The World Trade Organization (WTO) on Friday, Jan. 10, ruled in favor of Indonesia in a case against the European Union (EU) on palm oil-based biodiesel.¹  The WTO found that the EU failed to properly notify trade partners about the sudden changes in in their biofuel feedstock criteria back in 2018 and failed to meet transparency standards, which is inconsistent with the technical barriers to trade (TBT) agreement.²  Should there be no appeal, the WTO Dispute Settlement Body will adopt the ruling within 60 days.

In its report, the WNO panel acknowledged the EU's rationale for limiting the share of biofuels produced from food and feed crops, including palm oil, to a maximum of 7 percent of energy consumption in the transport sector by 2030, The EU had also classified palm oil as a high Indirect Land Use Change (ILUC) risk feedstock, citing environmental concerns such as deforestation. However, the panel found fault in the way the EU had prepared, published and administered its measures. Specifically, the EU failed to establish a timely review process to determine their standard for high risk, and not meeting transparency obligations, leading to arbitrary or unjustifiable discrimination against countries under similar conditions.

As a brief recap, the dispute stems from the EU's revision of its Renewable Energy Directive (RED II), which introduced limitations on biofuels categorized as having high ILUC risk. ILUC refers to the reallocation of pasture or agricultural land previously intended for food and feed markets to biofuel production, which can lead to environmental concerns such as deforestation. In 2019, the EU classified palm oil, a significant export for Southeast Asia, as high ILUC risk, effectively restricting its use in meeting renewable transport fuel targets.3 

The issue, however, is that the EU was not transparent about what data they used to justify the classification of palm oil as high ILUC risk. This designation prompted palm oil exporters, not only Indonesia but also Malaysia, to accuse that the EU is unfairly targeting palm oil while favoring biofuels derived from EU-grown crops, such as rapeseed. A notable example of discriminatory treatment, that was also included in the WTO case, is Article 266 of the French Customs Code, which explicitly states that "palm oil-based products are not considered to be biofuels." As a direct consequence of this, French consumers that use palm-oil based biofuel are excluded from the country's TIRIB, which is the country's premier biofuel incentive tax.⁴ 

Indonesia's Coordinating Minister for Economic Affairs Airlangga Hartarto spoke briefly about the impact of this ruling. Firstly, he described Indonesia's win at the WTO as the result of a long push for justice against the EU's discriminatory practices. But more importantly, this ruling could be used to bolster Indonesia's position in other trade disputes, particularly against the EU regulation on deforestation-free products (EUDR).5 

The EUDR, a policy that would have required all exporters go through a rigorous verification process to prove that their products have not been obtained through deforestation, would have been an insurmountable barrier for most of Indonesia's palm oil farmers. However, the implementation of the EUDR has been continuously delayed, initially slated for May 16 2023, but its next closest implementation date is the end of this year. The recent WTO ruling and the EUDR's continuous delays leads Minister Airlangga to be more confident in advocating for fairer treatment of its palm oil industry.6