Energy Subsidies And The World Trade Organization

Available online: https://pub.norden.org/temanord2020-539/ Estimated at USD 478 billion in 2019, fossil fuel subsidies strain the public purse, contribute to climate change, slow the uptake of renewable energy, and lead to local air pollution and associated impacts on public health. Their reform could thus lead to a wide range of socioeconomic and environmental benefits. Despite its binding rules to regulate subsidies, the World Trade Organization (WTO) has so far failed to play any significant role in constraining government support to fossil fuels. Against this backdrop, this report explores whether WTO rules and practices are fit for purpose in addressing fossil fuels subsidies and supporting the clean energy transition, and how they could be reformed to more effectively contribute to these key objectives. It also offers practical recommendations for WTO members and other stakeholders interested in moving this agenda forward.

In recent months the World Trade Organization (WTO) has seen increasing conflict over the rules for government support of the energy sector. Government subsidies for particular forms of energy have long influenced producers' investment choices and consumers' consumption patterns in ways that affect both international trade and the environment. Trade and environmental lawyers have thus closely watched the WTO's efforts to develop rules on government support for the energy sector. This essay outlines recent activity in the WTO on subsidies for both traditional fossil fuels and the renewable energy sector. It also discusses the difficulties posed by the increased application of WTO subsidies rules to renewable energy subsidies at a time in which fossil fuel subsidies programs continue to elude significant WTO scrutiny. This discrepancy - caused in part by WTO rules on subsidies and in part by energy politics in a number of countries that have shifted support for renewable energy subsidies to local governments less skilled in drafting WTO-compliant programs - threatens to undermine the WTO's ability to develop an environmentally-friendly jurisprudence on energy trade issues.

Despite the myriad tensions existing at the nexus of the international trade and climate change regimes, perhaps more striking are the similarities that exist between the two. Both are recognised as mechanisms designed for pursuing a global good - whether that be increasing wealth or combatting anthropogenic climate change - seemingly providing fertile ground for the conclusion of international agreements, yet both are plagued by political inertia on the international level, destined to do no more than produce rhetoric lauding their final goal. Set against the underwhelming outcome of the Rio 20 conference and the continuation of the Doha Round of negotiations, this article examines one particular example of such inertia encountered at this crucial crossroads - specifically, the framework regulating subsidies for renewable energy in the World Trade Organization (WTO). Whilst the inadequacy of the WTO rules regulating renewable energy subsidies has been evaluated extensively elsewhere, this article instead focuses on a legal analysis that aims to inform the design of subsidies that would not fall foul of the WTO rules as they currently stand. This approach enables implementing states to take all necessary steps to ensure that their subsidies are not vulnerable to legal challenge within the WTO. Taking feed-in tariffs (FITs) as an illustrative example of renewable energy subsidies, the article analyses the pertinent rules of the WTO Agreements, and relevant Dispute Settlement Understanding (DSU) jurisprudence, in order to draw four general principles that should be followed in the design and formulation of renewable energy subsidies; namely, the effective positioning of the subsidy within a larger climate change policy, strict adherence to the principle of non-discrimination, the maintenance of policy links to international standards and agreements, and the institution of transparent and open design, implementation and enforcement processes. Placed against the impasse of the current Doha Round negotiations, the creation of renewable energy subsidies that are impervious to WTO regulation offers a realistic and achievable method of promoting climate change mitigation in international trade.

This paper provides a detailed explanation how the law of the World Trade Organization regulates environmental subsidies with a focus on renewable energy subsidies. The paper begins by discussing the economic justifications for such subsidies and the criticisms of them and then gives examples of different categories of subsidies. Next the paper provides an overview of the relevant WTO rules and caselaw, including the recent Canada -Renewable Energy case. The paper also makes specific recommendations for how WTO law can be improved, and discusses the existing literature discussing reform proposals. The study further finds that because of a lack of clarity in WTO rules, for some clean energy subsidies, a government will not know in advance whether the subsidy is WTO-legal.

Renewable energy subsidies are crucial for combatting climate change, and yet the world's international legal infrastructure is not designed to accommodate such subsidies. The world needs a renewable energy sector to develop and implement the technologies necessary to reduce carbon and renewable subsidies are one of the best ways to cultivate this sector quickly. At the same time, one country's unfair subsidies can harm another country's industry. To take a recent newsworthy example, China's subsidies for its solar exports has allegedly bankrupted solar companies in the United States (US) and European Union (EU), undermining this crucial sector in these countries as it takes root. Thus, renewable subsidies pit two legitimate policy concerns against each other: cultivation of renewable energy and prevention of unfair trade practices. The World Trade Organization (WTO) regulates most subsidies effectively, but was simply not designed with renewable subsidies in mind. The Agreement on Subsidies and Countervailing Measures (SCM) - the heart of the WTO subsidies regime - treats renewable subsidies the same as all other subsidies, without an environmental exception in force that takes into account non-trade concerns. This environmental blind spot is unusual for the WTO: for example, Article XX of the General Agreement on Tariffs and Trade (GATT) includes an environmental exception for tariffs and other non-subsidy measures. However, an environmental exception did not make it into the SCM, leaving the agreement ill-suited to balance trade and environmental concerns. This article proposes several legal solutions to fix the SCM's environmental blind spot - invocation of the Agreement on Agriculture (AoA) for some subsidies, using the SCM's definition of subsidies to exclude some forms of support for renewable energy -- especially Feed-in Tariffs (FITs) - from the WTO's subsidies regime entirely, adopting a flexible interpretation of GATT Article XX's environmental exception such that it may apply to subsidies, and negotiating a new WTO agreement for renewable subsidies. Of all the solutions proposed, this article argues that the best approach would be to apply GATT Article XX to the SCM. This approach is not obvious, because WTO law does not make clear the relationship between the GATT and the SCM. Nevertheless, strong legal and policy reasons support this approach. This article proceeds as follows: Part II provides background, first on renewable subsidies, then on the current WTO regime governing subsidies. Part III discusses the proposed legal solutions to the WTO's green subsidy problem. Part IV compares the proposed solutions and concludes that applying Article XX to the SCM is the best approach.

