Commission drafts delegated regulation on RED III in response to WTO ruling

Written by IngChang Tan

The delegated regulation comes following a WTO ruling against the RED II’s Delegated Act which found that certain aspects of the Act regarding high-ILUC risk, which restricted the use of certain biofuels, were inconsistent with trade rules. The Commission’s delegated regulation, based on its report (add link to COM 36), does not revise the high risk ILUC classification of palm oil. However, it adds soybeans into the same classification, both of which are now proposed to be phased out as biofuels counted into the renewable energy quota by 2030.

Recap

In early 2024 and 2025, the World Trade Organisation (WTO) issued rulings regarding disputes brought by Malaysia (DS600) and Indonesia (DS593) against the European Union’s Renewable Energy Directive (RED II). While the WTO upheld the EU’s right to pursue environmental objectives through the phase-out of high-risk biofuels, it ruled on three specific implementation failures that constituted unfair treatment of its trading partners:

Outdated Data: The classification criteria relied on historical figures that did not reflect current market realities.
Discriminatory Classification: The initial framework exclusively classified palm oil as a high indirect land-use change (ILUC)-risk feedstock, while excluding other similar products.
Lack of Transparency: The certification process for low ILUC-risk status lacked clear, objective, and predictable procedures for producers.

In response, the European Commission commissioned Guidehouse to conduct updated research. The resulting report (COM(2026) 36) led to several proposed regulatory amendments, most notably the re-classification of soybean oil as a high ILUC-risk feedstock and the introduction of more rigorous audit protocols for low ILUC-risk certification.

What has changed?

Feature	Before WTO Ruling (Original 2019 Text)	After WTO Ruling (Proposed/Required Changes)
Data Recency	Relied on a 2017 study (published 2019) with data showing 45% expansion of palm oil into high-carbon stock land.Date 2008 – 2016	The WTO ruled the EU failed to use sufficiently up-to-date data. The EU must now re-evaluate ILUC risk using current data (e.g., the COM(2026)36 report).Date 2014-2021
Feedstock Scope	Only palm oil was effectively classified as high ILUC-risk.	Updated data resulted in the reclassification of soybean oil as high ILUC-risk alongside palm oil.
Low ILUC-Risk Certification	Criteria for “additionality” and “smallholder” exemptions were deemed vague and difficult to implement for foreign producers.	The EU is required to clarify and refine the certification process to ensure it is “transparent, objective, and predictable” for producers in Malaysia and Indonesia.
New Trajectory for phasing out	No explicit phase-out timeline of high ILUC-risk biofuel sources with exact calculation of percentages	Inclusion of concrete phase-out timeline of high ILUC-risk biofuels with percentages with complete phase-out by 2030

The European Commission has proposed several refinements to the audit and certification protocols in response to the 2024-2025 WTO rulings and the subsequent COM(2026) 36 report. These measures aim to address the WTO rulings by enhancing the objectivity, transparency, and predictability of the low ILUC-risk certification process.

1. Management and Auditing Framework

Low ILUC-Risk Management Plan: Economic operators must submit a formal plan prior to the implementation of “additionality measures.” This plan must detail the baseline, the proposed yield-increase measures, and the expected “additional” biomass to be produced.
Dual-Phase Auditing: The certification process is now formalised into two distinct stages:
1. The Baseline Audit: Verifies the historical status of the land and establishes the Dynamic Yield Baseline (DYB).
2. The Annual Additionality Audit: An ongoing yearly verification to ensure that the biomass produced actually exceeds the established baseline.

2. Technical and Methodological Standards

Dynamic Yield Baseline (DYB): Rather than using a static average, the baseline now accounts for the natural biological growth and decline cycles of crops (particularly perennial crops like oil palm) to ensure yield increases are genuine.
Remote Sensing Integration: The use of satellite imagery (e.g., Copernicus data) is now mandatory for high-risk regions to objectively verify land-use history and prevent the certification of land cleared after the 2008 cutoff date.
Standardised Net Present Value (NPV) Test: To reduce auditor subjectivity, the “financial additionality” test now utilizes standardised reference values for costs and prices based on OECD and FAOSTAT datasets. This ensures a harmonised financial assessment regardless of the project’s geographical location.

