THE BURDEN OF RSPO CERTIFICATION COSTS ON MALAYSIAN PALM OIL INDUSTRY AND NATIONAL ECONOMY Yusof Basiron*, Foong-Kheong Yew

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1 Journal of Oil Palm, Environment & Health An official publication of the Malaysian Palm Oil Council (MPOC) Review Open Access Journal of Oil Palm, Environment & Health 2016, 7:19-27 doi: /jope THE BURDEN OF RSPO CERTIFICATION COSTS ON MALAYSIAN PALM OIL INDUSTRY AND NATIONAL ECONOMY Yusof Basiron*, Foong-Kheong Yew Abstract The study shows that subjecting the total production of Malaysian palm oil to RSPO certification can place a heavy toll on the palm oil industry. By using 2014 as the base year of the study, it costs RM 851 million annually to undergo and to maintain RSPO certification. This amount is equivalent to 4.3% of the total Malaysian government s expenditure on healthcare. It is also equivalent to 1.6% of that spent on education and manpower training for the whole country in that year. With a lukewarm uptake of certified sustainable palm oil (CSPO) by the consumers at only 45% of that produced, the study shows that the extra revenue obtained from sales of CSPO and certified sustainable palm kernel oil (CSPKO) cannot cover the expenditure incurred for certification. As a result, the Malaysian palm oil industry will have to bear a total loss of RM758 million annually. The certification of palm oil using RSPO is only a means to justify that the palm oil is, indeed, sustainably produced. It is also to be noted that not all oils and fats used for food in the world need to be certified for their sustainability. Thus, it is felt that since the sales of CSPO and CSPKO do not derive economic benefits, the money that would be used to certify the entire palm oil production of Malaysia could, instead, be channelled for use in much needed, important and beneficial national social activities such as the provision of better healthcare, education and manpower training for the people. The money could also be diverted to carry out activities that significantly lower the carbon footprint of the Malaysian palm oil industry. One such activity is to capture methane in the palm oil mills. In addition, it is also known that the activities and travel needed to carry out RSPO certification will result in an additional carbon footprint for certified palm oil. As such, certified palm oil has a higher carbon footprint than non-certified palm oil. By using a very simplistic model here, the amount of RM 851 million needed for RSPO certification, if sourced from sales of petroleum, has a carbon footprint, on an annual basis, amounting to 1.6 million tonnes CO2 equivalent. One tonne of certified palm oil carries an extra 81.3 kg CO2 carbon footprint more than non-certified palm oil. As such, users of certified palm oil will, of course, have higher carbon footprints. Key words RSPO certification, Malaysian palm oil, palm kernel oil, social, carbon footprint JOPEH 2016, 7:19-27 *Corresponding Author Yusof Basiron ( yusof@mpoc.org.my), Yew Foong-Kheong ( yew@mpoc.org.my ) Address: Malaysian Palm Oil Council, 2nd Floor, Wisma Sawit, Lot 6, SS 6, Jalan Perbandaran, Petaling Jaya, Selangor, Malaysia Published: 27/4/16 Received: 20/12/15 Accepted: 21/3/ Yusof Basiron, Foong-Kheong Yew This is an Open Access article which permits unrestricted use, distribution and reproduction in any medium, provided the original work is properly cited. 19

