Think Piece

Subsidies, Clean Energy, and Climate Change

February 2015

Estimates show that fossil fuel subsidies average USD 400–600 billion annually worldwide while renewable energy (RE) subsidies amounted to USD 66 billion in 2010 and are predicted to rise to USD 250 billion annually by 2035. Domestic political rationales for energy subsidies include promoting innovation, job creation and economic growth, energy security, and independence. Energy subsidies may also serve social and environmental goals. Whether and to what extent subsidies are effective to achieve these goals or instead lead to market distortions is a matter of much debate and the trade effects of energy subsidies are complex.

This paper offers an overview of the types of energy subsidies that are used in the conventional and renewable energy sectors, and their relationship with climate change, in particular greenhouse gas emissions. While the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM) is mostly concerned with harm to competitors, this paper considers the extent to which the Agreement could also discipline subsidies that cause harm to the environment as a global common.  Beyond the existing legal framework, this paper surveys a number of alternatives for improving the ability of subsidies disciplines to internalise climate change costs of energy production and consumption. One option is a new multilateral agreement on subsidies or trade remedies (with an appropriate carve-out in the WTO regime to allow for it if such an agreement is concluded outside it). Alternatively, climate change-related subsidies could be included as part of another multilateral regime or as part of regional agreements. A third approach would be to incorporate rules on energy subsidies in sectorial agreements, including a Sustainable Energy Trade Agreement such as has been proposed in other ICTSD studies.

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