Finding Space for the EU Biofuels Policy in WTO
Law: Balancing between International Trade
Liberalization and Environmentally Sustainable
Development
ZHANG XUEFEI
STUDENT NUMBER: 10866094
UNIVERSITY OF AMSTERDAM
FACULTY OF LAW
Finding Space for the EU Biofuels Policy in WTO
Law: Balancing between International Trade Liberalization
and Environmentally Sustainable Development
By ZHANG XUEFEI, 10866094
1. Introduction
In contemporary society, central governments interfere with their energy trade through all sorts of legal measures in order to pursue their social values, including energy efficiency, environmental protection and so on. With the increasingly environmental-friendly awareness, it is widely accepted that fossil fuels make a significant influence on climate change; as a result, the authorities tend to encourage the use of a variety of renewable energies, such as solar, wind and biofuels. Compared with traditional renewable energy, biofuels, mainly including bioethanol and biodiesel, are regarded as alternatives to fossil fuels. The reason why countries around the world are willing to spur the promotion of biofuels industry is that biofuels promote not only the development of agriculture section also the reduction of the harmful gas emission. Thus, biofuels, as a new type of renewable energy, benefit to environmentally sustainable development, which is part of the most important objectives of WTO law. In addition, since biofuels production does not depend on special geographical conditions that a certain country may have, the biofuels trade crossing different countries is easy to be expanded on a large scale.
As for the EU market, its biodiesel, most of which is produced in Germany and France, is now the world’s largest production, while its production of bioethanol is the fourth largest. It is obvious that the European Union, as one of the major biofuels market, is willing to promote the international biofuels trade. Exactly, with the EU biofuels policy set up, the EU commits to encouraging their Member States to produce, market and use various biofuels and to trade biofuels with the third countries that have a commercial relationship with the EU. However, WTO law requires their
member states to promote not only international trade liberalization but the environmentally sustainable development as well. It is inevitable for the EU that there is a need to balance these two different values before WTO law. Therefore, this thesis tends to resolve the problem: to what extent does WTO law permit the EU to take their own biofuels policy?
In order to tackle the main problem,the remainder of this thesis proceeds as follows. As a beginning, the second section gives a brief introduction concerning some significant rules of the EU biofuels policy. Furthermore, with the analysis of some principal substantive provisions of the General Agreement on Tariffs and Trade 1994 (so-called GATT 1994) and the Agreement on Technical Barriers to Trade (so-called TBT Agreement), the thesis reviews whether the EU biofuels policy is WTO-compatible. Finally, section five summarizes those views concluded in before-mentioned sections.
2. EU biofuels policy
The European Union has a long tracking history concerning environmentally sustainable development. The first significant milestone in the development of a coherent EU policy on biofuels was the promulgation of Directive 2003/30, the Biofuels Directive1, which aimed to promote the use of biofuels and other renewable fuels for transport2. Then in 2006 European Commission published Green Paper related to the energy field entitled ‘European Strategy for a sustainable, competitive and secure energy’3. In order to trigger a larger consumption of biofuels in the EU market, the European Union adopted the Renewable Energy Directive4 (so-called the RED) on 23rd April 2009 and made this directive enter into force on 25th June 2009.
1
Directive 2003/30/EC, PBEU L 123
2 Switzer & McMahon, EU biofuels policy—raising the question of WTO compatibility, International
and Comparative Law Quarterly 2011/6, p. 713
3 Vizzotto, Sustainability Criteria for Biofuels in European Union (Directives 28/2009 and 30/2009):
Incentive to Sustainable Development or Violation to WTO Agreements, Revista de Direito Empresarial
2014, p. 213-231
Through the RED, the EU tends to achieve a dual goal, including the promotion of security of energy supply and the reduction of greenhouse gas emissions (so-called GHG emissions). Furthermore, European Parliament and the Council also adopted the Fuel Quality Directive5 (so-called the FQD) to regulate the trading of biofuels and bioliquids6 in 2009, which is amended based on the Directive 98/70/EC and Directive 1999/32/EC. Both these two directives about EU biofuels policy are part of the Strategic Energy Technology Plan.
Subsequently, the thesis will introduce the details of the RED and the FQD as follows.
2.1Outline of the RED and the FQD
First, the RED and the FQD set different operational targets respectively. The Article 3(4) of the RED requires EU Member States that ‘each Member State shall ensure that the share of energy from renewable sources in all forms of transport in 2020 is at least 10% of the final consumption of energy in transport in that Member State’, whilst the FQD in Article 7a obliges the suppliers of EU Member States to ensure a 6% reduction in GHG emissions from transport fuels by December 20207. The 6% reduction could be achieved by reducing emissions linked to the extraction and refining of fossil fuels, for example by reduced flaring of waste gas or by a switch to alternative fuels with lower lifecycle GHG emissions, including sustainable biofuels8.
Second, Article 17 of the RED and Article 7(b) of the FQD both define these two sets of sustainability criteria for EU’s biofuels, i.e. the ‘emission-related sustainability criteria’ and the ‘land-related sustainability criteria’. The reason why the EU biofuels policy sets such two sets of sustainability criteria is to address the possible negative
5 Directive 2009/30/EC, PBEU L 152 6
In EU legislation, biofuels are defined as ‘liquid or gaseous fuel for transport produced from biomass’; and bioliquids as ‘liquid fuel for energy purposes other than for transport, including electricity and heating and cooling, produced from biomass’. Other biomass for renewable energy (e.g., wood chips) is not currently subject to sustainability criteria.
7
Swinbank & Daugbjerg, Improving EU biofuels policy? Greenhouse gas emissions, policy efficiency
and WTO compatibility, Journal of World Trade 2013, p. 812
impacts brought by the explosion of biofuels trading. Actually, the use of biofuels never leads to a 100% reduction in GHG emissions compared to the use of fossil fuels and could, in extreme cases, even lead to an increase in emissions9. Besides, since the first generation biofuels are made based on biomass, which is originally used for food production or food purposes, the explosion of use of biofuels might lead to the increase of food price. Therefore, the EU lays down the emission-related sustainability criteria and the land-related sustainability criteria respectively. In terms of the emission-related sustainability criteria, the percentage reduction of GHG emissions generated through the use of a specific biofuel has to be more than one of a fossil fuel, because the EU biofuels policy aims to reduce the GHG emission through the use of biofuels. Thus, the EU sets a minimum saving rate of 35%, which is valid until 1st April 2013. From 2017 on, all biofuels will have to fulfill a 50% threshold and from 2018 the threshold will increase to 60%, but only for installations that started operating in 2017 or later10. Moreover, the RED also lays down a specific method to calculate the actual GHG emission savings of biofuels, that is, the sum of emissions has to be from extraction and cultivation of raw materials, land-use change, processing and transport and distribution. In terms of the land-related sustainability criteria, biofuels feedstock production must not occur on certain types of land with specific status that is determined in January 2008, regardless of whether certain types of land are within or outside the European Union. As listed in Article 17 (3)-(5) of the RED, (i) raw materials used to produce biofuels should not be obtained from land with high biodiversity value, such as primary forests and other wooded land where there is no indication of human activity as well as areas designated for nature protection purposes; (ii) the land-related sustainability criteria also discourage the use of ‘high-carbon-stock lands’ such as wetlands and continuously forested areas to produce biofuel feedstocks; (iii) peatlands are not permitted by the EU biofuels policy as well, unless they can be proved that production of the material did not result in the
9
Lendle & Schaus, Sustainability criteria in the EU renewable energy directive: consistent with WTO
rules, 2010, p. 1
drainage of previously undrained areas11. However, it is important to note that the use of default values can be used for biofuels made from certain raw materials as an alternative to case-by-case calculations, although the use of such values is subject to a reporting obligation and the Commission is explicitly directed to review the impact of indirect land-use change on greenhouse gas emissions12. Apart from these two environmental sustainability criteria, the inclusion of social sustainability criteria such as the impact on food prices resulted from the explosion of use of biofuels is also mentioned in the RED and FQD. For instance, paragraph 7 of Article 17 of the RED stipulates a report mechanism to monitor the potential social impact of increasing biofuel trading13. However, such inclusion of social sustainability criteria eventually failed, because paragraph 8 of Article 17 clearly rejects the social sustainability criteria to be used to define a biofuel product. Therefore, in addition to these two sets of criteria, the EU prohibits their Member States to impose any additional conditions to define the concept of ‘compliant biofuels’.
