, the
development of a carbon farming mechanism, complete with pre-financing and
guaranteed carbon credit offtake, represents a forward-thinking approach to
incentivising sustainable practices.

My aim is to dissect these three requests and how they are aligned with the objective of
inclusive implementation of the EUDR that does not marginalise these vital contributors
to the palm oil industry. I will try to delve into the potential of these strategies to serve as
a blueprint for a more equitable and sustainable future in the palm oil industry in Asia,
ensuring that the drive for a greener Europe does not overshadow the needs of those
who toil in the fields of Malaysia and Indonesia.
2. WHAT IS EU DEFORESTATION
REGULATION (EUDR)
The EU Deforestation Regulation (EUDR) is a legislative framework that was
implemented on 29 June 2023. Its objective is to prevent the importation of products
that are linked to deforestation and forest degradation into the European Union. The
EUDR covers a wide range of products, including wood, rubber, palm oil, soy, beef,
coffee, and cacao. To ensure compliance with this regulation, companies that deal with
these products are required to conduct due diligence to verify that the goods have not
been sourced from land deforested or degraded after 31 December 2020. Moreover, the
regulation makes it mandatory for companies to comply with the laws of the country of
production, including respecting human rights and the rights of Indigenous Peoples.
The EUDR is a significant milestone in the EU's efforts to curb deforestation and
promote sustainable trade. It builds upon the EU Timber Regulation and the EU FLEGT
Action Plan, which were earlier initiatives aimed at regulating the timber trade. By
extending the scope of the regulation to include other commodities that are major
drivers of deforestation, the EUDR aligns with the EU's broader objective of reducing its
environmental impact and contributing to global efforts to combat climate change.

3. CONCERNS ABOUT EUDR AND ITS

IMPACT ON OIL PALM SMALLHOLDERS
According to a briefing paper developed jointly by the Council of Palm Oil Producing
Countries and Solidaridad, the EUDR poses a risk of 'marginalising smallholders' and
'exacerbating poverty' among them. It also mentions that the regulation may 'undermine
the livelihoods of millions of smallholders. Read more about it here:
(https://www.solidaridadnetwork.org/wp-content/uploads/2023/04/Briefing-paper-EUDR-and-palm-oil-
smallholders.pdf)

The concerns stem from the stringent requirements of the EUDR, which may be difficult
for smallholders to meet. The due diligence process, for instance, requires a level of
documentation and traceability that many smallholders may not have the capacity to
provide. This could result in their exclusion from the EU market, which is a significant
destination for palm oil exports from Indonesia and Malaysia.
Moreover, the EUDR's focus on large-scale deforestation could overlook the nuances of
land-use change at the smallholder level. Smallholders often operate on a much smaller
scale and may not be directly involved in large-scale deforestation activities. However,
the regulation's blanket approach could inadvertently penalise them.
In Asia, a staggering 2.5 to 3.5 million smallholder oil palm farmers diligently tend to
their crops, as highlighted by a 2020 study from the International Institute for
Sustainable Development (IISD). Remarkably, these farmers are the lifeblood of the
industry, contributing to 40% of the world's oil palm cultivation. Yet, when we turn the
pages of the 2022 Palm Oil Barometer, we find less than 10% of sustainable palm oil is
produced by hardworking smallholders. Digging into the numbers, it's even more
shocking to find that independent oil palm smallholders, who represent about 80% of
these farmers, contribute less than 1% to sustainable palm oil production, mainly due to
the low number of certified farmers. In fact, out of many millions, only 22,338 farmers
have secured certification from the Roundtable on Sustainable Palm Oil by the year
2022. The reality is that, until now, the advantages of accessing markets through
sustainable practices have been confined to the larger oil palm plantations owned by
multinational companies. As these smallholders struggle to stay afloat and are left out of
sustainable supply chains, they now also face the risk of being excluded by the EUDR.

4. THE POSSIBILITY OF TRADE CONFLICT

BETWEEN THE EU AND INDONESIAN AND
MALAYSIAN GOVERNMENTS OVER EUDR
Indonesia and Malaysia have expressed concerns that the EUDR is 'punitive and unfair'
towards smallholders. Both countries have delayed trade talks with the EU and sent top
officials to voice their concerns. The regulation is seen as favouring 'large corporations
or multinationals' over smallholders. It adds to the already uneasy trade relations
between Indonesia and the EU. In 2019, the EU adopted a Delegated Regulation that
further restricted the use of palm oil-based biofuels. Indonesia responded by launching a
legal challenge at the World Trade Organization (WTO).

