A. Agreement on Agriculture

The WTO Agreement on Agriculture seeks to control ‘the annual level of support, expressed in monetary terms, provided for an agricultural product in favour of producers of the basic agricultural product or non-product-specific support provided in favour of agricultural producers.’Footnote ⁵¹ This calculation, referred to as the Aggregate Measurement of Support (AMS), provides the basis for the reduction commitments under the Agreement. The detailed rules for the AMS calculation are provided in Annex 3 of the Agreement and these make it clear that ‘measures directed at agricultural processors shall be included to the extent that such measures benefit producers of the basic agricultural product.’ The AMS is subject to reduction over the duration of the Agreement, as is support provided under production-limiting programmes classified under the Blue Box.Footnote ⁵² Annex 2 of the Agreement exempts what are referred to as Green Box measures, provided that the support provided ‘shall meet the fundamental requirement that they have no, or at most minimal, trade distortion effects or effects on production.’Footnote ⁵³ There is an obligation that the support is provided through a publicly-funded government programme and that such support should ‘not have the effect of providing price support to producers.’

It is important to know how to classify support given to feedstock producers in the EU in order to assess whether such support is compatible with the Agreement on Agriculture. The Energy Crop Payment was notified under the Blue Box of the Agreement and the use of set-aside land to support biofuels production could have come under the Green Box. However, following the CAP Health Check, both the Energy Crop Payment and the set-aside scheme have been abolished as from 2010.Footnote ⁵⁴ With the removal of such schemes, support under the CAP for the cultivation of biofuel feedstocks will instead be structured under the Rural Development pillar.Footnote ⁵⁵ The decoupling of support from production is part of a trend within recent reforms of the CAP to move agricultural support provided under the terms of the Agreement on Agriculture from the Blue Box, which is subject to reduction commitments, to the Green Box, which is not subject to such commitments.Footnote ⁵⁶

This is not to say that there are no disciplines associated with the Green Box. Paragraphs 5 to 13 of Annex 2 allow for various direct payments to producers to be exempt from the reduction commitment, provided the basic criteria laid down in paragraph 1 plus the specific criteria applicable to the individual payment are satisfied. If a particular payment is not specified in these paragraphs, it can still be exempt from the reduction commitment provided the general criteria of paragraph 1 are satisfied and the criteria of paragraph 6 (b)–(e) are also satisfied. Under these paragraphs, the amount of payment in any given year is not related to, or based on, the type or volume of production undertaken by the producer, the prices (domestic or international) applying to any production undertaken, or the factors of production employed, in any year after the base period. With changes to the set-aside scheme, the EU can no longer rely on paragraph 10 of the Green Box (Structural Adjustment—removing land from marketable agricultural production) or Paragraph 12 (Environmental Programmes). This leaves only Paragraph 13 of Annex 2, payments under regional assistance programmes, as a potential justification for biofuel subsidies.

Under Regulation 74/2009, support will be available under Axis 1 (Improving the competitiveness of the agricultural and forestry sector) and Axis 3 (Quality of life in rural areas and diversification of the rural economy).Footnote ⁵⁷ To qualify under the Green Box, paragraph 13 limits eligibility for such payments to producers in ‘disadvantaged regions’, that is, ‘a clearly designated contiguous geographical area with a definable economic and administrative identity, considered as disadvantaged on the basis of neutral and objective criteria clearly spelt out in law or regulation and indicating that the region's difficulties arise out of more than temporary circumstances.’ Payments, which would only be available to producers in these regions, cannot be related to, or based on, the type or volume of production or the prices applying to any production, undertaken in any year after the base period and are limited to the extra costs or loss of income involved in undertaking agricultural production in the region. It appears doubtful whether paragraph 13 would provide a sufficient basis for the provision of biofuel subsidies under the Agreement on Agriculture. As a result paragraphs 6 (b) to (e) will apply and the general criteria in paragraph 1 of Annex 2 will apply. Article 7 of the Agreement on Agriculture provides that it is up to each Member to ensure the conformity of domestic support measures with the provisions of Annex 2. In the event that a measure is shown not to satisfy the criteria in Annex 2 it will become subject to inclusion in the Member's total AMS. There is no jurisprudence interpreting article 7 and very limited jurisprudence interpreting Annex 2. If the subsidies to biofuel production are not covered by the Agreement on Agriculture, they will be subject to the disciplines of the Subsidies Agreement.

