In landmark deforestation case, WTO finds EU discriminated against palm oil in setting biofuel rules

In its first ruling on trade matters related to deforestation and carbon emissions, the World Trade Organisation found fault with the way the European Union decided against accepting palm oil as a source of renewable energy.

Although the international trade governance body agreed that it was valid for the EU to establish rules against crop-based fuels like palm oil due to the deforestation and emissions risks of indirect land use change (ILUC), it argued that the bloc had developed and implemented these rules in a way that constituted “arbitrary or unjustifiable discrimination” against trading partner Malaysia.

Deficiencies in the Design and Implementation of Low ILUC-Risk Criteria

The WTO panel ruled on multiple complaints brought against the EU, France, and Lithuania by Malaysia beginning in 2021. Malaysia, the world’s second-largest producer of palm oil after Indonesia, argued that the EU had violated international trade rules when it decided on a cap and phase-out designed to limit the use of palm oil as a biofuel under the bloc’s second version of its Renewable Energy Directive (RED II). Indonesia had filed a similar case against the EU in 2019 but asked for the proceedings to be suspended last Monday, a day before the result of Malaysia’s case was announced.

Among Malaysia’s key contentions was the EU’s use of a 10-year limit to determine which crops can be certified as having low ILUC-risk. While the timeframe makes sense for crops that are harvested and replanted such as rapeseed or sunflower seed oil, it would rule out the certification of palm oil as low-risk as oil palm trees only begin to fruit at 7 or 8 years old but typically have a 25 to 30-year lifespan, said Khalid Manaf Hegarty, an international trade policy expert and director of Australia-based consultancy Oxley Hegarty.

“Going through the panel report, the WTO actually asked the EU why they [set that time frame], but the EU didn’t have an answer for that. It was arbitrary,” Hegarty told Eco-Business. If the EU was being genuine about reducing emissions via their life cycle impact assessment, he said, they could find ways to consider crops that might have better emissions reduction capabilities over a 25-year period compared to annual crops.

The WTO panel also criticized the review period of the data used by the EU in assessing the ILUC risk of palm oil, which was based on data gathered between 2008 and 2016. This meant that the EU’s high ILUC-risk cap and phase-out relied on potentially outdated data.

EU to Adjust Renewable Energy Directive

Following the ruling, the EU’s Directorate-General for Trade said that the bloc “intends to take the necessary steps to adjust the Delegated Act” under RED II, which established the criteria used to determine which food and feed crop-based biofuels have high ILUC-risk.

Malaysia’s minister of plantation and commodities Johari bin Abdul Ghani responded saying that his ministry would “closely monitor the EU’s changes to its regulations to bring it in line with the WTO’s findings, and pursue compliance proceedings if necessary.

“This ruling from the WTO demonstrates that Malaysia’s claims of discrimination are indeed justified. This vindicates Malaysia’s pursuit of justice for our biodiesel traders, companies, and employees,” Johari said in a press statement.

Deforestation-related Backlash

The WTO’s ruling comes amid wider backlash against the EU for deforestation-related rules. On Friday, the Financial Times reported that the EU could delay its classification system for trading partners at risk of deforestation. The report cited an EU official who said the bloc had received a lot of complaints from partners.

Indonesia and Malaysia are among the countries which have long accused the EU of discrimination against palm oil and other commodities under the European Deforestation Regulation (EUDR). Indonesia argued to the WTO that it has taken effective action to prevent deforestation and mitigate climate change over the past decade. Last year, reports showed that the country has achieved record declines in deforestation rates.

“Indonesia [in its WTO case against the EU] outlines clear outcomes and policy shifts on sustainable development, and we hear it has (sic) a specialist team that brought substantial new data to its discussion,” said Khor Yu Leng, director at Segi Enam Advisors, a market research and intelligence consultancy whose coverage includes the palm oil industry.

Khor said she would be keeping an eye on subsequent developments in Indonesia’s case against the EU at the WTO after the case brought by Malaysia concluded with “no clear decision on market access.”