2 1. Introduction More and more oil palm growers are opting for Roundtable on Sustainable Palm Oil (RSPO) certification in order to demonstrate that their production is done sustainably. The RSPO seems to be the most common certification system used for sustainability evaluation of palm oil for food production. The first oil palm grower in the world to receive RSPO certification is United Plantations Bhd in Malaysia in For biofuel feedstock sustainability evaluation, the International Sustainability & Carbon Certification or ISCC scheme is the most common certification system used. The ISCC certification system was introduced in There is a tremendous lack of palm oil sustainability certification systems to choose from. As such, RSPO and ISCC command nearly monopolistic positions and they are the most publicized schemes for certifying palm oil sustainability. The RSPO certification system has been extended to RSPO REDD whereby certain parameters, such as greenhouse gas (GHG) calculations have been added on to make it a system that can be used also to certify biofuel feedstock sustainability. Similarly, the ISCC PLUS can be used to evaluate the sustainability of a food source. In 2011, Indonesia, which is the leading producer of palm oil in the world, has come up with a national system, commonly referred to as ISPO or Indonesian Sustainability Palm Oil 1. Recently, in 2014, Malaysia, which is the second largest producer of palm oil in the world, has also come up with her own national palm oil sustainability certification system 2. This is called Malaysian Sustainable Palm Oil or MSPO. Producing palm oil is a business with bottom lines to be taken care of and profits to be made for the companies. For many years, oil palm growers have been grousing over the lack of market demand for certified palm oil and the low premium obtained. As business entities, they are unhappy with the income that is generated by putting in a lot of effort, manpower and money to produce certified sustainable palm oil (CSPO). This study will evaluate the cost needed to subject the whole palm oil industry in Malaysia to RSPO certification. The economic viability of producing and selling CSPO and CSPKO will also be looked into. A cursory attempt is also made to look at the additional carbon footprint on certified palm oil in a scenario when the government performs an exercise of certifying the whole Malaysian palm oil industry with funding coming from the sales of crude petroleum. 2. Methodology The various costs of RSPO certification are first obtained. The published information of WWF et al 3 is used as the main reference. The costs are those related to the cost to prepare the area for certification, the audit and certification process itself as well as the maintenance of the areas subsequently. The average annual cost of certification is a summation of these costs averaged out over a period of 25 years. This period corresponds to the economic life span of the oil palm. Certain costs are not included in this study as they are applicable to some areas only. Such costs include costs for set aside areas and rehabilitation. Similarly, other costs for compensatory payments for new plantings are also not included. The cost of inflation as well as increasing cost which will take place over the lifespan of 25 years for the oil palm are also not taken into account in this study. The year of 2014 is chosen for the study. A case study is carried out to find out the total cost needed to certify all the 5.4 million hectares of oil palm planted in Malaysia 4. This is done by multiplying the oil palm area with the average cost of RSPO certification per hectare. The premiums for CSPO and CSPKO are obtained by looking them up in the Green Palm 5 trading scheme. The economics of certifying and selling Malaysian palm oil under the RSPO scheme is then evaluated. The relevance of these economic data in relation to the Malaysian government s expenditure in some key social areas such as healthcare, education and manpower training are then studied. A scenario is created when the Malaysian Government engages in certifying the whole production of Malaysian palm oil. The monies needed to fund this purpose may come from the sales of crude petroleum. A cursory attempt is, therefore, made to see the possible outcome on carbon footprint of certified palm oil if this materializes. 20

3 3. Results & Discussions 3.1. Cost of certification The results in Table 1 show the cost of certification. Certification takes place every five years, namely in the 1 st, 6 th, 11 th, 16 th and 21 st year of an oil palm plantation. At the beginning or the first year of certification, the pre-certification activities cost the most and the grower has to incur a cost of RM per hectare. The expensive pre-certification activities are the assessments needed for high conservation value (HCV) areas and social impact assessment (SIA). Although environmental impact assessment or EIA is compulsory for larger areas only, these costs are not included in this study since this assessment is mandatory for all new plantings, regardless of whether they are undergoing RSPO certification or not. Corrective actions, such as rehabilitation of riparian reserves and building of proper pesticide storage sheds, etc., for example, can cost another RM per hectare 3. As this study is meant to be for typical oil palm growing areas, set aside rehabilitation and maintenance costs for these set aside areas such as HCV areas identified during the audit are also not included as they are not present in all areas. Such activities can cost another USD 0 to USD (RM0- RM56.59) per hectare. Certification costs in the 6 th, 11 th, 16 th and 21 st year will be lower. In this study, the costs of HCV assessment of RM12.94 per hectare and the cost of initial staffing amounting to RM12.59 per hectare are deducted from the total cost shown in Table 1 as these activities are not needed then. The cost of certification for each of these years is RM Table 1: RSPO certification costs Type of operation Membership Pre-certification RSPO (per ordinary member*) Range Cost (RM /ha) Mean Value for Year , EIA Not considered 0 0 Mean Value for Year 2014 HCV assessment SIA Certification Initial certification with staffing Training of staff & implementers Corrective actions Corrective actions TOTAL COST Source: a) WWF, FMO and CDC 3 b) Values for Year 2014 are calculated based on an estimated 5% increase over Year 2012 values except for RSPO membership which remains constant c) Figures are meant to be typical for most areas. As such, although some areas will need rehabilitation and maintenance for set aside areas, these are not included here d) Cost of RSPO ordinary membership is EU2,000 per year e) 1 Euro= RM

