To qualify for the tax-excise exemption for bio-fuels, the greenhouse gas (GHG) savings of shifting to bio-fuels must be higher than 35%. This is also the requirement for bio-fuels to be counted in the national obligation for the use of bio-fuels. Such abject discrimination, however, is not likely to stand the test of WTO examination.

GATT Article I is one of the hurdles. It sets out a core principle of the GATT/WTO system – that ‘like’ products should be treated equally. ‘Likeness’ is not defined in the GATT. Case law, however, offers interpretations.

Two un-adopted 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 (GPR, US-Tuna [Mexico]; GPR, US-Tuna [EEC]). Even if these reports were un-adopted, they can, as later cases have shown, be a useful guide, 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 bio-fuels discrimination. The RED 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 bio-fuels 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 bio-fuels.

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 RED runs counter to several core GATT Articles. Yet it can still be consistent with the GATT if it can be established that the RED 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 RED itself suggests other and less-trade restrictive methods could be used to ensure the same policy objectives.

Difficult Test for EU

Yet the most difficult part will be to square the RED with the chapeau requirements of Article XX, which 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 RED is fairly straightforward in its intention to pursue trade-restrictive measures. Blockage of bio-fuel imports will also corrupt the environmental ambition to switch to bio-fuels as the price of bio-fuels 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 GHG impact used in EU bio-fuels policy as they arguably have been selected as much on the basis of the EU’s domestic performance as on scientific criteria. The 35% threshold ensures that domestic rapeseed oil will qualify with a small margin but that the default GHG saving of palm bio-diesel and soybean bio-diesel – the main foreign competitors to domestic rapeseed bio-diesel – will not.

The principal effect of the RED is that it essentially closes future market expansion for the main bio-diesel competitors. This is not environmental policy; it is industrial policy.

Fredrik Erixon
Director
European Centre for International Political Economy, Brussels

This is an edited version of the article published in Trade Negotiations Insights, Issue 10, Vol 8, Dec 10, 2009 January 2010.

By Fredrik Erixon, Director and Co-founder, ECIPE, Brussels

Executive Summary

• This paper examines the trade-policy consequences of current approaches in the EU towards bio-fuels. The EU uses a broad range of measures to subsidise the production of bio-fuels in Europe and to protect these from foreign competition. It is one of the biggest manifestations of ‘green protectionism’.

• Green protectionism is not about environmental policy itself, but about adding non-environmental objectives that are discriminatory or overly trade-restrictive in intent and/or effect, to environmental policy.

• Tariffs and subsidies have been part of the tool box for some time. Now the EU is also about to adopt a technical regulation in the RED that runs the risk of effectively cutting off market access for foreign competitors of European rapeseed oil. Unless it is changed, this measure is also at serious risk of running afoul of Europe’s obligations in the agreements of the World Trade Organisation (WTO).

• Europe’s tariffs on bio-fuels vary. Ethanol is protected with tariff equivalents between 39% and 63%. Bio-diesel is less protected by tariffs; vegetable oils for bio-diesel production have tariffs at 3.2%.

• Bio-fuel production in Europe is heavily subsidised. Support has also been increasing over the years and today stands at approximately €4 billion. Another way to look at subsidies is that every litre of ethanol consumed in Europe gets €0.74 and every litre of bio-diesel €0.5.

• The effective rate of assistance to bio-fuels (taking account of all measures of support) adds up to more than 250% for ethanol. Bio-diesel, and especially the rapeseed crop, has lower effective rates of assistance (up to approximately 60%).

• There has been a significant increase in bio-fuel production in Europe. It grew by a factor of 20 between 1998 and 2008. European producers have also invested heavily in future capacity. Production capacity in 2008 was 7.76 million tonnes, while the capacity for 2009 has been estimated at 20.91 million tonnes. There is significant overcapacity in bio-diesel production, in particular in Europe. Many producers have difficulty in making sufficient returns.

• The RED recently adopted in the EU sets out a new agenda for shifting away from fossil fuels. It directs the EU to adopt technical regulations and so-called process and production method standards. Producers who do not meet these standards will not qualify for the excise-tax exemption or the national targets that EU member-states should comply with. A sustainability criteria used in this technical regulation says that the greenhouse gas saving from a new entity of bio-fuels entering the EU market should be at least 35% to qualify for the target and tax preference.

• The RED is inconsistent with several core GATT articles. It violates GATT Article I rules on ‘like products’: any advantage given to one product must also be given to like products. It is also inconsistent with GATT Article III and Article XI on national treatment. The Agreement of Technical Barriers to Trade is likely to present difficulties to the implementation of the RED.

• The General Exception provision in GATT – Article XX – is unlikely to provide legal cover for the RED in the event it is used to discriminate between like products. Interpretations of case law suggest the measure would be too trade-restrictive and that it would run afoul of chapeau requirements. The revealing structure of the regulation strongly suggests that criteria have been chosen somewhat arbitrarily and in light of environmental conditions in the EU bio-fuels sector.

• When there is a direct competitive relationship between domestic and foreign products that might be changed in favour of the domestic product due to a new regulation, it is even more difficult to square a regulation with GATT rules on national treatment and non-discrimination.

• The RED will especially hit foreign competitors to Europe’s rapeseed oil producers. Such oils are less protected by tariffs than ethanol and are less subsidy-intensive. Producers of rapeseed oil 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.

• EU policies towards bio-fuels are costly, protectionist and now at risk of violating EU obligations in the WTO. These policies slow down the shifting away from fossil fuels in Europe.