Introduction: The Role of Subsidies in the Energy Sector

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2 CHRISTINE JOJARTH 29 September 2017 Geneva, Switzerland Introduction: The Role of Subsidies in the Energy Sector Christine JOJARTH, Lecturer, Stanford University (by video conference)

3 Christine Jojarth

4 Good reasons for limiting fossil fuel subsidies 1. Inefficient allocation of finite natural resources 2. Strain on government finances 3. Economic inequalities 4. Environmental problems on the local and global level

5 But you are threading a narrow path 1.Fossil fuels can support the achievement of the sustainable development goals

6 But you are threading a narrow path 2. Not all fossil fuel subsidies are created equal

7 But you are threading a narrow path 3. Pressuring governments into eliminating fossil fuel subsidies can lead to even less transparent and less efficient policies

8 Balancing the benefits and costs of fossil fuel subsidies 1. Inefficient allocation of finite natural resources 2. Strain on government finances 3. Economic inequalities 4. Environmental problems on the local and global level 1. Fossil fuels can support the achievement of the sustainable development goals 2. Not all fossil fuel subsidies are created equal 3. Pressuring governments into eliminating fossil fuel subsidies can lead to even less transparent and less efficient policies

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10 HELOISA PEREIRA 29 September 2017 Geneva, Switzerland Session I: Disciplining the Use of Fossil Fuel Subsidies: Lessons from the Fisheries Negotiations Heloísa PEREIRA, Former Deputy Director, Department of Trade Remedies (DECOM) of the Ministry of Development, Industry and Foreign Trade, Brazil

11 The Marrakesh Agreement Preamble The Parties to this Agreement, Recognizing that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development.

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13 1988: IPCC 1992: Rio Summit Eco 92

14 2009: Copenhagen Accord, G20 and APEC 2012: Rio : UN Agenda 2030& SDG 2015: Paris Agreement

15 World Merchandise Exports By Major Product Groups, 2016, share % Other non-specified; 4% Agricultural products; 10% Fuels and minerals; 13% Energy-intensive commodities (iron, steel, chemicals); 14% Other manufatured goods; 39% Capital exports (auto, IT); 20% Source: World Trade Statistical Review, 2017.

16 Estimated share of global anthropogenic GHGs by activity Industrial process; 7% Agriculture; 11% Others; 14% Fossil-fuels based energy, 68% CO 2, 90% Methane (CH 4), 9% Nitrous Oxide (N 2 O), 1% Source: IEA-OECD CO2 Emissions from Fuels Combustion. At p. 11 *Others include large-scale biomass burnin, post-burning decay, peat decay, indirect N2O emissions fromm non-agricultural emissions of Nox and NH3, waste and solvent use.

17 Dispute Number Dispute Name Type of Challenged Subsidies Complainant DS510 United States Certain Measures Relating to the Renewable Energy Sector Prohibited India DS459 European Union (formerly EC) Certain Measures on the Importation and Marketing of Biodiesel and Measures Supporting the Biodiesel Industry Prohibited Argentina DS456 India Certain Measures Relating to Solar Cells and Solar Modules Prohibited US DS452 EU Certain Measures Affecting the Renewable Energy Generation Sector Prohibited China DS426 Canada Measures Relating to the Feed-in Tariff Program Prohibited EU DS419 China Measures concerning wind power equipment Prohibited US DS412 Canada Certain Measures Affecting the Renewable Energy Generation Sector Prohibited Japan DS476 Certain Measures Related to the Energy Sector Prohibited Russian Federation

18 Fuels Share in Global CO 2 emissions Source: IEA-OECD CO 2 Emissions from Fuels Combustion (p. 11).

19 CO 2 emissions by region (2014) Africa; 3% Bunkers; 4% Other; 6% Latin America; 4% China; 28% Asia Oceania; 5% Middle East; 5% Asia, excluding China; 12% North America; 18% Europe; 15% Source: IEA-OECD CO2 Emissions from Fuels Combustion.

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21 CHRISTOPHE BELLMANN 29 September 2017 Geneva, Switzerland Session I: Disciplining the Use of Fossil Fuel Subsidies: Lessons from the Fisheries Negotiations Christophe Bellmann, Senior Resident Research Associate, ICTSD

22 Where Can Fisheries Subsidies Negotiations Serve as a Precedent? How to design and reach consensus on new multilateral, sector-specific disciplines to address the negative externalities associated with certain forms of subsidies beyond their trade distorting effect. Lessons on both the what and how: i.e on (1) process and (2) substance; What can be compared and where are the limits of such comparison. On process: Limits: no consensus reached yet? Unclear whether the proposed approach will be successful Lessons : Scope of the negotiations as a stand alone item vs as a part of a broader package; Calibrating scope/potential for reaching an agreement; What can we learn from RTAs: the unique TPP precedent? Unilateral reform as a driver for engagement; Use of external mandates.

23 Where Can Fisheries Subsidies Negotiations Serve as a Precedent? On substance: 4 main challenges posed by FFSR disciplines in a WTO context: Moving away from a mercantilist negotiations to collective action on the delivery of a public good; Definitional issues: does the lack of cost internalization of negative externalities constitute a subsidy (see IMF approach); Moving beyond the notion of specificity (including the distinction producer vs. consumer subsidies); Designing disciplines informed by their effect on environmental considerations (environmental effect based approach). Precedents of fisheries negotiations arguably mainly relevant to help address the fourth challenges.