Due to the relationship between the EU and its Member States, all Member States are encourage to implement their own domestic support schemes, including, amongst others, financial means such as ‘investment aid, tax exemptions or reductions, tax refunds, and direct price support schemes such as feed-in tariffs and premium payments’ and etc.14. In addition, Article 288 of the TFEU stipulates that ‘a directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods’. In other words, a EU’s Member State has its own discretion to implement the EU biofuels policy (the RED and the FQD) in its territories by its own forms such as domestic legislation. Therefore, in practice, it is the national law of a EU’s Member State, instead of the RED or the FQD themselves, that will be challenged under WTO framework.
11 Switzer & McMahon, supra note 2, p. 716-717 12
Ibid, p. 716
13 Lendle & Schaus, supra note 9, p. 4 14 Ibid, p. 2
2.2Effect of the RED and the FQD
Normally, the current cost of biofuels’ production is much higher than that of fossil fuels; thus, it is impossible to fulfill the objectives of the RED and the FQD only through market forces. In this sense, taking account of the sustainability criteria, the EU’s Member States will set their own national legislations to achieve the target in the RED and FQD. Germany, for example, already sets specific targets for the share of fuels from renewable sources that apply to all fuel providers; accordingly, every provider that brings fuel into circulation has to mix the regular fuel with a certain amount of biofuel in order to achieve a specific proportion for petrol and diesel15. Then, the governments must grant some advantages to biofuels producers for the sake of implementation of their national legislations. Nevertheless, the essential question is whether non-EU producers will have equal opportunities as those domestic producers. However, since the RED and the FQD establish a set of requirements, such as the sustainability criteria, to limit biofuels within the EU market, it is not uncommon that some biofuels cannot meet those requirements. For example, if one kind of biofuels failed one of the ‘land-related sustainability criteria’, it would have lower economic value in the EU market, even though it might have a higher GHG emission savings. When non-EU producers have the competitive advantage in the biofuels market and fail to meet the EU sustainability criteria, they will find their large amounts of imports impeded by the EU biofuels policy and consider that the EU biofuels policy constitutes a trade barrier. Although those non-compliant biofuels are still able to market in the EU, they would be treated as a fossil fuel or worse in the EU market. Nevertheless, with absence of the universally agreed rule to limit biofuels, others countries may disagree the EU sustainability criteria or even establish different requirements on biofuels which conflicts with EU biofuels policy. Therefore, this EU biofuels policy may generate WTO disputes because the EU may treat like biofuel products differently.
15 Ibid, p. 4
Besides, due to the different operational targets in the RED and FQD, there is a question that arises whether both of these two operational targets are binding on economic operators. In terms of the RED, this EU directive only establishes the emissions saving threshold, i.e. 35%, which means that all compliant biofuels are regarded equally no matter how much emission reduction is actually generated. As a result, the RED does not motivate biofuels producers to produce higher emissions-saving biofuels effectively as well as efficiently, because it gives same financial or other supports to all biofuels with different levels of emissions saving. However, the FQD goes further in this respect for the example of Germany, which is mentioned above. In fact, producers in the EU market face a ‘blend wall’, which is currently taken to be 10% for bioethanol in petrol (a FQD limit) and 8% for biodiesel (an industry standard)16. Therefore, in order to fulfill the objectives of the RED and the FQD, there is an approach harmonizing the FQD with the RED that rather than a sufficient inclusion of renewable energy to meet 10% of the energy content of fuels it would be reformulated to secure a 6% reduction in GHG emissions compared to a fossil fuel comparator, which means that the fuel’s lifecycle GHG emissions savings that would count17.
Consequently, the EU biofuels policy exerts a strong impact on biofuels producers and imports market. Moreover, the various types of EU’s supports for biofuels have been attracting non-EU countries’ attention. Thus, the possible conflict between the EU biofuels policy set out in the RED and the FQD with the EU’s international obligations set out in the WTO law have been discussed among academe as well as between different government.
16 Department for Transport, Consultation on proposals to implement Article 7a to 7e of the EU Fuel
Quality Directive (FQD) (Directive 98/70/EC as amended by 2009/30/EC) requires suppliers to reduce the lifecycle greenhouse gas intensity of transport fuels and introducing sustainability criteria for biofuels
3. EU biofuels policy and WTO disciplines
Currently, no particular WTO Agreement explicitly regulates biofuels in any particular manner in WTO Members’ territories. However, as one sort of goods, biofuels could be regulated by the General Agreement on Tariffs and Trade 1994 (so-called GATT 1994), which aims to regulate Member States’ treatment of goods in general, thereby insuring the international trade liberalization. This is the most traditional approach in the academic discussion. Apart from the GATT 1994, there is another agreement, Agreement on Technical Barriers to Trade (so-called TBT Agreement), under the WTO framework, which is relevant to international trade. If the national legislations set up by EU Member States, either singularly or collectively, fall into the definition of ‘technical regulations’ under the Annex of the TBT Agreement, then those EU national legislations could be challenged under the TBT Agreement.
