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Re-examining ‘Green Light’ Subsidies in the Wake of New Green Industrial Policies

By Mark Wu
August 2015
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For sustainable solutions to emerge to address climate change and other global environmental problems, investments are required at various points of the supply chain—from basic research and development (R&D) to commercialisation. The level of investment may be sub-optimal or market failures may lead to price distortions, which cause consumer adoption of green goods to be lower than socially desired. Some governments have chosen to intervene to redress market failures. This is giving rise to a new wave of industrial policy, with a green tinge. Subsidies are a key instrument in operationalising such an industrial policy. Of course, environmental considerations are not the only impetus behind green industrial policies involving subsidies. Complicating the narrative, governments often have additional motivations for such programmes. Further, it is not always the case that governments have the necessary capacity to tailor subsidy policies correctly without inducing waste. Subsidies associated with green industrial policies may introduce distortions and increase inefficiencies. The World Trade Organization’s (WTO) Agreement on Subsidies and Countervailing Measures (SCM Agreement) has sought to strike a balance between granting WTO Members sufficient policy autonomy to deploy subsidies to in pursuit of policy goals while limiting the negative impact of subsidies on trade. The SCM Agreement prohibits outright subsidies contingent on the use of domestic over imported goods and subsidies contingent on export performance. All others are permissible so long as they do not have an “adverse effect” on trading partners.

WTO Members are also permitted to impose countervailing duties (CVDs) in response to subsidies which cause material injury to the domestic industry manufacturing a “like” product. However, Article 2.1(b) of the SCM Agreement clarifies that a subsidy is to be considered non-specific if it is granted according to certain objective criteria or conditions that are strictly adhered to, and eligibility is automatic. For the first five years of the WTO (1995–99), the SCM Agreement contained a safe harbor available to all Members for particular forms of subsidies. These included certain types of research subsidies, subsidies providing assistance to disadvantaged regions, and subsidies promoting the adaptation of existing facilities to environmental requirements. These were classified into the legal category of “non-actionable subsidies.” Colloquially, these were referred to as “green light subsidies.”

The provision providing for “green light” subsidies was time-limited. On 1 January 2000, this safe harbor was not renewed by WTO Members, leading to its automatic expiration. Consequently, subsidies for industrial policies favoring renewable energy products are subject to WTO disciplines, just as they would be if they were designed for any other industrial good. However, disciplines on subsidies are not identical across WTO Members. Article 27 of the SCM Agreement provides for special and differential treatment of subsidies provided by least developed countries (LDCs) and a collection of select other developing countries. With the growing recognition that certain environmental products trigger positive externalities for climate change and other problems concerning the global commons, is it necessary to reintroduce a category of non-actionable “green light” subsidies for environmental goods?

This paper suggests that the disappearance of non-actionable subsidies in WTO rules has not greatly impacted the ability of countries to implement green industrial policies. It points out that some think reintroducing a category of non-actionable subsidies is unnecessary and/or undesirable, given the existing policy space for certain forms of subsidies that are not subject to effective challenge under WTO rules and because of the possibility of Type II errors. However, should one think that WTO rules ought to be altered to provide greater flexibility for subsidies for green industries, we must move beyond the original categories listed in Article 8 to consider additional approaches of the type the paper outlines. Whether such reforms work to spur greater investment and manufacturing capacity in green industries would depend on fiscal, structural, and political considerations, which differ by country. Under a certain set of conditions, however, the re-introduction of modified rules for environmental “green light” subsidies could serve to bolster a country’s potential for green industrial policy. The question is whether the related gains for global public goods are significant enough to make it worthwhile to push forward on reforming WTO subsidy rules to offer greater policy flexibility, given that such subsidies are inherently distortionary.

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