4 Table 2: RSPO post-certification costs for subsequent years Type of operation Mean Value for Year 2012 (RM) Mean Value for Year 2014 (RM) Membership Certification Annual surveillance cost, managing social conflicts and maintenance works RSPO (per ordinary member*) Maintain certification with staffing Maintain training of staff & implementers TOTAL COST Source: a) WWF, FMO and CDC 3 b) Cost in subsequent years is 45% lower than initial cost c) Cost for 2014 is assumed to be 5% higher than 2012 cost, except for RSPO membership which remains constant 3.2. Cost for second & subsequent years of certification In the second and subsequent years, which do not correspond to the certification years, there will be the necessity to keep and train staff to carry out post-certification functions. The total cost is RM35.44 per hectare per year as seen in Table 2. In addition, it is estimated that there will be a recurrent cost needed for annual surveillance audit, managing social conflicts and general maintenance. While this is very variable, a conservative value of RM per hectare per year is used. The total cost for second and subsequent years of certification is, thus, RM per hectare per year Total cost needed to certify the total production of palm oil in Malaysia Malaysia had 5.4 million hectares of oil palm in as seen in Table 3. This area consists of estates and smallholdings. While the cost of certification will be more expensive and certification will be more difficult to implement in smallholdings, this difference between smallholders and estates will not be taken into account in this study due to lack of available information. Assuming that the total 5.4 million hectares are certified according to RSPO, the cost in the first year, which will involve getting the areas ready for certification and to certify them is RM1.441 billion. The cost needed to re-certify all the oil palm areas in Malaysia every fifth year is RM1.304 million per year. The total sum of money needed to re-certify the areas during the life cycle of the oil palm is RM billion. It will cost another RM14.6 billion to maintain certification of the oil palm areas during the non-certification years over the 25 years period. Thus, the total certification cost is RM21.3 billion over this period. On an annual basis, the average total cost incurred by the Malaysian palm oil industry to get the total oil palm production in Malaysia certified and maintained under RSPO is RM billion Demand for RSPO certified oil RSPO certified palm oil is also referred to as CSPO or Certified Sustainable Palm Oil. Not all CSPO produced in the world is sold. In 2014, only 5.3 million tonnes from the total of 11.9 million tonnes produced were sold. The uptake of CSPO is, thus, only lukewarm with an uptake rate of 45% as shown in Table 4. 22

5 Table 3: Estimated costs needed for all Malaysian palm oil to be RSPO certified Row Parameter Area (ha) or Cost (RM) 1 Total oil palm area 5,392,235 ha 2 Total cost to certify 5.4m hectares in 1 st year RM billion 3 4 Total cost to certify 5.4m hectares in 6 th, 11 th, 16 th and 21 th year Total cost to maintain certification for all years except for the years mentioned in Rows (2) & (3) RM billion RM billion 5 Total cost for 25 years planting period RM billion 6 Average total cost per year RM billion Table 4: Demand for RSPO certified palm oil in 2014 Amount (tonnes) Amount CSPO produced 11,909,121 Amount CSPO sold 5,349,666 Percentage of production that is sold (%) Source: RSPO website Estimated sales of certified palm oil & certified palm kernel oil Based on an annual production of 19.7 million tonnes of palm oil in 2014, it is estimated that 8.8 million tonnes of CSPO will be sold based on the trend that 44.92% of all CSPO produced will be sold at a premium. This is shown in Table 5. Similarly, it is estimated that only 1.02 million tonnes of certified palm kernel oil will find a market Extra Revenue earned from sales There is a premium for CSPO amounting to USD 0.16 or RM 0.68 per tonne. The sales of CSPO result in a gain of RM 6.0 million as seen in Table 6. Similarly, there is a gain of RM 86.6 million from the sales of CSPKO. Although a lower volume of CSPKO is sold, a higher net revenue is obtained from its sales due to the higher premium accorded to CSPKO; this being USD or RM84.60 per tonne. The total extra revenue from sales as a result of certifying all palm oil production in Malaysia is, thus, RM 92.7million. Table 5: Estimated volume of sales of Malaysian certified palm oil and palm kernel oil Amount Produced Amount Sold (estimated) Palm oil (tonnes) 19,667,016* 8,834,424 Palm kernel oil (tonnes) 2,280,000* 1,024,176 *Source: MPOB 4 23