24 Lessons on Designing an Environmental Effect Based Approach How to articulate and measure the environmental effect? Notion of overfishing and overcapacity has proven elusive. In the absence of effective metrics, focus on certain situations or characteristics used as proxies and based on : Industry practices (e.g. stop support to vessels/operators found to have engaged in IUU); Existing level of deterioration of the resource locally (activities targeting stocks already in an overfished condition); Type of producers/economic agents (e.g. large scale industrial vs. small scale artisanal); Type of support provided (construction, repair, acquisition, inputs, equipment, income support, resource management); Geographical delimitation where the activity is taking place: territorial sea, EEZ, high seas, RFMOs. (a potential modulating element e.g. on fuel). How to structure and design disciplines? Prohibited; Allowed (exceptions and S&DT); Allowed conditioned on environmental performance; Actionable (redefinition of adverse effect and injury from an environmental perspective (Brazil 2007, draft chair text Article).

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26 JOEL P. TRACHTMAN 29 September 2017 Geneva, Switzerland Session II: An Ex-Ante Classification System for Fossil Fuel Subsidies? Innovative Approaches Inspired by the Agreement on Agriculture Joel P. TRACHTMAN, Professor, Fletcher School of Law and Diplomacy, Tufts University

27 JOEL P. TRACHTMAN 29 September 2017 Geneva, Switzerland Session II: An Ex-Ante Classification System for Fossil Fuel Subsidies? Innovative Approaches Inspired by the Agreement on Agriculture Joel P. TRACHTMAN, Professor, Fletcher School of Law and Diplomacy, Tufts

28 Deficiencies of Existing WTO Law Likely failure to include subsidies by virtue of failure to include social cost of carbon Specificity requirement Benchmark for government revenue due foregone Contributions from SOEs might not be covered Definition of injury based on market distortion, not environmental harm Ineffective notification regime

29 Precedents Fisheries Subsidies Agriculture Subsidies WTO Agreement on Agriculture Amber box: set overall monetary limit on domestic support Green box: exemptions for non-trade distorting: research, food aid, etc. Blue box: exemption for compensation to farmers for reducing production

30 Components of a WTO-based or WTO-parallel FFS Regime Definition Subsidy Fossil fuel subsidy No need for specificity; injury test Aggregate limits Transferability to renewables: sustainification as compensation to current recipients Other compensating measures for poor Special and differential treatment Exceptions? Notification, transparency, surveillance Dispute settlement Remedies

31 Defining Fossil Fuel Subsidies: Subsidy Component Begin with ASCM definition of subsidies Add contributions from SOEs Difficulty of benchmarking tax subsidies Make a decision on non-internalization of environmental externalities as a subsidy

32 Defining Fossil Fuel Subsidies: Fossil Fuel Component Fossil fuel component--oecd inventory process as starting point Consumption subsidies: price gap comparison with international prices Add: fiscal channel consumption subsidies that do not affect price per se Net out indirect taxes prior to benchmark comparison? Production subsidies pre-tax; post-tax Production subsidies: possible definitional references Producer price gap; but effects on price depend on market Producer identity Activity Effects on fossil fuel production Effects on carbon emissions Post-tax national benchmark comparison Anti-pigovian subsidies

33 Carbon Emissions Additionality as Focus Empirical difficulties in determining additionality Additionality of fuel use additionality of carbon emissions Use of proxies for estimation, based on average marginal effects of subsidies Shift burden of proof to states to show that their subsidies had lower emissions effects If use proxies, need for exceptions for subsidies that cause reduced carbon emissions Tradeoff between carbon emissions additionality precision versus administrability

34 The WTO Agreement on Agriculture Model: Boxes and AMS Amber Green Blue (Red) Agreement on Agriculture Trade-distorting agricultural support Food security, research, environmental Decoupled does not influence production Amber box subsidies that exceed AMS Agreement on FFS Emissions-inducing support Emission-reducing, renewable fuels, energy security Decoupled does not induce fossil fuel use Amber box subsidies that exceed AMS; subsidies for specified fuels or other specified subsidies

35 What Does the WTO Offer? Forum for exchange of diverse policy commitments: cross-sectoral tradeoffs Forum for international cooperation and formal commitment Analytical, reporting, and surveillance capabilities; Trade Policy Review Mechanism Experience with regulating national subsidies: agriculture, fisheries, general

36 Thank you. 22 September 2017 New York, United States of America Fossil fuel subsidies: a role for the WTO? Joel P. TRACHTMAN, Professor, Fletcher School of Law and Diplomacy, Tufts University

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38 ILARIA ESPA 29 September 2017 Geneva, Switzerland Session II: An Ex-Ante Classification System for Fossil Fuel Subsidies? Innovative Approaches Inspired by the Agreement on Agriculture Ilaria Espa, Senior Research Fellow, World Trade Institute (by video conference)

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40 NGRID SIDENVALL JEGOU 29 September 2017 Geneva, Switzerland Session III: The Way Forward Ingrid SIDENVALL JEGOU, Senior Associate, ICTSD

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42 RICARDO MELÉNDEZ-ORTIZ 29 September 2017 Geneva, Switzerland Session III: The Way Forward Ricardo MELÉNDEZ-ORTIZ, Chief Executive, ICTSD

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