The WTO subsidies agreement can be changed to discipline fossil fuel subsidies

August 2017

While reform will require considerable care, the most important prerequisite for curbing fossil fuel subsidies using the WTO framework is the recognition that climate change is too important to be held back by the political and technical intricacies of engaging in a reform of the Agreement on Subsidies and Countervailing Measures.

Fossil fuel subsidies are large, with estimates ranging from at least over US$600 billion a year up to over $5 trillion including externalities not otherwise compensated for. As fossil fuels are the primary source of greenhouse gas emissions, reducing subsidisation to their exploration, extraction, production and use could well reduce these emissions, along with related impacts on the climate.

The Agreement on Subsidies and Countervailing Measures (ASCM), a relic of 1993, is the part of the WTO aimed at disciplining non-agricultural subsidies. It is focused almost exclusively on protecting competitors from each other, and no active part of the agreement focuses on protecting global goods such as our climate. In this regard, the fate of one original piece of the ASCM is instructive: Article 8 expressly permitted three types of subsidies, including subsidies for adaptation to new environmental regulations. Yet, the way those three were drafted was so narrowly construed that they are of little use. For example, the only permitted environmental subsidy in Article 8 allows governments to pay up to 20 percent of the cost of adapting existing facilities to new environmental regulations, which does little or nothing to stimulate new renewable energy plants or discourage existing fossil fuel subsidies.

In short, the existing agreement does not offer specific targets for reducing greenhouse gas emissions from fossil fuels. However, nothing prevents this from changing. Litigation could for instance be brought by WTO members to treat the uncompensated externalities as “foregone revenue” and thus an actionable subsidy under the ASCM. Another important and preferred way forward under the current agreement is to create a much better fact base for decisions. To date, this system relies heavily on self-reported information, which understandably rarely reflects all of the subsidies, despite the best efforts of people doing the work at the OECD (which collects information from member governments on the subsidies they provide). For a quite modest sum of money, a much better database could be assembled, relying on universities and organisations, such as ICTSD, Resources for the Future, or the Global Subsidies Initiative, working with intergovernmental organisations, such as the OECD or the WTO.

Compared to using the existing agreement as it is, revisiting the text of the ASCM will however open far more possibilities to account for and discipline fossil fuel subsidies. Numerous efforts could be made within the agreement, including defining fossil fuel subsidies as “prohibited” under Article 3 (which already prohibits export subsidies and import substitution subsidies), which would make it far easier to bring challenges to the WTO system. Along those lines, “adverse effects” in ASCM Article 5 could be redefined to include harm to the human and natural environment, without regard to whether there is harm to competitors; or disallowing the exemption currently in GATT Article III.8.b which allows for subsidising only domestic producers (this perversely encourages subsidisation, and a requirement to subsidise everyone would make many fossil fuel subsidies too expensive).

All of this requires considerable care. Many possibilities cannot be enshrined in the text of the WTO, but must be decided on a national basis. For example, phasing out all fossil fuels subsidies may require national-level choices, such as whether to use fossil fuel liquids for transportation longer than coal for fixed point electricity generation. The most important prerequisite for curbing fossil fuel subsidies using the WTO framework is however the recognition that climate change is too important to be held back by the political and technical intricacies of engaging in a reform of the ASCM.

Climate change is happening and already affecting everything and everyone around us, so why not change the ASCM now? Rising electricity prices or transit fares are very sensitive politically, but those issues can be resolved with more efficient policies, as sufficiently proven by now, rather than with fossil fuel subsidies – the money could be used to subsidise green electricity or transit fares directly. The urgency of climate change needs to drive those political decisions now.

Gary Horlick is Attorney, Law Offices of Gary N. Horlick. He is the co-author with Peggy A. Clarke of the E15 Policy Options Paper Rethinking Subsidy Disciplines for the Future.

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