6 Table 6: Extra revenue obtained from selling Malaysian CSPO and CSPKO Amount sold (tonnes) Premium* Palm oil 8,834,424 USD 0.18 (RM0.68) 6,007,408 Extra revenue earned (RM) Palm kernel oil 1,024,176 USD (RM84.60) 86,645,290 TOTAL REVENUE 92,652,698 * as on 2/12/ Exchange rate: 1 USD= RM Net monetary loss due to RSPO certification The adoption of RSPO certification for Malaysian palm oil industry did not result in a monetary gain for it. On the contrary, it resulted in a loss amounting to RM 758 million annually as seen from the results in Table 7. The expenditure incurred to certify the whole Malaysian palm oil industry is RM 851 million annually while the gain from sales is only RM 93 million Loss of opportunity cost RM 851 million constitutes 4.2% of the Malaysian government s expenditure on health care as seen from the results in Table 8. It is equivalent to 1.6% of the amount spent on education and manpower training. The amount spent on these two important social duties can be increased further if funds become available. This could come from the monies intended for RSPO certification. Table 7: Annual net monetary loss to Malaysian palm oil industry and nation Value (RM per year) Expenditure to certify Malaysian palm oil industry 851 million Extra profit from sales of CSPO & CSPKO 93 million Net Loss 758 million RSPO certification cost Table 8: RSPO certification cost expressed as proportion of Malaysian Government's expenditure on some key social activities Certification cost as Amount spent (RM) percentage of cost of social activities (%) 851 million - Healthcare* Education and manpower training* 20,338 million RM51,816 million *Source: Ministry of Finance 7 24

7 RM851 million could also be used to assist the palm oil industry to achieve a higher level of sustainability faster. Life cycle assessment (LCA) studies have identified methane emission in the palm oil mills to be a dominant source of greenhouse gas (GHG) 8,9. Methane emission here constitutes 51% or more than half of the total GHG emissions in the production of palm oil. The Malaysian government has already implemented a programme to encourage all palm oil mills to trap methane at the palm oil mills. This has been spelled out in the government s Economic Transformation Programme (ETP) in 2010 where one of the national key economic activities involves biogas capture in palm oil mills 10. According to the timeline, it is targeted that all Malaysian palm oil mills will be capturing biogas by Currently, only less than 30% of the palm oil mills are doing it. As such, the extra RM851 million can hasten the process Higher carbon footprint for certified RSPO oil Subjecting palm oil to RSPO certification will incur extra use of energy and resources. The estate has to utilize resources and energy to prepare for certification, undergo certification audit and subsequently, to maintain the areas for repeated certification audits. Such work often requires much travel, often from headquarters, to the estates. In addition, the lack of local experts in certain fields e.g. High Conservation Value, may necessitate foreign experts to travel to Malaysia by air to carry out the job. Such extra expenditure on resources and energy has caused certified palm oil to incur a bigger carbon footprint than normal non-certified palm oil. In spite of the higher carbon footprint required to certify palm oil, there is no difference in functionality and performance of certified and non-certified palm oil. The only difference is that RSPO oil has been certified based on the relevant standard and is, thus, deemed to be sustainable while the non-certified oil is not. Another study will be carried out to calculate the extra carbon footprint borne by RSPO certified palm oil versus non-certified palm oil. In this study, a scenario is created where the Malaysian government wants to certify the complete palm oil production in the country. In order to obtain the RM851 million needed for the purpose annually, hypothesis is made that the monies needed, will be sourced from the sales of petroleum, which is the top revenue earner for the country. It is seen from the results in Table 9 that 5 million barrels of crude petroleum will have to be sold to raise RM851 million. The combustion of these 5 million barrels will emit 1.6 million tonnes of carbon dioxide. With a Table 9: Carbon footprint equivalent for certifying all of Malaysian palm oil using RSPO Row Value 1 Total annual cost of certification Number of barrels of crude petroleum oil needed to be sold to raise RM 851 million ** CO2 emissions per barrel crude petroleum oil when used as fuel*** CO2 emissions caused by burning all barrels of crude petroleum oil mentioned in Row (2) above as fuel RM 851 million (USD million) * 5,045,284 barrels 317 kg CO2 1.6 million tonnes CO2 5 Total certified CPO production for Malaysia in 2014**** 19,667,016 tonnes 6 Carbon footprint equivalent to certify total 1 tonne of CPO production for Malaysia 81.3 kg CO2 *1USD=RM4.22 **crude petroleum price is USD39.97 per barrel 11 *** CO 2 emissions per barrel of crude oil is 317 kg 12 **** Source: MPOB 4 25

