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Monday, 16 Aug, 2010

RED Alert - Unjust EU Biofuels Rule

The global palm oil industry has enjoyed extraordinary growth over the last two decades. During this time, industry participants have had to overcome many challenges. These included rapidly expanding operations while maintaining quality; entering new markets; continuing investment in new plants, equipment and human resources; and satisfying shareholders and customers with evolving needs. Malaysia's oil palm sector has met these expectations and more.

But rapid growth and an increasingly global presence are leading to new issues that need to be monitored and confronted. These were not tests that producers, suppliers, growers, financiers and consumers could have anticipated in the early years of the industry's development. The most serious of these comes from Europe. It involves a regulation called the Renewable Energy Directive (RED), and it points directly at the palm oil industry.

It is worth stating at the outset that the RED has seemingly good intentions. Indeed, it is these good intentions that have made it so politically potent. The aim is to increase Europe's use of alternatives to fossil fuels such as coal and petrol. Europeans are looking to reduce their carbon footprint that stems from use of fossil fuels. In this way they hope to combat global climate change resulting from greenhouse gas (GHG) emissions. These are sensible and laudable objectives.

But the RED has been unduly influenced by bio-energy producers in Europe as well as extreme environmental organisations. Both groups share something in common: they are opposed to the use of biomass products from Asia. In the case of the European biomass producers, the reason is straightforward enough: they don't like the competition.

In the case of the green groups, they believe - wrongly, as it turns out - that bio-fuels and other products from Asia are ecologically troubling. As a result, the RED includes certain rules and regulations that are specifically designed to limit and block market access and imports of palm oil. The regulation includes 'sustainability standards' designed to discriminate against foreign producers of bio-fuel, such as that made from palm oil.

Violation of WTO rules

Simply put, the RED is a bad deal for consumers, is against international law, rests on faulty premises and is deeply unethical. To understand why, consider several pieces of scholarship that have been published in recent years on the global trade in palm oil.

Research conducted by the Brussels-based European Centre for International Political Economy (ECIPE) found that sustainability standards and the RED violate WTO rules. In a paper entitled 'Green Protectionism in the EU: How Europe's Bio-fuels Policy and the RED Violate WTO', ECIPE Director Fredrik Erixon writes that the 'EU bio-fuels policy has become an industrial policy rather than environmental policy'.

He explains that the aim is not so much environmental protection as the provision of state aid to Europe's extensive agricultural sector. Environmental protection, specifically the reduction in the use of fossil fuels and CO2 emissions, is merely a means to this end.

He finds that the RED is specifically designed to 'hit foreign competitors to Europe's rapeseed oil producers' including foreign producers of palm oil. European producers cannot compete against a superior product supplied from Asia; as such, Erixon notes that 'producers of rapeseed oil [in Europe] will need other forms of protection to avoid tougher competition from foreign producers'. The RED, if used to cut off effective market access for foreign producers of foreign vegetable oils, will give them such protection, he writes.

Professor Andrew Mitchell of Georgetown University in Washington DC has also studied protective measures designed to shield European producers from competition. In a paper published in October 2009, Mitchell and his team examined previous case law in the context of the RED, in order to assess 'the current state of the law on issues relevant to the [Directive] and to apply that law to assess the consistency of the Directive with the EC's WTO obligations'. The Mitchell report found that the RED 'is likely to be prima facie inconsistent with the EC's obligations under the GATT', and as such is in violation of international laws and norms.

Hans Labohm, a leading Dutch economist and author, in his editorial for the Dutch financial daily Het Financieele Dagblad says that, if Europe is serious about raising the market share of bio-fuels, imports will have to play an important role. The cost of domestic production is higher than that in developing countries, which therefore have a comparative advantage. Hence, Europe would do well to make use of it, he says.

He adds that Europe's bio-fuel policy gives the impression of using concerns about global warming as an excuse to keep the heavily protectionist system of farm subsidies more or less intact. It does so at the expense of consumers, of the WTO's multilateral free trade system and, ultimately, of its own environmental aims, he warns.

Unwarranted criticism

Other research shows that claims about oil palm by critics in the environmental movement are way off base.

Oil palm generates a much higher yield than competitor sources of bio-fuel. This is partly a function of the fact that the tree grows best in tropical areas, which benefit from ideal climate and enjoy a long growing season that is conducive to crop generation and development. This enables the production of large volumes of oil on relatively small geographic footprints, something that cannot be achieved in Europe's colder climate and seasons.

In addition, the palm oil industry has invested heavily in research and development that has consistently boosted crop yields year after year. This is no surprise to those who have been doing much of this hard and productive work.

In Malaysia, for example, boosting yields is the key to the industry's continued growth and its capacity to satisfy demand while protecting its natural habitat. Contrary to the claims of environmental groups, palm oil is an environmentally friendly product - more so than fossil fuels or even other forms of bio-fuel.

Given the documented advantages palm oil enjoys over competitor products, how is it that the European Commission has reached the conclusion that imports should be restricted?

The Europeans have adopted erroneous values to measure the environmental and GHG impacts of various biomass products. They have done so despite the evidence to the contrary, in order to protect their agro-based industries and to satisfy environmental activists' demands. In short, it is clear that the RED is unfair and discriminatory.

Case for intervention

Palm oil producing countries have a strong case in pushing for an official complaint in the World Trade Organisation (WTO) against the EU and its policies with respect to biomass products. It is no secret that Europe has one of the most heavily subsidised agricultural sectors in the world. Against the odds, the palm oil industry has been able to break into the European market by providing a competitive product that satisfies customer needs. Although the palm oil sector is able to meet demand, it has run up against an ugly political process that distorts trade.

The reason the WTO exists is precisely to prevent trade-based discrimination. Prior to the advent of the GATT rounds and creation of the WTO, policy makers knew that trade protectionism was harmful. Protectionism had sown mistrust among nations and denied people the ability to use their energy and talents to tap global markets and provide a better future for themselves and their families. Protectionism had also denied consumers the fruits of a global division of labour and widespread competition, which make markets more efficient and bring prices down.

Furthermore, policy makers were aware that some producers or ideological groups hostile to trade would lobby to protect domestic industry and keep out exports. And so, the nations of the world banded together to create an organisation as well as a process that would not allow these narrow interests to derail the broader consumer interest.

That organisation is the WTO. That process is the ability of harmed nations to bring a case against counterparts that lawlessly and brazenly undermine free trade. What we are witnessing with respect to palm oil is exactly the sort of situation that justifies the existence of the WTO and the intervention it offers.


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