Standard as protectionist device: the EU Renewable Energy Directive

15 December 2009

In its Renewable Energy Directive, adopted earlier this year, the European Union has ushered its biofuels policy farther in the direction of protectionism. The professed environmental ambition to substitute fossil fuels with biofuels is warranted, but the design of Europe's biofuels policy and the Renewable Energy Directive has moved away from this ambition. Too often now it is little more than a tool of industrial policy for the uncompetitive agro-industrial sectors.

The Renewable Energy Directive adds a new dimension to the EU's use of trade restrictive measures in biofuels: technical regulations that operate as a standard. To qualify for the tax-excise exemption for biofuels, the greenhouse gas savings of shifting to biofuels must be higher than 35 percent. This is also the requirement for biofuels to be counted in the national obligation for the use of biofuels. Such abject discrimination, however, is not likely to stand the test WTO examination.

GATT Article I is one of the hurdles. It sets out a core principle of the GATT/WTO system: like products should be treated equally. "Likeness" is not defined in the GATT.  Case law, however, offers interpretations. Two unadopted panel reports have ruled that products are not unlike just because there are differences in production methods, when these differences do not affect the physical characteristics of the final product.[1] Even if these reports were unadopted, they can, as later cases have shown, be a "useful guidance", especially as they have not been opposed in subsequent cases.

In rulings from the Appellate Body, four criteria have consistently been used to define likeness. But none of these criteria provide legal cover for EU biofuels discrimination. The Renewable Energy Directive is principally inconsistent with this Article as it is based on discrimination of products that are like. The argument provided by the EU is that some biofuels will not have been produced in a way that is acceptable from an environmental point of view. This may be true, but it has no bearing on the physical characteristics of biofuels. It has been suggested that a recent case (EC-Asbestos) provides the legal legitimacy to distinguish products on the basis of the environmental impact of production methods. The Appellate Body ruled that consumer perceptions are relevant when considering "likeness". But they ruled on the basis of the use of chemical components with physical characteristics and hence established a link between the production process and physical properties of the end product.

It is clear that the directive runs counter to several core GATT articles. Yet it can still be consistent with the GATT if it can be established that the directive qualifies to be treated under the General Exception - Article XX. This article justifies exceptions if it can be established that an otherwise GATT-inconsistent regulation is necessary to - in this case - "protect human, animal or plant life and health" or if it relates to "the conservation of exhaustible natural resources". This article, however, does not provide an open-ended excuse to adopt any sort of trade-restrictive measure.

The problem for the EU will be to justify violations of GATT articles on the basis of effectiveness of the measure and scientific evidence in favour of the particular land-based sustainability criteria chosen by the EU. What also causes concern is that the directive itself suggests other and less-trade restrictive methods could be used to ensure the same policy objectives.

Yet the most difficult part will be to square the Renewable Energy Directive with the chapeau requirements of Article XX. The chapeau of Article XX disciplines the potential misuse of the Article. To that end, the Appellate Body has clarified in rulings that there must be a rational connection between the measure and the environmental goal in order to avoid "arbitrary and unjustifiable discrimination". Panel reports have opined that the way to test this is to examine whether "the design, architecture and revealing structures" indicate an intention to "conceal the pursuit of trade-restrictive objectives". This will be a difficult test for the EU. The directive is fairly straightforward in its intention to pursue trade-restrictive measures. Blockage of biofuels imports will also corrupt the environmental ambition to switch to biofuels as the price of biofuels will become artificially high.

The fact that the EU has adopted a so-called process and production method (PPM) regulation complicates WTO consistency. There is less favourable treatment of imports if the PPM and the non-PPM product are in a direct competitive relationship and the design has the effect that imported products are treated less favourably than like domestic products. This is particularly problematic in view of criteria used for calculating greenhouse gas impact used in EU biofuels policy as they arguably have been selected as much on the basis of the EU's domestic performance as on scientific criteria. The 35 percent threshold ensures that domestic rapeseed oil will qualify with a small margin but that the default greenhouse gas saving of palm oil biodiesel and soybean biodiesel - the main foreign competitors to domestic rapeseed biodiesel -will not. The principal effect of the directive is that it essentially closes future market expansion for the main biodiesel competitors. This is not environmental policy; it is industrial policy.

Fredrik Erixon is a Director at the European Centre for International Political Economy (ECIPE) in Brussels

[1] GPR, US-Tuna (Mexico); GPR, US-Tuna (EEC)

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