Tackling Fossil Fuel Subsidy Reform: A Role for the Global Trade Body?

30 November 2017

Although not currently a negotiating item, an effort to advance discussions in the WTO context on reforming fossil fuel subsidies is underway. An informal group of non-G20 countries known as the “Friends of Fossil Fuel Subsidy Reform” (the Friends”) has prepared a statement to this end, which is being circulated for support before a planned launch during the WTO’s Eleventh Ministerial Conference in Buenos Aires.

Fuelled by work in various plurilateral and multilateral settings, the sharp drop in global oil prices, and the WTO negotiations on fisheries subsidies, combined with the adoption of the UN’s Sustainable Development Goals (SDGs) and the Paris Agreement on Climate Change, the past two years have seen increasing debate about the WTO’s role in fossil fuel subsidy reform. Subsidy notifications on a general level under the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM) have long been lagging, and often lack sufficient detail on fossil fuel subsidy schemes, among other challenges. There is also no sectoral agreement in place to discipline such government support, unlike the rules currently in place on farm subsidies under the Agreement on Agriculture.

While the views on the rationale and options for tackling fossil fuel subsidies in the global trade body diverge, there is undoubtedly growing noise that may see the issue land on trade negotiators’ agendas.

Fossil fuel subsidies: Economic and environmental dimensions
All major economies subsidise the exploration, processing, and use of fossil fuels. Global annual government spending on producer and consumer subsidies is estimated by the International Monetary Fund (IMF) at US$333 billion. If external costs are considered, this number rises to US$5.3 trillion. This huge variation in estimates and data is due to the lack of a commonly accepted definition, metrics, and reporting framework. Irrespective of this discrepancy, fossil fuel subsidies clearly impose a significant burden on government budgets and displace financial resources from other priorities, like health and education. Moreover, fossil fuel subsidies often reinforce inequalities between the rich and poor and can cause serious distortions in the global economy. From an environmental perspective, these subsidies are an important driver of climate change. They encourage the over-extraction and wasteful consumption of fossil fuels, which account for 90 percent of greenhouse gas emissions, and by delaying the clean energy transition they further compound the climate problem. The associated air pollution moreover causes widespread health hazards.

The environmental harm, economic inefficiencies, and adverse effects on social development related to subsidising fossil fuels undermine the shared goals of sustainable development, enshrined in the UN’s 2030 Agenda for Sustainable Development and related Sustainable Development Goals (SDGs), as well as the preamble of the Marrakesh Agreement establishing the WTO. It also puts at risk the efforts to remain below the temperature target set under the global Paris climate agreement. That target is below a 2˚C increase above pre-industrial levels, and leading climate scientists warn that exceeding this level could have devastating environmental impacts, including extreme weather events and other natural disasters caused by climate change.

International reform momentum

While there is no legally binding global commitment on fossil fuel subsidies, various international forums have put the issue on their agenda and made voluntary commitments to discipline their use over the past several years.

At the 2009 Pittsburgh Summit, the G20 coalition of major advanced and emerging economies pledged to “phase out and rationalise over the medium term inefficient fossil fuel subsidies while providing targeted support to the poorest.” G20 members have put into place a peer review process, implemented by the Organisation for Economic Cooperation and Development (OECD), to increase transparency around fossil fuel subsidies. Germany and Mexico are the most recent pair to have undergone the process, with their reviews published and scrutinised at the annual UN climate talks in November. This follows the 2016 review of the US and China.

In 2009, the 21-member Asia-Pacific Economic Cooperation (APEC) group made a similar pledge on eliminating fossil fuel subsidies and is also carrying out peer reviews. Meanwhile, the G7 said in its 2016 communiqué that its members “remain committed to the elimination of inefficient fossil fuel subsidies and encourage all countries to do so by 2025.”

Since its formation in 2010, the “Friends” have committed to phasing out fossil fuel subsidies and have been promoting fossil fuel subsidy reform through political statements, research, and seminars. In December 2015, the group launched a communiqué on the sidelines of the annual UN climate conference in Paris, France, calling on the international community “to increase efforts to phase-out subsidies to fossil fuels through […] policy transparency, ambitious reform, and targeted support for the poorest.” The statement has since been endorsed by 43 countries and thousands of businesses. The adoption of both the Paris Climate Agreement and the Sustainable Development Goals have further increased the momentum for fossil fuel subsidy reform. Article 2.1.c of the Paris Agreement requires parties to “[make] finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development,” and 13 parties have submitted national climate action plans that refer to fossil fuel subsidy reform, while Sustainable Development Goal 12.C calls for “[rationalising] inefficient fossil fuel subsidies.”