B. Subsidies Agreement

The WTO Subsidies Agreement divides subsidies into two categories—prohibited and actionable with the former including export subsidies and subsidies contingent on the use of domestic products over imported products. For a subsidy to be actionable it must meet the definition of a subsidy, that is, there must be a financial contribution (including revenue foregone) provided by government that confers a benefit on the recipient. In addition, the subsidy must be specific, that is, it must target for example a particular industry and it must have adverse effects. A list of such effects is provided in article 5 of the Subsidies Agreement, which includes injury to the domestic producers of a like product in competition with the imported subsidized product and serious prejudice.Footnote ⁵⁸ Members affected by the use of subsidies by another Member may choose to either bring an action using the Dispute Settlement Understanding or may use the procedures set out in the Subsidies Agreement to impose countervailing duties against the subsidized products.

The two most widespread and arguably successful instruments utilized by Member States to promote biofuels are blending obligations and tax relief. Most Member States combine these two support measures and accompany an obligation to blend with a more favourable regime of taxation for blended fuels.Footnote ⁵⁹ In addition to these general measures of support, Member States also utilize more specific policy instruments to promote biofuels at both the production and consumption phase.Footnote ⁶⁰ As for whether the tax measures fall foul of the Subsidies Agreement, a number of questions need to be addressed. On the question of financial contribution, although it would appear that a reduction in the amount of tax owed would constitute a contribution in the form of a foregoing of revenue, the Panel in US–FSC opined that the foregoing of revenue cannot be presumed.Footnote ⁶¹ To establish whether there has been a financial contribution an appropriate benchmark must be established and this will be based on the tax rules of the Member in question. What is being examined is ‘the fiscal treatment of legitimately comparable income.’Footnote ⁶² Part of the problem in defining the existence of a subsidy in the biofuels area is that as the biofuels market is a creation of government intervention, establishing a workable benchmark may prove problematic. If a financial contribution is shown to exist that has been provided by government and it confers a benefit, the final question would be whether that subsidy has an adverse effect on another WTO Member.

Any support provided for factors of production, for example loans, whilst undoubtedly a contribution will also have to confer a benefit. Article 14 of the Subsidies Agreement makes it clear that a loan will confer a benefit when the recipient of that loan pays less than that payable on a comparable commercial loan that they could have obtained. Once again, adverse effects must be shown for this to be actionable. As to whether subsidies provided to consumers of biofuels would be actionable whilst there is obviously a contribution, as government foregoes revenue, the questions relate to whether the subsidy confers a benefit and especially whether it is specific. Another question relates to whether support for agricultural producers provides a downstream subsidy to biofuel processors. It would be difficult to argue that the subsidy is specific and that a benefit has been received and as noted in US – Softwood Lumber, it cannot be assumed that a benefit flows downstream. Rather, this would have to be proved.Footnote ⁶³ A further issue that arises here is that of cross subsidisation. As there has been a significant growth in rapeseed meal as a result of biodiesel production there is a possibility that surpluses of such production could be exported, displacing other producers.Footnote ⁶⁴

As for countervailing measures, it is worth noting that acting under Regulation 2026/97, in 2009 the European Commission imposed provisional countervailing duties ranging from €211 to €237 per tonne on exports of biodiesel from various American companies on the basis that such companies were benefitting from subsidies.Footnote ⁶⁵ The complaint was made by the European Biodiesel Board, and the Commission investigation indicated evidence of subsidies at both federal and state levels in the United States. Having satisfied itself that the subsidies had led to deterioration in the prices charged and market share held by the Community industry, the provisional duties were made definitive by Regulation 598/2009.Footnote ⁶⁶ Indeed, over the three year period, 2005–2007, imports of biodiesel from the United States had risen from about 7000 tonnes to about 1 million tonnes, which is sufficient to meet the serious prejudice criteria in article 6.3 of the Subsidies Agreement.