This much-needed book provides an empirically-grounded, and theoretically informed account of international law sources, mechanisms, initiatives and institutions which address and affect the practice of subsidising fossil fuel consumption and production. Drawing on recent scholarship on emerging international governance mechanisms, ‘informal’ international law-making and regime interaction, it offers suggestions, and critiques suggestions of others, for how the international law framework could be employed more effectively and appropriately to respond to environmentally and fiscally harmful fossil fuel subsidies.

The WTO and the broader international trade regime have seen an explosion of challenges to government support for renewable energy in the last seven years, while no country has brought a formal dispute challenging fossil fuel subsidies in the GATT/WTO's history. This pattern is puzzling because global fossil fuel subsidies dwarf global renewable energy subsidies. Moreover, it suggests that WTO rules may slow the transition to clean energy. Renewable energy technology must compete with highly subsidized fossil fuels, while trade disputes effectively restrict subsidization only for the former. Existing explanations for the absence of trade challenges to fossil fuels support policies have focused primarily on the lack of a mandate within the WTO. Major fossil fuel exporters have not historically been GATT/WTO members; WTO rules allegedly do not apply to energy or are inadequate to deal with the specifics of energy trade; or even if they do, nations have developed separate institutions, such as the IEA or the Energy Charter Treaty, to govern energy. This article argues that, although these explanations have some explanatory power, they cannot fully or satisfactorily account for the pattern of WTO energy disputes in light of the recent focus on some forms of energy in the WTO but not others. Instead, I hypothesize that the economic diversification of energy-producing countries plays a major role in driving challenges to renewable energy support policies, but not fossil fuel support policies. It does so in two ways. First, states challenging energy support policies expect to have greater success in changing the respondent's behavior when the respondent has diversified exports. Renewable energy technologies tend to be produced in countries with diversified economies, while fossil fuel reserves are located overwhelmingly in countries with little diversification in their exports. Second, under what I term the loss aversion hypothesis, states may be more likely to challenge new trade restrictions, rather than similar but long-standing trade restrictions. The loss-aversion hypothesis suggests that trade challenges will arise more in sectors of the economy in which innovation leads to competition, as opposed to in mature sectors of the economy. Economic diversification, in turn, is a good predictor of innovation. As applied to energy, economic diversification contributes to innovation and competition in the renewables sector - and hence triggers demand for new trade restrictions - but not the fossil fuel sector, even though trade restrictions have a long history in that sector as well.

This comprehensive volume provides the first book-length account on the politics of fossil fuel subsidies. This title is also available as Open Access.

Faced with the energy transition imperative, governments have to decide about public policy to promote renewable electrical energy production and to protect domestic power generation equipment industries. For example, the Canada - Renewable energy dispute is over Feed-in tariff (FIT) programs in Ontario that have a local content requirement (LCR). The EU and Japan claimed that FIT programs constitute subsidies that go against the SCM Agreement, and that the LCR is incompatible with the non-discrimination principle of the World Trade Organization (WTO). This paper investigates this issue using an international quality differentiated duopoly model in which power generation equipment producers compete on price. FIT programs including those with a LCR are compared for their impacts on trade, profits, amount of renewable electricity produced, and welfare. When 'quantities' are taken into account, the results confirm discrimination. However, introducing a difference in the quality of the power generation equipment produced on both sides of the border provides more mitigated results. Finally, the results enable discussion of the question of whether environmental protection can be put forward as a reason for subsidizing renewable energy producers in light of the SCM Agreement.

Fossil fuel subsidies undercut the international community's Sustainable Development Goals and climate change objectives in many ways. Estimated at several hundred billion dollars a year, such subsidies also affect fossil fuel prices, and can therefore have distorting impacts on trade and investment. Given its central role in disciplining trade-distorting subsidies across sectors, the World Trade Organization (WTO) is an obvious candidate for advancing fossil fuel subsidy reform internationally. However, its engagement on this topic has been limited. While a growing body of disputes on renewable energy support measures have been brought before the WTO, Members have yet to initiate legal proceedings against subsidies for oil, coal or gas. This Article highlights the range of explanations for this puzzling discrepancy. The Article analyses the compatibility of four selected fossil fuel support measures in the Group of 20 countries with the WTO's 1994 Agreement on Subsidies and Countervailing Measures. In doing so, it identifies some of the key legal questions and challenges faced at the WTO. Specifically, the findings highlight the difficulty of litigating fossil fuel consumption subsidies. In light of these shortcomings, the Article identifies five complementary avenues for reform of international trade policy to enable countries to better address fossil fuel subsidies: (i) promoting technical assistance and capacity building; (ii) enhancing transparency; (iii) pledging subsidy reform and ensuring credible follow-up through reporting and review; (iv) adopting a political declaration; and (v) expanding the category of prohibited subsidies. Some of these options could be pioneered by one or several WTO Members, or through regional, megaregional and plurilateral trade agreements. The adoption of the 2030 Agenda and the Paris Agreement represent a call for more decisive action on climate change and sustainable development, providing a clear mandate for deeper engagement of the international trade community in this space.