Overview Paper

Winds of Change and Rays of Hope: How Can the Multilateral Trading System Facilitate Trade in Clean Energy Technologies and Services?

By Mahesh Sugathan, 
December 2013
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The world today confronts an urgent need to address climate change and the serious consequences that a global temperature rise of more than 2 degrees Celsius threatens to bring with it. At the same time, it is imperative for increasing global energy supplies to meet the needs of economic activity and continued growth in both developed and developing countries, as well as to provide energy access to the 1.3 billion people that lack it. The reality is that fossil-fuel use—the primary cause of human-induced global warming—is dominant in the global energy mix, and is expected to remain so for several decades to come. Efforts to keep global temperature rise within the 2 degrees Celsius mark will require both a rapid scale up of clean energy sources (solar, wind, hydro, and biomass) and greater efficiency in the use of energy. This is critical not only for countries in the Organization for Economic Co-operation and Development (OECD) that already contribute a significant level of carbon dioxide (CO2) emissions, but also countries in the developing world, where most of the future growth of emissions is expected.

The transition to a low-carbon future will require an effective “enabling environment,” shaped by a “toolkit” of domestic and international regulatory policies and frameworks that will influence price signals, and public and private resource allocation and consumption decisions, encouraging the deployment and diffusion of new clean energy and energy-efficiency technologies and discouraging the use of fossil fuels. Trade policies and regulatory frameworks will be an important set of tools in that context. While energy itself is “tradable” like other goods and services, it is also different and more fundamental in that it is also an “enabler” of economic activity, including manufacturing and trade.

For the purposes of this paper, clean energy has been taken to include only clean electricity generation technologies related to wind, solar, hydro, and biomass and in certain cases cleaner fuels, such as ethanol, in addition to clean energy services. While nuclear fuel and generation technologies produce no carbon emissions during generation, the associated environmental and safety risks lead to its being excluded from the scope of the paper, although there is no doubt that it will play an important role in climate change mitigation efforts. Also excluded from the paper is consideration of a broad set of measures, such as carbon taxes and fossil fuel subsidy reform, and measures such as carbon and border tax adjustments, all of which may indirectly promote clean energy by discouraging or removing incentives related to the use of fossil fuels.

Despite the gloomy investment climate resulting from the global economic recession, investment in renewable power and fuels increased by 17 percent to a new record of USD 257 billion in 2011, with 35 percent of investment flows going to developing economies. It is encouraging that some of the biggest greenhouse gas emitters, such as the United States (US), the European Union (EU), China, and India witnessed the largest volumes of clean energy investments or represent some of the fastest growing clean energy markets. Another noticeable trend has been a significant jump in investment inflows in solar helped by rapid cost declines in solar photovoltaic (PV) modules. Long-term forecasts by Bloomberg New Energy Finance (BNEF) predict a bright future for renewables, and in one scenario renewables account for between 69 percent and 74 percent of all new power capacity added between now and 2030, owing to increasing cost competitiveness. Large hydro is expected to remain the dominant form of renewable energy generation under all scenarios. According to the projections of the International Energy Agency (IEA’s) 2012 World Energy Outlook, by 2035, renewables would comprise 31 percent of electricity generation in 2035, up from 10 percent in 2010. Falling costs and natural demand is also expected to take over from policy support as the main driver for renewables according to BNEF, which also foresees a need for public support at least until 2020.

Trade in clean energy goods has been growing rapidly and the growth in exports and imports of solar PV modules has been particularly impressive. Chinese solar PV exports, for instance, grew spectacularly from USD 644 million in 2004 to USD 27.94 billion in 2011. An interesting aspect is that the key traders in clean energy products, like solar panels and wind turbines, are often also the major greenhouse gas-emitting countries. Thus, the “critical mass,” if it were to be defined as such, for both climate mitigation as well as trade in clean energy products comprises a handful of countries and often the same ones—China, the US, and the EU being fundamentally important in both spheres. The emerging economies among developing countries have been steadily increasing their share of exports of clean energy products, and their rates of growth have been much larger than OECD countries. Another interesting aspect is the concentration of the major players in solar PV and wind turbines (and clean energy technologies more broadly) in the Asia-Pacific region. This has implications, particularly in the context of voluntary initiatives on liberalising trade in clean energy goods and services (and environmental goods and services more broadly) under the aegis of Asia-Pacific Economic Cooperation (APEC).

