Consistency of the EU's Renewable Energy Directive with WTO Rules

The European Renewable Energy DirectiveCompatible with WTO Rules?

Simon Lacey | Last Updated on 17 October 2013

Overview

I. Summary of Findings

II. Background

III. Summary of Legal Merits of the Case Filed against the EU by Argentina

IV. Strategic Rationale for Indonesia to Bring its Own Case

V. Findings and Conclusions

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I. Summary of Findings

The European Union's Renewable Energy Directive (RED) will almost certainly to be found in clear violation of WTO rules, including the core-principle of non-discrimination.

If Indonesia wants to have the same leverage against the EU as Argentina will have once it wins the case, Indonesia must file its own case or become a co-complainant in the Argentinian case.

Although Indonesia might want to await the outcome of the Argentinian dispute and see if it can free-ride of the Argentinian victory, this strategy may back-fire and result in the Argentinian position being strengthened vis-à-vis all other competing biofuel imports.

Indonesia cannot stand idly by and allowcertain interests in the EU to paint palmoil with the brush of being an environ-mentally unfriendly product


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II. Background

The EU Renewable Energy Directive Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the

promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/ EC and 2003/30/EC (EU Renewable Energy Directive or RED).

Pursues a number of sometimes conflicting policy objectives Achieving an increase in the use of energy from renewable sources, energy savings and

increased energy efficiency, with the overarching goal of reducing greenhouse gas emissions to comply with the Kyoto Protocol to the United Nations Framework Convention on Climate Change;

Achieving a reduction in dependency on imported oil for the transport sector; Supporting economic growth through innovation and a sustainable energy policy directed

particularly at local or regional small and medium-sized enterprises (SMEs); and Achieving greater decentralization of energy production.


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Potential Trade Effects Article 3 - Mandatory national overall targets and measures for the use of energy from renewable sourcesArticle 5 - Calculation of the share of energy from renewable sources - biofuels and bioliquids that do not fulfil the sustainability criteria set out in Article 17(2) to (6) shall not be taken into account.Article 17(2) - Green house gas (GHG) emissions savings resulting from use of biofuels and bioliquids must be at least 35% compared with those of non-renewable energy sources; 50% on 1 January 2017; 60% on 1 January 2018.Article 17(3) to (5) - Land use change criteria excluding biofuels made from feedstock grown on various types of land:

• With high biodiversity value• Highly biodiverse grassland• With high carbon stock


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II. Background

Potential Trade Effects - continuedArticle 19(1) – Calculation of greenhouse gas impact of biofuels and biloiquids. Provides for the application of three different criteria for determining the GHG emissions savings:

1. A predetermined default value (Annex V)

2. An actual value determined in accordance with a formula (Annex V)Article 19(3)(a) – Annex V default values can only be used for raw materials cultivated outside the EU, so that otherwise, the Annex V actual value must be used


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II. Background

II. Background

How the the EU Renewable Energy Directive threatens Indonesia’s Export Interests

Because the default value for greenhouse gas emission savings attributed to biodiesel made from palm oil have only been set at 19 percent by Annex V of the RED, any party wishing to avail itself of biodiesel from Indonesian palm oil to meet its renewable energy targets under the RED will have to prove, on a shipment by shipment basis, that the palm oil in question was produced in a way that meets the 35 percent GHG emissions savings value.

In addition to the fact that palm oil biodiesel has only been attributed a default greenhouse gas emission saving value of 19 percent is the fact that biofuels and bioliquids cannot be used to meet the renewable energy quotas of Member States if they come from raw material obtained from land with high biodiversity value, from highly biodiverse grassland, or with high carbon stock.

Thus even if Indonesian palm oil exporters were able to demonstrate that palm oil was produced in a way that met the 35 percent GHG emissions savings values required under Art. 17(2), the EU could still ban the use of palm oil biodiesel from Indonesia on the basis of the land use change criteria


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III. Summary of Legal Merits of the Case Filed against the EU by Argentina

1. Claims under the GATT2. Claims under the TBT Agreement3. Claims under the TRIMS Agreement4. Claims under the ASCM5. Inconsistency under the Marrakesh Agreement6. Summary of likely outcomes on the merits


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1. Claims under the GATT

Argentina claims that the EU Renewable Energy Directive violates a number of GATT provisions, namely:- Art. I.1, (most favoured nation)- Art. III:1, and Art. Art. III.2, III.4 and III.5. (various national treatment obligations)

We believe that on all the constitute elements of these claims (like product, less favourable treatment) Argentina can easily and unambiguously show that the way in which the RED is currently formulated is both de jure and de facto discriminatory against imported biofuels.