So far there is no legally binding tool that provides for accountability to those pledges and a framework for effectively disciplining the use of fossil fuel subsidies. There has recently emerged increasing support from various countries for the idea of the WTO filling this void.

Building on Bonn’s momentum

At this year’s UN climate conference in Bonn, Germany, New Zealand, which has been a key driver of the “Friends’” work, made a push for the WTO to take on a role in addressing fossil fuel subsidy reform (FFSR).

In his speech, New Zealand’s Minister for Pacific Peoples William Sio said “New Zealand would like to see more focus on FFSR in the World Trade Organization. We believe that trade policy can and should address global environment challenges.”

Calls for a role for the global trade body in disciplining fossil fuel subsidies have also been made in the WTO at various panels and workshops, including during one held in June 2017.

Aiming to increase the attention of WTO members to fossil fuel subsidy reform and encourage a dialogue on this issue within the global trade body, the “Friends” together with New Zealand and Finland are co-hosting a side-event during MC11. They will be calling for high-level attendance and support for their statement on the WTO’s role in advancing discussions on disciplining the use of fossil fuel subsidies.

A push is also being made by France, which is driving a European Union initiative to support dialogue on the role of trade in disciplining fossil fuel subsidies, to place the issue on the agenda of the WTO’s Committee on Trade and Environment.

Rationale behind the initiative

Advocates for fossil fuel reform in the WTO context say that there is both a trade and an environmental rationale for doing so.

Fossil fuel subsidies can cause distortions to trade. Providing subsidies to producers of tradable goods such as oil, gas, and coal can distort competition between producers in different countries as well as between different energy sources. The impact can also extend to downstream industries where energy is a major input and therefore a factor in costs. Fossil fuel subsidies also impact competition between fossil fuels and clean energy, reducing the competitiveness of the latter and diverting investments away from clean energy sources.

The environmental rationale relates to the effect of fossil fuel subsidies on global warming, as these subsidies incentivise the production and use of climate-warming fossil fuels and delay the widespread uptake of clean energy.

Even in the absence of trade distortions, some advocates of fossil fuel subsidy reform highlight the value of addressing the issue in the WTO. For example, some argue that fossil fuel subsidies should be disciplined because of their environmental impact alone and highlight that the preamble of the Marrakesh Agreement establishing the WTO explicitly recognises the need “to protect and preserve the environment.”

They argue that the WTO would provide the right framework for disciplining fossil fuel subsidies because of the institutional structure it provides for negotiations; its monitoring and enforcement mechanisms, including the Trade Policy Review Mechanism and the dispute settlement function; as well as its experience with negotiating sectoral subsidies. They cite, for example, the experience negotiators have in the areas of agriculture and fisheries subsidies, though ongoing efforts to update decades-old rules on agricultural domestic support and negotiate new prohibitions on harmful fisheries subsidies have proven challenging in practice.

Experts say that there are various options for disciplining the use of fossil fuel subsidies in the WTO. These range from the use of existing mechanisms for transparency and notification, such as under the ASCM or the Trade Policy Review Mechanism, to a plurilateral reform initiative, a reform of the ASCM, or the negotiation of a new legal framework. The choice would depend on the level of ambition and the rationale chosen for embarking on this path.

Fossil fuel subsidy reform and the WTO: First steps

Fossil fuel subsidy reform is not an official item on the WTO negotiating agenda, and turning it into a negotiating item will require additional work and political will, especially to bring on board countries that are heavily reliant on fossil fuels – along with answering long-standing questions within the WTO over whether existing negotiating mandates should be expanded to include new topics.

However, a number of international commitments have increased the momentum for disciplining the use of fossil fuel subsidies. The idea that the WTO, with its negotiating function, monitoring, enforcement, and compliance provisions, and long-standing experience with sectoral subsidy initiatives can provide the right institutional framework for turning the commitments into real action is gaining increasing traction. The “Friends” planned statement for MC11 may be a concrete first step in this direction, though its impact will depend on the support it receives and the action it incites.

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