(Bio)Fueled to Combat Climate Change? An Analysis of the WTO Panel Decision in the EU-Palm Oil (Malaysia) Dispute
By Isha Das, University of Passau
I. Introduction
The Panel report in the EU–Palm Oil (Malaysia) dispute[i] was circulated on 5 March 2024. It is an important addition to the list of environment-related international trade disputes brought before the World Trade Organisation (‘WTO’). This is the first time that a WTO Panel has had to deal with measures aiming to promote greater usage of biofuels to address greenhouse gas (‘GHG’) emissions. This decision is largely skewed in favour of the architecture and design of the EU measures but there are some individual findings affirming Malaysia’s claims. The Panel report has been welcomed by many scholars as confirming that WTO Members can pursue stronger climate action by using trade-related climate measures, even if they have an extraterritorial impact.
As always, however, the devil is in the details. A closer look at the Panel report reveals that the Panel did not unconditionally greenlight trade-related climate measures. It is also evident that the Panel has missed the mark in balancing climate ambition and the inclusion of different WTO Member States (especially developing and least developed countries). In this blog post, I examine the implications of this Panel report for WTO law in general and for trade-related climate measures in particular. First, I summarize the facts of the dispute, focusing on the non-discrimination claims brought by Malaysia. Second, I discuss the decision on the non-discrimination claims raised in the dispute. I focus on Articles I:1 and III:4 of the GATT and Article 2.1 of the TBT Agreement in this regard. While the decision on other issues under Articles 2.2 and 2.4 of the TBT Agreement is also worthy of a detailed discussion, I will limit myself to the non-discrimination claims. This is because I believe that the Panel made fundamental errors regarding the protectionism claims brought in these issues. Given that non-discrimination (and the mandate regarding lack of arbitrariness of such discrimination) is the backbone of the WTO regime, I argue that the Panel’s troubling reasoning may shift the focus away from discriminatory presumptions made by countries in imposing unilateral climate-related trade measures. I then examine the broader implications of the dispute for WTO law in general and trade-related climate measures in particular. Finally, I highlight some questions for future research.
II. Statement of the Facts
The dispute revolves around the tension between promoting the use of renewable biofuels and excluding palm oil-based biofuels from the EU’s energy mix over concerns their production leads to land-use changes that undermine their potential to reduce GHG emissions into question. In general, biofuels are fuels derived from biomass materials, including crops and algae. Currently, most biofuels are derived from food and feed crops and these biofuels are referred to as ‘crop-based biofuels’.
To incentivize a greater use of crop-based biofuels, the EU adopted the Directive on the Promotion and Use of Energy from Renewable Sources (‘RED II’) in December 2018 and an accompanying Delegated Regulation in March 2019. Under the RED II and the Delegated Regulation, the EU mandated a general and binding renewable energy target of at least 32% of all energy consumed in the EU by 2030. It sets a sub-target of 10% of renewable energy for the transport sector. Crop-based biofuels could contribute a maximum of 7% to this target.
The RED II deals with GHG emissions’ risks associated with land-use change – both direct land-use change and indirect land-use change. Direct land-use change (‘DLUC’) occurs when a current high-carbon stock land (like a forest) is converted to agricultural use. Additionally, when biofuel crops’ demand increases such that existing agricultural land is replaced to cultivate biofuel crops instead of agricultural crops, the demand for food and feed crops is met by clearing high-carbon stock land (like forests) to cultivate said agricultural crops. This indirect change in use of land is called ‘ILUC’.
Under the RED II, the EU identifies palm oil-based biofuels as ‘high ILUC-risk’. Considering the high ILUC risk, the RED II excludes the usage of palm oil-based biofuels from counting towards meeting its energy targets and consequently excludes it from qualifying for the incentives offered. The RED II does not consider other crop-based biofuels, especially the ones produced domestically in the EU using rapeseed oil, soybean oil and sunflower oil, to be high-ILUC risk and provides incentives for their production. Malaysia argued that the measures introduced by the EU are protectionist as they discriminate solely against palm oil-based biofuels and promote the EU’s own crop-based biofuels.