C. Conclusion

Together the Agreement on Agriculture and the Subsidies Agreement represent the most complete picture of the approach of the WTO towards the use of subsidies. With respect to EU Biofuels policy, recent changes have decreased the likelihood that action would be taken against the EU before the WTO using the dispute settlement process. The 2008 CAP Health Check has removed two of the more contentious bases for the support of biofuels, that is, the Energy Crop Payment and the set-aside obligation. In both cases it was far from clear that support under both of these measures would satisfy the criteria of paragraphs 10 and 12 of Annex 2 of the Agreement on Agriculture, when read in conjunction with paragraph 1 of that provision.Footnote ⁶⁷ EU Member States were given to 2009 to advise the Commission of their plans of how they would implement the renewable energy aspect of rural development and notification of the measures taken to the Committee on Agriculture is awaited with interest.Footnote ⁶⁸ Will the EU use paragraph 13 of Annex 2 to justify support for biofuels? As for the Subsidies Agreement, the all-pervasive nature of government support in this sector makes disputes unlikely.Footnote ⁶⁹ Such support creates problems in establishing that the criteria for an actionable subsidy exist, for example, in establishing appropriate benchmarks. It is more likely that action taken under the Subsidies Agreement will be countervailing action, similar to that taken by the EU against US exports of biodiesel. Overall, and as will be discussed below, it seems ironic that in reducing the chance of litigation before the WTO arising from subsidies as a result of changes in the EU Biofuels policy, those same changes have increased the chance of litigation under the discrimination provisions of the GATT. Such litigation could be initiated by a number of Members, for example Brazil, the world's largest ethanol producer,Footnote ⁷⁰ which has not hesitated in challenging subsidies provided by developed countries in a number of areas, or by Members such as Indonesia and Malaysia, who may be detrimentally affected by the new sustainability criteria.Footnote ⁷¹ We will consider such arguments more fully in the next section.

A. Article III:2

A central support mechanism for biofuels in the Renewables Directive is the imposition of a differential tax regime upon otherwise identical biofuels.Footnote ⁷³ In assessing the compatibility of such provisions with WTO legal disciplines, article III:2 GATT deals with issues of taxation or other forms of internal charges imposed upon imported products and provides:

A Note Ad to article III further sets out that;

The two sentences of article III:2 serve a different legal purpose. The first mandates that identical taxation be applied to ‘like’ domestic and imported products while the second draws on the principle set down in article III:1 and provides that ‘directly competitive or substitutable products’ should be similarly taxed so as to not afford protection to domestically produced products. In US–Tobacco it was noted that if a measure has been found to be inconsistent with the first sentence, the second sentence need not be considered.Footnote ⁷⁴

The first sentence of article III:2 is concerned with taxation of imported products in excess of ‘like’ domestic products. Assuming that a system of taxation which grants an advantage to biofuels adhering to sustainability criteria would be considered to be an ‘internal tax or charge’ within the meaning of article III:2, the first question relates to the WTO compatibility of a taxation regime which favours biofuels produced in a ‘sustainable’ manner. This raises the question of like products which will involve a comparison between sustainably produced biofuels and other biofuels which do not meet the criteria set out in the Renewable Energy Directive. The Appellate Body in Japan–Alcoholic Beverages II Footnote ⁷⁵ outlined that products may be considered to be ‘like’ by reference to the requirements outlined in the Report of the Working Party on Border Tax Adjustments.Footnote ⁷⁶ This Report list a number of criteria typically shared by ‘like’ products such as the physical properties of a good, its end use and consumer perceptions of the product. The additional criterion of tariff classification has also been recognised in case law as relevant to the question of likeness.Footnote ⁷⁷ Only when two products are ‘like’ is it investigated whether imported products have been taxed in excess of their domestic counterparts.Footnote ⁷⁸ Thus a regime which makes a distinction between conventional [unblended] fuels and those mixed with biofuels seems permissible given that it can be argued that they are not ‘like’ products. It should also be noted that a differential taxation regime in itself is GATT compatible if it does not distinguish between domestic and imported products.

