Towards the RED III: A failed reform and unpleasant surprise for palm oil as a biofuel feedstock?

The EU is currently reviewing the current iteration of the EU’s Renewable Energy Directive, known as the RED II, in view of the EU having increased its ambitions regarding the greenhouse gas (GHG) emissions reduction target for 2030 and the EU’s path to climate neutrality.

On 16 July 2021, the European Commission (Commission) had published its Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2018/2001 of the European Parliament and of the Council, Regulation (EU) 2018/1999 of the European Parliament and of the Council and Directive 98/70/EC of the European Parliament and of the Council as regards the promotion of energy from renewable sources, and repealing Council Directive (EU) 2015/652 (hereinafter, RED III). The Proposal is part of the Commission’s Fit for 55: delivering the EU’s 2030 Climate Target on the way to climate neutrality Communication, which was published on 14 July 2021.

As much as the current iteration of the EU’s rules on renewable energy, the RED III is poised to affect palm oil as a biofuel feedstock. As the Commission, the Council of the EU (Council) and the European Parliament have been formulating their positions in view of reaching a commonly agreed text, it is time to engage and ensure that the producers’ and producing countries’ perspectives are part of the EU debate and taken into account by EU regulators.

Increased ambitions regarding the EU’s climate scorecard and sustainability

The Commission is pursuing a number of sustainability-related objectives through various initiatives and legal instruments. In December 2019, the Commission presented the European Green Deal,[1] a set of policy initiatives with the overarching aim of making the EU’s economy sustainable and climate neutral by 2050 and, on 14 July 2021, the Commission adopted its Fit for 55 Communication.[2]  The Fit for 55 Communication aims at providing a coherent and balanced framework for reaching the EU’s climate objectives. It builds on policies and legislation already in place in the EU, including, inter alia, the revision to the EU’s Renewable Energy Directive RED II in view of the increased ambition regarding the revised 2030 climate target.

The RED III

To achieve the objectives set out in the European Green Deal and to achieve the EU’s increased ambition to reduce greenhouse gas emissions, the EU intends to revise and update the RED II, notably by increasing the EU target of renewable energy sources in the EU’s integrated energy system.

According to the Commission, the RED III pursues three overall objectives:

  1. To achieve an increase in the use of energy from renewable sources by 2030”;
  2. To foster better energy system integration”; and
  3. To contribute to climate and environmental objectives including the protection of biodiversity”.[3]

New binding target and sub-targets to achieve an increase in the use of renewable energy

The current RED II establishes a common framework for the promotion of energy from renewable sources and sets an overall EU biding target of 32% for the overall share of energy from renewable sources in the EU’s gross final consumption of energy in 2030.

According to the Commission’s Proposal, the RED III would increase the overall binding target for renewable energyin the EU from 32% to 40%. It can be expected that this target would actually be set at 45%, as proposed by the European Parliament, as well as by the Commission’s own REPowerEU plan, which was presented in May 2022.

Article 25 of the RED II on ‘Mainstreaming renewable energy in the transport sector’ sets sub-targets for the share of renewable energy within the final consumption of energy in the transport sector. The Commission’s Proposal introduces amendments to Article 25, which would be titled “Greenhouse gas intensity reduction in the transport sector from the use of renewable energy”. The proposed text foresees to increase the level of renewable energy used in the transport sector by setting a 13% greenhouse gas emission (GHG) “intensity reduction target”. The GHG emission reduction target is intended to make the RED III compatible with the EU’s Effort Sharing legislation, which establishes binding emission reduction targets for sectors not covered by the EU’s Emission Trading System, such as transport.

In comparison to the Commission’s Proposal, the Council proposes to provide EU Member States with the possibility to choose, with regard to the transport sub-targets, between two options: 1) “A biding target of 13% GHG reduction in transport by 2030”; or 2) “A share of renewable energy within the final consumption of energy in the transport sector of at least 29 % by 2030”.[4]

In its position, the European Parliament proposes to set a binding target of 16% GHG reduction in the transport sector by 2030. The amendments proposed by the European Parliament to Article 25 also include the possibility of a revision of the RED III by 2025 to assess the obligations set in paragraph one of Article 25. Any revision would only be undertaken if it were needed to meet the EU’s international commitments for decarbonisation or where a significant decrease in energy consumption in the EU justifies an increase of the obligation target and sub-targets.

Accelerating the phase out of high-ILUC risk biofuels?

