In the WTO's first ruling related to deforestation, a three-person panel voted by two-to-one to reject Malaysia's substantive claims, while accepting its complaints over how the measures had been prepared, published and administered.
The EU will need to make adjustments, but need not withdraw its measures after the WTO's first ruling related to different treatment of products according to their risks of greenhouse gas emissions.
The dispute centres on EU rules setting a target of 10% of transport fuels from renewable sources. Crop-based biofuels are considered renewable if they meet sustainability criteria. The EU excludes crops grown on deforested land or where there is a high risk they displaced food crops, which were then grown on cleared land.
The EU determined that palm oil-based biofuel should be phased out as a renewable by 2030, while crops grown in the bloc, such as sunflower or rapeseed, did not need to be.
Malaysia and Indonesia, the world's two largest palm oil producers accounting for 85% of global exports, then challenged the European Union at the WTO.
The WTO panel was the same for both cases and was expected to have also issued a joint ruling on Tuesday. However, Indonesia requested the suspension of the panel's work on Monday. Parties to WTO disputes normally know panel results before publication.