The second sentence of GATT article III:2 requires a complainant to show that the imported and domestic product are directly competitive or substitutable products that are in competition with each other, the products are not similarly taxed, and the dissimilar taxation is applied so as to afford protection to domestic production. The first requirement applies to ‘directly competitive and substitutable products’ and focuses on factors such as cross-price elasticity of substitution.Footnote ⁷⁹ As such, the existence of a ‘direct competitive relationship between two products or groups of products requires evidence that consumers consider or could consider the two products or groups of products as alternative ways of satisfying a particular need or taste.’Footnote ⁸⁰ The Panel in Korea–Alcoholic Beverages warned that ‘product categories should not be construed so narrowly as to defeat the purpose of the anti-discrimination language informing the interpretation of article III.’Footnote ⁸¹ The Appellate Body in the same dispute noted that the essence of the relationship is that products are in competition, but this does not depend solely on current consumer preferences if the products are capable of being substituted. The test may be satisfied if the products are interchangeable or if they offer alternative ways of satisfying a particular taste or need.Footnote ⁸²

The criterion of ‘not similarly taxed’ will be satisfied where there is a non-de minimis difference between the rates of tax applied to imports and to domestic products that are directly competitive or substitutable.Footnote ⁸³ The test will be applied on a case-by-case basis. As for the question of whether the measure affords protection to domestic production, this will require an examination of how the measure is applied. The Appellate Body in Canada–Periodicals Footnote ⁸⁴ noted that the phrase was intended to cover both the objectives of the measure and its effects. This may require an examination of the legislative history of the measure, although it must be admitted that in most cases the protective nature of the measures in question have been self-evident. The imposition of differential tax regimes on the basis of sustainability may fall foul of article III:2 as this is a non-trade objective. To use such an objective to justify a measure under article III risks intruding into the area covered by article XX GATT.

B. Article III: 4

Article III:4 provides for ‘no less favourable treatment’ between ‘like’ domestic and imported products in respect of ‘all laws, regulation and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.’ In order for the prohibition in article III:4 to be engaged, there must be (a) less favourable treatment between imported and domestic products; (b) the imported and domestic products must be considered to be ‘like’ products and; (c) the less favourable treatment must relate to a law, regulation or other requirement which; (d) affects the internal sale, offering for sale, purchase, transportation, distribution or use of the product concerned.Footnote ⁸⁵ It should be noted at the outset that a distinction can be drawn between biodiesel and bio-ethanol. There are no specific tariff lines within the EU for either fuel ethanol or biodiesel with the latter being imported under the classification, Other Chemicals (38 24 90 98), and the former being imported under undenatured alcohol (22 07 20).Footnote ⁸⁶ The most-favoured-nation (mfn) bound tariff for biodiesel is 6.5 per cent (other vegetable oils used in biodiesel production have a bound tariff of 3.2 per cent or are free) whereas the bound duty for ethanol is either €19.2/hectolitre or €10.2/hectolitre depending on the alcohol content and there is an ad valorem equivalent tariff of either 63 per cent or 39 per cent.Footnote ⁸⁷

The relevance of article III:4 to our review stems from the question of whether the operation of the sustainability criteria is such as to subject imported biofuels to ‘less favourable treatment’ than ‘like’ domestic products. Where treatment of an imported good is no ‘less favourable’ than that of domestic goods, there will be effective equality of opportunities for imported products.Footnote ⁸⁸ It therefore needs to be considered whether the introduction of sustainability criteria is such as to modify the conditions of competition between imported and domestic biofuels.

