‘Beware of 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


“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


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.

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