February, 2020 in Issue 1 - 2020, Markets
In December 2018, the European Union’s (EU) updated Renewable Energy Directive (REDII) entered into force. It set higher renewable energy targets for EU Member States and claims to “ensure robust [greenhouse gas (GHG)] emission savings and minimize unintended environmental impacts”.1 One element of REDII is the cap it places on the use of biofuels in the transport sector and, relatedly, its targeting of emissions from so-called indirect land-use change (or ILUC).2
Biofuels are renewable fuels made from plant or animal material. They can be used to replace non-renewable fuels. For example, biodiesel (a biofuel made mostly from renewable vegetable oils) can replace diesel (a fuel made from the non-renewable fossil fuel petroleum). Although biofuels release GHG, they release less than fossil fuels.
ILUC concerns a potential scenario where biofuel production indirectly releases significant GHG. The scenario has three steps. The first is that demand for biofuel leads to existing agricultural land (producing food and feed crops) being converted to biofuel production. The second is that supply of food and feed crops decreases as a result but the demand for food and feed crops remains the same. The third is that to meet this unmet demand for food and feed crops, the use of other land is changed, in particular, land with high carbon stock, such as forests or wetlands, is changed into agricultural land (by clearing or burning) releasing a large amount of GHG.3
The EU has expressed its concern that ILUC-related emissions could negate some or all of the GHG savings through biofuel use.4 REDII limits EU Members’ ability to factor so-called “high ILUC-risk” fuels into their calculations of renewable energy use in the transport sector to 2019 levels, and gradually reducing that share to 0% by 2030.5 The relevant effect is to set a renewable energy target, but to limit the biofuel consumption in the transport sector that an EU Member State can take into account when assessing whether it achieves that target. The EU has also implemented regulations setting out its methodology for determining whether a biofuel is associated with a high risk of ILUC.6
In a related press release, the EU notes that the data it relied on “show that palm oil has been associated with the highest level of deforestation” as “over the period 2008-2015, 45% of the expansion of palm oil took place in high carbon stock areas”, which is “is not even by far comparable to other feedstock”.7
Indonesia and Malaysia — the top two producers of palm oil — have raised concerns in relation to REDII in the Committee on Technical Barriers to Trade at the WTO. On 13 March 2019, Malaysia stated that this will result in “arbitrary and unjustifiable discrimination, in favour of other oil crops”, that it is “a disguised restriction on international trading of palm oil and its products”, and that the basis for determining high ILUC risk “lack[s] scientific data and reliable information”.8 Indonesia stated to the same Committee on 1 July 2019 that REDII will discriminate against biodiesels generated from palm oil vis-à-vis other biodiesel products produced within EU members countries, and will create unnecessary barriers to trade.9
The EU has stated that REDII complies with its WTO obligations, as it does not single out specific biofuels, and does not limit the market access of imported biofuels to the EU.10
Indonesia11 and Malaysia12 were both expected to initiate WTO dispute settlement proceedings in November, in order for a WTO dispute settlement panel to assess REDII for its consistency with the EU’s WTO obligations. At the time of writing, no dispute has been initiated by either country, but in light of the EU’s recent initiation of disputes against Indonesia in relation to alleged illegal subsidies for raw materials,13 it is reasonable to expect that the initiation of a dispute against the EU is imminent.
While the EU is right that the text of REDII and its accompanying regulations make no mention of palm oil, or of Indonesia and/or Malaysia (or indeed of any other country), WTO law nonetheless precludes WTO Members from discriminating “de facto” against foreign products, or against products from one or more countries. To the extent that palm oil-derived biofuels are in a competitive relationship with other food crop-derived fuels — such as the sugar and cereal crops that feed bioethanol production, or the other vegetable oils that are used in biodiesel, which do not have a high ILUC risk under the EU’s methodology — then the inquiry will turn on whether REDII changes the conditions of that competition in the biofuel market by disadvantaging palm oil-derived biofuels.