In terms of the GATT 1994, WTO law lays out an important principle of non-discrimination, to which Articles I:1, III:4 and XI:1 of the GATT 1994 are relevant. In fact, the EU biofuels policy may lead to different treatment on the basis of whether certain biofuels are able to fulfill the two sets of sustainability criteria. Although different treatment is not definitely inconsistent with the principle of non-discrimination under the GATT 1994, when one compliant biofuel mainly comes from one country and another non-compliant biofuel mainly comes from another country, this different treatment is likely to be regarded as discrimination, which breaches WTO obligations placed on the EU Members. However, the threshold question is whether products distinct on the processes and production methods (so-called PPMs) could be regarded as like. In other words, does the discrimination between like products based on the PPMs cover by the GATT 1994? Generally, PPMs are classified into two types: product-related and non-product-related PPMs. The latter is named npr-PPMs. Product-related PPMs are ‘used to assure the functionality of the product, or to safeguard the consumer who uses the product’, whereas the
npr-PPMs are ‘designed to achieve a social purpose’18. With respect to EU biofuels policy, the land-related sustainability criteria should be regarded as npr-PPMs, which do not impact on physical characteristics of the final biofuel products. Although there is no certain conclusion on this matter, in light of the rulings in US-Alcoholic
Beverages19 and US-Gasoline20, a prevailing and positive view is that the different
treatment made by the land-related sustainability criteria on the basis of different PPMs does not exclude the application of Articles I and III of the GATT 1994. Therefore, this thesis considers that EU biofuels policy falls within the scope of application of Articles I:1, III:4 of the GATT 1994.
However, in terms of the TBT Agreement, with a lack of case law, whether the TBT Agreement could apply to biofuels has not drawn a clear conclusion yet. It is well-known that the TBT Agreement exclusively regulates technical regulations, standards and conformity assessment procedures of ‘all products including industrial and agricultural products’, which are defined exactly in Annex 1 of this Agreement. Thus, this thesis needs to analyze whether the EU biofuels policy falls into the scope of the definition of ‘technical regulations’ under the TBT Agreement. Annex 1.1 of the TBT Agreement states that ‘a document which lays down product characteristics or their related processes and production methods, including the applicable administrative provision, with which compliance is mandatory. It may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method’. According to this definition, there are four elements to determine whether the measure at issue could satisfy the definition of a ‘technical regulation’: (i) a ‘document’, (ii) applicable to an identifiable group of products, (iii) product characteristics or their related PPMs and (iv) ‘mandatory’.
18 Charnovitz, The Law of Environmental PPMs in the WTO: Debunking the Myth of Illegality, Yale J.
Int’l L. 2002, p. 65
19
Panel 19-06-1992, WT/DS2/R (US – Measures Affecting Alcoholic and Malt Beverages) [online]
20 Panel 29-01-1996, WT/DS2/R (US – Standards for Reformulated and Conventional Gasoline)
Except for the third element, other three elements are easy to judge. First, the Appellate Body interpreted the term ‘document’ quite broadly in US – Tuna II
(Mexico) (2012), stating that a ‘document’ is something written, inscribed, etc., which
furnishes evidence or information upon any subject21. The EU biofuels policy lays down in the RED and FQD; thus, Directives as one formal sort of EU legislation indeed belong to ‘documents’ in the meaning of the Annex 1.1 of the TBT agreement. Second, although the definition of ‘technical regulation’ does not refer to the second element, the Appellate Body in EC – Asbestos (2001) held that a ‘technical regulation’ must be applicable to an identifiable product, or group of products22. The EU biofuels policy applies to an identifiable group of products, namely, biofuels and bioliquids, which is clearly laid down in the RED and FQD. Third, the final element requires the compliance of a ‘technical regulation’ mandatory in either a positive or a negative form. The nature of the EU Directives has decided that the compliance of EU biofuels policy is mandatory for all EU Member States.
As for the third element of concept ‘technical regulations’, firstly, with respect to the term of product characteristics, it includes, not only features and qualities intrinsic to the product itself, but also related extrinsic ‘characteristics’, such as the means of identification, the presentation and the appearance of a product23. The EU emissions-related sustainability criteria are linked to the physical features and qualities of a final biofuel product; thus, this set of criteria relates to product characteristics and falls within the definition of Annex 1.1 of the TBT Agreement. Nevertheless, the most complex part of the definition ‘technical regulations’ is related to PPMs. The heart of the issue is whether non-product-related processes and production methods (so-called npr-PPMs), which do not affect the characteristics of the final product put on the market, fall within the scope of application of the TBT
21
Appellate Body 16-05-2012, WT/DS381/AB/R (US – Tuna II (Mexico)) [online]
22 Appellate Body 12-03-2001, WT/DS135/AB/R (EC – Asbestos) [online] 23 Ibid
Agreement. The proponents argue that the words ‘their related’ should be understood to relate to ‘product characteristics’, rather than to products; thus, any product characteristic referring to a process or production method, whether detectable in the final product or not, would be covered by the TBT Agreement24. While those oppose to the above point of view, ruling that in spite of the absence of the adjective ‘related’ in the second sentence of Annex 1.1 of the TBT Agreement, the first sentence referring to the words ‘their related’ still limits the scope of the second sentence, which means that the TBT Agreement only applies to those product-related PPMs. Although this matter has been of controversy, given that the TBT Agreement addresses concerns relating to PPMs, this thesis adopts the proponents’ view, which is a systematic and teleological interpretation25. Therefore, the EU land-related sustainability criteria, as an npr-PPM, could fall within the scope of application of the TBT Agreement. Consequently, this thesis argues that the EU biofuels policy, either emissions-related or land-related sustainability criteria, falls into the coverage of the TBT Agreement.
3.1 the EU emissions-related sustainability criteria and the WTO principle of non-discrimination
Given what is mentioned above, the EU emissions-related sustainability criteria require that biofuels must reduce much more GHG emission compared with fossil fuels. For example, the required GHG emission savings should be at least 35% now. While Article I:1, Article III:4 of the GATT 1994 and Article 2.1, 2.2 of the TBT Agreement mainly reflect the WTO principle of non-discrimination. Therefore, this thesis will examine the extent to which the EU emissions-relate sustainability criteria may be potentially consistent with Article I:1, Article III:4 of the GATT 1994 and Article 2.1, 2.2 of the TBT Agreement.
24 Marceau & Trachtmann, The Technical Barriers to Trade Agreement, the Sanitary and
Phytosanitary Measures Agreement, and the General Agreement on Tariffs and Trade – A Map of the World Trade Organization Law on Domestic Regulation of Goods, Journal of World Trade 2002, p. 832
25 Norpoth, Mysteries of the TBT Agreement resolved? Lessons to learn for climate policies and
3.1.1 the consistency with the most-favored-nation treatment obligation
The General most-favored-nation treatment (so-called MFN treatment) is a WTO obligation laid down in Articles I:1, stating that ‘with respect to all matters referred to in paragraphs 2 and 4 of Article III, any advantage, favor, privilege or immunity granted by any Member to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like products originating in or destined for the territories of all other Members’. There are three terms considered when biofuels are examined under Articles I:1: (i) advantage; (ii) like products; (iii) immediately and unconditionally. The GATT does not define these key terms, but some case law has clarified their definition.