The governments of Indonesia and Malaysia have taken diplomatic steps to address
these concerns, including sending ministerial delegations to the EU to discuss the
regulation.
In April 2019, Indonesian President Joko Widodo and Malaysian Prime Minister Mahathir
Mohamad sent a joint letter to the European Commission, expressing their opposition to the
EUDR. The two leaders argued that the EUDR would "harm the livelihoods of millions of
people in our countries" and that it would "undermine efforts to achieve sustainable
development in the palm oil sector."
Earlier this year, the Deputy Prime Minister of Malaysia, YAB Dato’ Sri Haji Fadillah bin
Haji Yusof, and the Coordinating Minister for Economic Affairs of the Republic of
Indonesia, Mr. Airlangga Hartarto, conducted a joint mission to the EU headquarters.
During the visit, they met with Mr. Frans Timmermans, the Executive Vice-President of
the EU, and discussed the three major areas of concern. These areas include the
inclusion of smallholders in the supply chain, acceptance of national sustainable
certification schemes as references to the implementation guidelines, and technical
clarification on the benchmarking system, geolocation, legality, and traceability.
These actions indicate the seriousness with which both countries view the potential
impact of the EUDR on their palm oil industries and underscore the need for a balanced
and inclusive approach to its implementation. Any regulations that are put in place must
be fair and equitable, and they must take into account the needs of smallholder farmers.

5. SO, HOW CAN THE EUDR BE MORE INCLUSIVE OF OIL

PALM SMALLHOLDERS?

5.1 INCLUSIVITY QUOTA FOR OIL PALM SMALLHOLDERS IN

THE EU MARKET
Solidaridad, in collaboration with the Council of Palm Oil Producing Countries (CPOPC),
is advocating for the establishment of an inclusivity quota for palm oil produced by
smallholders to gain access to the European Union (EU) market. This initiative draws
inspiration from similar quota systems that the EU has implemented for other sectors
and select groups. For instance, the EU has established quotas for sugar imports from
the African, Caribbean, and Pacific (ACP) countries under the Cotonou Agreement,
ensuring that these nations have preferential access to the EU market. This has not
only boosted the economies of the ACP countries but also ensured a stable supply
chain.
There are a number of examples of quotas that are already available for select groups
to access the EU market. For example, there is a quota for sugar produced by
developing countries, which helps to ensure that these countries have a fair chance to
compete in the EU market. There is also a quota for bananas produced by African,
Caribbean, and Pacific (ACP) countries, which is designed to help these countries to
develop their economies. Similarly, the US has a quota for sugar produced by developing
countries. This quota is designed to help these countries to develop their economies. India
has a quota for wheat produced by smallholder farmers. This quota is designed to ensure that
smallholder farmers have a fair chance to compete in the market.
In the discourse on sustainable agricultural practices, the European Union's
Deforestation Regulation (EUDR) could significantly benefit from incorporating a
provision that mandates the inclusion of a minimum quota, ranging from 5 to 10 percent,
of palm oil produced by smallholders in the total palm oil procurement by European
Union businesses. This integration would not only bolster the market access for
smallholder produce but also reinforce the commitment to sustainable sourcing.
Admittedly, there exists a degree of scepticism regarding the feasibility of distinguishing
smallholder-produced palm oil within the intricate web of the supply chain. Addressing
this concern, the "mass balance" certification system emerges as a viable solution. This
system permits a regulated amalgamation of certified and non-certified raw materials
throughout the production continuum, ensuring that the volume of the final certified
product does not surpass that of the certified input. Such a system is conducive to the
gradual adoption of sustainable practices by smallholders, allowing for an incremental
increase in the proportion of certified produce, thereby obviating the need for immediate
and comprehensive alterations to their agricultural and business methodologies.
Current trends indicate that numerous enterprises are already deploying sophisticated
traceability instruments to source and monitor oil palm from smallholder farmers. These
instruments encompass geographical mapping for precise origin identification, farmer
registration for supply chain transparency, and meticulous transaction records to uphold
accountability. Enhanced by blockchain technology, these methods provide a fortified
security of transactional data. Additionally, the utilisation of satellite imagery and GPS
tracking enables real-time surveillance of the supply chain. Beyond technological
advancements, forging partnerships with local entities and non-governmental
organisations is indispensable for the validation of sustainable practices and the
resolution of sourcing impediments.
The imperative of traceability in business operations within the European Union is set to
become a non-negotiable element. Traceability is pivotal in complying with the EUDR,
acting as a transparent conduit to ascertain that commodities such as palm oil are
devoid of any associations with deforestation or degradation of forests. By implementing
an inclusivity quota, the EU would take a balanced approach that recognises palm oil
production's economic and social realities in Indonesia and Malaysia. This would align
with the EU's broader objectives of promoting sustainable development and responsible
trade while also addressing the concerns of millions of smallholders who depend on
palm oil farming for their livelihoods.