3. Transparency and Public Oversight

Public Summary Audit Reports: To satisfy WTO transparency requirements, a summary of every low ILUC-risk audit must be made publicly available. These summaries include the specific coordinates of the certified plots and the nature of the additionality measures applied.
Union Database (UDB) Registration: All certified volumes must be recorded in the UDB to allow for real-time tracking and to prevent the double-counting of “additional” biomass.

Impact on ASEAN

Following the WTO ruling, Malaysia and Indonesia had expressed hope of a revision of palm oil away from the high ILUC classification, particularly with its knock-on effect to other legislations such as the EUDR. However, the Commission’s draft has indicated otherwise, confirming its previous data from its 2019 feedstock report and approach taken in RED II and III.

Significant changes to regulation and industry approaches have already been taking place in ASEAN as a result of the European Deforestation Regulation (EUDR) and the RED II & III regulations. Palm oil as a bioenergy feedstock for renewable energy is currently subject to a phase-out trajectory in the European Union, with full exclusion from renewable energy targets scheduled by the end of 2030. An exception exists for producers who can obtain low indirect land-use change (ILUC)-risk certification.

In light of this, Malaysia has established a framework to transition its production toward this low ILUC-risk category through various national policies. These include a 6.5 million-hectare cap on total plantation area, a strategic shift toward intensification and yield improvement, and enhanced national traceability systems. Indonesia has demonstrated success in technical pilot programmes; however, implementation faces institutional challenges. Key obstacles include the lack of a harmonised “smallholder” definition — where the EU threshold of 2 hectares differs from larger national definitions of Indonesia and Malaysia — and the administrative costs associated with proving “additionality” for certification.

Another factor of consideration is the Dynamic Yield Baseline (DYB) which remains highly contentious with its calculating formula to not be viable for long-term sustainability or for its short-term accuracy as a result of climate change. Central to this critique is the biological yield ceiling of agricultural crops, a limit that current scientific advancement has yet to overcome. The “dynamic” nature of the baseline — which incorporates a five-year historical average alongside a projected growth trend from technological improvements — is unsustainable. This is further exacerbated with increasing climate volatility that has led to significant yield fluctuations, penalising farmers for productivity losses caused by environmental factors beyond their control.

From a structural perspective, the DYB creates a situation where the benefits of yield-improvement measures are absorbed into the moving baseline after only a few years. This poses a significant challenge for small-scale farmers, for whom the escalating costs of continuous yield-intensification measures will become prohibitive.

Additionally, neither the ISPO (Indonesia) nor the MSPO (Malaysia) national certification schemes are currently formally recognised as standalone modules for low ILUC-risk eligibility under RED III (although discussions are ongoing under the context of the free trade agreements between both countries and the EU). Instead, producers must utilise EU-recognised voluntary schemes, such as ISCC EU, which introduces additional costs to the transition. Efforts must be made for the formal recognition of national schemes that meet international benchmark criteria in ensuring smallholder inclusion and certification cost reduction. This is important as the EU has stated to support micro and small operators and are not the target of said regulation.

The proposed inclusion of soybean oil as a high ILUC-risk feedstock addresses long-standing ASEAN concerns regarding “like product” discrimination. This regulatory shift, along with the standardisation of audit protocols, had been a key request of the EU-ASEAN Joint Working Group (JWG) on Palm Oil and ongoing Free Trade Agreement (FTA) negotiations as the region shifts from land expansion toward yield-driven intensification.

Furthermore, questions about the political motivation behind REDIII remain. By adding soybeans, which are mainly exported by Latin America and the US, into the same classification as palm oil, the Commission has kept rapeseed (a key EU crop) as the only cultivated biomass oil source eligible for quota compliance.