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Steven Gust, Ilmari Lastikka 9 March 2010 **Neste Oil Comments to ILUC modeling assumptions** Weappreciate this opportunity to respond to the assumptions concerning the use of palm oil as a feedstock for biodiesel or Renewable Diesel production in the simulation of an ILUC value. As was pointed our in the simulation, this can be considered to be a DRAFT. ILUC gives a “snapshot” of the future taking into consideration a number of key assumptions. Wefeel that the following notes and comments could and should be used when simulating palm oil ILUC. Unfo rtunately we did not have sufficient time to complete our list of comments and they are not yet fully referenced. Wehope we could discuss these with you in person as the DRAFT version is modified. **1. Size and Effect of the Shock**   Expanding production of palm oil by 18.5 million tonnes by 2020 is not reasonable considering the plantation preparation time required, the number of seedlings required and the fact that palm oil does not reach full production in the first 2 - 3 years. On what basis was an expansion of 18.5 M t CPO presumed?  This very large increase of demand of 18.5 Mt would put strong upward pressure on palm oil prices. W hat might be the magnitude of this increase? There is no indication of this in the report. Another controlling factor is crude oil prices. Wh at is the assumed crude oil price in 2020? There is good correlation between crude oil prices and vegetable oil commodity prices. These 2 factors taken together could increase palm oil prices by 30 to 70% over historical trends. This would reduce demand in traditional markets. This demand reduction in traditional markets would free up CPO for energy production and thus reduce the volume required to be supplied by new plantations. Depending on the specific market addressed and it’s particular consu mption elasticity , we feel that 10 - 20 % of the palm oil demand in traditional markets could be reduced (4 - 8 million tonnes per year). This could reduce the need for land expansion by 30 -40% from your estimate. **2. Effect of Increased Volumes of Side Products**   As the volume of CPO increases, so does the volume of the side products. This has been pointed out in your report. The expanding volume of palm kernel oil (PKO) side products will therefore decrease the land required to grow the substitute crop. In your a nalysis you have reduced the need for coconut oil by 3.7 million tonnes thus saving 2 M ha. This land is now availble for other crops which would reduce the need to clear land additional land. How much of a carbon saving will this bring? This should be cre dited directly to palm oil expansion. W e may assume that this 2 M ha will save a combination of natural forest from being converted to cropland (1.5 Mha) and savannah (0.5 M ha). How should this credit be included in your analysis?  A similar analysis mu st be done for the palm kernel expeller. This animal feed will reduce the amount of purpose grown animal feed. W hat feed would be replaced by the palm kernel expeller will depend on the relative market prices. The analyses by E4Tech in their report is one example or scenario. For example the co -firing example although having no land impact could have a large CO2 saving if this expeller replaced a fossil fuel such as coal. W ith the new emission trading schemes in Europe this becomes a strong possibility. **3. FFB**  **Yields & CPO Extraction**   The impact of yield improvement in the presented model is considered to be minor. The FFB yield used in the model is 17 t FFB/ha in Indonesia and 21.3 in Malaysia rising to 22.4 in 2020. It is well known in the palm plantatio n industry that yields are dependent on using the best strains of palm, optimizing the fertilization rates (both organic from EFB and inorganic fertilizers) together with climatic influences. Oil extraction rates at mills also vary from 19% to2 ( 3 )

Steven Gust, Ilmari Lastikka 9 March 2010
21.3%. If we assume that the average FFB t / ha is 20 and an oil extraction average of 20% then there would be 4 t CPO/ha / a. Wedid not find the extraction rate used in your report. Wh at value was used and how was it chosen? What percentage of the expanded producti on will use the extraction rated of 20% and what is the lower rate of extraction? At this hectare yield the land required would be 4.6 Mha which is significantly less than the 5.9 M ha in the report. There is a large body of literature available that the y ields could increase to as much as 6 t/ha. This would then significantly reduce the land requirements further. **Taken together these would reduce the land required to < 4 M ha.** 

