Climate Change and Energy Subsidies: Is There a Role for the WTO?

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The present WTO framework thus imposes more constraints on renewable energy subsidies than on much larger and environmentally harmful subsidies to fossil fuels, which places it at odds with the key objectives of environmental policy.

Climate change is a major global challenge which, according to the UN (the UNFCCC), can best be addressed by reducing greenhouse gas emissions. Since almost two-thirds of global greenhouse gases are generated by the energy sector, a key plank of climate change policy is to transition from fossil fuels to clean energy. This post considers the role of the WTO in achieving this transition.

Energy subsidies have a great impact on climate change. Subsidies for fossil fuels (such as oil, natural gas and coal) directly encourage environmentally damaging means of generating energy and reduce the relative attractiveness of clean energy investments. By contrast, subsidies for renewable energy (such as wind, solar and hydro) can be used as an instrument to reduce greenhouse gas emissions not only by directly increasing clean energy generation but also by supporting innovations that improve its viability. Nevertheless, despite the recent rise in renewable energy subsidies ($140 billion in 2016), they are still significantly lower than fossil fuel subsidies ($260 billion in 2016).

Reflecting their ability to distort markets, WTO law has a special set of general rules on subsidies – the Subsidies and Countervailing Measures Agreement (the “SCM Agreement”), alongside the General Agreement on Tariffs and Trade (“GATT”). Subsidies can be counteracted by multilateral action through the WTO dispute settlement system or, where subsidized products affect the domestic market, by the adoption of domestic countervailing measures. At the multilateral level, six disputes have been brought so far to the WTO against renewable energy support programs. Yet environmentally harmful fossil fuel subsidies have never been challenged. Similarly, at the unilateral level, 41 trade remedy investigations in the renewable energy sector were initiated between 2008 and 2014. At the same time, unilateral trade remedies have not been used against fossil fuel production subsidies. Why is this happening? MORE