A role for the WTO in reducing fossil fuel subsidies

31 October 2017

The elimination of fossil fuel subsidies would decrease global carbon emissions significantly. This piece outlines five features of an ambitious approach to fossil fuel subsidy reform using the multilateral trading system.

 

The World Trade Organization (WTO) is not an environmental organisation. But it has a number of attributes and capabilities that make it an attractive candidate to provide an institutional framework for an international regime for the reduction of fossil fuel subsidies. Fossil fuel subsidies have a large socially perverse effect: they encourage use of fossil fuels by making them cheaper or by inciting producers to increase capacity, thereby delaying the energy transition. Greater use of fossil fuels accelerates the rate of climate change, leading to global disaster.

Subsidy disciplines in the WTO

The WTO has a system of disciplines for agricultural subsidies, upon which a regime for reduction of fossil fuel subsides could easily be modelled. In addition, the WTO is hosting negotiations on the reduction of harmful fisheries subsidies, which also provide a model for negotiation and eventual agreement on a mechanism to reduce fossil fuel subsidies.

The WTO already has a set of rules for disciplining subsidies generally, including the WTO Agreement on Subsidies and Countervailing Measures. However, this agreement was designed to address subsidies based on their trade-distorting effects, and is not well suited to fossil fuel subsidies, which may be environmentally disastrous even when they do not cause injury to another member’s domestic industry – a required condition for subsidies to be deemed actionable and thus subject to challenge.

Furthermore, fossil fuel subsidies may not be sufficiently specifically targeted at a particular industry, or group of industries, to meet the requirement for “specificity” that is a prerequisite for action against them. Perhaps most importantly, the very definition of “subsidy” in the WTO excludes failure to charge firms for the “social costs of carbon” – which arise from the adverse environmental effects of carbon emissions.

Five features of a fossil fuel subsidy reduction regime

What would be the features of a fossil fuel subsidy reduction regime, at the WTO or elsewhere?

First, it is necessary to have a definition of fossil fuel “subsidy.” As noted in the previous paragraph, some changes to the WTO definition of “subsidy” would need to be negotiated.

Second, what makes a subsidy a “fossil fuel” subsidy? The best answer is that it is found in the effects on fossil fuel use. The precise effects may be difficult to calculate so some proxies may be used. These could include the type of recipient of the subsidy, the conditions for grant of the subsidy, or the effects on prices. For example, if a subsidy is granted to a firm previously identified as being in the fossil fuel business, or if it is conditioned on fossil fuel exploration or production, it could be assumed to have effects on fossil fuel use. If price is used as a reference, it should be based on world market prices rather than domestic prices that may be distorted by cheap government supply of fuels. The International Monetary Fund, Organisation for Economic Co-operation and Development, the  International Energy Agency and the Global Subsidies Initiative already conduct a good deal of work to estimate the amounts and effects of fossil fuel subsidies.

Third, aggregate limits on each member’s fossil fuel subsidies would need to be negotiated. This is a mechanism introduced in the WTO Agreement on Agriculture (see Table 1). These limits could be scheduled to be progressively reduced over time.

Fourth, exceptions would need to be crafted for subsidies that are needed to support the poor, and for subsidies that assist transition to more efficient use or to renewable fuels. The Agreement on Agriculture also addresses similar issues.

Fifth, effective provisions for notification, auditing, dispute settlement, and remedies would be important to ensure compliance. Although the WTO subsidies notification mechanism is criticised by some, the WTO’s Trade Policy Review Mechanism, notification regimes, and dispute settlement system could be adapted for use in the context of fossil fuel subsidies.

Table 1: The WTO Agreement on Agriculture Model: Boxes and AMS

  Agreement on Agriculture Agreement on Fossil Fuel Subsidies
Amber Trade-distorting agricultural support Emission-inducing support
Green Food security, research, environmental Emission reducing, renewable fuels, energy security
Blue Decoupled: does not influence production Decoupled: does not induce fossil fuel use
(Red) Amber box subsidies that exceed AMS Amber box subsidies that exceed AMS; subsidies for specified fuels or other specified subsidies

Note: AMS refers to Aggregate Measurement of Support which includes all product-specific and non-product-specific support. The table schematically outlines how the existing WTO Agreement on Agriculture approach to subsidy disciplines could serve as a model for fossil fuel subsidy reform. Subsidies in the red category would be forbidden, while subsidies in the amber box would be reduced over time. The green box could contain certain clean energy subsidies, and other kinds of permissible subsidies.

Source: Trachtman 2017

The WTO does not have an explicit environmental function. But the preamble of the Marrakesh Agreement Establishing the WTO recognises the need “to protect and preserve the environment.” Furthermore, any fossil fuel subsidy reduction regime included in the WTO would be incorporated by an amendment, which could easily add a new subsidiary function, if that were thought necessary.

What the WTO does provide is the world’s premier forum for negotiation, commitment, and dispute settlement about subsidies and economic reform – a forum in which states make diverse commitments and trade-offs based on their individual policy needs and aspirations. Addressing fossil fuel subsidies at the WTO would also deliver a response to those who criticise the multilateral body for focusing too narrowly on trade liberalisation while insufficiently tackling areas of global environmental impact that arise in parallel.

 

This article is derived from the paper Fossil Fuel Subsidy Reduction and the World Trade Organization commissioned by ICTSD and authored by Joel P. Trachtman. The paper is part of a series of policy dialogues, research and analysis, and communications activity of ICTSD aimed at finding constructive solutions to priority matters essential for the attainment of Agenda 2030 and the Sustainable Development Goals. As such, it was discussed at dialogues organised by ICTSD, in partnership with NYU, in New York during Climate Week on 22 September and at an E15 Initiative workshop in Geneva on 29 September 2017.

Joel P. Trachtman is Professor of International Law at the Fletcher School of Law and Diplomacy, Tufts University.