Malaysia challenged the RED II and the Delegated Regulation (as well as certain national implementing measures), arguing that they violate a plethora of provisions of WTO law under the Agreement on Technical Barriers to Trade (‘TBT’) and the GATT.[ii]
III. Panel Report
WTO law mandates non-discrimination under Articles I:1 and III:4 of the GATT and Article 2.1 of the TBT Agreement, among other provisions. Article I:1 of the GATT provides that WTO Members must not discriminate between like imports and are required to confer any advantage, favour, privilege or immunity granted to imports from one country immediately and without additional conditions on all other ‘like’ imports. Similarly, Article III:4 of the GATT prohibits WTO Members from discriminating between imports and like domestic products to the detriment of the imports. Article 2.1 of the TBT Agreement embodies the legal mandates under Articles I:1 and III:4 of the GATT by providing for non-discrimination between like imports or between imports and like domestic products, unless the discrimination is for sole regulatory policy objectives. If it can be demonstrated that the discrimination between like products is solely to attain a legitimate policy objective, then the discriminatory measure is not considered to violate Article 2.1 of the TBT Agreement.
In its analysis under Article 2.1 of the TBT Agreement and Articles III:4 and I:1 of the GATT, the Panel first determined that palm oil-based biofuels were ‘like’ rapeseed, sunflower and soybean oils-based biofuels.
With respect to Article III:4 of the GATT, the Panel found that the EU’s measures did not provide palm oil-based biofuels with the same advantage as other domestic crop-based biofuels. The Panel therefore found a violation of Article III:4 of the GATT. The Panel based this finding on the fact that the RED II isolated and excluded palm oil-based biofuels from counting towards the EU’s energy targets and from qualifying for incentives under the RED II. Consequently, palm oil-based biofuels would not have the same market opportunities as domestically produced rapeseed, sunflower and soybean oil-based biofuels. The latter were not subject to the high ILUC risk-cap and phase out requirements based on the assumption that they have a low ILUC risk. The Panel also found a violation of Article I:1 because the EU discriminated against palm oil-based biofuel imports compared to other like crop-based biofuel imports.
After establishing the violations, the Panel turned to examining if the measures could be justified under Article XX(g) of the GATT. It found that the measures were related to the conservation of high carbon stocks in the form of forests and wetlands as exhaustible natural resources. The Panel also found that the measures were even-handed because the measures restricted the EU’s domestic production of all crop-based biofuels which were identified as high ILUC-risk. Hence, the Panel had found the measures to be provisionally justifiable under Article XX(g). Similarly, it also found that the EU’s measures were necessary to protect ‘human, animal, or plant life or health’ from GHG emissions because none of the alternatives presented could achieve the EU’s level of protection. Indeed the Panel found that the EU’s measures were more trade restrictive than necessary. In the light of these observations, the Panel concluded that the measures could also be provisionally justified under Article XX(b) of the GATT. However, the EU’s measures failed to satisfy the requirements of the chapeau. The Panel found that while the measures could be provisionally justified under different sub-paragraphs of Article XX, they could not be justified under the chapeau of Article XX owing to the EU’s failure to conduct a timely review of data used to determine which biofuels were high ILUC-risk. This failure had led to an arbitrary and unjustifiable discrimination against palm oil-based biofuels.
With respect to Article 2.1 of the TBT Agreement, the Panel found that the EU’s measures had a detrimental impact on palm oil-based biofuels by classifying them as having a high ILUC-risk and excluding them from counting in the energy mix or from receiving incentives under the RED II. The Panel then considered whether this detrimental impact arose from a sole regulatory objective. Here, the Panel found that the objective pursued by the EU (to limit GHG emissions from ILUC) was legitimate. However, they took concern with the fact that the EU had failed to conduct a timely review of the data used to determine which biofuels pose a high ILUC risk. The Panel also considered the design and implementation of the low ILUC risk criteria to be problematic.[iii] Due to this failure, the Panel concluded that the distinction in the EU’s measures did not arise from a sole regulatory objective and that the measures violated Article 2.1 of the TBT Agreement.
