WTO negotiations on fossil fuel subsidy reform must begin now

18 June 2018
  • World Trade Organization rules can be used affirmatively to combat climate change by imposing new and more specific trade disciplines on fossil fuel subsidies.
  • Decisions must be made on how to define fossil fuel subsidies, how to separate the inefficient from the efficient, and how best to measure them.
  • Options must then be identified for new disciplines. One among a number of options is to adopt a waiver from WTO rules that would have the effect of transforming fossil fuel subsidies into prohibited subsidies that are automatically illegal under WTO law.

 

One way the global trade rules of the World Trade Organization can be used affirmatively to combat climate change is by imposing new and more specific trade disciplines on fossil fuel subsidies.

How should this be done?

As one target in achieving their goals of combating climate change while ensuring sustainable consumption and production patterns, the 193 members of the United Nations that have agreed on the world’s Sustainable Development Goals for 2030 have identified the shared necessity to “[r]ationalize inefficient fossil-fuel subsidies that encourage wasteful consumption by removing market distortions…”

Toward this end, last December, at the WTO ministerial conference in Buenos Aires, 12 of the 164 members of the WTO issued a declaration voicing  the need for fossil fuel subsidy reforms in the existing WTO rules. These dozen WTO members have embarked now on a diplomatic campaign to enlist 152 more.

In this daunting endeavour, these ambitious countries can benefit from being able to offer other countries a menu of options. Other WTO members are much more likely to join in supporting a solution they have helped craft than one that has been presented to them in final form. At the same time, they are more likely to find a solution on which they can agree if they can begin with a ready array of possible choices for their consideration.

At the outset, preliminary decisions will be required.

What is a “fossil fuel subsidy”? The estimates made by different international institutions of the annual amount of fossil fuel subsidies globally range from the hundreds of billions of dollars to trillions of dollars. These estimates vary because the definitions used by these institutions vary. Should we count both production and consumption subsidies? Should we include in the tally the extra health costs and other negative “externalities” resulting from the burning of subsidised fossil fuels? There must be one agreed definition within the WTO (and, indeed, one agreed definition overall internationally).

What is an “inefficient” fossil fuel subsidy? Setting aside for the moment the understandable suspicion that the pressures of domestic politics played a major role in the choice of phrasing in this target the fact that the word “inefficient” modifies “fossil fuel subsidies” presumes that some such subsidies are efficient while others are not. If so, where do we draw the line between efficient and inefficient? This question must be answered in WTO deliberations.

Once decisions are made defining these terms for WTO purposes, how then should we measure fossil fuel subsidies? The answer to this question is inextricably linked to the answers we agree to give to the previous two questions. To provide more effective disciplines for fossil fuel subsidies under WTO rules, there must first be one agreed means of measuring them. At a minimum, this crucial process of ensuring accurate measurement will require prompt and full international transparency for all such subsidies – including timely notification to the WTO.

Once we have answered these questions, what are our options?

One option is to leave the current rules unchanged. Fossil fuel subsidies are already covered by WTO subsidies rules. As it is, a WTO member can employ existing WTO subsidies rules to challenge the fossil fuel subsidies of another WTO member if those subsidies are specific to a certain industry and if they have adverse effects in the marketplace. No WTO member – so far – has brought such a case. Even if such a case were brought and won, it would remedy only the one subsidy challenged – and not all the rest of the multitude of fossil fuel subsidies in the world.

Another option is to adopt a WTO waiver that would waive certain of the current subsidies rules as they apply to fossil fuel subsidies. The requirement of specificity could be waived. The requirement of proving adverse effects in the marketplace could also be waived. In effect, this would – without changing any WTO rules – transform fossil fuel subsidies into de facto prohibited subsidies, which are automatically illegal under WTO subsidies rules. Such a waiver could adopted on its own, or it could be be part of a broader WTO waiver of a number of WTO obligations adopted to address the urgency and the uniqueness of climate change.

Still another option is to change the current WTO subsidies rules to prohibit fossil fuel subsidies. Conceivably, fossil fuel subsidies for production and for consumption could be treated differently under such a prohibition. Different categories of fossil fuel subsidies could be established for different disciplines – as the members of the WTO have done with agricultural subsidies. Also, such subsidies could be phased out over time while providing for special and differential treatment for certain countries in different stages of development. And, of course, any phase-out internationally should be accompanied by technical assistance for capacity building to help affected governments ensure domestically that poorer people are aided in other ways and are not harmed by the phase-out and the ultimate prohibition. There are many other ways the poor can be helped without encouraging them to use fossil fuels.

In addition, and more broadly for purposes of achieving sustainable development, the current WTO subsidies rules could be altered to expand the current legal concept of adverse effects from subsidies to include environmental as well as economic effects. An additional category of adverse effects could be added for causing climate or other environmental harm.

Other options include emulating the Paris climate agreement by having WTO members make pledges to reduce and eventually eliminate their fossil fuel subsidies and by requiring them regularly to report their progress and submit to reviews; negotiating a WTO understanding clarifying the application of WTO subsidies rules to fossil fuel subsidies; including progress in reforming fossil fuel subsidies in periodic WTO trade policy reviews; adding references to, and disciplines on, fossil fuel subsidies in regional trade agreements as a prelude to eventual full WTO disciplines; negotiating a separate legal framework within the WTO specifically aimed at reducing fossil fuel subsidies; and including new fossil fuel subsidy disciplines in a comprehensive sectoral trade agreement on sustainable energy which could begin by covering some WTO members and could eventually cover all of them.

The climate scientists on the Intergovernmental Panel on Climate Change tell us that three-fourths of proven fossil fuel reserves must remain in the ground to meet the globally agreed goal of keeping the rise in the global average temperature below 2 degrees Celsius by 2100. We are already halfway to 2°C. The last thing we should be doing is engaging in the sheer perversity of subsidising the production and consumption of fossil fuels.

WTO negotiations on how best to discipline fossil fuel subsidies must begin now.

 

James Bacchus is Senior Counsellor to ICTSD. He is also Distinguished University Professor of Global Affairs and Director of the Center for Global Economic and Environmental Opportunity at the University of Central Florida. In July, Cambridge University Press will publish his new book, The Willing World: Shaping and Sharing a Sustainable Global Prosperity.