Beware cascading effects of EU energy directive

MAJOR palm oil producing countries such as Malaysia and Indonesia must be watchful for the “cascading” effects of the proposed European Union’s (EU) Renewable Energy Directive (RED) next year, warned a visiting European economist.

The EU may be the first to start on a technical regulation and methodology like its RED to address climate change, but the move, if left unchecked, could lead to similar actions by other countries.

Fredrik Erixon, who is with Brussels-based European Centre for International Political Economy (ECIPE) – a trade policy think-tank, said the RED faces the risk of running afoul of Europe’s obligations in the agreements of the World Trade Organisation (WTO).

“If the EU goes ahead and is not legally challenged by the WTO, then there would be others like the US which would also proceed with similar legislation for biofuel producers … because no one has the guts to take action,” he told Business Times in an interview in Kuala Lumpur.

European leaders are committed to a binding EU-wide target to source 20 per cent of their energy needs from renewables including biomass, hydro, wind and solar power by 2020.

Europe’s tariffs on biofuels vary. Ethanol is protected with tariff equivalents of between 39 per cent and 63 per cent. Biodiesel is less protected by tariffs as vegetable oils for biodiesel production have tariffs at 3.2 per cent.

Although the policy is targeted to reduce the use of fossil fuels and reduce emissions of greenhouse gases, it will affect the production costs as well as the trading system, he said.

“The RED effectively cuts off market access for foreign competitors of European rapeseed oil like palm oil for biofuel use in Europe,” Erixon said.

It directs the EU to adopt technical regulations and so-called process and production method standards and producers which do not meet those standards will not qualify for the excise-tax exemption or the national targets that EU member states should comply with.

Erixon said the RED is inconsistent with several articles of the General Agreement on Tariffs and Trade (GATT), the predecessor of the WTO, including that any advantage given to one product must also be given to like products.

A sustainability criteria used in the RED’s technical regulation says that the greenhouse gas saving from a new entity of biofuels entering into the EU market should be at least 35 per cent to qualify for the target and tax preference.

According to the EU’s calculation, the use of palm oil-based biodiesel from Malaysia failed the requirement as it achieved only 19 per cent, preventing it from qualifying for the incentives.

Malaysian stakeholders in the palm oil industry have urged the EU not to discriminate against palm oil.

Both Malaysia and Indonesia have expressed their intention to initiate action against the EU when it implements the directive next year.

Erixon said most countries are hesitant to bring about a dispute against the EU, which is a sizeably large market with 27-member states.

“It’s a valid point that you will upset a major client but one needs to demystify and depoliticise what a dispute in the WTO is. It can be done on the basis of legal obligations and in a fair and open manner with no retaliation of trade wars.”

In almost 600 of the disputes brought up in the WTO, he said, almost all of them were solved in a good manner and policies adjusted.

Although the EU is currently undertaking bilateral free trade agreements with several Southeast Asian economies like Malaysia, he said, they would not be a right platform as the issue could upset the entire negotiation.

Aggrieved parties can constantly bring up their grouses about the RED to the Technical Barriers to Trade meetings in the WTO before moving to the next course of action.

Written by The Oil Palm