The Panel did not engage in an analysis of Articles III:4 and I:1 of the GATT or Article 2.1 of the TBT Agreement to challenge the discriminatory presumption that only palm-oil poses a high ILUC risk. It also missed the opportunity to balance the level of protection sought by the Respondent with the level of unilateral coercive action it should be allowed to exercise. This leads to the question of whether a WTO Member should be allowed to take any measure to achieve its desired level of protection.
IV. Trade and Environmental Implications
There are five major points of contention in the Panel report: First, with respect to the likeness test under the TBT Agreement and indeed even under the GATT, the Panel did not expound on the extent to which non-product related process and production methods (NPR-PPMs) are relevant in determining likeness between products. The EU had attempted to argue that palm oil-based biofuels and other crop-based biofuels should not be considered ‘like’ products due to the difference in ILUC risk and associated GHG emissions. However, the Panel still considered them to be ‘like’ products based on the standard likeness test.[iv] For proponents of the NPR-PPM issues – those who argue that NPR-PPM should be considered under the WTO law regime – this appears to be a missed opportunity. If the Panel had accepted the argument that GHG emissions can cause products to not be ‘like’, it could have paved the way for legitimate discrimination between more and less environmentally friendly goods. Such discrimination, in turn, could have carved out space within WTO law for better promotion of more environmentally friendly goods. This would have laid the groundwork for using WTO law to achieve climate objectives. Conversely, for opponents of the NPR-PPMs issue – those who oppose the inclusion of these issues in the WTO law regime – the non-likeness of palm oil-based and other crop-based biofuels would only make sense if it could be conclusively demonstrated that there was little or no degree of competitiveness between the products, based on differences in ILUC-risk and GHG emissions. This would indeed be difficult to establish. Hence, the Panel’s reasoning remains an important win for the opponents of NPR-PPMs, who fear that the inclusion of NPR-PPM considerations in the assessment of the likeness would inevitably lead to discrimination against goods from developing and least developed countries, as it would be difficult for these goods to meet the relevant NPR-PPM requirements.
Second, in considering the discrimination claims, the Panel did not find that the EU’s measures arbitrarily discriminated against palm oil-based biofuels by solely excluding them from the energy mix. Currently, there are no international standards for determining GHG emissions due to ILUC, so there is no internationally agreed methodology to precisely calculate the ILUC risk of any crop-based biofuel. This means that, in theory, disputing parties can provide different and equally compelling scientific evidence supporting their claim. In this light, the Panel did not question how the EU had arrived at the conclusion that palm oil-based biofuels have a higher ILUC risk compared to other crop-based biofuels. Nor did the Panel raise concerns about the EU’s lack of evidence in this regard. Additionally, the Panel rejected protectionism allegations despite the fact that soybean, rapeseed and sunflower oil-based biofuels were not assumed to have high ILUC risk, and all of these are produced in the EU, while palm oil-based biofuels are not produced in the EU. The Panel’s agreement with the premise that palm oil-based biofuels have a higher ILUC risk compared to other crop-based biofuels and its focus on the review process seems rather counterintuitive. The Panel argued that the EU did not aim to quantify GHG emissions through the RED II and the Delegated Regulation, but only to identify the ILUC risk. However, regardless of the lack of objective to quantify GHG emissions resulting from ILUC, it is questionable how a higher risk of ILUC can be conclusively attributed to palm oil-based biofuels without any clear method of calculating ILUC risk or concrete evidence indicating this. It thus appears that the Panel missed the broader concern here.[v] This may lead to a shift in focus away from the problem of discriminatory presumptions and their role in violating the disciplines of Articles I:1 and III:4 of the GATT and Article 2.1 of the TBT Agreement. In short, flawed reasoning can change how the principle of non-discrimination is interpreted under the GATT and the TBT Agreement. Hence, future Panels should be careful in this regard. Ironically, neither Malaysia nor the Panel focused on the fact that Europe has cut down almost half of its own forest cover over many centuries due to agricultural activities and technological needs, and is now imposing unilateral extraterritorial measures against similar practices elsewhere.[vi]
Third, the Panel glossed over the European Parliament’s Resolution of 4 April 2017, which called for a phase out of palm oil-based biofuels and for the promotion of oils from domestically cultivated rapeseed and sunflower seeds. Arguably, this Resolution could have been a relevant tool for understanding the context of the RED II and the Delegated Regulation. Consequently, it could have tipped the scales in deciding on the issue of protectionism. This is because the history of the parliamentary debate on the measures in question clearly shows the will to gradually eliminate palm oil-based biofuels from the EU’s energy mix. It is worth repeating here that the EU imports all palm oil-based biofuels and does not produce them domestically. Hence, the Parliament’s Resolution is evidence of the EU’s aim to discriminate against palm oil-based biofuels in favor of domestically manufactured crop-based biofuels. An examination of this Resolution and its impact on the final drafting and implementation of the RED II and the Delegated Regulation could have better helped to decide on the issue of discrimination under Article III:4 of the GATT and Article 2.1 of the TBT Agreement.