The Commission’s Proposal for the RED III contains a number of amendments to Article 26 of the RED II, which provides the specific rules for biofuels, bioliquids and biomass fuel produced from food and feed crops, including oil palm. The amendments aim at reflecting the new GHG reduction target set for the transport sector. This means that the calculation of an EU Member State’s gross final consumption of energy from renewable sources would take into account the GHG reduction target and not the minimum share of biofuels and bioliquids, as well as of biomass fuels consumed in transport as established in the RED II.

Article 26(1)(3) of the RED II currently provides that “Member States may set a lower limit and may distinguish, for the purposes of Article 29(1), between different biofuels, bioliquids and biomass fuels produced from food and feed crops, taking into account best available evidence on indirect land-use change impact”. The Commission’s Proposal would not change this approach and Recital 31 of the proposed RED III reconfirms that “in order not to create an incentive to use biofuels and biogas produced from food and feed crops in transport, Member States should continue to be able to choose whether count them or not towards the transport target”.

Thus, EU Member States will likely continue adopting legislation that excludes certain feedstocks, such as palm oil, from being counted towards the renewable energy targets or even from being used as a biofuel at all. A worrying example is the approach pursued by Belgium, which will prohibit, from 1 January 2023, the placing on the market of biofuels and biogases based on palm oil or other products directly or indirectly derived from oil palms and, from July 2023, will also prohibit the placing on the market of biofuels and biogases based on soyabean oil or other products directly or indirectly derived from the soyabean plant. Instead of endorsing and perpetuating such discriminatory practices, the revision of the RED II should address these unfortunate aspects of EU legislation.

Neither the Commission’s Proposal, nor the Council’s position on the RED III foresee to modify the rules related to high ILUC-risk and low ILUC-risk certification. However, the European Parliament proposes amendments regarding the phase out of high ILUC-risk biofuels.

Currently, Article 26 (2) of the RED II states that, “for the calculation of a Member State’s gross final consumption of energy from renewable sources (…) the share of high indirect land-use change-risk biofuels, bioliquids or biomass fuels produced from food and feed crops (…) shall not exceed the level of consumption of such fuels in that Member State in 2019, unless they are certified to be low indirect land-use change-risk biofuels, bioliquids or biomass fuels pursuant to this paragraph” and that “from 31 December 2023 until 31 December 2030 at the latest, that limit shall gradually decrease to 0 %”. The European Parliament proposes that the RED III move forward the phase out of high ILUC-risk biofuels to the entry into force of the RED III, which is expected to be in late 2023 or beginning of 2024. This is particular worrisome for the palm oil industry, as this would do away with the gradual phase out until 2030 and would lead to a de facto ban of oil palm crop-based biofuels well before 2030.

Additionally, the European Parliament proposes to add a new sub-paragraph to Article 26(2), which would state that, by 30 June 2023, the Commission must submit to the European Parliament and to the Council“an update of the report on the status of worldwide production expansion of the relevant food and feed crops”. The new-subparagraph states that such update must include “the most recent data from the last two years with regard to deforestation and high indirect land use change risk feedstocks, and shall address other high risk commodities in the category of high indirect land use change risk feedstocks”.

With respect to the Delegated Act setting out the criteria for the certification of low ILUC-risk biofuels, bioliquids and biomass fuels and for determining high ILUC-risk biofuel feedstocks, namely Delegated Regulation (EU) 2019/807,[5] the European Parliament states that,“for the purposes of the delegated acts referred to in the sixth subparagraph, the maximum share of the average annual expansion of the global production area in high carbon stocks shall be 7,9%”. Currently, the Delegated Regulation (EU) 2019/807 sets this share at 10%. This amendment appears clearly motivated by the intention to phase out also soybean as a biofuel feedstock, given that soybean is currently attributed an 8% annual expansion into high-carbon stock land.

Revising the rules applicable to used cooking oil (UCO) under the RED III

A notable change proposed by the Commission concerns the double counting system, which refers to the approach under the RED II where used cooking oils are considered to be waste-based and are double counted for the decarbonisation of the EU’s transport sector. For instance, if used cooking oils consumption amounts to 2%, it will be counted as 4% of total energy used in transport, providing an incentive to use such oils in view of reaching the renewable energy targets. Palm oil that has been used to fry foods can be converted for the production of biodiesel. In 2019, over 1 million metric tonnes of used cooking palm oil were exported from Malaysia alone to the EU. In its Proposal for the RED III, the Commission eliminates the reference to “double counting” with respect to advanced and waste-based biofuels, which removes the additional incentive and might discourage the use of cooking oil as a biofuel feedstock.

