Europe’s Renewable Energy Directive and the Implications for Palm Oil

A recent editorial in Europe’s World entitled “Europe’s biofuels policy is protectionist and wrong-headed” by Fredrik Erixon, Director of the European Centre for International Political Economy (ECIPE), highlights very troubling developments coming out of the European Union – ones with dangerous consequences for the future use of palm oil-sourced biofuels.

Mr. Erixon’s concerns are with the European Union’s Renewable Energy Directive (RED), the EU biofuels policy that is protectionist in its heavily favouring of domestically produced biofuels within the EU. Mr. Erixon states:

“RED adds a new type of policy, technical regulation, to Europe’s toolkit of trade restrictive measures in biofuels…[it] is an ineffective tool for regulating biofuels – and it’s also a policy that will make Europe’s shift from fossil fuels to biofuels even more costly than it already is. Behind the rhetoric there hide industrial policy concerns that favour domestic biodiesel production at the expense of biodiesel produced abroad.”

Not only is RED a protectionist mechanism used to prop up Europe’s domestically sourced biofuels; it also violates World Trade Organization (WTO) commitments:

“The WTO rules are especially sensitive to discrimination, and to the principle that like products should be treated equally. Several opinions from the WTO’s panels and its appellate body have made clear that violations of these principles will not be taken lightly… In the event of a country opting for trade-restrictive measures, other countries will swiftly take it to the WTO for dispute resolutions. That means there is a clear risk of sharp trade conflicts with severe ramifications.”

The implications to Malaysia of Europe’s RED policy are grave. RED seeks to prioritize domestic biofuels over more efficient developing world biofuel sources, such as Malaysian palm oil.

Palm oil is low-cost, energy efficient, and environmentally friendly. It has a higher yield per hectare than any other readily vegetable oil source in the world, making it an effective source for biofuel in both the developing world, such as Malaysia, and the developed world, such as EU Member States.

Despite the 2.05 million tonnes of Malaysian palm oil exported to European countries in 2010, the EU’s RED policy illustrates an attempt to undermine foreign biofuel sources in favor of less efficient European, domestic biofuels. German-produced Rapeseed is a less efficient vegetable oil than palm oil, but has received massive subsidies for its production to compete with foreign-produced palm oil.

ECIPE’s earlier research further illuminates this problem.

For example, EU has increased subsidies to producers of rapeseed and sugar (already commanding inflated European prices) to meet the new demand for biofuels which has been artificially created to increase consumption of renewable energy. In 2009, the EU provided €4 billion in subsidies to the domestic biofuels sector.

And in pursuing RED, the EU is erecting trade barriers to limit imports of unsubsidized and cheaper biofuels (such as biodiesel from palm oil in Malaysia and ethanol from Brazilian-based sugar) to preserve this new market for biofuels for subsidized and more expensive biodiesel processed from European rapeseed and European sugar beet.

If Europe really wants to open up trade with Malaysia – as the EU’s pursuit of a EU-Malaysia Free Trade Agreement suggests – the EU would be well-served by ceasing the protectionist nature of the RED and reducing its trade barriers which only serve to slow economic growth in both the developed and developing worlds.

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Written by The Oil Palm