8 production of 19 million tonnes of crude palm oil in 2014, the results in Table 9 also show that every tonne of certified palm oil has a higher carbon footprint amounting to 81.4 kg CO2 more than non-certified palm oil. 4. Conclusions More and more oil palm growers are opting to undergo RSPO and /or ISCC certification as a means to demonstrate that the production is done sustainably. These two certification systems command nearly monopolistic positions due to the lack of certification systems in the market. The results from this study show that there is no economic advantage in pursuing RSPO certification. This is due to the lukewarm demand and poor sales of CSPO in the market. In spite of the demand of end users for CSPO and the ability of the growers to produce it, the uptake of CSPO is still very low. In 2014, only 45% of the CSPO produced was sold. Due to the low demand, the premium of CSPO is also not high, with a value of RM 0.76 per tonne. The study looked at a scenario whereby the total production of 19.6 million tonnes of crude palm oil produced in Malaysia in is to be RSPO certified. It is found that it will cost RM 851 million annually to certify, maintain and ensure that the production is CSPO compliant. It is also found that the premium obtained by selling the CSPO and CSPKO amounting to RM 93 million cannot cover the cost of RSPO certification. In fact, the Malaysian palm oil industry has to incur a huge loss of RM 761 million in the process. Thus, it is seen that the act of subjecting the total production of Malaysian palm oil production to RSPO certification is not a good economic proposition. For the Malaysian economy, there is a loss of opportunity cost for the amount of RM831 million required annually in the certification of Malaysian palm oil. If RSPO certification cannot give an economic advantage for Malaysian palm oil, then this amount of money can be diverted to more useful purposes, which have social benefits. The amount of money spent on certification is equivalent to 4 % of the amount spent by the Malaysian government on healthcare for the whole nation; the latter value being only RM 20,338 million in This amount of money spent on certification is also nearly 2% of the value spent by the Malaysian government on education and training costing RM51,816 million. Alternatively, the amount of money that can be used for certification will be better utilized by the Malaysian palm oil industry to reduce its carbon footprint. LCA studies on Malaysian palm oil show that the methane emitted at palm oil mills contribute majorly to its greenhouse gas (GHG), accounting for more than half of the total GHG emission. If the money used in certification can be used to address this issue, the Malaysian palm oil industry can be made even greener. Besides, it is pointed out that the many activities needed for certification require the expenditure of energy and travel. Thus, certified palm oil has a higher carbon footprint than non-certified palm oil. The additional cost needed for certification must be sourced from somewhere if the Malaysian government takes the initiative to certify the entire palm oil production in Malaysia. In this study, it is hypothesized, that the money could come from sales of crude petroleum since Malaysia derives much revenue from petroleum. The carbon footprint to certify all the CPO produced in Malaysia is 1.6 million tonnes CO2. The carbon footprint of 1 tonne of certified palm oil is 81.3 kg CO2 more than non-certified palm oil. Thus, consumers of certified palm oil will, of course, have higher carbon footprints. References 1. Indonesian Palm Oil Commission (IPOC) (2011). The Introduction of ISPO,pp Department of Standards Malaysia (2013). Malaysian Sustainable Palm Oil (MSPO). Part 1: General Principles, pp9 3. WWF, FMO and CDC (2012). Profitability and sustainability in palm oil production,pp Malaysian Palm Oil Board (MPOB) (2015). Malaysian Oil Palm Statistics 2014, pp GreenPalm website. 6. RSPO website. 7. Ministry of Finance Malaysia (2013). Laporan Ekonomi 2014/15,pp van Zutphen, H. (2008) Comparative LCA analysis of different edible oils and fats, 26

9 International Palm Oil Sustainability Conf, Kota Kinabalu, Sabah,p Vijaya,S., Choo Y.M., Halimah M., Zulkifli H., Tan Y.A., Puah C.W. (2010) Life cycle assessment of the production of crude palm oil (Part 3). Jour. of Palm Oil Research, 22, Malaysian Palm Oil Board (MPOB) (2011). NKEA Palm Oil: The Way Forward.pp Crude oil and commodity price Carbon dioxide emissions per barrel of crude. 27