At the outset, it should be noted that although adherence to the sustainability criteria is not mandatory, as outlined in article 17 (1) of the Directive, compliance with the sustainability criteria is necessary in order that a benefit be received. Thus, while biofuels which do not adhere to the sustainability criteria set out in the Renewables Directive may still make it on to European markets, they will not receive the ‘advantage’ of being able to be used to meet targets or receive other forms of financial support. A similar situation arose in Mexico–Taxes on Soft Drinks in which producers of soft drinks and syrups received various tax exemptions and a reduced administrative burden provided they used cane sugar as opposed to beet sugar or non-fructose corn syrup. The measures, taken together, created an incentive to use cane sugar as a sweetener. According to the Panel, while these measures did not legally impede producers from using non-cane sugar sweeteners, ‘they significantly modify the conditions of competition between cane sugar, on the one hand, and non-cane sugar sweeteners … on the other hand.’Footnote ⁸⁹ Thus, while there is no legal impediment to the use or indeed importation of biofuels which do not adhere to the strict sustainability criteria, there is an incentive against their use. As such, the establishment of these criteria is likely to alter significantly the conditions of competition between ‘sustainably’ produced and ‘unsustainably’ produced biofuels since that is the very purpose of the establishment of such rules.

However, this does not necessarily equate unsustainably produced biofuels with imported products and sustainably produced biofuels with domestic production. Even if this could be proven to be the case, the phrase ‘no less favourable treatment’ is to be interpreted strictly in that a mere difference in treatment between imported and domestic products would not be sufficient to establish less favourable treatment.Footnote ⁹⁰ According to the Appellate Body's direction in Dominican Republic–Import and Sale of Cigarettes, ‘the existence of a detrimental effect on a given imported product resulting from a measure does not necessarily imply that this measure accords less favourable treatment to imports if the detrimental effect is explained by factors or circumstances unrelated to the foreign origin of the product.’Footnote ⁹¹ So, even if a detrimental effect upon imported products was shown, such treatment is not necessarily less favourable if it can be explained by reference to factors other than national origin.

It is argued that while the existence of sustainability criteria does not in itself subject imported products to treatment which is ‘less favourable’ within the meaning of article III:4, the core sustainability criterion of a 35 per cent greenhouse gas savings may be problematic. It is possible that this figure could favour biofuel production from domestically produced rapeseed oil over imported products such as biodiesel derived from palm oil.Footnote ⁹² Indeed, the ‘default’ greenhouse gas savings for biodiesel produced from rapeseed set out in the Directive is listed as 38 per cent. While ‘actual’ savings may be higher than this, it is notable that this figure compares rather unfavourably with the default for biodiesel produced from palm oil which is listed as achieving greenhouse gas savings of only 19 per cent.Footnote ⁹³ Both these figures assume that there are no emissions associated with direct land-use change and do not specify the production method to be used. It is, however, clear that different modes of production will have an impact upon the greenhouse gas savings associated with particular biofuels, thereby potentially leading to a distinction being made between such fuels based upon the process and production methods used in their manufacture. While a more detailed examination is required of both the impact of these default values and reasons behind the introduction of the value of 35 per cent greenhouse gas savings, it is possible that their combined effect could result in less favourable treatment of imported biofuels as well as the raw materials used in their production. This is particularly so if the use of the 35 per cent greenhouse gas savings criterion is such as to ‘modify the conditions of competition’Footnote ⁹⁴ between imported and domestic biofuels.Footnote ⁹⁵

Having established that a distinction in treatment between domestic and imported biofuels based upon the 35 per cent criterion could potentially constitute ‘less favourable treatment’ for the purposes of article III:4, the next step in the examination is to assess whether biofuels which meet such sustainability criteria are ‘like’ biofuels which do not. This is important since the national treatment obligation contained in article III:4 does not preclude differential treatment of biofuels in accordance with sustainability criteria to the extent that the products concerned are ‘unlike.’ In approaching the question of ‘like products’ the Appellate Body in EC-Asbestos considered that likeness under article III:4 turns upon a ‘determination about the nature and extent of a competitive relationship between and among products.’Footnote ⁹⁶ As noted previously, in assessing the criterion of likeness, recourse to the 1970 GATT Working Party Report on Border Tax Adjustments is usually made although this does not provide an all encompassing account of ‘likeness.’Footnote ⁹⁷