In the context of used cooking oils, the European Parliament proposes to add a new recital 38b, which would state that an “adequate anti-fraud provisions must be laid down, in particular in relation to used cooking oil (UCO) given the widespread mixing of palm oil. As the detection and prevention of fraud is essential to prevent unfair competition and rampant deforestation in third countries, full and certified traceability of these raw materials should be implemented”. In this regard, the European Parliament proposes to amend paragraph 3 of Article 30 on ‘Verification of compliance with the sustainability and greenhouse gas emissions saving criteria’, which states that “auditing shall verify that the systems used by economic operators are accurate, reliable and protected against fraud, including verification ensuring that materials are not intentionally modified or discarded so that the consignment or part thereof could become waste or residue”.

The wrong reforms to discriminatory rules

The rules adopted under the RED II and the EU’s Delegated Regulation setting out the criteria for certification of low ILUC-risk biofuels, bioliquids and biomass fuels, and for determining the high ILUC-risk feedstock, discriminate against certain biofuel feedstocks, notably those not produced in the EU, such as palm oil. Indonesia and Malaysia, as the world’s key palm oil-producing countries, have, therefore, embarked on dispute settlement proceedings with the EU at the World Trade Organization, arguing that the EU rules discriminate against oil palm crop-based biofuels. The revision of the RED II would be the ideal opportunity to correct these discriminatory instances, but far from it, the European Parliament’s proposal might actually make things worse.

Malaysia considers that the ILUC approach under the RED II is inconsistent with the EU’s WTO obligations. Instead of further accelerating the phase out of high ILUC-risk biofuels, the EU should, in the true spirit of the Paris Agreement, reconsider its approach and pursue a more coordinated, global approach to land-use change, whether direct or indirect, that could sustainably address the environmental problems that the world faces today.

Given the diverging positions, the European Parliament and the Council of the EU must now agree with the Commission on a commonly agreeable text before the RED III can be adopted and subsequently enter into force. The inter-institutional ‘trilogue’ negotiations are scheduled to begin on 6 October 2022 and the RED III is poised to enter into force towards the end of 2023 or the beginning of 2024.

Malaysia must continue to engage with the EU and clearly reiterate in writing and formally, both bilaterally and within the WTO framework, its special development, financial and trade needs as a developing country that is highly dependent on the production and export to the EU of palm oil as a biofuel feedstock. A single approach by the EU that does not recognise Malaysia’s efforts vis-à-vis sustainability, GHG emission reduction and the protection of high carbon stock land is not only discriminatory, but also profoundly unfair and counterproductive in the fight against climate change.

Prepared by  Uthaya Kumar 
MPOC Brussels

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[1] Commission Communication The European Green Deal, 11 December 2019, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1576150542719&uri=COM%3A2019%3A640%3AFIN (accessed 22 September 2022).

[2] European Commission Communication Fit for 55: delivering the EU’s 2030 Climate Target on the way to climate neutrality, 14 July 2021, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52021DC0550 (accessed 22 September 2022).

[3] Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2018/2001 of the European Parliament and of the Council, Regulation (EU) 2018/1999 of the European Parliament and of the Council and Directive 98/70/EC of the European Parliament and of the Council as regards the promotion of energy from renewable sources, and repealing Council Directive (EU) 2015/652, European Commission (14 July 2021), available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52021PC0557 (accessed 22 September 2022).

[4] Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2018/2001 of the European Parliament and of the Council, Regulation (EU) 2018/1999 of the European Parliament and of the Council and Directive 98/70/EC of the European Parliament and of the Council as regards the promotion of energy from renewable sources, and repealing Council Directive (EU) 2015/652- General approach, Council of the EU (24 June 2022), available at https://data.consilium.europa.eu/doc/document/ST-10488-2022-INIT/en/pdf (accessed on 24 September 2022).

[5] Commission Delegated Regulation (EU) 2019/807 of 13 March 2019 supplementing Directive (EU) 2018/2001 of the European Parliament and of the Council as regards the determination of high indirect land-use change-risk feedstock for which a significant expansion of the production area into land with high carbon stock is observed and the certification of low indirect land-use change-risk biofuels, bioliquids and biomass fuels, EUR-Lex (13 March 2019), available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv%3AOJ.L_.2019.133.01.0001.01.ENG&toc=OJ%3AL%3A2019%3A133%3AFULL (accessed 24 September 2022).

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