5.2 SUPPORT ALIGNMENT OF ISPO AND MSPO WITH THE

REQUIREMENTS OF THE EUDR
The EU could recognise the efforts of producing countries in implementing mandatory
sustainability standards like the Malaysian Sustainable Palm Oil (MSPO) and the
Indonesian Sustainable Palm Oil (ISPO). Aligning these standards with the EUDR could
drive compliance and ensure that palm oil has not been produced from deforested land.
The EU could recognise the efforts of producing countries in implementing mandatory
sustainability standards like the Malaysian Sustainable Palm Oil (MSPO) and the
Indonesian Sustainable Palm Oil (ISPO). Aligning these standards with the EUDR could
drive compliance and ensure that palm oil is not produced from deforested land.
The ISPO and MSPO standards are mandatory sustainability standards for palm oil
production in Indonesia and Malaysia, respectively. These standards encompass a
range of criteria that focus on legal compliance, environmental stewardship, and social
responsibility. For smallholders, adhering to ISPO and MSPO standards can provide a
structured pathway to implement best practices in sustainable agriculture. This includes
guidelines on zero-burning land-clearing techniques, riparian zone management, and
soil fertility management, all of which contribute to avoiding deforestation and promoting
environmental sustainability.
The ISPO and MSPO standards are not perfect, and there are some concerns about
their implementation. However, they represent a significant step forward in the effort to
ensure that palm oil is produced in a sustainable way within a mandatory legal
framework. The EU support could further strengthen the implementation of these
standards and help it align with the requirements of the EUDR so that national
mandatory instruments could be of help to gather pertinent data from oil palm cultivators
and mills in line with EUDR requirements, ensuring efficient dissemination throughout
the supply chain.

5.3 DEVELOP A MECHANISM OF CARBON FARMING BY THE

OIL PALM SMALLHOLDERS

The EUDR imposes strict requirements on smallholder farmers. Implementing these

requirements is costly and will take a lot of effort from smallholders. To finance their
compliance and accompanying activities, new mechanisms need to be developed.
Incorporating carbon farming practices into the EUDR as a key component could incentivise
smallholder oil palm farmers to adopt sustainable practices that enhance carbon
sequestration. This integration could involve pre-financing mechanisms and guaranteed off-
take agreements for carbon credits.
The concept of carbon farming presents a transformative opportunity for smallholder oil
palm farmers, particularly in Indonesia and Malaysia, to contribute to global climate
mitigation efforts while enhancing their livelihoods. Carbon farming involves the
adoption of agricultural practices that capture and store carbon dioxide, thereby
reducing greenhouse gas emissions. In the context of oil palm farming, this could
include agroforestry systems, cover cropping, and the restoration of degraded lands.
The EU Government can play a pivotal role in promoting carbon farming practices among
smallholder oil palm farmers by implementing the following strategies:
• Provide Pre-Financing for Carbon Farming Practices: The EU member
Governments could offer pre-financing options to smallholder oil palm farmers to
implement carbon farming practices. This financial support would alleviate the
initial costs of transitioning to sustainable agricultural methods like agroforestry
systems, cover cropping, and the restoration of degraded lands.
• Support Technical Assistance: With the support of NGOs, the private sector
and other actors to provide technical assistance ensuring the success of carbon
sequestration efforts among smallholders.
 • Guaranteed Purchase of Carbon Credits: To incentivise and sustain carbon
farming practices, the EU Governments could commit to purchasing the carbon
credits generated by smallholder oil palm farmers. This would create a
guaranteed market for these credits, providing smallholders with an additional
income stream and encouraging the long-term adoption of sustainable practices.