Where two biofuels have indistinguishable physical characteristics, the same end use and a similar if not identical tariff classification, under the GATT Working Party Report, the only criterion upon which a distinction can be made on the grounds of sustainability would be consumer perceptions. This ground for determining likeness was particularly relevant in the dispute of EC-Asbestos.Footnote ⁹⁸ While it is as yet unclear whether a distinction may be made between products based upon the way they are made, it is possible that consumer concerns as to the importance of promoting sustainably produced biofuels may permit a distinction to be made between otherwise ‘like’ biofuels. However, the more difficult question arises as to the use of a particular methodology for assessing sustainability which distinguishes between otherwise identical products. This methodology could well be used to bolster consumer perceptions that a product is or is not ‘sustainable.’ Where such methodology is questionable, the Panel in EC–Sardines made it clear that manipulated consumer perceptions will not be accepted as a permissible ground for a country to justify the imposition of trade restrictive measures.Footnote ⁹⁹

The preceding paragraphs have surveyed some of the disputes on the extent to which the process and production methods undertaken in manufacturing a product can be used to differentiate between what are from a tariff point of view like products. The state of the law in this area is difficult to state with any degree of certainty as there is no explicit acceptance of the legality or illegality of such measures.Footnote ¹⁰⁰ What the EU is trying to do in introducing the sustainability criteria is to draw a distinction between like products on the basis of their mode of production and the contribution made to greenhouse gas reduction therein. In so far as criteria are introduced which are origin neutral it may be that any differential treatment that results will not fall foul of the non-discrimination requirements of article III. In the event that they do, there is always the possibility of using article XX to justify such discrimination. We examine this provision below.

C. Article XX GATT

Article XX is an almost exhaustive list of exceptions to the basic GATT obligations.Footnote ¹⁰¹ The order of analysis in this article is that the proposed justification is measured against one (or more) of the ten exceptions before being tested against the requirements laid down in the opening paragraph (or chapeau) to article XX.Footnote ¹⁰² The chapeau requires the non-discriminatory application of measures for like goods originating in countries where the same conditions prevail. With reference to the sustainability criteria adopted in the Renewables Directive, the EU could seek to rely on either paragraph (b) or paragraph (g). The former allows Members to enact measures which are ‘necessary to protect human, animal or plant life or health’ [emphasis added] and this would allow the EU to argue that their promotion of ‘sustainable’ biofuel which leads to a reduction in green house gas emissions when compared to fossil fuels is necessary so as to protect human, animal and plant life from the dangers of climate change.Footnote ¹⁰³ To the extent that this argument is accepted, the examination would then turn to whether the measures in question are necessary to fulfill the relevant policy objective.Footnote ¹⁰⁴ The necessity requirement in paragraph (b) suggests that there must be no other measure which is less restrictive, and which can achieve the same result. In the context of paragraph (d), which also uses the expression ‘necessary’, the Appellate Body in Korea–Beef indicated that there exists a continuum of meaning in regard to the term ‘necessity’, alluding to measures which do more than make a contribution to achieving the designated goal but not confined to those which are ‘inevitable’ or ‘absolutely necessary.’Footnote ¹⁰⁵ Having referred to this decision, the Appellate Body in Brazil–Retreaded Tyres noted that the selection of a methodology to assess measures is a function of the nature of the risk, the objective pursued, and the level of protection sought.Footnote ¹⁰⁶ It ultimately depends on the nature of the risk, quantity, and quality of evidence at the time the analysis is made with a preference being given to those measures that are the least inconsistent with GATT obligations.Footnote ¹⁰⁷

