‘Is the EU phasing-out palm oil-based biofuels? The European Parliament continues its discriminatory path’

• The European Parliament continues its discriminatory campaign against palm oil. On 17 January 2018, the European Parliament adopted its position on the European Commission’s proposal for a Directive of the European Parliament and of the Council on the promotion of the use of energy from renewable resources (proposed RES Directive). A clear majority of the Members of the European Parliament (MEPs) voted in favour of including a phase-out of biofuels made from palm oil from 2021.

• This position has now become part of the European Parliament’s negotiating mandate for the forthcoming inter-institutional ‘trilogue’ negotiations between the European Parliament, the Council of the EU (Council) and the European Commission (Commission). While the phase-out of palm oil-based biofuels in the EU is not yet decided and can still be prevented, it could soon become reality if the position of the European Parliament prevails in the ‘trilogue’ negotiations which start from end of February 2018.

• Currently, the EU’s renewable energy framework is governed by the Renewable Energy Directive (RED). The RED is supposed to ensure that the EU meets its 2020 targets for reducing energy consumption (i.e., to reduce greenhouse gas emissions by 20%, to increase the share of renewable energy to 20% of consumption, and to achieve energy savings of 20%).

• In 2016, and in order to expand the timeframe of its renewable energy framework until 2030, the Commission proposed the RES Directive. The main purpose of the proposed RES Directive is to increase the share of renewable energy sources in the EU energy mix to at least 27% by 2030, a goal set by the Council in October 2014.

The Commission proposed to continue its already discriminatory approach

• The current framework calls for the EU to fulfil 20% of its energy needs via renewable sources by 2020 and, specifically with respect to transport fuels, it requires that at least 10% of transport fuel consumption be derived from renewable sources. Conversely, the proposed RES Directive requires that 27% of energy consumption in the EU be derived from renewable sources by 2030, and removes the requirements that 10% of transport fuel consumption be derived from such sources after 2020.

• The proposed RES Directive includes a decreasing maximum share of first generation biofuels (i.e., biofuels and bio-liquids made from food and feed crops), starting from 2021, as a way of addressing emissions from Indirect Land Use Change (ILUC). Regarding the final consumption of energy in road and rail transport, the current framework states that the contribution from biofuels and bio-liquids, as well as from biomass fuels consumed in transport, if produced from food or feed crops, should be no more than 7% of the final consumption of energy.

• This could get more restrictive with the future RES Directive. Even the proposal by the Commission would require such sources to be reduced from 7% to 3.8% in 2030. A short-sighted approach, obviously adopted without taking into account the situation on the ground in producing countries. Not all palm oil and, therefore, not all palm oil-based biofuel is unsustainable or is related to so-called ILUC. Even more worrisome as an alternative way to address ILUC, it would allow EU Member States to set lower limits and distinguish between different types of biofuels and bio-liquids produced from food and feed crops. The proposed RES Directive expressly includes an example explaining that EU Member States may set a lower limit for the contribution of biofuels produced from oil crops, taking into account ILUC. Even without specifically referring to palm oil, the Directive would expressly allow further discrimination by EU Member States.

Support for the discriminatory approach by the EU Energy Ministers

• The EU Energy Ministers discussed the proposed RES Directive multiple times during the course of 2017 and the Council agreed on its general approach on 18 December 2017, largely supporting the controversial proposal by the Commission. In its position, the Council supports the 27% EU target for 2030 as proposed by the Commission.

• However, it introduces a 14% renewable energy target for each EU Member State in the transport sector for 2030 and a sub-target of 3% for advanced biofuels (i.e., biofuels derived various types of biomass). The Council supported continuing the 7% cap for the use of food and feed-based biofuels, compared to the Commission’s proposed reduction to 3.8% in 2030 of final consumption of energy in road and rail transport.

• The Council stated that the existing cap of 7% on first generation biofuels was maintained in order to provide more certainty to investors. Of course, maintaining the previous limit also means continued discrimination against food and feed-based biofuels such as those derived from palm oil.

The ENVI Committee’s anti-palm oil campaign continues

• In the European Parliament, the Committee on Industry, Research and Energy (ITRE) is the responsible Committee for the proposed RES Directive. The ITRE Committee worked in close cooperation with other Committees, most notably the Committee on Environment, Public Health and Food Safety (ENVI), while the Committee on International Trade is (quite astonishingly!) absent from the list of involved Committees.

• With its contribution, the ENVI Committee continued its anti-palm oil campaign, which has so far culminated in the European Parliament’s Resolution on palm oil and deforestation of rainforests of April 2017. The key point of the ENVI Committee’s opinion was the introduction of an actual phase-out (instead of the existing limitation) of food-crop based, first generation biofuels by 2030, with those derived from palm oil to be phased-out already by 2021.

• On 28 November 2017, the ITRE Committee adopted its report, which included the elements from the ENVI Committee, and was used as the basis for the plenary debate and vote in January 2018. It added a new Recital 25a referencing the infamous European Parliament’s Resolution on palm oil and deforestation of rainforests and amended Article 7 of the proposed RES Directive to include the phase-out of food-crop based biofuels by 2030, with those derived from palm oil already from 2021. The proposed changes to Article 7 were arguably the most controversial aspects vis-à-vis the Commission’s proposal and the Council’s position, but apparently were not controversial at all within the European Parliament.

