Can the international trade system be a catalyst for reforming fossil fuel subsidies (FFS) to help relieve the burden on the public purse, reduce local and global air pollution, improve energy security and tackle climate change?
This was the theme of a recent workshop set at the World Trade Organization (WTO) in Geneva and organised by Climate Strategies, the Stockholm Environment Institute and the International Institute for Sustainable Development. The event forms part of a broader conversation on how the international trading system can be made compatible with the UN Sustainable Development Goals (SDGs) and the goals of the Paris Agreement on climate change.
- Annual expenditure on fossil fuel subsidies has been estimated at US$320 billion for consumers in developing and emerging countries in 2015, and at US$100 billion for fossil fuel production worldwide.
- Fossil fuel subsidy reform can free up significant funds towards meeting the SDGs.
- Encouraging examples from India and Indonesia show that today’s low oil prices form an opportunity to redirect public spending on oil, coal and gas towards development priorities such as education, health, infrastructure and access to clean and reliable energy.
- Reform is also vital piece of the climate change puzzle, with the potential to cut greenhouse gas emissions by more than 10% by 2020.
- By complementing and strengthening ongoing reform efforts, the international trading system can be a key enabler of the 2030 Agenda.
- Reform should adequately address the needs and concerns of developing countries, including those related to energy access.
Participants found there is significant scope for the WTO and international trade agreements to complement and strengthen reform efforts already being supported under a range of international forums, including the 2030 Agenda for Sustainable Development, the G20 and APEC (the Asia-Pacific Economic Cooperation).
Fossil Fuel Subsidies and the WTO: “A Missed Opportunity”
Owing to its wide membership, its central role in disciplining trade-distorting subsidies across economic sectors, and its well-established dispute settlement system, the WTO is well-equipped to take the FFS reform agenda forward.
To date, however, the Organization’s involvement on FFS has been limited. In notable contrast with the various disputes against renewable energy subsidies that have been launched at the WTO over the past decade, no FFS have been disputed thus far. In part this is because many WTO Members do not fully notify their FFS, whether because of a lack of data and understanding of energy subsidies and their trade effects, current shortfalls in the Agreement on Subsidies and Countervailing Measures’ (ASCM) notification questionnaire or a lack of mechanisms to enforce notification. In the absence of case law and targeted research, there is also a lack of legal clarity on the extent to which different types of FFS can be disciplined by the ASCM to begin with.
And yet addressing this topic falls squarely within the Organization’s mandate. FFS can have a range of distorting impacts on trade and investment, including by affecting the rate and timing of development of new fields or mines.
Moreover, the WTO was established with a view to ensuring economic progress is achieved in accordance with the objective of sustainable development, and the SDGs explicitly identify trade as a critically important means of implementation. As such, trade should be viewed as an enabler for achieving the SDGs and targets, including the objective of reducing FFS set out under SDG 12.
Although parallels should not be overstated, it is also worth noting the WTO’s continued engagement on reducing environmentally harmful fisheries subsidies as part of the Doha Round. Observing the discrepancy in how the two subsidies were treated in the WTO, the former Director-General Pascal Lamy characterised the absence of FFS from the WTO’s agenda as a “missed opportunity”.
What Can Be Done?
During the Geneva workshop, participants identified multiple avenues to address FFS within the international trading system. While not purporting to be exhaustive, the table below identifies five key categories of action available to WTO Members: 1) Promote capacity building and technical cooperation; 2) Enhance transparency; 3) Adopt subsidy reform pledges and ensure credible follow-up through reporting and review; 4) Clarify the interpretation of existing rules; and 5) Make changes to existing rules. Several concrete pathways to help realise these goals are also identified.
It is important to note that these pathways are not mutually exclusive, and many are likely to be particularly effective if adopted together. A pledge, report and review system, for instance, would benefit from parallel efforts to improve transparency.
All approaches would necessarily be led by WTO Members. They range from those that are purely voluntary to those that are binding, and embedded in the WTO’s dispute settlement mechanism. This provides scope for gradual enhancements of ambition.
In a similar vein, many approaches can either be taken forward plurilaterally (by a coalition of the willing) or multilaterally (involving all WTO Members). As illustrated by references to fossil fuel subsidy reduction in the EU-Singapore Free-Trade Agreement (which is awaiting formal approval), bilateral and regional trade agreements may form an effective platform to pioneer cooperative approaches on fossil fuel subsidy reform.
The workshop also made clear that any successful effort to address FFS through the international trade system will need to adequately address the special circumstances of developing countries. That might involve special and differential treatment provisions, including potential exemptions and carve-outs for development, energy access and other reasons.
With the WTO’s 11th biennial Ministerial Conference coming up in Buenos Aires in December this year, creative thinking, constructive debate, and further research on the various options on the table is needed to help ensure the promise of Paris and the SDGs is fulfilled.
About the authors
Peter Wooders is Group Director, Energy with IISD
Cleo Verkuijl is a Research Fellow with SEI