We also believe that even if the EU should be able to show that the RED meets the criteria set forth in GATT Art. XX(d) - which we doubt - the RED would in any event founder on the requirements set forth in the chapeau of GATT Art. XX, namely because it either constitutes arbitrary or unjustifiable discrimination and/or a disguised restriction on international trade.


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2. Claims under the TBT Agreement

Argentina has challenged the RED in invocation of claims under Articles 2.1, 2.2 (technical regulations)

As well as under Articles 5.1 and 5.2 (conformity assessment procedures). We believe that Argentina will ultimately be able to prevail under Art. 2.1, since the RED

constitutes a technical regulation that provides for less favourable treatment to imported biofuels and because such treatment is not justified by its contribution to achieving a legitimate regulatory objective.

We also believe that this might be the first time a country may succeed in prevailing on an Art. 2.2 claim, since we believe that the EU will ultimately fail to show that the RED is necessary as well as being less trade restrictive than necessary.

We also believe that Argentina will be able to prevail on Articles 5.1 and 5.2, given that the discretionary authority to recognize or withhold recognition of foreign biofuels as meeting the RED sustainability criteria upon applications by national industry associations seems to violate the obligations set forth in these two articles, namely the principles of non-discrimination, necessity and expediency


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3. Claims under the TRIMS Agreement

Argentina claims that the RED and its implementing legislation to date are inconsistent with Art. 2.1 and 2.2 of the TRIMs Agreement "because the measures appear to be investment measures related to trade in goods which are inconsistent with Article III of the GATT 1994.”

We believe that in making this claim Argentina seeks to further strengthen its argument that the EU is treating imported biofuels less favourably than domestic biofuels in violation of its national treatment obligations under GATT Art. III.

Particularly where the RED seeks to pursue a policy of promoting investment into renewable energy infrastructure to further the Directive's objectives of greater energy self-sufficiency and a more regionally diverse energy supply chain, and does this by tilting the playing field in favour of domestic biofuels in violation of various national treatment obligations, a strong case exists for a violation of the TRIMS Agreement.

Prevailing on these claims will be contingent on Argentina prevailing on its GATT Article III claim.


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4. Claims under the Subsidies Agreement

Argentina claims that the RED and its implementing legislation to date are inconsistent with 3.1(b) and 3.2 of the SCM Agreement "because it appears that a subsidy is granted within the meaning of Article 1.1 of the SCM Agreement, there being a financial contribution that confers a benefit. The subsidy appears to be a prohibited subsidy because it is granted on the condition that biodiesel which is produced in the EU is used. Since the subsidy is covered by the provisions of Article 3 of the SCM Agreement, it would also be considered to be specific pursuant to Article 2.3 of the SCM Agreement."

In the alternative, Argentina also claims that the alleged subsidy in question, if not inconsistent with ASCM Art. 3 (i.e. a prohibited import substitution subsidy), is in any event an actionable subsidy that has caused it adverse effects under ASCM Art. 5, possibly in connection with Art. 6.

In effect, Argentina is complaining of an excise tax reduction that is essentially only available for European biofuels.


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4. Claims under the Subsidies Agreement – cont.

If Argentina is not able to prove that the excise duty reduction is in fact a prohibited subsidy under ASCM Art. 3, we believe that Argentina may encounter some difficulty in proving causality between the EU excise tax reduction and any adverse effects it claims.

In any event, if Argentina is successful in convincing the panel that the EU has violated its obligations under GATT Art. I and or III, then Argentina will not need to prevail on a serious prejudice claim.

Moreover, if Argentina can successfully convince the panel that the EU's RED violates GATT Art. I and/or III, as well as Articles 2.1 and/or 2.2 of the TBT Agreement, the panel might well opt to exercise judicial economy and refrain from making any findings under the ASCM.

