KUALA LUMPUR: The European Union (EU) will now need to bring its measures to conform with the World Trade Organisation (WTO) obligations following Malaysia's win against the former's renewable energy policy that discriminates against biofuels produced from palm oil.
The WTO panel had on March 5 issued its final report and concluded that the EU's renewable energy policy, which restricted palm oil biofuels, was discriminatory.
Malaysia, a major palm oil producer, had in January 2021 requested WTO dispute consultations with the EU over measures adopted by the bloc and its member states affecting palm oil and palm crop-based biofuels.
"Malaysia shall diligently and firmly monitor the EU's and France's efforts to bring their measures into conformity with the WTO law and to comply with the WTO ruling," Plantation and Commodities Ministry said in a document seen by the New Straits Times.
"Malaysia believes that the decision by the WTO, and the findings by the panel against the EU and France, should contribute to trigger genuine negotiations between the EU and Malaysia to resolve the matter in a way that recognises Malaysia's efforts regarding the sustainability of its oil palm cultivation and palm oil production, including the specific needs of its smallholders," it added.
On Jan 15 2021, Malaysia launched a challenge against certain elements of the second iteration of the EU's Renewable Energy Directive (RED II), as well as certain related measures maintained by France.
In general terms, this concerned the controversial concepts of indirect land-use change (ILUC) and of low ILUC-risk.
In a nutshell, Malaysia has won important elements of the dispute, because the EU and France's measures, as they currently stand, have been deemed inconsistent with WTO rules by the adjudicating panel.
"The panel had ruled that the EU and France must now bring their measures into conformity with WTO obligations," the statement said.
In relevant part, the Panel Report published on March 5 2024 vindicates many of Malaysia's claims.
The following findings were decided in favour of Malaysia:
1. The panel found that the high ILUC-risk cap and phase-out are inconsistent with Article 2.1 of the Agreement on Technical Barriers to Trade (TBT), as well as with Article I.1, Article III:4, and Article X:III of the GATT 1994, because they accord less favourable treatment to palm oil-based biofuel from Malaysia than that accorded to like products of EU origin;
2. When it comes to the calculation of the ILUC risk, the panel found that the EU should have undertaken a regular review and updated the underlying data, which the EU did not do. This resulted in arbitrary and unjustifiable discrimination against Malaysia, thereby breaching the EU's WTO obligations;
3. With respect to the low ILUC-risk certification procedure, which would allow some oil palm crop-based biofuels back on the EU market, albeit at costly and arbitrary conditions, despite the phase-out of such products by 2030, the panel found deficiencies in the implementation by the EU, and by France in particular, of the low ILUC-risk procedures, resulting in unnecessary obstacles to international trade that are WTO-inconsistent.
More specifically, the EU must take into better consideration the characteristics of oil palm as a perennial crop;
4. The panel confirmed that the EU was required to notify its draft measures to the WTO Committee on Technical Barriers to Trade (TBT), so as to allow for a proper discussion of the proposed measures, which it had not done and which Malaysia had often requested during the EU legislative process that led to the adoption of the RED II.
This is no mere formality, but has important systemic value because, arguably, the same lack of engagement and dialogue is currently happening vis-à-vis other restrictive EU measures, such as the EUDR;
5. The panel agreed with Malaysia's arguments that the EU's measures constitute technical regulations within the meaning of the TBT Agreement and that the relevant products (namely oil palm crop-based biofuels and other oil crop-based biofuels) are 'like' products competing in the EU market. These legal victories were important enablers for the findings of WTO-inconsistency listed above;
6. In the context of the justification of the broader measures, the EU's attempt to justify its measures through the public moral exception was not successful;
Again, this finding may have important systemic consequences, as many other controversial measures being adopted by the EU (e.g., EUDR, forced labour, etc.), which will have significant trade-restrictive effects, would not be as easily justified through the public morals exception; and
7. The panel found that France's biofuel tax reduction, which does not apply to oil palm crop-based biofuels, violates Article I:1 and Article III:2 of the GATT 1994.
The panel found the measures not justified under WTO law, since France did not include any provisions or flexibilities for palm oil-based biofuels to be certified as low ILUC-risk.
On the other hand, in its decision on the following issues, the panel disagreed with Malaysia:
1. The panel considered the broader ILUC mechanism, despite its discriminatory and arbitrary traits, justifiable as a policy relating to the conservation of exhaustible natural resources and as a policy necessary to protect human, animal or plant life or health.
Unfortunately, this means that the high ILUC risk cap and phase-out can be maintained by the EU, thereby progressively removing oil palm crop-based biofuels from the EU market and resulting in a loss of commercial opportunities by Malaysia;
2. The panel did not consider the various alternative measures, put forward by Malaysia, as viable (i.e., reasonably available) alternatives to the ILUC mechanism, thereby preserving the policy space of the EU to regulate its market and to ensure that consumer demand in the EU is not a driver of adverse environmental effects, even when this may be tantamount to an exercise of extra-territorial jurisdiction; and
3. With respect to France's biofuel tax reduction, which does not apply to oil palm crop-based biofuels, the panel found that the biofuel tax reduction is not a subsidy and does not violate the WTO Agreement on Subsidies and Countervailing Measures.
"Malaysia underlines that one of the three Panellists issued a dissenting opinion, disagreeing with certain key aspects of the panel's reasoning, including the justification of the measures, and basically sided with Malaysia on all accounts," the statement said.