First, whether the EU biofuels policy grants an advantage is an essential question. In light of the word ‘any’ before the word ‘advantage’, it is convincing that the term ‘advantage’ can be interpreted broadly in the case law. In EC – Bananas III (1997), the Panel considered that a measure granting an ‘advantage’ within the meaning of Article I:1 of the GATT 1994 is a measure that creates ‘more favorable competitive opportunities’ or affects the commercial relationship between products of different origins26. For example, ‘advantages’ from the case law include: exemptions from import duties or other fees; intellectual property protection; and freedom from certain legal requirements27. It must be an advantage that the EU biofuels policy allows a Member State to count certain biofuels in the final consumption of energy from renewable sources, because this policy inevitably encourages Member States to legislate domestic law to stimulate consumers to purchase biofuels, which meet the two sets of sustainability criteria. Usually, this stimulation is performed by the control of price, and then the price has a great influence on competitive opportunities. Take German legislation for example. The German authorities entitle electricity producers
26 Panel 22-05-1997, WT/DS27/R/ (EC – Bananas I II (Guatemala and Honduras)) [online]
27 Mitchell & Tran, The Consistency of the EU Renewable Energy Directive with the WTO agreements,
to payment of a tariff under the Renewable Energy Sources Act with respect to electricity produced from bioliquids only if those bioliquids meet the sustainability criteria28.
Second, the concept of ‘like products’ is more complex than the term of ‘advantage’. If products are not like, the different treatment between them will not constitute discrimination under Article I:1 of the GATT 1994. In Spain – Unroasted Coffee
(1981), the Panel decided to consider three elements when it carried out the likeness
test under the meaning of Article I:1 of the GATT 1994, including the physical characteristics of the products, their end-use and tariff regimes of other Members29. On the basis of the ruling of Spain – Unroasted Coffee (1981), a WTO panel now argued that consumers’ tastes and habits as well as any other relevant criterion should also be considered in the likeness test under Article I:1 of the GATT 1994. Thus, there are four factors in the meaning of Article I:1 of the GATT 1994 to examine whether products in question are like, including (i) the products’ physical characteristics, (ii) the products’ end-uses, (iii) consumers’ tastes and habits, and (iv) the products’ tariff classification. With respect to the EU emissions-related sustainability criteria, compliant biofuels seem to be not like with those non-compliant biofuels, which only cannot meet the emissions-related sustainability criteria, because gas emissions are created by burning biofuel products, it is obvious that gas emissions belong to physical characteristics. However, in practice, it is very hard for consumers to believe that a certain biofuel product with 34% GHG emissions saving is not like a compliant biofuel with a 35%, because such difference on GHG emissions saving is quite marginal. Nevertheless, regardless of the RED or the FQD, they both fail to explain or justify that 35% GHG emissions saving is distinguished from 34% in essence. Therefore, biofuels that differs on the basis of the emissions-related sustainability criteria are like products.
28
art. 3 Ordinance on requirements pertaining to sustainable production of bioliquids for electricity production (OBEP)
Third, Article I:1 of the GATT 1994 requires that any advantage must be granted ‘immediately and unconditionally’. There is little debate on the interpretation of ‘immediately’, which means that no time should lapse between granting an advantage to a product and according that advantage to all like products30. However, three different views of the meaning of ‘unconditionally’ are competing until now. The Panel in Indonesia – Autos (1998) argued that such advantage cannot be made conditional on any criteria that are not related to the imported product itself31. While in Canada – Autos (2000), ‘unconditionally’ is interpreted by the Panel to mean that a condition is valid unless it relates to the origin of the products32. However, four years later, the Panel in EC – Tariff Preferences (2004) gave the term its ordinary meaning, that is, ‘not limited by or subject to any conditions’33. In essence, the WTO principle of non-discrimination aims to prohibit that the different treatment is made on the basis of origin. The EU emissions-related sustainability criteria apply to domestic and imported biofuels equally; thus, at least, the emissions-related conditions do not constitute de jure discrimination on the basis of origin. While in practice the requirement of 35% GHG emissions saving has not yet discriminated to most of the exports of biofuels, since majority of producers such as Brazil and U.S both export biofuels with above 35% GHG emissions saving. However, there will be a possibility of de facto discrimination when the EU requirement of GHG emissions saving increases to 50% in 2017.
Consequently, although biofuels distinct on the basis of the emissions-related sustainability criteria are like products, such EU criteria do not constitute discrimination to date, which means that the EU emissions-related sustainability criteria are consistent with Article I:1 of the GATT 1994.
30 Ibid
31 Panel 02-07-1998, WT/DS54/R, WT/DS55/R, WT/DS59/R,WT/DS64/R (Indonesia – Autos)
[online]
32 Appellate Body 31-05-2000, WT/DS142/AB/R (Canada – Autos) [online] 33 Panel 01-12-2003, WT/DS246/R (EC – Tariff Preferences) [online]
3.1.2 the consistency with the national treatment obligation
The national treatment obligation under Article III:4 of the GATT 1994 concerns internal regulations. This provision provides that ‘the products of the territory of any Member imported into the territory of any other Member shall be accorded treatment no less favorable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use’. In other words, Article III:4 of the GATT 1994 involves a three-tier test to examine the consistency of the domestic regulation at issue.
To begin with, the national treatment obligation under Article III:4 of the GATT 1994 applies to domestic regulations affecting internal sale, offering for sale, purchase, transportation, distribution or use. In Italy – Agricultural Machinery (1958), the selection of the word ‘affecting’ would imply, in the opinion of the Panel, that the drafters of the Article intended to cover in paragraph not only laws and regulations which directly governed the conditions of sale or purchase but also any laws or regulations which might adversely modify the conditions of competition between the domestic and imported products on the internal market34. Thus, the meaning of the word ‘affecting’ is very broad. In fact, there is no measure in question failed this element to date. It is evident that EU biofuels policy exerts an impact on the sale and use of biofuels, because it motivates the consumption of those biofuels meeting two sets of sustainability criteria than those non-compliant biofuels.
Next, the second element of the test of consistency with Article III:4 of the GATT 1994 is the likeness test. Actually, the ‘like products’ appears in many different provisions of WTO law, such as Article I:1, Article III:4 of the GATT 1994 and Article 2.1 of the TBT Agreement, etc.. In Japan–Alcoholic Beverages II (1996), the
Appellate Body illustrated that the accordion of ‘likeness’ stretches and squeezes in different places as different provisions of the WTO Agreement are applied, and the width of the accordion in any one of those places must be determined by the particular provision in which the term ‘like’ is encountered as well as by the context and the circumstances that prevail in any given case to which that provision may apply35. However, the likeness test of Article III:4 of the GATT 1994 is much similar to that in Article I:1 of the GATT 1994. In EC–Asbestos (2001), the Appellate Body has consistently applied four factors to determine likeness, including (i) the physical characteristics of the products in question, (ii) the extent to which they share end uses, (iii) the extent to which consumers treat the products as alternative means of satisfying the same demand, and (iv) the tariff classification of the products36. Therefore, same as the analysis and conclusion of likeness test in Article I:1 of the GATT 1994, biofuels that differs on the basis of the emissions-related sustainability criteria are like products, because in practice it is very hard for consumers to distinguish a compliant biofuel with a 35% GHG emissions saving from a non-compliant biofuel with 34%.