• Risk Mitigation and Insurance Products: EU member governments can support the
development and availability of risk mitigation and insurance products tailored to
carbon farming projects. These products can help to reduce the financial risks
associated with carbon farming, such as weather events, market fluctuations, or
changes in carbon credit regulations, thereby encouraging more participation in
carbon farming initiatives.

All four strategies could be covered under the proposed European Carbon Credit
Guarantee scheme. The scheme would guarantee the purchase of carbon credits from
developing countries that meet certain sustainability criteria. The scheme is still in the early
stages of development, but it has the potential to bring a multitude of benefits to smallholder
farmers in Indonesia and Malaysia, enhancing their livelihoods, promoting sustainable
agriculture, and contributing to global climate change mitigation efforts. By providing a
guaranteed market for carbon credits and facilitating access to finance, the scheme can
empower smallholder farmers to become active participants in the transition to a low-carbon
economy.

6. AN EUDR FUND COULD BE SET UP FOR

THIS PURPOSE
A dedicated EUDR Fund could be established, managed jointly by the EU and CPOPC,
with the participation of other civil society organisations in the governance of the fund.
This fund could support the various initiatives aimed at making the EUDR more
inclusive for oil palm smallholders.

The European Union (EU) and the Council of Palm Oil Producing Countries (CPOPC) have a
shared interest in ensuring that the EU's upcoming sustainable palm oil directive (EUDR) is
inclusive for smallholders. A dedicated EUDR Fund could help to address these challenges by
providing financial support to smallholders who are transitioning to sustainable production
practices to address the three objectives shared above.

The fund could be modelled after the Africa Carbon Market Initiative (ACMI)-a €80
million program that was launched in 2017 by the European Commission (EC) to support the
development of carbon markets in Africa. The program aims to foster the growth of carbon
markets in Africa, enhance the demand for carbon credits from African initiatives, enable
smallholder farmers to engage in carbon markets, and aid in the advancement of sustainable
development projects across the continent. The ACMI recognises that smallholder farmers
are at the forefront of climate change mitigation efforts in Africa. The program is helping to
empower smallholder farmers to participate in carbon markets and to benefit from the
carbon credits they generate.

There are other examples, as highlighted in a brilliant report by Stockholm-based think

tank Free Trade Europa. Let me share one of them. In Guyana, a country with vast
tropical forests and a significant forestry industry contributing to GDP and employment,
the European Union's support has been pivotal in enhancing sustainable practices
among smallholders. The EU has collaborated with Guyana to refine the country's Wood
Tracking System into a comprehensive Timber Legality Assurance Scheme (TLAS) under
a Voluntary Partnership Agreement (VPA). This partnership has led to the adaptation of
Guyana's tracking system to meet EU standards, ensuring legal compliance for timber
exports. Through technical platforms like the Joint Monitoring and Review Mechanism,
Technical Working Groups, and Multi-Stakeholder Consultations, the EU and Guyana
work together to monitor progress and engage various stakeholders, thereby
reinforcing the country's legal framework and supporting sustainable forest
management.
Oil palm producing regions possess a significant capacity to sequester and store carbon,
making them a crucial component of the rapidly depleting belt of equatorial forests that
serve as the "lungs of the earth." Moreover, it offers opportunities for aligning
environmental governance and developing a common policy framework between
Indonesia and Malaysia through CPOPC, which together account for roughly 80% of all
palm oil production.

7. CONCLUSION
The EUDR presents both challenges and opportunities for oil palm smallholders in
Indonesia and Malaysia. By adopting an inclusive approach, the EU and the
governments of Indonesia and Malaysia can ensure that the regulation serves its
intended purpose without marginalising smallholders.
At present, the EU is challenged with discerning the broader picture amidst intricate
details, yet there are several viable and successful models demonstrating how it can
synergise environmental objectives with the advancement of trade, economic alliances,
and wider political goals through a cooperative approach. The initial recommendations
proposed in this document could serve as constructive steps towards fulfilling these
ambitions.
I have tried to make a case for setting up a dedicated EUDR Inclusivity Fund for Oil
Palm Smallholders, which will help in addressing the three major areas proposed in the
document. By implementing these recommendations, all stakeholders can work
together to create a more sustainable and equitable palm oil industry that benefits both
the environment and the millions of smallholders who depend on it for their livelihoods.