Fourth, neither Malaysia nor the Panel addressed the degree of coerciveness of the measures. While it is clear that WTO Members may regulate access to their domestic markets, WTO Members do not have unlimited ability to do so. Can a WTO Member condition access to its domestic market on other Members adopting its method of addressing a concern – for example, by forcing other Members to adopt its method of addressing GHG emissions from land use or land use change? Admittedly, US–Shrimp established a precedent that extraterritoriality and unilateralism as such do not mean that a unilateral measure is inconsistent with WTO law. However, even US-Shrimp left room for the coercive nature of the measure to be challenged. In EU–Palm Oil , no attention was paid to: 1) the fact that the EU’s measures did not adequately explore with Malaysia the possibility of cooperation to mitigate the problems arising from palm-oil production and their lack of accounting for the cost of transition for a developing country like Malaysia– where the costs are not merely inadvertent or unavoidable and are rather significant– to meet the EU’s stringent demand to produce palm-oil with low ILUC risk.[vii] In fact, the EU never gave palm-oil based biofuels a chance in this regard; 2) the fact that the EU did not make room for alternative ways to achieve the objective of addressing ILUC risk (e.g., by limiting land clearing through oil palm cultivation) and reducing GHG emissions (through alternative means of GHG mitigation); or 3) the fact that the EU did not provide a transition period for Members to achieve their level of protection. Thus, the Panel seems to have glossed over the coercive nature of the EU’s measures. This is problematic because, under WTO law, Members do not have unfettered rights to impose unilateral measures to achieve their goals. Past disputes such as US–Shrimp; US–Gasoline; US–Tuna II (Mexico); Brazil–Retreaded Tyres have all established that a Respondent is free to set a level of protection or a desired goal as it sees fit. However, it cannot force other WTO Members to adopt its precise methods of achieving that goal. Rather, the Respondent must always allow other Members to seek alternative ways to achieve the chosen level of protection, so as not to interfere with each Member’s sovereign right to formulate laws and policies is not impacted. The Panel in this case has left this issue open, such that future Panels might think that the issue of unilateralism and coerciveness has evolved to allow a greater coercion when the issue is as urgent as environmental protection. But this is simply not the case. While the protection of the environment, mitigation of climate change alleviation and reduction of GHG emissions are clearly recognised as critical objectives in the disputes mentioned above, all of these disputes unanimously require a balancing of trade and environmental concerns. Without such a balance, WTO Members would always find themselves pandering to the demands of a few countries, with little room for their own decision-making on trade and environmental policy and law.
Finally, such unilateral and coercive measures continue to go against the environmental law principles of common but differentiated responsibilities and respective capabilities (‘CBDR-RC’) and just transitions, as enshrined in the Paris Agreement. Under these principles, countries have the ability to decide on their contributions to environmental protection and climate change mitigation and to take measures to achieve them. While a WTO Panel can only enforce WTO law, and CBDR-RC is not part of that law, the principle could be relevant under general public international law, which could be used to clarify existing provisions under WTO law.[viii] Arguably, these principles could have been used by the Panel to explain the degree of coercion and even discrimination of the EU’s measures.