Finally, a complaining Member must still establish that the measure accords to the group of ‘like’ imported products ‘less favorable treatment’ than it accords to the group of ‘like’ domestic products37, because the distinction between like products is not sufficient to violate Article III:4 of the GATT 1994. The term of ‘less favorable treatment’ does not mean the differential treatment. The Panel in US – Section 337
Tariff Act (1989) interpreted ‘treatment no less favorable’ as requiring effective
equality of opportunities for imported products38, while the Appellate Body stated in
Korea – Various Measures on Beef (2001) that according ‘treatment no less favorable’
means, according conditions of competition no less favorable to the imported product
35 Appellate Body 04-10-1996, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R (Japan – Alcoholic
Beverages II) [online]
36
Appellate Body 12-03-2001, WT/DS135/AB/R (EC – Asbestos) [online]
37 Ibid
than to the like domestic product39. Applying the interpretation above, the EU emissions-related sustainability criteria are applicable to both domestic and imported biofuels, which means that such criteria do not discriminate against specific countries. In addition, the requirement of 35% GHG emissions saving currently cannot constitute de facto discrimination on the basis of origin.
Consequently, with respect to emissions-related sustainability criteria, since differential treatment between like products does not mean the less favorable treatment in the meaning of Article III:4 of the GATT 1994, this set of criteria does not violate Article III:4 of the GATT 1994.
Meanwhile, on the one hand, according to the Preamble of the TBT Agreement, this agreement pursues to protect Members’ rights of conservation of human, animal and plant life and health, and security interests and devotes to the development of technical regulations and standards. On the other hand, the TBT Agreement also goes further the WTO principle of non-discrimination set out in the GATT 1994. As a result, it is clear that the TBT Agreement commits to striking a balance between international trade liberalization and environmentally sustainable development. Thus, the TBT Agreement is of importance to biofuel products, because it not only facilitates the biofuels trade in the international market but also avoid the adverse effect brought by the explosion of biofuels trade.
Article 2.1 of the TBT Agreement is very closely similar with Article III:4 of the GATT 1994 in language. Thus, similarly, there are also three elements fulfilled to examine whether the EU biofuels policy is subject to the national treatment obligation in the meaning of Article 2.1 of the TBT Agreement. In the beginning, the measure in question should fall into the application of Annex 1.1 of the TBT Agreement, referring to the discussion above on the coverage of the TBT Agreement. Therefore,
39 Appellate Body 10-01-2001, WT/DS161/AB/R, WT/DS169/AB/R (Korea – Various Measures on
the EU biofuels policy could be regarded as a technical regulation in the meaning of Annex 1.1 of the TBT Agreement and the EU emission-related sustainability criteria specifically lays down biofuels products’ characteristics. Next, the Appellate Body in
US–Clove Cigarettes (2012) opted for a competition-based approach to the
determination of ‘likeness’ under Article 2.1 the TBT Agreement, which is, as under Article III:4 of the GATT 1994, a determination about the nature and extent of a competitive relationship between and among the products at issue40. It is clear that the likeness test is narrower under Article 2.1 the TBT Agreement than Article III:4 of the GATT 1994, because in addition to the examination of the certain likeness criteria, Article 2.1 of the TBT Agreement also requires to carry out competitiveness analysis. In spite of the narrower likeness test under Article 2.1 of the TBT Agreement, the conclusion on the likeness is the same as one under Article III:4 of the GATT 1994. Thirdly, a panel must examine whether products imported from one WTO Member are accorded ‘treatment no less favorable’ than like products originating in any other country, instead of examining whether the imported products are accorded ‘treatment no less favorable’ than like domestic products41. As noted above, standards and conformity assessment procedures are also subject to an MFN treatment and the national treatment obligation under Article 2.1 of the TBT Agreement42. Similar with Article III:4 of the GATT 1994, the measure must have a detrimental impact on the competitive conditions in order to prove the inconsistency with Article 2.1 of the TBT Agreement. However, in cases of de facto discrimination which is different with Article III:4 of the GATT 1994, the Appellate Body in US – Clove Cigarettes argued that a panel must carefully scrutinize the particular circumstances of the case, that is, the design, architecture, revealing structure, operation, and application of the technical regulation at issue, and, in particular, whether that technical regulation is even-handed, in order to determine whether it discriminates against the group of imported products43. In fact, the EU emission-related sustainability criteria are
40 Appellate Body 04-04-2012, WT/DS406/AB/R (US – Clove Cigarettes) [online] 41
Appellate Body 16-05-2012, WT/DS381/AB/R (US – Tuna II (Mexico)) [online]
42 Ibid
applicable for both EU and non-EU biofuels, which means that this set of criteria does not belong to the de jure discrimination, and this set of criteria is designed to purse the legitimate objective, i.e. reduction of GHG emissions and combating the climate change; thus, the EU emission-related sustainability criteria is consistent with Article 2.1 of the TBT Agreement.
3.2 the EU land-related sustainability criteria and the WTO principle of non-discrimination
The EU land-related sustainability criteria do not allow biofuels to make from raw materials grown in certain categories of land, including land with ‘high biodiversity value’, land with a ‘high carbon stock’ and peat land. Then this thesis will review the consistency of the land-related sustainability criteria with the WTO principle of non-discrimination.
3.2.1 the consistency with the most-favored-nation treatment obligation
Applying the three-tier test in the meaning of Article I:1 of the GATT 1994, firstly, there is an advantage that the EU biofuels policy allows a Member State to count certain biofuels in the final consumption of energy from renewable sources. Secondly, since the difference on the basis of land-related sustainability criteria does not affect the physical characteristics of the final biofuel product itself, so land-related sustainability criteria are npr-PPMs. Although whether PPMs can determine the likeness test is still much debated under WTO law, the traditional view is that such npr-PPMs are not relevant to the likeness test44. Therefore, biofuels that differ only on the basis of land-related sustainability criteria are like products. MFN treatment obligation only applies between ‘like products’ and the advantage must be granted unconditionally within the meaning of Article I:1 of the GATT 1994. Regardless of which one of these three competing views concerning the concept of ‘unconditionally’, all can draw the conclusion that the EU land-related sustainability
criteria do not grant the advantage unconditionally, because EU land-related sustainability criteria are not related to the product itself, which should not be imposed on any biofuels. Moreover, in practice, particular lands always are linked to certain countries; thus the EU land-related sustainability criteria are indirectly conditional on the origin of biofuel products, which violates the WTO principle of non-discrimination.
Consequently, the EU land-related sustainability criteria do not allow all like biofuel products concerned, irrespective of their origin, to count in the final consumption of energy from renewable sources unconditionally, which are inconsistent with Article I:1 of the GATT 1994.
3.2.2 the consistency with the national treatment obligation
Applying the three-tier test in the meaning of Article III:4 of the GATT 1994, EU biofuels policy exerts an impact on the sale and use of biofuels, because it motivates the consumption of those biofuels meeting land-related sustainability criteria than those non-compliant biofuels. Therefore, the EU land-related sustainability criteria belong to domestic regulations affecting internal sale, offering for sale, purchase, transportation, distribution or use, which are covered by Article III:4 of the GATT 1994.