We believe that Argentina will ultimately be able to convince the panel that the excise tax deduction is either a prohibited subsidy under Art. 3 of the ASCM or if necessary, that the excise tax deduction has caused it adverse effects within the meaning of Art. 5 of the ASCM.


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5. Inconsistency with the Marrakesh Agreement

Argentina claims that the RED and its implementing regulations are in breach of Article XVI:4 of the Marrakesh Agreement Establishing the World Trade Organization "because the measures do not appear to conform to the obligation of the European Union to ensure the conformity of its laws, regulations and administrative procedures with the obligations incumbent upon it under the annexed Agreements."

This article is generally invoked in disputes where in the absence of a specific measure, or where WTO non-consistent laws, regulations or procedures have not been applied as such but still exist on the statute books, another WTO Member can sue with a view to having the WTO non-compliant legislation, regulations or procedures brought into conformity with WTO rules.

We believe that this claim was merely invoked by Argentina for the sake of completeness, or in the event that the EU might argue that although the RED has been enacted at the Community level, Member States have in many cases not issued implementing regulations so that there is in effect no case of effective discriminatory treatment for foreign biofuel imports.

To prevail on this claim, Argentina will first have to prevail on one of the other substantive claims it has made under either GATT, the TBT Agreement, the TRIMS Agreement or the ASCM.


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6. Summary of likely outcomes on the merits

Following our analysis of the RED and an examination of its consistency with the claims Argentina has raised in its request for consultations, we have come to the conclusion that the EU Renewable Energy Directive cannot, in its present form, withstand this challenge by Argentina, and will be found to be WTO in-consistent either on some or all of the claims invoked by Argentina.


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Palm oil production and exportation is big business in IndonesiaAlthough Indonesia's palm oil exports currently flow predominantly to India and China, with the United States and the EU representing export destinations of only marginal importance, Indonesia can ill afford to sit idly by and let two of the most important emerging markets for renewable energy (the US and the EU) become effectively closed to exports of biodiesel from palm oil.


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Those behind RED wish to paint palm oil as environmentally unfriendlyMany of the environmental claims leveled against Indonesian palm oil are really just a front for well-organized interests that produce competing products in either the EU or the United States. These interests wish to see palm oil become so tainted with the stigma of environmental destruction and the extinction of endangered species that consumers will be loath to buy it for any purpose whatsoever.


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Challenging RED has important systemic implications for Indonesia If Argentina brings this case alone, it might succeed in obtaining a very narrow

ruling or a mutually agreed solution that benefits its own exporters but is of limited value to other exporters of non soy-based biofuels.

In addition, we also believe that Indonesia must start to assert itself in WTO dispute settlement in a manner that is befitting of its size as well as its economic and geopolitical importance as the largest economy in ASEAN.


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Indonesia must have the same substantive and procedural rights as other litigants

Enforcing compliance with a positive WTO ruling could be a prolonged battle which Indonesia can only hope to benefit from if it is authorized to use the full ambit of retaliatory measures provided under the Dispute Settlement Understanding. It cannot benefit from these important procedural rights by sitting on the side-lines or merely becoming a third party to the Argentinian (or another WTO Member's) complaint.


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V. Findings and Conclusions

Free-riding is not an option for Indonesia hereArgentina has a strong case against the EU in this dispute and this dispute has far-reaching and significant implications for Indonesia, to the extent that Indonesia cannot afford to adopt a wait-and-see attitude but should immediately file its own complaint or become a co-complainant in the case launched by Argentina.

Argentina only has the interests of its own exporters in mindWe consider it very likely that Argentina will either obtain a very narrowly formulated ruling that primarily benefits itself, or comes to a mutually agreed solution with the EU that again is primarily of benefit to Argentinian exporters.

Threat of retaliation is the best way to force changeAlternatively, Argentina may prevail but spend years waiting for the EU to comply, in which case Argentina could be the only WTO Member authorised to retaliate against the EU - like Brazil in the cotton case, where the African countries which make up the Cotton 4 have only empty promises that their concerns will be addressed "ambitiously, expeditiously and specifically” within the Agriculture Negotiations”


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Consistency of the EU's Renewable Energy Directive with WTO Rules

Education

use of energy

energy savings

renewable energy targets

share of energy

renewable sources article

nonrenewable energy

renewable sources biofuels

use of palm oil biodiesel