DS-600: European Union and Certain Member States – Certain Measures Concerning Palm Oil and Oil Palm Crop-Based Biofuels

Summary:

Complainant: Malaysia
Respondent: European Union; France; Lithuania
Third Parties: Argentina; Australia; Brazil; Canada; China; Colombia; Costa Rica; Ecuador; El Salvador; Guatemala; Honduras; India; Indonesia; Japan; Korea, Republic of; Norway; Russian Federation; Saudi Arabia, Kingdom of; Singapore; Thailand; Turkey; Ukraine; United Kingdom; United States.

In 2018, the Renewable Energy Directive Recast (RED II) came into force in the European Union. RED II introduces measures to phase out biofuels which pose high risk significant GHG emissions from indirect land-use change (ILUC), which is defined as occurring where there is “cultivation of crops for biofuels, bioliquids and biomass fuels displaces traditional production of crops for food and feed purposes.”
The European Commission’s Delegated Regulation 2019/807 (Delegated Regulation) introduced pursuant to RED II laid down the criteria for determining high-ILUC feedstock and certifying low ILUC-risk biofuels, bioliquids and biomass fuels. Based on the criteria set by the EU biofuel measures in determining high ILUC-risk fuels, only palm-oil-based biofuels, which are usually imported, will be phased out by 2030 (unless certified as low ILUC-risk). By contrast, biofuels based on oil crops, which are more likely to be produced domestically in EU, such as sunflower or rapeseed, are not subject to the phase out.

Following the introduction of RED II and the Delegated Resolution, France introduced a new law on fuel tax. The new fuel tax regime provides incentives for the consumption of petrol and diesel that contain certain crop-based biofuels to meet EU renewable energy targets. It provides expressly under the French Customs Code that palm-oil products are not considered as biofuels. Lithuania also amended its law on renewable energy, providing that by 2030, the share of fuels produced from feedstocks considered as high ILUC-risk feedstocks are to gradually decrease to nil for the calculation of Lithuania's gross final consumption of energy from renewable sources.

On January 15, 2021, Malaysia brought a claim against the EU, France and Lithuania at the WTO. Malaysia claimed that certain measures imposed by virtue of RED II, including the criteria for determining the high ILUC-risk feedstock, and the sustainability and GHG emission savings criteria are discriminatory against palm-oil-based biofuels and are therefore inconsistent with various provisions under the TBT Agreement and GATT 1994. In summary, Malaysia has contended that the EU measures are inconsistent with:
(a) Article I:1 of the GATT 1994 as they discriminate among 'like' feedstocks and derived biofuels originating in third countries;
(b) Article III:4 as they accord less favorable treatment to imported palm oil and oil palm crop-based biofuels than they do to 'like' domestic feedstocks and derived biofuels, thereby modifying the conditions of competition to the detriment of the imported palm oil and oil palm crop-based biofuels, in particular from Malaysia
(c) Article X:3(a) of GATT 1994 as they were administered in a manner that is not uniform, impartial and/or reasonable;
(d) Article XI:1 of the GATT 1994 as they restrict the importation of palm oil and oil palm crop-based biofuels;
(e) Article 2.1 of the TBT Agreement as they have a detrimental impact on the competitive conditions in the EU market of Malaysia's imports of oil palm crop-based biofuels compared with 'like products' imported into the EU from other countries and compared with 'like' domestic products;
(f) Article 2:2 of the TBT Agreement as they are more trade-restrictive than necessary to achieve the objectives pursued by the measures
(g) Article 2.4 of the TBT Agreement as they are not based on the relevant international standards
(h) Article 2.5 of the TBT Agreement as EU has failed, upon the request of Malaysia, to explain the justification for those measures in terms of Articles 2.2 to 2.4 of the TBT Agreement
(i) Article 2.8 of the TBT Agreement as they are based on an abstract and unsubstantiated high-ILUC risk concept instead of the performance of such biofuels;
(j) Article 2.9 of the TBT Agreement as they were adopted without the required timely publication and notification of these measures and organising an adequate process for commenting;
(k) Article 5.1.1 of the TBT Agreement as they treat suppliers of oil palm crop-based biofuels from Malaysia less favourably than domestic suppliers of 'like' biofuels or suppliers from other WTO Members in a comparable situation;
(l) Article 5.1.2 of the TBT Agreement as they create unnecessary obstacles to international trade;
(m) Article 5.2 of the TBT Agreement as EU failed to make available the conformity assessment procedures to certify low ILUC-risk;
(n) Article 5.6 of the TBT Agreement as EU neither notified nor enter into meaningful consultations, or allowed for comments on such conformity assessment procedures;
(o) Article 5.8 of the TBT Agreement as EU neither promptly published nor otherwise made available the measures at issue, which provide criteria for certifying low ILUC-risk biofuels, being conformity assessment procedures within the meaning of Annex 1.3 of the TBT Agreement; and
(p) Articles 12.1 and 12.3 of the TBT Agreement as EU, in the preparation and application of the measures, failed to take into account the circumstances specific to developing countries, in particular Malaysia, where palm oil and oil palm crop-based biofuels are produced.
In respect of the measures imposed by Lithuania, Malaysia has contended that they are inconsistent the same provisions in GATT 1994 and the TBT Agreement as set out above.

As for the measures implemented by France, Malaysia has contended that they are inconsistent with:
(a) Article I:1 of the GATT 1994 as the measures at issue, under which the tax on petrol and diesel is only reduced when they contain biofuels other than oil palm crop-based biofuels, discriminates against 'like' biofuels by granting an advantage, in the form of a tax reduction, to biofuels of some countries, that is not granted to all WTO Members, and in particular not to Malaysia,
(b) Article III:2 of the GATT 1994 as the measures at issue, under which the tax on petrol and diesel is only reduced when they contain biofuels other than oil palm crop-based biofuels, indirectly applies a tax on imported oil palm crop-based biofuels: (1) in excess to 'like' domestic biofuels; or (2) which is not similar to the tax on 'directly competitive and substitutable' domestic biofuels, and affords protection to the production of these domestic biofuels
(c) Articles 3 and 5 of the SCM Agreement as the measures at issue, under which the French Government reduces the tax on petrol and diesel containing crop-based biofuel other than oil palm crop-based biofuels and excludes petrol and diesel containing oil palm crop-based biofuels from this tax reduction, amount to a subsidy within the meaning of Article 1 of the SCM Agreement which is: (1) a prohibited import substitution subsidy within the meaning of Article 3.1(b); and/or (2) an actionable subsidy causing an adverse effect on the interests of Malaysia within the meaning of Article 5(c) of the SCM Agreement

The EU’s contention is that the measures are not in breach of its WTO obligations. EU has also submitted that the measures implemented are justified as they are intended to pursue EU’s legitimate policy objectives of climate change mitigation, environmental protection, preserving biodiversity, and ensuring energy security and sustainability.

At Issue: Whether EU’s renewable energy measures in respect of biofuels are discriminatory against palm-oil-based biofuels.