As for the likeness test, if two type of biofuels with the same GHG emissions saving only different on the basis of the land-related sustainability criteria, the physical properties of a compliant and of a non-compliant biofuel will be completely same, because the land-related sustainability criteria, as a npr-PPMs, do not impact on physical characteristics of final products. And with respect to the end use they both serve as fuel in combustion engines. Furthermore, they have the same customs classification when they are traded in the market. The only questionable point is whether consumers have such perceptions or preference to treat compliant and non-compliant biofuels on the basis of the land-related sustainability criteria as
alternative products. Essentially, such preference is almost represented by governments in order to promote environmentally sustainable development, instead of final consumers. Furthermore, when compliant and non-compliant biofuels have like, even same, physical characteristics, final consumers must establish a much higher burden that they are not like products. In competitive relationships of the marketplace emphasized by the ruling of EC–Asbestos (2001), it is difficult for consumer perceptions concerning environmental-friendly awareness to overweigh the physical likeness of biofuel products. Therefore, consumer preferences are too weak to displace the presumption that compliant and non-compliant biofuels on the basis of the land-related sustainability criteria are like products.
Additionally, the EU land-related sustainability criteria seem to treat certain biofuels unfavorable according to the interpretation of ‘less favorable treatment’ mentioned above, because if non-compliant biofuels on the basis of land-related sustainability criteria were mainly from certain countries, while the EU as a whole or some particular EU Member States typically produced compliant biofuels, the EU biofuels policy might afford less favorable treatment to imported biofuels than domestic biofuels. In practice, most high carbon stock land and most land with high biodiversity value is situated outside the EU, in particular in countries with a high interest in exporting biofuels; therefore, to conserve such land is an objective that cannot be addressed in an origin-neutral way45, which means that the EU land-related sustainability criteria treat like biofuels less favorably.
Consequently, with respect to ‘land-related sustainability criteria’, it appears to afford less favorable treatment to imported biofuels than domestic biofuels under certain circumstances.
As for the consistency of the land-related sustainability criteria with Article 2.1 of the
TBT Agreement, this set of criteria lays down related processes and production methods. In addition to the competitiveness analysis, the likeness test under Article 2.1 of the TBT Agreement also includes the consideration of production methods, which is distinct from Article III:4 of the GATT 1994, because the definition of Annex 1.1 of the TBT Agreement includes processes and production methods. However, the conclusion on the likeness test is the same as one under Article III:4 of the GATT 1994, because among the competitive relationship between like biofuel products concerned, the original land types cannot displace the presumption of likeness created by their absolute similar physical product characteristics. Furthermore, the land-related sustainability criteria apply certain types of land either within or outside EU area; therefore, those criteria with objectives of the protection of the environment constitute de facto discrimination, which is consistent with Article 2.1 of the TBT agreement.
3.3 General elimination of quantitative restrictions obligation
Actually, a threshold question is that whether the EU biofuels policy fall in the scope of application of Article I:1 and Article III:4 of the GATT 1994. With respect to the coverage of Article I:1 of the GATT 1994, in the light of its words, it is true that Article I:1 of the GATT 1994 covers a very broad range of measures, including border measures and internal measures. Despite this, it does not mean that the scope of Article I:1 of the GATT 1994 is unlimited. In EC – Commercial Vessels (2005), the Panel made it clear that if a particular measure is not subject to the obligations of Article III, that measure in our view does not form part of the ‘matters referred to’ in Articles III:2 and 4 and cannot be covered by the expression ‘matters referred to in paragraphs 2 and 4 of Article III’ in Article I:146. Therefore, if the EU biofuels policy falls outside the scope of Article III:4 of the GATT 1994, it will also fall outside the scope of Article I:1 of the GATT 1994. As for the scope of Article III:4 of the GATT 1994, whether those measures on the basis of product’s PPM or npr-PPM fall inside
Article III:4 of the GATT 1994 has been much debated. The opponents hold the view that a product is literally distinguished from its PPM or npr-PPM. The reasoning is following. First, both the Panel and Appellate Body tend to emphasize the literal meaning of words in their context. Regardless of Article I:1 or Article III:4 of the GATT 1994, they only refer to ‘product’ rather than ‘PPM’. Second, later case law on other provisions and agreements emphasizes this focus on ‘products’ as opposed to PPMs47. As a result, this issue is still open to some doubt. However, if Article I:1 and Article III:4 of the GATT 1994 do not apply, Article XI:1 of the GATT 1994 will be applicable providing that the EU biofuels policy fulfills the test of latter article.
Article XI:1 of the GATT 1994 states that ‘no prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licenses or other measures, shall be instituted or maintained by any Member on the importation of any product of the territory of any other Member or on the exportation or sale for export of any product destined for the territory of any other Member’, which means that quantitative restrictions are generally prohibited under WTO law. According to the expression, quantitative restrictions include a prohibition or ban on the importation or exportation of a product, an import or export quota, import or export licensing, and other quantitative restrictions made effective through state trading operations. These different types of quantitative restrictions illustrate the broad scope of application of Article XI:1 of the GATT 1994. In Japan
Semi-Conductors (1988), Article XI:1 of the GATT 1994 is comprehensive as: it
applied to all measures instituted or maintained by a contracting party prohibiting or restricting the importation, exportation or sale for export of products other than measures that take the form of duties, taxes or other charges48. The financial support established by EU biofuels policy, in the form of inter alia tax exemptions, reductions or refunds or direct price support rather than charges, is a support for imported or
47
Mitchell & Tran, The Consistency of the EU Renewable Energy Directive with the WTO agreements, 2009, p. 24
domestic sustainable biofuels49. Therefore, the EU biofuels policy is imposed upon importation, which falls within the coverage of Article XI:1 of the GATT 1994.
Therefore, in terms of EU biofuels policy, the significant element of this provision is ‘restricting the importation’. In India – Autos (2002), the Panel argued that the term ‘restriction’ cannot mean merely ‘prohibitions’ on importation, since Article XI:1 of the GATT 1994 expressly covers both ‘prohibition or restriction’50. Furthermore, the Panel considers that the expression ‘limiting condition’ used by the India–
Quantitative Restrictions Panel to define the term ‘restriction’ and which this Panel
endorses, is helpful in identifying the scope of the notion in the context of the facts before it51. That phrase suggests the need to identify not merely a condition placed on importation, but a condition that is limiting, i.e. that has a limiting effect52. Applying this interpretation, when non-compliant biofuels without financial support in the form of tax exemptions, reductions or refunds or direct price support imports in the EU market, their price will be much high than that of fossil fuels, thereby losing incentive to use those biofuels, which must have a limiting effect on importing non-compliant biofuels. Moreover, the Panel in Dominican Republic–Import and Sale of Cigarettes
(2005) further clarified that only those measures that constitute a prohibition or a
restriction on the importation of products, i.e. those measures which affect the opportunities for importation itself, would be covered by Article XI of the GATT 199453. As for this issue, complaint country needs to provide for sufficient evidence to prove that non-compliant biofuels are normally penalized on importation. In addition, Article XI:1 of the GATT 1994 does prohibit not only de jure but also de
facto quantitative restrictions, which ruled by the Panel in Argentina – Hides and Leather (2001) that there can be no doubt, in our view, that the disciplines of Article
49 Lendle & Schaus, supra note 9, p. 11
50 Panel 05-04-2002, WT/DS146/R, WT/DS175/R (India – Autos) [online] 51 Ibid
52
Ibid
53 Appellate Body 19-05-2005, WT/DS302/AB/R (Dominican Republic – Import and Sale of
XI:1 of the GATT 1994 extend to restrictions of a de facto nature54. Therefore, the EU biofuels policy is likely to constitute a de facto restriction in relation to importation.
