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Fossil fuel subsidies harm the environment and delay the energy transition. This post draws on the fisheries subsidies negotiations at the World Trade Organization to explore how the global trade body could discipline the use of fossil fuel subsidies and advance reform in this area.

In December last year, trade ministers gathered in Buenos Aires for the WTO’s Eleventh Ministerial Conference (MC11). One of the possible deliverables was an outcome in fisheries subsidies negotiations. Although negotiations intensified in the weeks leading up to MC11, members ultimately were unable to reach consensus, as reflected in the wording of the ministerial decision. The decision expresses agreement on the part of members “to continue to engage” in the negotiations aimed at adopting a deal with effective disciplines by 2019 at the next WTO ministerial conference.

For many, this result is far from ideal. But the fact that members have agreed to continue working on fisheries subsidies may have heartened those with higher expectations. The result of MC11 – which includes four ministerial decisions and several joint ministerial statements among groups of WTO members dealing with new issues – shows that it is time for the WTO to effectively reflect today’s global reality.

If global trade is to drive development and prosperity in a sustainable manner, environmental externalities stemming from trade measures need to make their way into the WTO agenda sooner rather than later.

Ministerial declaration on fossil fuel subsidy reform

A first important step in that direction has been taken in Buenos Aires. New Zealand, supported by eleven other members, delivered a ministerial statement acknowledging the need for global action, including by the WTO, aimed at reforming inefficient fossil fuel subsidies. The twelve signatories agreed to rationalise and phase out inefficient fossil fuel subsidies and advance reform discussions at the WTO with a view to “achieving ambitious and effective disciplines on inefficient fossil fuel subsidies.”

Although this is already a leap forward in the context of fossil fuel subsidy reform at the WTO, lessons from key substantive aspects and procedural tactics underlying the fisheries negotiations can also provide incentives for other WTO members to support the initiative and carry the reforms forward. While the governments represented in the WTO have pledged under the 2030 Agenda and the Paris Agreement to take action in this area, implementation is lagging. A move by the WTO – with its binding legal nature and system for compliance – could make a difference.

Lessons from substantive aspects of the negotiations

Substantive aspects of the fisheries negotiations suggest that the WTO should be able to take a new approach to discipline practices that have a damaging effect not only on trade but also on broader sustainable development concerns. The fisheries negotiating process in which different types of subsidies are distinguished by means of an “effects-based” approach indicates that a similar method could be contemplated for fossil fuel subsidies.

Under this approach, prohibited subsidies could include those subsidies that cause the most harm to the environment – assessed on the basis of the share in global CO₂ emissions by fossil fuel type. Actionable subsidies could involve subsidies to the most efficient forms of fossil fuel production, provided the negative externalities to the environment of emitting CO₂ are offset by a proportional decrease in greenhouse gas emissions by means of investments in clean energy, energy efficiency, and/or carbon capture, utilisation and storage technologies. Non-actionable subsidies could be those subsidies directed to R&D in the renewables sector, taking into account the broader energy supply mix of each member.

Another substantive lesson from the fisheries negotiations is the centrality of definitions regarding flexibilities and carve-outs under the special and differential treatment umbrella for developing countries. A multilateral agreement on fossil fuels subsidies would also need to ensure the consent of a wide range of governments, including many low-income countries that rely on cheap energy obtained from fossil fuels to meet their energy needs and poverty alleviation goals.

A two-way approach could be envisaged: a wide exception for least developed countries and another exception based on the contribution of each member to the environmental problem (importing the concept of common but differentiated responsibilities from the climate debate).

Political commitments beyond the WTO

Limiting discussions to what can be done in terms of substance, however, is insufficient. Experience suggests that the WTO can deliver when methods and approaches are pragmatic. Currently, the fisheries negotiations focus on a seemingly small and manageable package.

Political commitments outside the WTO have also constituted a key enabler for the fisheries talks. The UN Sustainable Development Goal (SDG) 14.6 has provided an important push to propel the talks through 2016-17, as well as a plurilateral initiative to discipline fisheries subsidies.

Likewise, political pledges have targeted fossil fuel subsidy reform. SDG 12.c calls on UN members to “rationalize inefficient fossil-fuel subsidies” by “removing market distortions,” including “by restructuring taxation and phasing out those harmful subsidies.” SDG 7 also calls for enhanced “international cooperation” to facilitate access to “advanced and cleaner fossil-fuel technology” within the broader context of climate change mitigation measures.

Under the Paris Agreement, parties agreed to “[m]aking finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.” And, in paragraph 82 of the Addis Ababa Action Agenda, states commit to “integrate sustainable development into trade policy at all levels.” Aligning these commitments with the new route of “small-packages” can shed some light on the small-step approach that fossil fuel subsidy reform could follow at the WTO.

Looking forward

Looking beyond a business-as-usual type of attitude – e.g. considering trade injury only associated with trade measures – would allow the WTO to meaningfully explore emerging trade issues. Demandeurs of fossil fuel subsidy reform have pitched at a very pragmatic level at MC11. They have delivered a ministerial statement that emphasises the need for global action, including by the WTO, aimed at phasing out inefficient fossil fuel subsidies in the near term. This forward looking approach seeks to ensure that the WTO effectively take account of negative environmental externalities.

Against a background in which existing climate commitments, even if fulfilled, will be unable to maintain global temperatures well below a 2^oC rise relative to pre-industrial levels, trade policymakers have an important role to play. In theory, trade rules promise great global economic gains. In practice, however, those gains cannot be fully, equitably, and sustainably realised unless policymakers start to act and do more to shield the environment from the negative externalities stemming from trade measures.

The post is an adaptation of the paper How the WTO Can Help Tackle Climate Change through Fossil Fuel Subsidy Reform: Lessons from the Fisheries Negotiations commissioned by ICTSD and authored by Heloisa Pereira.

Heloisa Pereira is a former Deputy-Director of the Department of Trade Defence (DECOM) in the Ministry of Development, Industry and Foreign Trade of Brazil.

Tag: Climate Change, Fisheries and Oceans, Multilateral, Sustainable Development Goals, United Nations Framework Convention on Climate Change