A clearly discriminatory compromise by the European Parliament’s plenary

• On 15 January 2018, the European Parliament’s plenary debated its position on the proposed RES Directive on the basis of the ITRE report and underlined once again the prevailing anti-palm oil sentiment. MEPs called for stricter sustainability criteria in order to avoid deforestation, not only within the EU, but also in third countries.

• Instead of cooperation and a bilateral or multilateral approach, the unilateral interference with other countries’ policies and the extraterritorial reach of the EU measures appears to be the preferred by the European Parliament.

• Unsurprisingly, the MEPs’ support concerning the inclusion of the phase-out of palm oil-based biofuels by 2021 became apparent. While not a single MEP expressed disagreement with this worrisome step, a number of MEPs expressed their full support. How a discriminatory ban on palm oil-based biofuels may be considered as “reasonable” is highly perplexing, but the Commission has so far been very reluctant to comment on this issue.

• Prior to the debate and the subsequent vote, the European People’s Party (EPP), the Socialists and Democrats (S&D) and the Alliance of Liberals and Democrats for Europe (ALDE) groups within the European Parliament reached a compromise on the phase-out of palm oil-based biofuels. The compromise simplified the relevant proposed amendments to the proposed RES Directive and removed the general phase-out of food-crop based biofuels, but still clearly states that “[t]he contribution from biofuels and bioliquids produced from palm oil shall be 0% from 2021”. On 17 January 2018, this anti-palm oil amendment was unequivocally adopted by a show of hands of the present MEPs.

The likely illegality of the European Parliament’s approach 

• Obviously, there are legitimate concerns about the European Parliament’s position. In the context of international legal obligations, in particular of the World Trade Organization (WTO), the EU and the EU Member States are bound to, in relevant part, the General Agreement on Tariffs and Trade 1994 (GATT) and the Agreement on Technical Barriers to Trade (TBT). Article III:4 of the GATT and Article 2.1 of the TBT Agreement, respectively, require non-discriminatory treatment between ‘like’ products. Such ‘like’ products could arguably include biofuels derived from a variety of sources, such as palm oil, coconut oil, soy oil, rapeseed oil and sunflower oil. ‘Like’ products may arguably even encompass both first-generation and advanced biofuels (e.g., biofuel derived from food and feed-based biofuels, such as coconut palm oil, versus biofuel derived from various types of biomass).

• Traditionally, the approach used to determine ‘likeness’ includes the consideration of: 1) The properties, nature and quality of the products; 2) The end-uses of the products; 3) Consumers’ perceptions and behaviour in respect of the products; and 4) The tariff classification of the products. Insofar as Article 2.1 of the TBT Agreement is concerned, the WTO Appellate Body found that the determination of ‘likeness’ using the factors listed above is also a determination of the competitive relationship between the products. When applied to biofuels, it is questionable whether the secondary effects, such as the alleged ILUC and deforestation, are an issue that should be considered at all when assessing ‘likeness’. They do not appear to have an impact on any of the factors listed above and deemed relevant by the WTO. If this is true, then the varying rules with respect to the different types of food and feed-based biofuels and so-called advanced biofuels could be de facto discriminatory. More importantly, the express phase-out of palm oil-based biofuels could be de jure discriminatory. Further, Article 2.2. of the TBT Agreement prohibits measures that are more trade-restrictive than necessary to fulfil a legitimate objective. Such legitimate objectives include “plant life or health, or the environment”. However, Article 2.2 of the TBT Agreement states that, in assessing such risks, relevant elements of consideration include available scientific technical information, related processing technology, or intended end-uses of products. Considering the statements by the MEPs, it appears rather questionable that solid science-based evidence could be provided to support the phase-out.

• The clear distinction between biofuels produced from palm oil, which is a vegetable oil that is not even produced in the EU, and biofuels from other oil crops (e.g., coconut oil, rapeseed oil or sunflower oil) raises a number of political and legal questions. While MEPs argued during the debate that their vote sent a clear message towards the EU’s commitment to the Paris Climate Agreement, banning biofuels produced from palm oil alone also raises the question of whether the actual aim could be, instead, the protection of EU ethanol production against palm oil imports.

The ‘trilogue’, the last chance to stop the palm oil phase-out, before WTO litigation

• Now that the three EU institutions have internally agreed on their respective position, inter-institutional negotiations, the infamous ‘trilogue’, will begin behind closed doors (starting from end of February 2018). While any provisional agreement reached within the ‘trilogue’ is informal and still has to be approved by the formal procedures applicable within the Council and the European Parliament, the decision will be taken before anything is made public. This is the last chance to prevent the phase-out of palm oil-based biofuels! After that, the only remaining legal avenue will be the recourse to the WTO dispute settlement system, a set of procedures that are available only to WTO Members. These procedures are costly, time-consuming and riddled with legal, political, diplomatic and commercial intricacies. Both the EU and palm oil producing countries should spare themselves from such epilogue and should rather find a negotiated and science-based solution through the joint definition of an internationally recognised multilateral standard for palm oil sustainability. Unilateral actions, and even more so discriminatory and trade restrictive measures, should be avoided.

Datuk Dr. Kalyana Sundram
CEO MPOC