Following the trade dispute brought by Malaysia against the European Union (EU) at the World Trade Organisation (WTO), the dispute settlement panel has since issued its first ruling, agreeing with some, but not all, of the charges brought by Malaysia against the EU, as well as France and Lithuania. 

The dispute revolves around the EU’s Renewable Energy Directive II (RED II)’s limit on how much crops like palm oil can contribute to a Member States’ biofuels targets. The Delegated Act of the RED II classifies palm oil as a crop where its cultivation results in high-risk significant GHG emissions from indirect land-use change. Such crops can only contribute to a limit of 7% of a EU Member State’s biofuel use, meaning that the demand for palm oil as a biofuel would likely decline. Malaysia has claimed that such a classification is discriminatory against palm oil, and argue that Indirect Land Use Change (ILUC) and its risk cap and phase-out discriminate between the country’s palm oil and oil palm-based biofuel products and other similar products of EU origin. It also challenges the EU’s national treatment and most-favoured-nation obligations as a result of the certification, risk cap and phase-out of high ILUC-risk feed crops. Malaysia’s allegations also extend to certain laws in Member States France and Lithuania, who had implemented the Directive into local laws. 

The WTO panel’s lengthy 348-page report agreed with Malaysia’s claim that its palm oil products were unfairly discriminated against by the EU as compared to like products of EU origin, as well as other third countries [1], and noted deficiencies in the design and implementation of the EU’s ILUC risk criteria. However, the WTO also ruled that the measure itself does not constitute an unfair barrier to trade, nor violated the EU’s Most Favoured Nation obligations. In particular, the WTO found inconsistencies in the implementation and certification of the ILUC risk caps. 

What is RED II?

RED II is the EU’s common framework for the promotion of renewable energy sources. It sets sustainability and greenhouse gas reduction criteria for biofuels, bioliquids and biomass fuels. One of the mechanisms governing biofuel sources is the categorisation and certification of crops under the Indirect Land Use Change (ILUC) risk factor. ILUC considers the potential for biofuel sources to replace existing agricultural land, creating a demand that increases pressure to expand agricultural land into forests, wetlands, and peatlands, which risk releasing significant amounts of CO2 emissions into the atmosphere [2]. 

Palm oil falls into this category, and its classification as a high ILUC risk feedstock means that it must be capped at 7% and phased out of the EU’s renewable fuel sources by 2030. Crops that are certified as ‘low ILUC risk’ are still subjected to a 7% limit/maximum share but not required to be phased out by 2030 [3].

Malaysia and Indonesia had both lodged complaints against the measure and sought arbitration at the WTO’s dispute settlement body. Indonesia later suspended its complaint, pending the outcomes of the Malaysia case, and also due to the ongoing FTA negotiations with the EU. 

Next steps

It is difficult to determine the immediate impact of the WTO ruling on Malaysia’s palm oil exports to the EU. Further discussions on the classification of palm oil would still need to take place, possibly in the Joint Working Group on Palm Oil. The EU currently ranks behind India and China as a destination for Malaysia’s palm oil exports [4], although most of such exports are palm oil products for food rather than for use as biofuels. The European Commission has said that it “take necessary steps” to adjust the Delegated Act under the RED II. However, since the ILUC risks and the 7% limit has been ruled by the panel as permissible under WTO rules, it is likely that such a cap remains in place. 

Malaysian Plantations and Commodities Minister Johari Abdul Ghani said that “the Malaysian government will monitor any changes to the EU’s regulations to bring it into line with the WTO’s findings and pursue compliance proceedings if necessary [5].

Based on the reactions from both parties, it appears unlikely that either side will lodge an appeal on the outcome of this ruling. Appealing is also unlikely to result in any tangible outcomes because of the current impasse in the Appellate Body and the EU’s position against “appealing into the void”. Malaysia is also not a Party to the alternative appeals mechanism initiated by the EU, the multi-party interim appeal arrangement (MPIA). 

It is also yet to be seen if Indonesia will resume the case at the WTO, given the outcomes of this ruling.   

ASEANcham-EU will continue to monitor the outcomes of this dispute, and the changes that the EU will make to bring its RED II into compliance of the ruling.

[1] https://www.wto.org/english/tratop_e/dispu_e/600r_e.pdf

[2] https://ec.europa.eu/commission/presscorner/detail/en/MEMO_12_787

[3] Article 26 (2) of RED II

[4]https://www.kpk.gov.my/kpk/images/mpi_statistik/2023_statistik_on_commodity/Sawit_2023.pdf

[5] Malaysia to monitor changes in EU curbs on palm biofuel after WTO ruling | Reuters