 Another determining factor when considering yields is the size of the estate an d the support given by governmental institutions to small land owners. As prices rise, there is a high probability that small holders will better manage estates and increase yields and to increase for example fertilizer applications. Thus the conclusion th at there are currently lower yields in Indonesia and Thailand than in Malaysia due to the high relative share of smallholders would no longer play a dominating role. Many of these smaller estates which have been started up in the late 1980s and early 1990 s are now maturing and the new plantations will have significantly better yields. **4. Land use change period 2001**  **- 2007**  **and government policies**

 It is the common practise to use historical trends for land use change patterns. But other factors will also effe ct future land use patterns such as local legislation and international treaties and regulation. In the study the trend period of 2001 - 2007 was used as the basis for future land use changes. Here it was assumed that there would be no influence of current or upcoming legislation. In both of the main palm oil producing countries of Indonesia and Ma laysia there has been recent legislative changes to prevent land use expansion to forest In addition, the international Round Table on Sustainable Palm oil has onl y recently started operating in the industry and this will have a large impact on land use change and palm oil production in the future. Wetherefore believe that the use of historical trends must be combined with existing and upcoming legislation.

 **5. Lan**  **d use change ty pe**  **and government policies**

 The land use change type has been taken from satellite images. These images cannot reveal whether the land being converted in Indonesia or Malaysia is primary forest or secondary logged over forest. These images could also mistake idle land (with large leaf coverage bushes) with forest. A more accurate description of land types and correlation with satellite images should be performed.

 There was no mention in the report concerning the use of degraded lands in Sout heas Asia for establishing plantations. There are many unutilized degraded lands, with estimations varying from 1 million to 8 million hectares. Wh y were these degraded lands not considered ?

 In the recent Copenhagen Climate conference, the Indonesian government announced its plan to reduce emissions to 26% by 2020 by avoidance of deforestation and implementation of REDD ( http://www.thejakartag lobe.com/national/climate - conference - a -winner-for- indonesia official/349077 and http://www.nrdc.org/international/copenhagenaccords/default.asp ). This means using more degrad ed lands for palm oil expansions which would in fact sequester carbon.3 ( 3 )

Steven Gust, Ilmari Lastikka 9 March 2010

**6. Land use change driver** 

 The modelling assumption is that the production of palm oil is the driving force for land use change from forest to palm oil production. Many studies have show n that the main driver is poverty. It is known fact that the logging industry (legal and illegal) is major converter of forests in Indonesia and Malaysia. Thus the carbon stock removed from these forests if put into lumber should not be considered as contr ibuting to CO2 emissions. W hat portion of the carbon stock removed will be converted to lumber? It should also be taken into consideration that the clearing of the forests is not the primary driver. Forests are cleared for income. The question must be rais ed as to what portion of forests have been converted by logging industry before palm oil production was initiated. This would also mean that some of the palm oil expansion has occurred on degraded (already logged forest) land where the carbon intensity of land use change is positive for palm oil planting. **7. Elasticity** 

**of the vegetable oil market**

 The model does not include elasticity of the vegetable oil market. Vegetable oil markets are global where different oils substitute each other. Therefore the ILUC modelling should take this into consideration. **8. Palm oil plantation C sequestation** 

 In the model it was assumed that after 25 years the palm trees would be cut down and burned before planting new trees (which would cause GHG emissions from burning). Thi s practice is illegal in Malaysia and Indonesia and is also against the rules of RSPO. The standard practice in the industry is after the tree have reached 25 - 30 years is to cut them down and crush them with tractor (on the spot and bury them under ground fo r fertilizing the soil. Palm oil trees could also on the future be used for energy to repalce for example coal. Palm oil trees could also be used to produce lumber products. Based on this analyses the palm oil plantation should be credited with carbon se questation of 60 t/ha. In conclusion we would like to repeat that the outcome of the study would have very different results when taking more carefully into consideration the actual developments in Southeast Asia. Welook forward to meeting with you a nd your staff in the near future to discuss these points Best Regards Steven Gust