Bridges Trade BioRes Review • Volume 2 • Number 4 • December 2008

Enhancing market access for biofuels: What role for environmental goods negotiations?

by Mahesh Sugathan

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The Doha Declaration calls for the reduction or, as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services (Para 31 (iii)). The question arises as to whether this mandate applies to biofuels, which are considered to be environmentally preferable to fossil fuels.

The debate on biofuels has to be considered in relation to the system of product classification. Both ethanol and biodiesel are ‘ex-outs,’ classified under the broader HS-6 digit categories that also contain other products. While biodiesel is an industrial product (as it is produced through a chemical process called transsesterification) and classified under HS code 382490 (that includes products, preparations and residual products of the chemical or allied industries not elsewhere specified), ethanol is classified as an agriculture product under HS code 2207. Ethanol is traded under HS code 2207, which covers un-denatured (HS 2207 10) and denatured alcohol (HS 2207 20).

Any reduction commitments on tariffs and non-tariff measures for ethanol and biodiesel would need to be reflected under broader commitments in negotiations on agriculture and non-agricultural market access (NAMA). They could also be singled out for fast track liberalisation in the context of negotiations on environmental goods and services (EGS). However, WTO Members have generally taken a cautious approach under the EGS mandate, given certain technical considerations and strategic concerns.

Members have principally looked at modalities for the identification of goods in the EGS discussion at the Committee on Trade and Environment (CTE). Introducing ethanol into the discussions would imply a de facto acceptance that environmental goods regarded as agricultural also fall under the Para 31 (iii) mandate. This has never been universally accepted, although the mandate does not explicitly exclude a consideration of agricultural goods either.

Nonetheless, certain WTO Members have proposed considering biofuels in EGS negotiations. Brazil made a submission in 2005 (TN/TE/W/59) proposing that the definition of environmental goods cover renewable energy products, including ethanol and biodiesel, and also cleaner technologies, such as “flexi fuel” engines and vehicles considered environmentally efficient products. In a later informal submission [JOB (07)/146] in 2007, Brazil stated that “biofuels are essentially an environmental good.”

However, neither Brazil nor any other developing country has formally proposed that ethanol be included as part of a ‘list’ or ‘category’ of environmental goods. Developing countries have largely considered it premature to venture into a discussion of specific products. First, they would like to see the perceived drawbacks of the so called ‘list approach’ (which is not the only approach on the table) - such as the dubious environmental relevance of many products and predominance of ‘dual-use’ goods having both environmental and non-environmental end-uses - addressed.

New Zealand and Canada had earlier proposed biodiesel for enhanced tariff liberalisation, with New Zealand proposing to include methanol (which can be made from biomass and is a component in biodiesel manufacture) as an environmental good.

In 2007, a group of countries sympathetic to EGS liberalisation proposed an abbreviated list of 153 products for tariff reduction. In this revised list, both methanol and biodiesel were dropped - reportedly because the group decided to leave out the entire category of chemicals. Trade sources indicate, however, that biodiesel and ethanol are particularly sensitive to the EU and US due to massive domestic support - both political and financial - for their production.

Countries have indeed expressed concern that opening up the environmental goods basket to biofuels would bring up the contentious issue of their subsidisation. Many Members feel that the proper forum to deal with industrial subsidies (falling under the Agreement on Subsidies and Countervailing Measures) would be in the rules negotiations and agriculture subsidies within negotiations on agriculture.

In addition, given that both biodiesel and ethanol are ex-out products under six-digit categories, WTO Members would have to decide whether to liberalise the 6-digit category as a whole or only the ex-out. If they chose the latter, they would need to ensure that customs authorities at the national level either harmonise HS-codes, or at least harmonise product descriptions, to avoid confusion regarding products subject to a tariff waiver.

Most developing countries generally favour liberalising biofuels trade, although they have not taken an official position on possible modalities within environmental goods negotiations. Some developing countries informally mention that even if they do not foresee exporting biofuels per se, their feedstock exports to countries producing biofuels might increase.

Adding to their caution, countries have reacted to the bad press biofuels have gotten due to potential negative impacts on land-use and food prices. In addition, the environmental “friendliness” of biofuels would depend not only its end-use, but also on how it was produced. However, considering this aspect would bring up the issue of Process and Production Methods (PPM), which most Members are keen to avoid. Further liberalising only biofuels produced in an environmentally sound manner would imply a common agreement on standards and certification as the basis for undertaking liberalisation, given that the same biofuel (produced using different methods) cannot be physically distinguished by customs.

Discussions on EGS have been stalling due to the overall deadlock in the Doha Round. However, when the round is brought to a conclusion, pertinent EGS issues will need to be speedily resolved following compromise in key areas. The biofuels issue will most likely be one of them.

Mahesh Sugathan is Economics & Trade Policy Analysis Programme Coordinator at ICTSD