BRUSSELS (Reuters) - The European Commission has concluded that palm oil cultivation results in excessive deforestation and its use in transport fuel should be phased out, setting the bloc on a collision course with major palm oil producers Malaysia and Indonesia.

FILE PHOTO: A worker inspects oil palm fruits at a palm oil factory in Sepang outside Kuala Lumpur October 1, 2007. REUTERS/Bazuki Muhammad

The Commission published its criteria on Wednesday for determining what crops cause environmental harm, part of a new EU law to boost the share of renewable energy to 32 percent by 2030 and determine what are appropriate renewable sources.

The use of more harmful biofuel feedstocks will be capped at 2019 levels until 2023 and reduced to zero by 2030.

The law has caused uproar in Indonesia, which had threatened a World Trade Organization challenge, and Malaysia, which is looking into restricting imports of French products over French plans to remove palm oil from biofuel in 2020.

The main biofuels are bioethanol, made from sugar and cereal crops, to replace petrol, and biodiesel, made from vegetable oil, such as palm, soybean or rapeseed oils.

The Commission concluded that 45 percent of the expansion of palm oil production since 2008 led to destruction of forests, wetlands or peatlands and resultant greenhouse gas releases. That compared to 8 percent for soybeans and 1 percent for sunflowers and rapeseed.

It set 10 percent as the dividing line between less and more harmful feedstocks.

An initial Commission proposal drew more than 68,000 comments in a four-week public feedback period and criticism from environmentalists for allowing a number of exemptions.

Producers who could show they had intensified yields could be exempt. It could then be argued that their crops cover demand for biofuel and for food and feeds, without needing expansion onto non-agricultural land.

Such crop expansion would be considered as less harmful if, for example, it was applied by smallholdings or led to cultivation of food or feed on “unused land”.

Among changes made after the feedback period was a stipulation that a smallholding meant farmers who were independent and had less than 2 hectares (4.9 acres) of land. Cultivation on unused land was also limited.

Campaign group Transport & Environment said the labeling of palm oil as unsustainable was a milestone in the fight to recognize the climate impact of burning food for energy.

However, it said the victory was only partial as soybean oil and some palm oil could still be labeled “green”.

EU governments and the European Parliament have two months to decide whether to accept or to veto the act.