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  • Writer's pictureGeorge Jacob and Divyashree Suri

To Be or Not To Be (A PPM) - EU-Biofuels (DS600)


Malaysia filed a complaint in this case against the European Union for imposing certain restrictions on imports of palm oil into the European Union. These restrictions were aimed at reducing greenhouse gas emissions.


The panel report addresses a number of aspects that may be relevant to ‘green’ instruments being introduced by countries worldwide.


We will be attempting to summarize and simplify the panel's position in this Panel Report over the course of a few blog posts. The present blog post focuses on its assessment of ‘Product and Production Methods’ (PPMs) in WTO law.


What is the background for the dispute?

The EU’s measure - the Renewable Energy Directive (RED II): The European Union introduced a law – the RED II, which mandated that 14% of the energy consumed in the transport industry in the EU was to be from renewable energy sources (including biofuels) by 2030. Ironically, biofuel products are also associated with environmental degradation due to land use change. As a result:

  • The law limits the share of food crop-based biofuels to only 7%.

  • Also, ‘high ILUC-risk’ biofuels must be ‘frozen’ at 2019 usage levels, and ‘phased out’ by 2030.

Description of Land Use Change

Malaysia’s concerns about EU RED II - Malaysia is one of the largest producers of palm oil and was disproportionately affected by the measure since palm oil production was classified as high ILUC risk. This means the EU will limit and eventually stop using biofuels made from palm oil by 2030. Since Malaysia is a large palm oil exporter, the EU’s decision to limit palm oil imports would result in an adverse effect to the Malaysian economy as it would result in the loss of a major biofuel import market. This would consequently result in the loss of jobs and shrinkage of the Malaysian palm oil production industry. Due to this potential ill-effect on its economy, Malaysia decided to raise a WTO dispute against EU’s RED II.



Was the measure a ‘technical regulation’ under the TBT Agreement?

Three-tier test of a ‘technical regulation’

Does the EU RED-II satisfy this requirement?

Panel’s Reasoning

Whether it applies to an identifiable product or group of products

Yes

Biofuel produced from food and feed crops is the ‘identifiable product or group of products’ to which both the 7% maximum share and the high ILUC-risk cap and phase-out both apply

Whether it lays down one or more characteristics of product, or their related process and production methods (PPM), including applicable administrative provisions

Yes

Both biofuels being (i) produced from food or feed crops or (ii) produced from food or feed crops with high ILUC-risk are concerning product characteristic

Whether it lays down one or more characteristics of product, or their related process and production methods (PPM), including applicable administrative provisions

Yes

The EU RED II rules determine which fuels can be used to meet the EU's mandatory renewable energy target. Hence, compliance is mandatory


Why was the measure considered to be dictating a product characteristic?

The EU measure identifies biofuels with reference to two criteria:

1)    What they are produced from (food and feed crops); and

2)    The group of products it applies by reference to their relative degree of ILUC risk.


The Panel was of the view that since both these measures ultimately identify the measure through a specific raw material (food and feed crop), it was reasoned by the Panel to also fall within the definition of “product characteristic”. It further states that since the law ultimately defines the product in question – “palm oil,” it identifies a product characteristic.


The Panel's reasoning is simple. If a specific raw material is prescribed in the measure, then it can be considered a product characteristic. This idea comes from the EC-Sardines case, where a measure required preserved sardines to be made only from the Sardina pilchardus fish, making the specific species of fish a product characteristic. In this case, the measure was seen as a product characteristic because the raw material (preserved sardines) was so closely linked to the input (the specific species of sardines) that it fulfilled the criteria of qualities intrinsic to the product.


Could this be a PPM instead?

PPMs and Product Characteristics

So, we think that a regulation that mandates specific inputs to be used or a particular procedure or process during the manufacturing or production of the product is classified as a "process and production method." For example, a regulation mandating a certain amount of tensile strength for rubber tyres is a product characteristic. On the other hand, a regulation requiring a specific type of rubber as input or a particular process for treating the rubber used in the manufacturing process is typically considered a "process and production method."


So, how does one classify a measure appropriately?

It is important to determine if a measure is a PPM (process or production method) or a product characteristic. Equally important is to figure out if the PPM is related to the product or not. For example, a measure concerning biofuels made from food grains might not be related to the product unless it directly affects the biofuel itself. If there's no clear evidence that a factor, such as different fuel efficiency between biofuels from food crops and advanced biofuels, can be detected, then the measure is considered non-product related (NPR-PPM). Similarly, the presence or absence of high ILUC risk is not a factor in the final product, as it mainly deals with exporter countries' incentives to grow biofuels in specific areas.

 

Why does it even matter?

The classification of a measure as a product characteristic or PPM is significant in trade and trade dispute resolution, especially when determining if products are "like". The concept of "like" products is important for non-discrimination rules in WTO agreements. If an NPR-PPM is misclassified as a product characteristic, it may result in different products when doing a "like" analysis. For instance, if a regulation imposes higher taxes on steel produced using a high CO2 emitting process and lower taxes on steel using a low CO2 emitting process, these might be considered different products due to their different NPR-PPM processes, even if the physical characteristics are similar. Moreover, this misclassification can lead to failure in enforcing the non-discrimination obligations in the WTO agreements. Incorrect classification is also significant due to sustainability-linked trade policies such as the EU-Carbon Border Adjustment Mechanism, is it not?

 

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