Consequently, the EU biofuels policy, especially the land-related sustainability criteria, constitutes a de facto quantitative restriction by penalizing non-compliant biofuels on importation, which is inconsistent with Article XI:1 of the GATT 1994.
4. Justifications
Although Article 2.1 of the TBT Agreement works in a similar way as Article III:4 of the GATT 1994, Article 2.2 of the TBT Agreement does not work like Article XX of the GATT 1994 at all. Article XX of the GATT 1994 is applicable only when a measure at issue violates Article III:4 of the GATT 1994. By contrast, a technical regulation must be justified by Article 2.2 of the TBT Agreement, even though it has already complied with Article 2.1 of the TBT Agreement.
4.1 General exceptions to GATT obligations
Although the GATT 1994 commits itself to the pursuit of objectives — trade liberalization, WTO member state still has its own discretion to adopt its domestic policies aimed at environmentally sustainable development. Yet actually, there must be some conflicts between international trade liberalization and environmental sustainable development. Thus, Article XX of the GATT 1994, entitled general exceptions, is an important gateway to allow governments to protect their other core values during international trade. When a certain measure is proved to violate other GATT provisions, Article XX of the GATT 1994 enables such measure to be justified. Article XX of the GATT 1994 states that ‘nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member of measures …’, which demonstrates that Article XX of the GATT 1994 may justify measures
inconsistent with any of the GATT obligations, of course including Article I:1, III:4 and Article XI:1 of the GATT 1994.
Article XX of the GATT 1994 sets out a two-tier test to judge whether a WTO-inconsistent measure can be justified. In US – Gasoline (1996), the Appellate Body stated that the measure at issue must not only come under one or another of the particular exceptions – paragraphs (a) to (j) – listed under Article XX; it must also satisfy the requirements imposed by the opening clauses – chapeau – of Article XX55. The Appellate Body further clarified the sequence of steps, in US – Shrimp (1998), that one must always examine, first, whether this measure can be provisionally justified under one of the specific exceptions listed in paragraphs (a) to (j) of Article XX; and, if so, whether the application of this measure meets the requirements of the chapeau of Article XX56.
In terms of the EU biofuels policy, since it aims to reduce GHG emissions and improve environmentally sustainable development, the relevant specific exceptions listed in Article XX of the GATT 1994 should be paragraphs (b) and (g). However, in practice, to date, only one environmental measure has been upheld under Article XX of the GATT 199457. According to this, such defense has been difficult to defend environmentally motivated legislation. Nevertheless, whether the EU biofuels policy can be saved by Article XX of the GATT 1994 will depend on the extent of scientific evidence, so the outcome remains uncertain.
4.1.1 paragraphs (b) of Article XX of the GATT 1994
Article XX(b) of the GATT 1994 applies for measures concerned which are ‘necessary to protect human, animal or plant life or health’. According to the words, there are two elements considered to determine whether this measure can be provisionally justified under Article XX(b) of the GATT 1994: (i) the policy objective
55
Appellate Body 20-05-1996, WT/DS2/AB/R (US – Gasoline) [online]
56 Appellate Body12-10-1998, WT/DS58/AB/R (US – Shrimp) [online] 57 Ibid
pursued by the measure is the protection of the life or health of humans, animals or plants; and (ii) the measure is necessary to fulfill that policy objective58.
Normally, Panels and Appellate Body examine the design and structure of the measure in order to determine the objective pursued, so the first element of this test is relatively easy to apply. However, as the Panel noted in Brazil–Retreaded Tyres
(2007), a party Article XX(b) with regard to environmental policy measures ‘has to
establish the existence not just of risks to “the environment” generally, but specifically of risks to animal or plant life or health’59. As a result, not all environmental policy measures could meet the first element of the test under Article XX(b) of the GATT 1994. The fact is that biofuels, which meet the land-related sustainability criteria, contribute to the reduction of GHG emissions and thereby benefit climate change and air pollution. This air pollution actually exists the risk to the health of humans, animals and plants. In addition, EU land-related sustainability criteria also aim to preserve biodiversity, which is particularly beneficial to the health of animals and plants.
The most complex part of this test is the second element, i.e. the necessary requirement. In Brazil – Retreaded Tyres (2007), the Appellate Body summed up how the ‘necessity’ requirement of Article XX(b) is interpreted and applied, as follows: a panel must consider the relevant factors, particularly the importance of the interests or values at stake, the extent of the contribution to the achievement of the measure's objective, and its trade restrictiveness60. If this analysis yields a preliminary conclusion that the measure is necessary, this result must be confirmed by comparing the measure with possible alternatives, which may be less trade restrictive while providing an equivalent contribution to the achievement of the objective61. This comparison should be carried out in the light of the importance of the interests or
58 Appellate Body 20-05-1996, WT/DS2/AB/R (US – Gasoline) [online] 59
Panel 12-06-2007, WT/DS332/R (Brazil – Retreaded Tyres) [online]
60 Appellate Body 03-12-2007,WT/DS332/AB/R (Brazil – Retreaded Tyres) [online] 61 Ibid
values at stake62. First, the environmental objectives of the EU biofuels policy, especially the land-related sustainability criteria, involve reducing the GHG emissions to combat climate change and preserving biodiversity to protect certain environments. If the EU is able to provide the WTO with sufficient and correct scientific basis for this policy, the EU land-related sustainability criteria indeed make a material contribution, rather than marginal or insignificant one, to its environmental goals mentioned above. As for the extent of trade restrictiveness, since the EU biofuels policy does not prohibit non-compliant biofuel products marketing and using in the EU trade system, it seems that this EU policy does not overly restrict non-compliant biofuels to trade. However, considering other possible alternatives, there is a less trade restrictive alternative that can provide an equivalent contribution to the achievement of environmental objectives of the land-related sustainability criteria. In fact, the EU Renewable Energy Directive (so-called RED) excludes biofuels made from raw materials obtained from the land with high biodiversity in January 2008, whether or not the land continues to have that status63. If the land had lost that status that is related to environmental objectives, such as the endangered animals or plants in that land had been extinct, at this moment the EU governments would not have any rational reason for excluding biofuels made from raw materials produced from that land. Therefore, the EU biofuels policy appears not to be justified by Article XX(b) of the GATT 1994, because there is a less trade restrictive alternative existing, leading to the EU biofuels policy cannot meet the necessary requirement.
