Palm oil emerged as a flashpoint in a potential trade war between the European Union and some of the world’s largest developing nations after the bloc imposed stricter limits on how the crop can be used in green fuels.

The European Commission on Wednesday restricted the types of biofuels from palm oil that may be counted toward the EU’s renewable-energy goals and introduced a certification system. Indonesia and Malaysia, which supply 85 per cent of the crop, have warned that they are ready to retaliate against what they see as “discriminatory” rules.

Palm oil prices have dropped 18 percent since the start of 2018 partly because of a campaign by environmental groups to reduce use of the crop in fuels that was endorsed by the European Parliament. The EU rules left some loopholes that will weaken the overall impact of the restrictions. Benchmark futures fell for the seventh day on Thursday, the worst streak since November.

“The exemptions to smallholders do not solve the discrimination exercised against palm oil,” said Mahendra Siregar, executive director of the Council of Palm Oil Producing Countries. “It fails to recognize the considerable efforts made to secure sustainable palm oil from plantations. Palm oil producing countries should continue to apply pressure on the EU.”

The move was required by a broader law agreed by the 28-nation bloc last year, when the European Parliament pushed for curbs on the use of palm oil on concerns its production caused deforestation and aggravated climate change.

The EU wants to lead the battle against global warming and has toughened goals to reduce greenhouse gases blamed for climate change. It aims to cut emissions by at least 40 per cent by 2030 compared with 1990 levels, boost the share of renewable energy to 32 per cent and increase energy efficiency by 32.5 per cent.

“Today’s decision puts a welcomed brake on the craziness of subsidizing the burning of palm oil for energy,” said Ariel Brunner, senior head of policy for the environmental group BirdLife Europe. “Unfortunately, it still has many loopholes and doesn’t affect other drivers of deforestation and biodiversity loss, such as soy. The EU is still locked into a perverse policy that incentivizes environmental destruction and increases greenhouse gas emissions in the name of fighting climate change.”

The move set up the EU for conflict with producing nations, which had stepped up their lobbying against the provision in recent weeks.

The Council of Palm Oil Producing Countries, whose members Indonesia, Malaysia and Colombia produce about 90 per cent of global supply, announced they will jointly challenge the bill through bilateral consultations, as well as through the World Trade Organization. The council said the law uses a “scientifically flawed” concept that targets palm oil and “makes no attempt to include broader environmental concerns” linked to other vegetable oils.

Malaysia plans to halt all expansion of oil palm plantations as it seeks to dispel the oil’s reputation as a driver of deforestation, Minister of Primary Industries Teresa Kok said in an interview earlier this month. The EU accounted for 12 per cent of Malaysia’s palm oil exports in 2018, making it the biggest buyer after India, according to the Malaysian Palm Oil Board.

Indonesia has warned that the EU restrictions on the use of palm oil would jeopardize the nation’s fight against poverty. The country’s special envoy on palm oil has said that Indonesia and the EU need to find a “win-win” solution, adding that his country considered buying around 250 new airplanes, with Airbus among possible suppliers.

In a letter dated March 8, Indonesia’s Minister for Foreign Affairs Retno Marsudi told EU High Representative Federica Mogherini that palm oil producing countries “may have no choice but proceed to the WTO” should Europe approve the restrictions on the use of palm oil.

The EU argues the new measure and palm-oil sustainability criteria are compatible with WTO rules. The new regulation is now set for a two-month scrutiny period when the bloc’s member states and the European Parliament can express objections. If none is received, the measure will be published in the EU official journal and become a law.

“Today’s decision to label palm oil as unsustainable is a breakthrough,” said Laura Buffet, clean fuels manager at Transport & Environment lobby group. “But this is only a partial victory since soy and some palm oil can still be labelled green.”

The EU Parliament’s campaign to limit the use of the vegetable oil in renewable fuels called for an end to public support for high-emission biodiesel from palm oil, rapeseed and soy. Forty-six percent of total palm oil imports into the bloc is used for biofuels, according to data from the EU assembly.

Under the measure adopted by the commission on Wednesday, palm oil is classified as “unsustainable.” There were some exemptions designed to placate producer countries, such as the possibility to count under the EU green goals palm oil coming from small farms. The EU decided to set a limit on the size of those farms at 2 hectares, which was the lower end of the 2-5 hectares range it considered when drafting the regulation.

The EU renewable energy law that obliged the commission last year to set sustainability criteria for palm under its green goals specifies use of unsustainable food and feed crop-based biofuels should be limited from 2019, with a view to start a gradual phase-out in 2023 leading to a ban by 2030.

The law also called on the EU regulatory arm to develop a certification system for biofuels linked to their impact on so-called indirect land-use change, known as ILUC, where crop-based biofuels displace food production or lead to deforestation, indirectly boosting greenhouse-gas emissions.

“With today’s decision the member states will still be able to use and import fuels included in the category of high ILUC-risk biofuels, but they will not be able to include these volumes when calculating the extent to which they have fulfilled their renewable targets,” the commission said.