V. Conclusion
The EU-Palm Oil (Malaysia) dispute is a unique addition to the body of disputes over trade-related climate measures that have been brought before the WTO Dispute Settlement System. It has forced a WTO Panel to consider the various factors that make an energy source “clean”. It has highlighted the fact that just because the final product is a “clean” energy source does not mean that the inputs are necessarily clean, so that its benefits in terms of climate change mitigation can be challenged. On the other hand, the dispute has highlighted the challenges faced by developing countries trying to contribute to the clean energy mix on a just transition path. Faced with these issues, the Panel had the age-old task of balancing trade and environmental concerns. While the decision in this dispute has some merit, the Panel has erred on important points of interpretation of WTO law, with implications for countries’ rights under international environmental law too.
The dispute also raises legal questions that go beyond the confines of WTO law. First, could the EU have used a cooperative legislative approach to achieve its objective? What role could mutual supportiveness play as a tool of lawmaking and treaty interpretation play in balancing climate change concerns with economic considerations in promoting biofuels?[ix] Second, given that there is no inherent hierarchy between different sub-fields of international law, what role should the human right to livelihood (Article 11 of the International Covenant on Economic, Social and Cultural Rights; Article 25 of the Universal Declaration of Human Rights) play in the discussion of just transitions and the shift away from biofuels that are perceived to have a high ILUC risk? This is particularly important because a transition away from palm oil would affect the livelihoods of significant populations in countries such as Malaysia and Indonesia – the main producers of palm oil and palm oil-based biofuels.[x] These populations include small-scale farmers who would be the worst hit by such measures. These, and other related questions, may be fertile ground for research in the future.
[i] WTO Panel Report, EU–Palm Oil (Malaysia) WTO/DS600/P/R (2024).
[ii] See Andrew D. Mitchell and Dean Merriman, ‘Indonesia’s Challenge to the European Union’s Renewable Energy Directive: Palm Oil and Indirect Land-Use Change’ 12(2) Trade L. & Dev 548 (2020) for a detailed discussion of possible arguments which Indonesia (and Malaysia) could have presented in these disputes.
[iii] WTO Panel Report, EU–Palm Oil (Malaysia) WTO/DS600/P/R, paras. 7.463-7.572
[iv] WTO Appellate Body Report, Japan-Alcoholic Beverages II WTO/DS8/AB/R (1996).
[v] WTO Panel Report, EU–Palm Oil (Malaysia) WTO/DS600/P/R, paras. 7.495-7.636.
[vi] See, e.g., Sarah Carter, Fred Stolle, Mikaela Weisse and Stientje van Veldhoven, ‘Timber Harvesting and Climate Change Are Depleting Europe’s Mature Forests’ (21 November 2023) <https://www.wri.org/insights/european-tall-forest-decline> accessed 11 September 2024.
[vii] See WTO Appellate Body Report, US-Gasoline, WT/DS2/AB/R (1996), paragraphs 28-29, for more context.
[viii] See Article 3.2 second sentence of the Understanding on Rules and Procedures Governing the Settlement of Disputes (‘WTO DSU’).
[ix] See generally on mutual supportiveness, Alessandro Monti, Promoting Renewable Energy: The Mutual Supportiveness of Climate and Trade Law (Edward Elgar Publishing 2023).
[x] International Trade Centre’s Trade Map, List of exporters for the selected product in 2019: Product: 1511 Palm oil and its fractions, whether or not refined (Excluding Chemically Modified) <https://www.trademap.org/(X(1)S(opki3t55tddi14boen0vsr45))/Country_SelProduct.aspx ?nvpm=1%7c%7c%7c%7c%7c1511%7c%7c%7c4%7c1%7c1%7c2%7c1%7c1%7c2%7c1 %7c1> accessed 11 September 2024.
