The Palm Oil Dilemma

What connects a biscuit in London, a truck in Jakarta, and a farmer in Borneo? The answer is palm oil, the hidden commodity at the heart of a new East–West confrontation. It is everywhere in our daily lives, yet its story stretches far beyond supermarket shelves, into the fields of Southeast Asia and the halls of global trade negotiations.

Indonesia and Malaysia together produce almost 85% of the world’s palm oil. Indonesia alone yields around 46 million metric tons a year, Malaysia another 19 million. For millions of small farmers across Sumatra and Borneo, oil palms are lifelines that fund education, healthcare, and housing. But this dominance has also placed Southeast Asia in the crosshairs of Western regulators, particularly in Europe, where climate policy is reshaping global commodity markets.

That dominance is colliding with a Western push to police deforestation and reshape “sustainable” consumption. The EU’s Deforestation Regulation (EUDR) bans the sale of commodities, including palm oil, linked to recent deforestation. It entered into force in June 2023 and, after industry pushback, Brussels streamlined compliance: from April 2025, firms can file a single annual statement instead of shipment-by-shipment checks. The direction is clear: tighter traceability, geolocation requirements, and risk ratings for supplier countries. For Southeast Asian producers, this is more than red tape, it is leverage that can tilt market access and margins.

Europe’s climate rulebook also targets palm biodiesel. Under RED II, the EU is phasing out palm-based biofuels by 2030 unless they qualify as “low ILUC-risk,” a designation narrow and hard to meet. In January 2025, a WTO panel upheld the EU’s climate approach in a dispute brought by Indonesia, signalling that Brussels’ restrictions can survive trade scrutiny if framed around environmental goals. For Jakarta and Kuala Lumpur, it was a wake-up call: litigation won’t easily roll back Europe’s climate line.

Southeast Asia has responded with its own strategy. Indonesia doubled down on domestic biofuel mandates, using a levy-funded scheme to absorb supply and stabilise incomes. The country kept a B35 blend in 2024, tested B40, and floated B50 to cut fuel imports and support prices. Analysts estimate B40 alone could push biodiesel palm use toward 14 million tons, compared with 11 million under B35. These mandates turn palm oil into both an energy-security tool and a bargaining chip in trade rows.

On the Western side, politics is not monolithic. The EU is tightening sustainability screens; the U.S. leans more on corporate pledges than federal bans, and India, the world’s top buyer, shifts pragmatically with price. When palm oil trades at a premium, Indian refiners switch to alternatives. In August 2025, industry data showed record soyoil imports and palm shipments sliding to a five-year low as buyers chased cheaper substitutes. Southeast Asia’s market power meets the reality of elastic demand: if prices rise or compliance costs bite, buyers pivot.

Sustainability certification sits in the middle. The Roundtable on Sustainable Palm Oil (RSPO) reported 9.8 million tons of certified palm oil consumed in 2023, with Europe and North America together accounting for nearly 47%. In those markets, CSPO penetration is approaching 90%.

These figures show that, where consumers and regulators demand it, and where companies can pass on costs sustainable palm oil scales. But much of Asia’s fast-growing demand remains price-sensitive and less certification-intensive. For farmers in Sumatra or Sabah, “certification” feels distant compared to the immediate need to sell crops and repay loans.

The political economy is sharper still in trade defense. Brussels has deployed anti-subsidy measures and sustainability screens. Indonesia and Malaysia have answered with WTO litigation, diplomatic coalitions, and diversification to China, India, and the Middle East. The EU’s mooted risk ratings under EUDR “high,” “standard,” or “low” — could become a powerful sorting mechanism, rewarding jurisdictions that digitise land titles while penalising laggards. For producer nations, the risk is reputational contagion: even compliant exporters can suffer if their country is tagged “high risk.”

On the ground, the impacts are sobering. Smallholders, who farm much of Southeast Asia’s oil palm area, face the steepest hurdles in mapping plots, proving legality, and funding audits. Unless Western buyers co-finance traceability and yield upgrades, EUDR may unintentionally concentrate market power in larger estates.

Supply security is not guaranteed either. If Indonesia accelerates B40/B50 and Europe squeezes palm biodiesel, edible oil flows will tighten; substitution into soyoil and sunflower is possible but constrained by harvests, logistics, and their own sustainability debates.

Meanwhile, price volatility could rise as energy policy, climate regulation, and geopolitics interact in real time. For households, that means fluctuating grocery bills; for farmers, unpredictable incomes.

There is, however, a pragmatic path forward. For Southeast Asia, lifting smallholder yields through replanting, enforcing no-burn rules, and expanding certification could defend market access while boosting incomes. For the EU, locking in streamlined reporting and offering technical aid for geolocation can reduce friction without diluting climate goals. For major buyers like India, publishing clear import protocols that recognise credible sustainability standards would lower uncertainty and bargaining costs.

Palm oil has become a test case for how climate ambition, trade law, and development priorities collide. The quiet power struggle is less about whether the world uses palm oil than how it is produced, certified, and allocated between food and fuel.

In that sense, palm oil is no longer just an ingredient, it is a mirror reflecting the world’s uneasy trade-off between growth, climate, and fairness.