For years, palm oil was a major feedstock for biodiesel in the European Union. But under the revised Renewable Energy Directive (RED III), palm oil's status has fundamentally changed. This explainer breaks down how the mechanism works and what it means for those exporting, trading, or buying palm oil for the EU market.

The Renewable Status Mechanism

The EU's Renewable Energy Directive sets targets for the share of renewable energy in transport. To count toward these targets, biofuels must meet sustainability criteria. The key mechanism is the Indirect Land Use Change (ILUC) risk assessment. This evaluates the carbon impact of using land for biofuel feedstocks, considering the displacement of food production and natural ecosystems.

RED III classifies feedstocks into three categories: low ILUC-risk, high ILUC-risk, and those with no significant ILUC risk. Palm oil is classified as a high ILUC-risk feedstock. This classification is not a permanent ban but a conditional phase-out.

The Phase-Out Structure

Under RED III, the treatment of high ILUC-risk feedstocks is structured with a specific timeline and conditions. The directive requires member states to cap the contribution of such feedstocks to their national renewable energy targets. This cap is set at a level that reflects the feedstock's share in 2019, and it is designed to decline to zero by a specified date.

The crucial point is that this is a reduction in the value of the biofuel for compliance purposes, not an outright prohibition on use. A palm-based biofuel can still be physically blended into diesel, but it no longer counts toward the EU's renewable energy targets. This makes it economically less attractive, as it does not generate the same compliance value.

Where the Demand Went

The loss of renewable status has shifted demand in several ways. First, demand for palm oil for biofuel in the EU has significantly decreased as blenders seek feedstocks that still qualify. This has led to a search for alternatives, including used cooking oil, animal fats, and other low ILUC-risk feedstocks.

Second, some of that demand has moved to other markets outside the EU that do not have similar restrictions. Countries in Southeast Asia and other regions may continue to use palm oil for biofuel, absorbing some of the supply.

Third, within the EU, palm oil is increasingly being used for other purposes such as food and oleochemicals, which are not subject to the same biofuel-specific rules.

Practical Consequences for Exporters and Traders

For those in the palm oil supply chain, the practical consequences are clear. Documentation is now critical. Buyers in the EU will require proof that your palm oil is certified as low ILUC-risk if it is to be used for biofuel. This means obtaining the appropriate certification from recognized schemes.

Specification matters. If you are selling for biofuel, you must ensure your product meets the EU's sustainability criteria. If you are selling for food or other uses, the requirements are different.

Cost implications are inevitable. Compliance with certification schemes adds administrative and auditing costs. Additionally, the reduced demand for biofuel may put downward pressure on prices for palm oil destined for that market. Understanding these mechanics is essential for navigating the EU market successfully. ---

*This article reflects the position as of 10 August 2026. Duty structures, levies and mandates change often, sometimes at short notice. Please verify the current position, and any changes made after this date, before relying on it.*