In regard to the requirement that the measure at issue be ‘necessary’ in order to fit within the exception outlined in article XX (b), one issue not addressed by the Renewable Energy Directive was the question of whether to introduce sustainability criteria for solid and gaseous [i.e. non-liquid] biomass sources used in electricity, heating and cooling. Article 17 (9) of the Directive tasked the Commission to report by 31 December 2009 on the possibility of introducing sustainability requirements for such energy uses. A public consultation held on the issue found the overwhelming majority of respondents to be in favour of the introduction of criteria in this area.Footnote ¹⁰⁸ A smaller majority of respondents were supportive of a legally binding scheme whereby only biomass found to adhere to sustainability criteria could be used to meet national targets.Footnote ¹⁰⁹ Furthermore, a majority of respondents were in favour of such criteria being extended to imports so as to ensure conditions of ‘fair competition’ with domestic biomass stock.Footnote ¹¹⁰

A set of proposals were consequently published by the Commission in March 2010. These recommend that Member States adopt largely the same sustainability criteria for biomass as applicable to biofuels under the Renewable Energy Directive.Footnote ¹¹¹ This is however merely an indicative and non-binding recommendation, creating the potential for a substantially different regime to be applied to biofuel feedstocks depending upon their end use. It is arguable that any resulting disparity of treatment between biomass for transport and other energy uses such electricity and heating may result in the biofuel sustainability criteria promulgated by the Renewable Energy Directive being more difficult to justify as ‘necessary’ under article XX (b) of the GATT. This is particularly so given the jurisprudence of the Appellate Body suggests that there must exist a ‘genuine relationship of ends and means between the objective pursued and the measure at issue.’Footnote ¹¹² Hence, where regulation of solid and gaseous biomass feedstocks for use in electricity, heating and cooling is subjected to a more lax regulatory regime, the establishment of a genuine relationship between the measure and the aim to be achieved may be more difficult to satisfy.Footnote ¹¹³

Having considered the issue of whether the EU would be able to rely upon the provisions of article XX (b), it is also necessary to delineate upon whether a defence could arise in relation to article XX (g). Paragraph (g) 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.’ This could potentially allow the EU to argue that the sustainability criteria are required to conserve the climate, which could be classified as an exhaustible natural resource.Footnote ¹¹⁴ The EU would also be required to demonstrate that the measures at issue relate to the conservation of ‘climate.’ In this regard, the Appellate Body in US – Shrimp held that the ‘relating to’ requirement implied that there is a real connection between a measure and the conservation of exhaustible natural resources.Footnote ¹¹⁵ The paragraph also requires the Member to adopt domestic measures aimed at the protection of exhaustible natural resources.

Even if the measure is found compatible with a particular paragraph it must also satisfy the requirements of the chapeau, i.e. it must not amount to arbitrary or unjustifiable discrimination or a disguised restriction on international trade. What the chapeau is designed to do is to prevent the abuse of the freedom enjoyed by Members under article XX. The way in which the chapeau is applied in individual cases is not ‘fixed and unchanging’ but rather ‘moves as the kind and shape of the measures at stake vary and as the facts making up specific cases differ’.Footnote ¹¹⁶ It is worth noting, however, that the objective of the chapeau is shared by article III even if the standards by which they are judged are necessarily distinct.Footnote ¹¹⁷

D. Conclusion

The introduction of the sustainability criteria in the Renewable Energy Directive could open the EU to dispute settlement proceedings before the WTO as there are reasonable grounds to suggest that certain aspects of the application of these criteria may amount to a breach of article III GATT. With respect to article III:2, by allowing for a differential tax regime upon otherwise identical biofuels, it could be argued that if the regime is used to support domestic biofuels at the expense of imported biofuels, a difference in fiscal treatment is made between like products or products which are in direct competition. The difference may be being used so as to afford protection to domestic production contrary to the requirements of article III. Similar concerns arise in relation to the 35 per cent greenhouse gas savings applicable to biofuels counted towards national targets. Arguments have been advanced that this figure tends to favour biofuels produced from domestic feedstocks such as rapeseed oil. Such arguments appear to have at least some validity in light of the reference values for greenhouse gas savings listed in the Directive itself. Whilst the EU may seek to defend such action using article XX, arguments that such measures are ‘necessary’ pursuant to article XX (b) may come under fire as a consequence of the lax regulatory regime applied to biomass. Furthermore, the chapeau of article XX would prevent such measures having a discriminatory impact.