4.1.2 paragraphs (g) of Article XX of the GATT 1994
Similar with Article XX(b) of the GATT 1994, Article XX(g) of the GATT 1994 usually justifies those measures for environmentally sustainable development purpose. It covers measures ‘relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption’. According to the expression, Article XX(g) of the GATT
62 Ibid
1994 has three elements considered to determine whether the measure in question can be provisionally justified under Article XX(g) of the GATT 1994: (i) ‘related to’ the conservation, ii) conservation of ‘exhaustible natural resources’, and (iii) ‘made effective in conjunction with’ restrictions on domestic production or consumption.
The first element of this test under Article XX(g) of the GATT 1994 requires the measure at issue to be ‘related to’ the conservation of exhaustible natural resources. When the Appellate Body in US – Shrimp (1998) analyzed the relationship between the measure in question, Section 609 of Public Law 101-162, and the conservation of exhaustible natural resources, the term of ‘related to’ interpreted as follows: the relationship between the measure in dispute and the policy objective need to be a close and real connection; and the means adopted, i.e. the measure, must be reasonably related to the end pursued, i.e. the conservation of an exhaustible natural resource; in other words, a measure may not be disproportionately wide in its scope or reach in relation to the policy objective pursued64. In this sense, the interpretation of ‘related to’ in the meaning of Article XX(g) of the GATT 1994 is not so strict as the necessary requirement under Article XX(b) of the GATT 1994. As the analysis under Article XX(b) of the GATT 1994, in the light of the design and structure of the EU the land-related sustainability criteria, the EU biofuels policy is not a simple prohibition of non-compliant biofuel products marketing and using in the EU trade system. The design of the EU biofuels policy has considered the mode of biofuels production and possible environmental consequences resulted in on the scientific basis. Thus, the EU land-related sustainability criteria seem not to be disproportionately wide in its scope and reach in relation to the policy objectives of reducing the GHG emissions to combat climate change and preserving biodiversity to protect certain environments. If the EU is able to provide WTO with sufficient and correct scientific basis for this policy, the land-related sustainability criteria indeed are, in principle, reasonably related to the ends, that is, the relationship of means and ends between the EU
land-related sustainability criteria and the environmental goal of reducing the GHG emissions to combat climate change and preserving biodiversity to protect certain environments, is a close and genuine one.
With respect to the second element of this test, the measure at issue must aim to preserve exhaustible natural resources. In US – Shrimp (1998), the Appellate Body interpreted the term of exhaustible natural resources by an evolutionary method, ruling that the generic term of ‘natural resources’ in Article XX(g) of the GATT 1994 is not ‘static’ in its content or reference but is rather ‘by definition, evolutionary’; it is, therefore, pertinent to note that modern international conventions and declarations make frequent references to natural resources as embracing both living such as animals and non-living resources such as mineral65. Since the EU land-related sustainability criteria aim to protect certain high biodiversity ecosystems, which must be linked to the endangered species，such high biodiversity ecosystems should belong to exhaustible natural resources. Besides, even clean air is an exhaustible natural resource, which has been interpreted expansively in US–Gasoline (1996). Applying this reasoning, reduction GHG emissions to combat climate change also could constitute the conservation of exhaustible natural resource. As a result, the EU land-related sustainability criteria indeed purpose to preserve exhaustible natural resources, including high biodiversity ecosystems and clean air.
As for the third and final element of Article XX(g) of the GATT 1994, the measure in dispute needs to be ‘made effective in conjunction with’ restrictions on domestic production or consumption. In terms of the term ‘made effective in conjunction with’, the Appellate Body in US – Gasoline (1996) interpreted that the clause is a requirement of even-handedness in the imposition of restrictions, in the name of conservation, upon the production or consumption of exhaustible natural resources66, which means that the measure concerned should impose restrictions on both imported
65 Ibid
and domestic products. However, the requirement of even-handedness in the imposition of restrictions does not mean the identical treatment between imported and domestic products; it merely requires that they are treated in an ‘even-handed’ manner67, because where there is identity of treatment – constituting real, not merely formal, equality of treatment – it is difficult to see how inconsistency with Article III:4 would have arisen in the first place68. This approach is also confirmed in US –
Shrimp (1998). As a result, the EU biofuels policy appears to meet the requirement of
‘made effective in conjunction with’ restrictions on domestic production or consumption for the reason that the EU biofuels policy is applicable to all involved parties, both domestic and imported biofuel products. Therefore, the EU land-related sustainability criteria relate to the exhaustible natural resources, including high biodiversity ecosystems and clean air, by encouraging the marketing and use of those compliant biofuels, and these criteria are applied to both domestic and imported products, which means that it could be provisionally justified by Article XX(g) of the GATT 1994.
4.1.3 the chapeau of Article XX of the GATT 1994
As discussed above, Article XX of the GATT 1994 sets out a two-tier test to judge whether a WTO-inconsistent measure can be justified. Even though the EU land-related sustainability criteria can be provisionally justified under Article XX(g) of the GATT 1994, it still needs to pass the test of chapeau under Article XX of the GATT 1994. The chapeau of Article XX of the GATT 1994 provides that ‘subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member of measures’. Basically, the object and purpose of the chapeau of Article XX is to avoid that provisionally justified measures are applied in such a way
67 Bossche, supra note 45, p. 865
as would constitute a misuse or an abuse of the exceptions of Article XX69; thus, the analysis of the chapeau requirement is highly based on how the measure in dispute is applied in practice. In other words, it is a balance struck between the substantive rights under the GATT 1994, such as international trade liberalization, and achievement of certain legitimate values, such as environmentally sustainable development.
There are three elements in the chapeau requirement under Article XX of the GATT 1994: (i) arbitrary discrimination between countries where the same conditions prevail, (ii) unjustifiable discrimination between countries where the same conditions prevail, and (iii) a disguised restriction on international trade. In essence, Article XX of the GATT 1994 only prohibits arbitrary and unjustifiable discrimination, which means that the chapeau requirement permits a certain degree of discrimination. In the case law, if the application of the measure at issue is rigid and inflexible, it may regard as ‘arbitrary discrimination’ within the meaning of the chapeau of Article XX. While in US–Shrimp (Article 21.5 – Malaysia) (2001), the Appellate Body argued that the Member needs to make serious efforts, in good faith, to negotiate a multilateral solution before resorting to unilateral measures70; otherwise, the discrimination may be the nature of ‘unjustifiable’. As for ‘disguised restriction on international trade’, the Appellate Body in US – Gasoline (1996) considered that this concept may properly be read as embracing restrictions amounting to arbitrary or unjustifiable discrimination in international trade taken under the guise of a measure formally within the terms of an exception listed in Article XX of the GATT 199471. Then, this term in EC – Asbestos (2001) is linked to whether the measure in dispute reveals an intention to conceal the pursuit of trade-restrictive objectives, which is further clarified as ‘disguised restriction on international trade’. Since the judgment of the chapeau requirement under Article XX of the GATT 1992 mainly depends on the
69
Appellate Body 03-12-2007,WT/DS332/AB/R (Brazil – Retreaded Tyres) [online]
70 Appellate Body 21-11-2001, WT/DS58/AB/RW (US–Shrimp (Article 21.5 – Malaysia)) [online] 71 Appellate Body 20-05-1996, WT/DS2/AB/R (US – Gasoline) [online]
