The World Trade Organization (WTO) upheld the European Union's decision to introduce rules against palm oil as a biofuel on the grounds of emissions risk. However, the WTO stated that the European Union had not implemented them properly, thereby upholding the complaints of the EU's trading partner Malaysia.
In its first ruling on trade matters relating to deforestation and carbon emissions, the WTO found that the European Union had erred in its decision not to accept palm oil as a renewable energy source. The WTO initially agreed that the European Union had been justified in drawing up rules on crop-based fuels such as palm oil in the context of the deforestation and emissions risks caused by indirect land use change (ILUC). Later, however, the WTO issued a report stating that the EU had designed and implemented these rules in a way that amounted to "arbitrary or unjustifiable discrimination" against its trading partner Malaysia.
"There are shortcomings in the design and implementation of the indirect land use change (ILUC) risk criteria," the WTO panel stated in the 348-page report published in early March.
The panel ruled on several complaints that Malaysia had brought against the European Union, France and Lithuania since 2021. Malaysia, the world's second-largest palm oil producer after Indonesia, argued that the EU had breached international trade rules. The European Union had adopted a decision on the restrictions and phase-out intended to limit the use of palm oil as a biofuel under the second version of the EU Renewable Energy Directive (RED II). Indonesia had filed a similar claim against the EU in 2019, but the day before the outcome of the Malaysian case was announced, it asked for the proceedings to be suspended.
One of Malaysia's main objections was that the EU uses a 10-year cut-off to determine which crops can be certified as low ILUC risk. While such a period is reasonable for crops that are harvested and replanted (rapeseed or sunflowers, for example), it would rule out any possibility of certifying palm oil as a low-risk crop. Oil palms only begin to bear fruit at 7 or 8 years of age, but typically live for 25 to 30 years, said international trade policy expert Khalid Manaf Hegarty (Khalid Manaf Hegarty), director of the Australia-based consultancy Oxley Hegarty.
"When the expert panel's report was being considered, the WTO asked the European Union's representatives why it had set such a period. The EU had no answer. The period was set arbitrarily," Hegarty told Eco-Business. The Oxley Hegarty director noted that if the EU genuinely wants to reduce emissions using a life-cycle impact assessment, it could find ways to include on the list those crops that may offer better emissions reduction potential over 25 years compared with annual crops.
The WTO panel criticised the reference-period data that the EU used in assessing the ILUC risk of palm oil. The risk assessment was based on data compiled between 2008 and 2016, which means that the EU's high ILUC risk restrictions and phase-out were based on data that may already have been out of date.
Following the ruling, the EU's Directorate-General for Trade announced that Europe "intends to take the necessary steps to adapt the delegated act" under RED II. That act sets out the criteria used to determine which food and feed crop-based biofuels are high ILUC risk.
Malaysia's Minister of Plantation and Commodities, Johari bin Abdul Ghani, stressed that his ministry would "closely monitor the changes the EU makes to the rules in order to bring them into line with the WTO's findings, and, if necessary, compliance proceedings will be initiated". "The WTO ruling proves that Malaysia's claims of discrimination are well founded. It vindicates Malaysia's efforts to secure justice for our biodiesel trading companies and their employees," Johari bin Abdul Ghani said in a press statement.
One of the three members of the WTO panel, who issued a dissenting opinion, went further in vindicating Malaysia's arguments, attaching greater weight than the other panel members to the elements of EU protectionism in the setting of the trade rules. It appears that the EU "singled out" palm oil when it came to curbing ILUC-related emissions. Other crop-based biofuel feedstocks, such as soybeans, pose similar emissions risks, the panel member noted.
The backlash surrounding the EU Deforestation Regulation
The WTO ruling was handed down against a background of wider resistance to the EU over rules relating to deforestation. In mid-March the Financial Times reported that the EU might delay its classification system for trading partners that would fall under the terms of the Deforestation Regulation. The report quoted a European official who spoke of the many complaints already received from partners.
Indonesia and Malaysia are among the countries that have long accused the European Union of discrimination in relation to palm oil and other commodities under the European Deforestation Regulation (EUDR). Indonesia argued before the WTO that over the past decade it has taken effective measures to prevent deforestation and mitigate climate change. Reports from last year indicate that the country has achieved a record reduction in deforestation.
"In its WTO case against the EU, Indonesia sets out clear results and policy changes in the field of sustainable development; we hear that it has a team of specialists that has brought new, substantial data to the discussion," said Khor Yu Leng (Khor Yu Leng), director of the market research and intelligence consultancy Segi Enam Advisors. The firm's work covers the palm oil sector.
Khor Yu Leng will continue to follow further developments in Indonesia's case against the EU at the WTO, after the case brought by Malaysia concluded without a "clear decision on market access".
Palm oil is currently the most popular and the preferred choice for biodiesel blends in Malaysia and Indonesia. Both countries require biofuel to be blended with fossil feedstocks. Indonesia currently requires biofuel to make up 35% of the diesel blend (B35) and aims to increase this to 40%, or B40, by 2030. Malaysia requires only a 10% palm oil blend (B10) in the transport sector.
The International Civil Aviation Organization (ICAO) has assessed the carbon intensity of various biofuel feedstocks, taking into account the indirect land use change (ILUC) risk of palm oil and other agricultural crops.
"Because biofuel is currently more expensive than fossil fuel, official mandates are needed to drive demand for this energy source," explained Ji Yang Lum (Ji Yang Lum), lead biofuels researcher at the financial information company S&P Global.
"Over the past five years we have seen this direction develop," Lum told an industry conference in Kuala Lumpur held in mid-March. "The EU, for example, has made it a priority to meet its decarbonisation targets without affecting the food market. That explains why Europe has chosen to phase out the use of food and feed crops as feedstocks," she noted.
As for palm oil-based biofuels, S&P Global sees limited growth in the road transport fuel sector, given the current biodiesel mandates in Malaysia and Indonesia. Industry players are therefore exploring the use of palm oil in sustainable aviation fuel (SAF), the researcher Lum said. This is currently permitted by the International Civil Aviation Organization (ICAO) under its global carbon offsetting scheme Corsia.
The carbon emissions of different biofuel feedstocks will also become increasingly important. "Carbon intensity matters when you look at biofuels. We are seeing the carbon intensity of the feedstock being taken into account, not just the use of biofuel," the researcher stressed.
In ICAO's life-cycle assessment of various biofuel feedstocks, palm oil currently has high ILUC-related emissions, but Lum believes palm oil has an opportunity to "fill the gap" that currently exists in sustainable aviation fuel, because the supply of lower-intensity feedstocks is limited. When it comes to deforestation, biodiesel "mandates" will matter less than government policy on land and forest management, the Oxley Hegarty director stressed.
"If your land use planning and land management laws are good enough, it will make no difference whether a biofuel policy is in place or not," said the head of Oxley Hegarty.