Trade and Environment Newsletter: Issue 18, March 2013

US blending credit for alternative fuels encourages palm oil imports

A US blending tax credit for biofuels could see palm biodiesel exports to the US from South East Asia increase markedly. At $1 a gallon, or $300 per tonne, the credit would reportedly will make palm oil derived biodiesel competitive with petroleum diesel in the US. Palm oil prices are currently cheaper than US soyoil mainly due to high inventories in major producers Malaysia and Indonesia.

The tax credit was reinstated at the beginning of this year as part of legislation to support the biofuel industry, after expiring in 2011. Its impact on prices favours palm oil exporters who have been pushing the US EPA to reconsider a ruling that palm oil biodiesel does not meet greenhouse gas emissions standards under US biofuel subsidy schemes.

Last year palm biodiesel exports to the US were negligible, but began to surge this year. It is estimated about 10,000 – 15,000 tonnes have already been sold from South East Asia to the US this year, attributed mainly to the price differential.

The large part of palm oil exports from Indonesia and Malaysia are to Europe, where some of it competes with rapeseed oil for feedstock. However, regulatory requirements for renewable energy combined with possible anti-dumping actions  could encourage trade in alternative markets, particularly with palm oil inventories at record levels (see ‘EU proposes restrictions on biodiesel imports” in February 2013 newsletter).

Nonetheless, the positive outlook for US biofuel market could be threatened if the EPA decides not to recognise the complete emissions reductions from palm oil derived biodiesel under the Renewable Energy Directive. The EPA are currently reconsidering their GhG emissions assessment of palm oil derived biofuels, following a report by a former senior economic official in the Clinton Administration that found the EPA’s initial rating for palm oil imports was not correct.

EUTR enters into force – problems already for tropical timber exporters

The EU Timber Regulation (EUTR), which regulates illegal timber trade, entered into force on March 3. Already there are signs from NGOs that it will operate to exclude supply of timber from tropical countries to European markets.

Under the EUTR, the import of illegal timber is prohibited. Failure to comply can land importers with up to two years imprisonment or a 50,000 Euro fine, and block the timber trade.

Companies importing timber into the EU are required to carry out ‘due diligence’ to ensure that the timber was logged according to the producer country’s laws, including for example, knowing the details of each logging licence under which timber is cut and taking measures to verify that all relevant laws are followed.

Not only are these requirements almost impossible to meet in some countries, reducing their attractiveness as source markets, but there is the risk they will permit arbitrary discrimination against trade from countries perceived as being of ‘high risk’.

Tropical forested countries have already been singled out by NGOs as high risk. Following a report that illegal Liberian timber was found in a French port, Global Witness campaigner Alexandra Pardal told BBC: “Almost all timber from tropical rainforests carries a high risk of illegality and should be checked out thoroughly – if there’s any suspicion at all, don’t touch it”. WWF has stated “much of the illegally traded timber comes from central Africa and South-East Asia”. A recent Greenpeace report singled out DRC timber as “clearly extremely high risk”.

Timber exporting countries in both Africa and South East Asia are negotiating bilateral agreements on timber trade and forest governance with the EU that will exempt them from the EUTR. The conclusion of some however has been delayed. In the meantime, they must trade under the EUTR.

Considerable resources are being spent on bilateral agreements that attempt to curb trade in illegal logged timber, when in fact there exists very little objective empirical data and rigorous analysis on rates of illegal logging. Apart from isolated instances, the incidence of illegal logging and exports of illegal timber is small.

Many countries already have in place national systems for the legality and sustainability of timber trade. Building the capacity of governments to improve these, rather than restricting trade, will support legal and viable forestry industries that deliver growth.

US agriculture demands EU-US trade deal address barriers to biofuels

US commodity and agriculture groups are demanding the US-EU FTA address EU technical trade barriers, including “arbitrary sustainability requirements on the production of feed stocks for biofuels.” In a letter to USTR, industry labels “such unscientific measures” as “the most challenging barrier to U.S. food and agricultural exports to the EU.”

The letter, from a coalition of 64 commodity groups, follows prior calls by the US Soy industry for technical requirements affecting biofuel exports to the EU to be dealt with in a trade agreement (see ‘Environmental trade barriers a target in EU/US trade deal’ from January 2013 newsletter).

There are reports that the EU and US are considering dealing with some technical barriers to trade (such as SPS measures for health and safety) through a consultative mechanism, rather than addressing them through specific disciplines in the main agreement.

The final report  of the High-Level Working Group (HLWG) which recommended the trade agreement be negotiated, raises the idea of a consultative mechanism to address bilateral SPS issues over time. It also recommends the FTA “build upon the key principles of the World Trade Organization (WTO) SPS Agreement, including the requirements that each side’s SPS measures be based on science and on international standards or scientific risk assessments.”