From a World Trade Organization (WTO) perspective, there are ways in which the multilateral trading system could play a more supportive role to facilitate greater deployment of clean energy goods and services. These would include the following.
(i) Addressing measures that restrict trade in clean energy goods and services while being mindful of legitimate concerns with respect to the policy space that WTO Members, particularly developing countries. may have.
(ii) Enabling greater transparency on clean energy measures and policies that could restrict trade.
(iii) Improving clarity on existing trade rules that may affect deployment of clean energy and exploring the need for reformulating rules and new provisions through fresh negotiations among WTO Members with a view to ensuring greater predictability for policymakers and the private sector, and reducing the likelihood of future trade disputes.

From this perspective, the paper examines five key issues at the interface of trade and clean energy policy—(i) tariffs; (ii) clean energy incentives, subsidies and local content measures; (iii) services; (iv) government procurement policies; and (v) standards and certification. A review of these issues, including examination of the findings of the ICTSD, reveal that tariffs may be relatively easier to address compared with non-tariff measures. At the same time, tariff liberalisation has faced its own set of challenges, as reflected by the contentious debates over defining and identifying “environmental” goods in the WTO Doha Round of negotiations. Such issues of classification and identification may also play an important role in addressing market access-related barriers on services. From the perspective of clarifying rules and examining the need for new rules, the significant issue areas appear to be clean energy subsidies and local content measures, standards, and certification and government procurement policies. Services also appear to be an important area for further developing and clarifying rules, particularly on subsidies and domestic regulatory aspects. From a rules perspective of all the issues, clean energy incentives and local content measures could arguably deserve priority attention from the WTO, especially keeping in mind the nature of disputes arising at it. Addressing trade remedies may also be important from a market access perspective, and it has taken centre stage in disputes between the US, the EU and China. Countervailing duties, to the extent they are applied in the future, will no doubt also be shaped by any clarification or development of subsidy rules that may take place within the WTO.

In addition to these five sectoral issues, the paper also examines WTO process-related issues and systemic questions. It contends that the WTO is at a crossroads. Given the lack of progress in the Doha Round of negotiations, activity is increasingly shifting to regional forums. At the same time, the WTO remains the only multilateral institution with binding rules and a robust dispute settlement system. It is also the only trade institution that brings all major greenhouse gas emitters—developed as well as developing—under a single set of trade-related rules and obligations. Hence trade-related decisions taken under the WTO would be politically and economically significant. Given that the WTO operates within the “single undertaking” framework, decision-making agreements may not be easy to reach. Progress may need to come incrementally, and the focus may have to be first on easily attainable reforms and issues. In other words, “fine-tuning the WTO’s engine” will be easier than aiming for a rapid overhaul or transformation. The paper highlights three process-related problems in the WTO—(i) fragmentation of relevant rules across a number of WTO agreements; (ii) challenges on negotiating market access for clean energy goods and services, including fragmentation of negotiating forums; and (iii) lack of clarity and coherence in rules. The paper raises a number of questions for these process-related issues once again from the perspective of improving transparency, increasing market access, and clarifying existing rules and developing new ones if necessary.

In addition, the paper raises the issue of whether any interim measures may be necessary to reduce the likelihood of trade disputes related to clean energy policies until meaningful progress may be made on the other pillars—market access, transparency, and rules.

The paper will not attempt to address the WTO’s coherence with the United Nations Framework Convention on Climate Change (UNFCCC) system and climate-relevant measures, such as treatment of fossil fuels, carbon taxes, labeling, and border carbon adjustments on carbon-intensive goods. Important as they are in determining market opportunities for the scale up of clean energy, any meaningful discussion of their range and complexity and relevant gaps in the multilateral trading system that will need to be addressed will require a separate paper. The current paper, therefore, focuses only on trade barriers, transparency measures, and rules that directly affect clean energy technologies and services.

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