Climate Change and Energy Subsidies: Is There a Role for the WTO?

Climate change is a major global challenge which, according to the UN (the UNFCCC), can best be addressed by reducing greenhouse gas emissions. Since almost two-thirds of global greenhouse gases are generated by the energy sector, a key plank of climate change policy is to transition from fossil fuels to clean energy. This post considers the role of the WTO in achieving this transition.

Energy subsidies have a great impact on climate change. Subsidies for fossil fuels (such as oil, natural gas and coal) directly encourage environmentally damaging means of generating energy and reduce the relative attractiveness of clean energy investments. By contrast, subsidies for renewable energy (such as wind, solar and hydro) can be used as an instrument to reduce greenhouse gas emissions not only by directly increasing clean energy generation but also by supporting innovations that improve its viability. Nevertheless, despite the recent rise in renewable energy subsidies ($140 billion in 2016), they are still significantly lower than fossil fuel subsidies ($260 billion in 2016).

Reflecting their ability to distort markets, WTO law has a special set of general rules on subsidies – the Subsidies and Countervailing Measures Agreement (the “SCM Agreement”), alongside the General Agreement on Tariffs and Trade (“GATT”). Subsidies can be counteracted by multilateral action through the WTO dispute settlement system or, where subsidized products affect the domestic market, by the adoption of domestic countervailing measures. At the multilateral level, six disputes have been brought so far to the WTO against renewable energy support programs. Yet environmentally harmful fossil fuel subsidies have never been challenged. Similarly, at the unilateral level, 41 trade remedy investigations in the renewable energy sector were initiated between 2008 and 2014. At the same time, unilateral trade remedies have not been used against fossil fuel production subsidies. Why is this happening?

In keeping with the WTO’s main objective to promote free trade between WTO Members, the goal of the SCM Agreement is to discourage subsidies that harm competing foreign producers. Other considerations (such as environmental considerations) are not taken into account, so the same rules apply to both fossil fuel and renewables subsidies. For a measure to constitute a subsidy covered by the SCM Agreement, it must represent a financial contribution (or income support) by a government and provide a benefit to a recipient. The SCM Agreement then distinguishes between prohibited and actionable subsidies. Prohibited subsidies are those subsidies which are contingent upon export performance or the use of domestic over imported goods. Actionable subsides must in addition be “specific” in the sense that they are limited to an enterprise or industry or group of enterprises or industries and can then be challenged (“actioned”) if they have adverse effects on the interests of another WTO Member. Typically, this is by discriminating against the products of that other WTO Member in the domestic market, foreign markets or even the world market.

And yet the SCM Agreement does not easily apply to fossil fuel subsidies. A common example is the practice of dual pricing schemes under which governments sell their energy resources at significantly lower prices on the domestic market compared to prices on  the export market. These policies are most commonly applied by resource-rich countries. For example, Russian state-controlled Gazprom, the world’s largest gas producer which has monopoly rights on gas exports from Russia, offsets a low domestic price for natural gas, set by government, with revenues from gas exports. Dual pricing is probably one of the most harmful fossil fuel subsidies: states that maintain this policy encourage the burning of cheap fossil fuels through low domestic prices. Yet these measures are highly unlikely to be found inconsistent with the SCM Agreement. They do not constitute export subsidies, and, because they are available throughout the economy, they fail to meet the “specificity” requirement, and are therefore also not actionable. Of course, if the beneficiaries of the subsidy turn out “predominantly” to be specific industries, such as the steel industry, then an argument can be made that subsidy is de facto specific. But, if the subsidy benefits a wide range of actors, this might not be easy to demonstrate.

By contrast, because they are focused on the energy industry per se (e.g. wind or solar), renewable energy subsidies are much more likely to be found WTO-inconsistent. Specificity is relatively easy to establish, and all that remains to be shown is an adverse effects on foreign competitors. In addition, many renewable energy subsidy programmes (such as feed-in tariffs) contain domestic content requirements which are prohibited.

Five of the six disputes that have so far been brought to the WTO against renewable energy support programs targeted discriminatory measures in the form of local content requirements. In the two cases where rulings have been made (Canada–Renewable Energy and India–Solar Cells), the Appellate Body found that the local content requirements attached to feed-in schemes clearly violated the national treatment obligation under Article III:4 GATT. It means that this most common type of renewable energy support scheme can be successfully challenged even without invoking the provisions of the SCM Agreement. This is particularly important, given that Canada–Renewable Energy also made it more difficult to establish that feed-in tariffs constitute a subsidy in the first place. There, the Appellate Body interpreted the “benefit to a recipient” element of the subsidy definition as meaning that if the government creates a market by providing a financial contribution (e.g. for  solar-generated electricity), the benchmark for the benefit determination has to be found within the contours of this newly created market (i.e. for solar generated electricity) rather than the overall energy market

The present WTO framework thus imposes more constraints on renewable energy subsidies than on much larger and environmentally harmful subsidies to fossil fuels, which places it at odds with the key objectives of environmental policy. To change this, the current rules could be revised in two ways. First, more policy space could be created for renewable energy subsidies (either through introducing exceptions for them or allowing waivers). Second, and perhaps more importantly, fossil fuel subsidies could be constrained (and ideally banned). This might require an expansion of the category of prohibited subsidies to include fossil fuel subsidies, or at least the ones that cause the most harm to the environment (such as dual pricing), with other types of fossil fuels subsidies becoming actionable. The latter could be achieved by, for example, redefining “adverse effects” to include harm to the human and natural environment, without regard to whether there is a harm to competing foreign producers.