US industry has reiterated that all barriers should be addressed comprehensively and enforced under the agreement, following the approach taken in previous US FTAs. They want obligations for trade restrictive measures to be based on science and international standards, consistent with WTO rules.

This is important if the agreement is to substantially eliminate regulatory barriers and promote economic growth through trade.

FAO: biofuel regulations could hinder market development

A new report by the FAO finds that certification schemes for biofuels can hinder trade and reduce market access for developing countries, limiting opportunities for growth development from viable food and agriculture industries.

The report “Biofuels and the Sustainability Challenge” refers to the increasing number of biofuel certification schemes which have emerged in recent years, largely as the result of EU regulations and sustainability concerns about biofuel expansion. It notes “many biofuel sustainability schemes specifically target palm oil producers like Indonesia and Malaysia.”

It points out that these schemes can become indirect barriers to trade where they are established to control imports. Challenges in implementation and compliance with technical requirements can hinder trade and reduce market access. The FAO refers to studies which point to higher costs as a result of compliance with the RSPO criteria, and the EU Renewable Energy Directive.

Trade barriers particularly impact on “developing countries with comparative advantages in business production, and which see in this industry a real opportunity for development and for overcoming rural poverty and high unemployment.” For example, “the oil palm sector in Malaysia employs many workers and is one of the largest income sources in the country.”

The report advocates use of a mix of policy measures and market mechanisms to support positive environmental outcomes and encourage participation of developing countries in international trade in biofuels including “appropriate policies and strategies by the national governments in cooperation with the private sector.”

It cautions that mandatory frameworks (such as the European Union Renewable Energy Directive) need to be consistent with international trade rules.

“International” standards for meat additive beg trade dispute

A long running disagreement about the safety of a meat additive could test WTO rules on international standards. The US may challenge a ban by Russia on meat imports containing residues of ractopamine in the WTO.

The ban is in contravention of a highly politicised decision of Codex (the international body which sets food standards) that ractopamine is safe for use in food, which was taken last year.

In July Codex set acceptable maximum reside levels, or MRLs for ractopamine use (see ‘Codex food standard could test international food trade” in September 2012 newsletter). The decision to do so was considered controversial as it was made based on a narrow vote of 69-67, rather than achieved through consensus, which is the usual Codex process for adopting standards.

China, Russia and the EU have maintained effective bans on use of ractopamine in livestock, including imported meat. Russia has “prohibited all imports of US beef, turkey and other meat products by requiring a zero tolerance for the presence of ractopamine.”

At the urging of Congress, the US has challenged Russia’s ban (though not yet formally) for breaching WTO rules. Under the WTO SPS Agreement countries may ban trade for health and safety reasons where this is contrary to international standards, provided the measure is based on science.

The scientific debate over ractopamine in Codex was highly politicised, driven by differing approaches to risk management among major traders. While there is less scope in the WTO disputes system for political debate- it is rules based – key questions would still be raised: is the Codex standard an “international standard” under WTO rules, and is there sufficient scientific evidence to justify a ban?

The dispute could test trade rules on “international standards” with implications for the legitimacy of trade restrictive measures for food and chemicals regulation.

EU to impose duties on bioethanol, solar panels, reconsider fatty alcohols

EU announced in February that it would impose a five year tariff on US ethanol used for fuel sold in Europe, would investigate whether it could impose duties on solar glass from China and would partially reopen a case for imports of fatty alcohols and their blends from Indonesia, Malaysia and India.

The bioethanol tariffs follow an investigation by EU authorities begun late last year to determine if US ethanol was being sold below normal prices or was being “dumped” in the EU, unfairly damaging the domestic industry. WTO rules permit the temporary imposition of additional duties to remedy the damage used.

US industry decried the measures as “blatant protectionism” by the EU. Duties will raise the price of US ethanol imports, worth US$930 million, by about 10 percent, benefiting, French and British ethanol producers.

The reopening of the investigation on fatty alcohols, imposed in 2011, was the result of a legal challenge by an Indonesian exporting producer, Ecogreen Oleochemicals, which contested the application of duties against it. This forced the European Commission to reopen the investigation given the impact of these products no longer being considered dumped.

Exports of Indonesian fatty alcohols were worth $US42.73 million in 2009 and constituted 41.12 million tons (see ‘Indonesia challenges EU ‘anti-dumping’ measures on fatty alcohols in WTO’ in August 2012 Newsletter). They are almost all derived from palm oil. Indonesia lodged a complaint with the WTO on the anti-dumping measures in 2012.

Anti dumping actions are not unique to the EU. But WTO disputes over renewable energy are escalating – the US in February announced (USTR) it would challenge India’s national solar program (see EU proposes restrictions on biodiesel imports’ in February 2013 newsletter). In November China disputed the renewable energy measures of several European countries.

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