If REDII does discriminate against palm oil products, the case will turn on whether the EU can successfully make out a defence under the various exceptions in WTO law, such as for measures “necessary to protect human, animal or plant life or health”, or measures “relating to the conservation of an exhaustible natural resource”.
Several complexities arise in this respect. First, the EU identifies in REDII not only the reduction of GHG emissions as its objective, but also improving energy security, reinforcing technological leadership in the renewable energy field, and creating jobs and growth.14 Here, the EU would need to demonstrate that REDII addresses GHG emissions; if REDII is successful only in (for example) improving energy security through shifts in production to other feed crops (in particular those predominantly produced in the EU), it is unlikely that the measure will be validated by a panel.
Second, WTO panels and its Appellate Body have been reticent15 regarding whether there is an implied jurisdictional limitation on WTO Members regarding measures to address public policy objectives in other countries. In this case, the difficulty would arise because the EU is adopting measures to address GHG emissions in palm oil-producing countries, related to the clearing of the land required. This difficulty is compounded by the fact that the Kyoto Protocol limits parties to basing their National Emission Inventories (used to benchmark progress towards UNFCCC goals) on GHG emissions and removals taking place within their own territories, and not in other jurisdictions.16 Endorsement of an EU measure that addresses an environmental concern in another country would, therefore, be a big step for WTO law, and a contentious one under international environmental law.
Third, the EU would need to justify the scientific basis upon which REDII distinguishes between palm oil and other biofuels. The EU has set out a review of scientific literature17 that considers the relative expansion of different feed crops; the complainants in any WTO dispute would certainly challenge this. In particular, the EU would be in a difficult position were the complainants to adduce evidence of other feed crops – particular those produced within the EU – that could also be associated with a high risk of ILUC but that are not excluded by the ILUC thresholds identified in the EU’s methodology.
Fourth, REDII identifies whether a product carries a high ILUC risk based on historical data relating to the expansion of global production of a given biofuel into areas with high carbon stock. Although there are limited exemptions for low ILUC-risk biofuels, the measure nonetheless does not appear to accommodate the notion that specific palm oil biofuel may have been farmed sustainably, or on already cleared land, that did not push agricultural production onto other lands. Put differently, there appears no way of accounting for any disjuncture between a general risk of ILUC and a given consignment of biofuel. This may make it difficult for the EU to demonstrate that REDII is sufficiently flexible to take into account relevant differences in conditions among, or even within, palm oil-exporting WTO Members.
Finally, the EU’s justification of REDII would involve argumentation around the relationship between the measure and its intended objective — the required strength of this relationship will depend on the exception(s) that the EU invokes. Part of the analysis is likely to relate to the contribution that REDII makes to its objectives. Here the EU will have to grapple with the likelihood that reducing the extent to which EU Members can rely on palm oil will likely shift demand towards other biofuels — all of which are less energy-rich and thus require more land for production.18 Unless the EU can demonstrate that increases in demand for alternative (non-palm oil) fuels will not drive additional land-clearing to account for the lower productivity of those substitutes, it may face difficulties demonstrating that REDII makes a contribution towards reducing GHG emissions associated with ILUC.
Any such dispute would come at a difficult moment for the WTO. The organisation is among President Trump’s favourite political footballs; it faces an institutional crisis with the expiration of the terms of two of the remaining three Appellate Body members on 10 December, after which time the organisation will no longer be able to hear appeals of panel reports.19 At a time when the legitimacy, and even the ongoing existence,20 of the WTO is being openly questioned, a dispute which (again) tests the limits of WTO law’s ability to sanction a measure that is purportedly directed towards environmental protection will only serve to compound the institution’s mounting difficulties.
Professor Andrew D. Mitchell
Professor,
Melbourne Law School
and
Mr Dean Merriman
Senior Manager,
Deloitte Australia’s Global Trade Advisory practice
