Phasing-out palm oil biodiesel is compatible with WTO due to its climate and environmental impacts

In the context of the EU recast of the Renewable Energy Directive (REDII), the European co-legislators asked the Commission to develop a methodology to identify high ILUC risk biofuels with a significant expansion into high-carbon stock areas. These high ILUC risk biofuels would be frozen and then fully phased-out of the EU renewable targets by the year 2030. Some parties have raised questions regarding the compatibility of these measures with international trade rules.

Attempts by the EU to phase-out the support to unsustainable biofuel feedstocks such as palm oil or soy has been opposed using WTO retaliation as a threat. T&E has commissioned a law firm to assess whether a phase-out of the RED targets of specific feedstocks can be justified under WTO, based on the environmental and climate impacts of such crops. The law firm based the analysis on the recent report by Cerulogy “Identifying high and low ILUC-risk biofuels under the recast Renewable Energy Directive, which identified the emissions and deforestation links of biofuel feedstocks which are forest risks commodities, such as palm and soy.

The report concludes that, in general lines, the measure of phasing-out palm oil as biofuel feedstock and therefore not allowing it to be accounted for renewable targets is compatible with WTO rules on the basis of environmental protection and the fact that the measure is not trade-restrictive. The measure has been deemed justifiable under TBT (technical barriers to trade - aiming at ensure equal treatment of like products) and GATT (General Agreement on Tariffs and Trade - which ensures secure trade without discrimination but also ensures environmental protection).

Other main takeaways are:

  • The report concludes that the evidence provided sets a strong connection between palm production and CO2 emissions and expansion into high-carbon stock areas, which justifies a measure aimed at environmental protection.

  • The measure in itself is not trade restrictive - it doesn’t prohibit imports, exports, sales or use - although it will affect demand of the product as it won’t count towards the EU renewable targets. Regulations leading to a decrease in demand are not considered trade restrictive under WTO.

  • GATT art XX. is in place to justify environmental protection of the measure. This article relates to the necessity of protecting animal and plant life and to the conservation of exhaustible natural products.

  • For a measure to be compatible with WTO rules, it has to: not be an arbitrary or unjustifiable discrimination and not constitute a disguised restriction on international trade. In the present case, there are no indications of any.

  • The measure will apply irrespectively of the country of origin. In the case of palm oil, there are several producing countries. There is  no differentiated treatment based on the country where the palm oil is produced, there is no discrimination under international trade.