Palm Oil as a Biofuel Source

Palm oil is currently the first choice of biodiesel blends in Malaysia and Indonesia, both of which have mandates that require the use of a biofuel blend with fossil fuel sources. Indonesia currently requires a blend of 35 per cent biofuels in its diesel mix (B35) and is aiming to raise this to 40 per cent, or B40 by 2030. Meanwhile, Malaysia only requires a 10 per cent blend of palm oil for its transportation sector (B10).

Because biofuels are currently more expensive than fossil fuels, official mandates are necessary to drive demand in this energy source, said Ji Yang Lum, senior principal research analyst for biofuels at S&P Global, a financial information firm.

“What we’ve seen over the past five years are evolutions to these mandates,” he said at an industry conference in Kuala Lumpur last Tuesday. The EU, for example, has prioritized meeting decarbonization targets without impacting the food market, which explains why they’ve chosen to phase out food and feed crops as feedstocks, he added.

For palm oil-based biofuels, S&P Global sees limited growth in the road transportation fuel sector, given the current limited mandates for biodiesel in Malaysia and Indonesia. Industry players are therefore exploring the use of palm oil in sustainable aviation fuel (SAF), said Lum, which is currently allowed by the International Civil Aviation Organisation (ICAO) under its global carbon offsetting program Corsia.

Increasingly, the carbon footprint of different biofuel feedstocks will also matter. “Carbon intensity matters when looking at biofuels (because) we are seeing a push towards counting the carbon intensity of your feedstocks rather than just using a biofuel,” said Lum.

The ICAO’s life cycle assessment of different biofuel feedstocks currently sees palm oil as having high ILUC-related emissions (see graph) but Lum believes there is room for palm oil to “bridge the gap” that currently exists in the SAF due to the limited supply of lower-intensity feedstocks.

With respect to deforestation, however, biodiesel mandates will matter less than government policies on land and forest management, said Hegarty.

“If your land use planning and land management laws are good enough, it isn’t going to matter

SDGs, Targets, and Indicators

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 7: Affordable and Clean Energy
• SDG 12: Responsible Consumption and Production
• SDG 13: Climate Action
• SDG 15: Life on Land
• SDG 17: Partnerships for the Goals

The article discusses issues related to renewable energy, deforestation, emissions, and trade rules, which are connected to the above-mentioned SDGs.

2. What specific targets under those SDGs can be identified based on the article’s content?

• Target 7.2: Increase substantially the share of renewable energy in the global energy mix.
• Target 12.2: By 2030, achieve the sustainable management and efficient use of natural resources.
• Target 13.2: Integrate climate change measures into national policies, strategies, and planning.
• Target 15.2: Promote the implementation of sustainable management of all types of forests.
• Target 17.14: Enhance policy coherence for sustainable development.

These targets are relevant to the issues discussed in the article, such as promoting renewable energy, sustainable resource management, climate change mitigation, forest conservation, and international cooperation.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• Indicator for Target 7.2: Share of renewable energy in the total energy consumption.
• Indicator for Target 12.2: Material footprint, domestic material consumption, and ecological footprint.
• Indicator for Target 13.2: Number of countries with integrated climate change plans.
• Indicator for Target 15.2: Forest area as a proportion of total land area.
• Indicator for Target 17.14: Existence of mechanisms to enhance policy coherence of sustainable development.

These indicators can be used to measure progress towards the identified targets by assessing the share of renewable energy, resource consumption, climate change planning, forest area, and policy coherence.

Table: SDGs, Targets, and Indicators

These findings from analyzing the article demonstrate the relevance of specific SDGs, targets, and indicators to the issues discussed.

Behold! This splendid article springs forth from the wellspring of knowledge, shaped by a wondrous proprietary AI technology that delved into a vast ocean of data, illuminating the path towards the Sustainable Development Goals. Remember that all rights are reserved by SDG Investors LLC, empowering us to champion progress together.

Source: eco-business.com

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