Legal Precedents for an Agreement to Limit Fossil Fuel Subsidies in the UNFCCC Negotiations By Steven Herz for American University Washington College of Law s Program on International and Comparative Environmental Law & Oil Change International 1 March 2009 Introduction. Public subsidies to the production and use of fossil fuels pose a significant impediment to resolving the climate crisis. These subsidies tend to increase fossil fuel use and reduce incentives to use it more efficiently. They also reinforce dependence on fossil fuels, and impede the necessary transition to less carbon intensive energy sources and development pathways. 1 Global fossil fuel subsidies amount to about US $180 to 200 billion per year. 2 Subsidies in the twenty largest non-oecd countries have been estimated to be around US$170 billion. 3 This has a significant affect on CO 2 emissions. In 2000, the OECD estimated that eliminating all subsidies that lower the price of fossil fuels for industry and energy production would reduce global CO 2 emissions by more than 6 per cent by 2010, while raising real incomes by 0.1 percent. 4 Recognizing the perverse affects of fossil fuel subsidies on climate, OilChange International and its partners are exploring the feasibility of a campaign to include a subsidies agreement in the post-2012 climate framework. This memorandum supports this effort by showing how previous international agreements have limited public subsidies to achieve their objectives. It finds that there is ample legal precedent for such an initiative. The Kyoto Protocol and subsequent decisions of the Parties already call on developed member countries to reduce fossil fuel subsidies as a matter of priority. And a number of other international agreements have also used subsidy limitations to achieve their stated purposes. This memorandum considers these precedents in three categories. Section 1 reviews international agreements and declarations that specifically address the problem of fossil fuel subsidies. It considers the Kyoto Protocol and subsequent decisions of the Parties, and the Plan of Implementation of the World Summit on Sustainable 1 For information on this paper or efforts to end international subsidies to fossil fuels, contact Steve Kretzmann at Oil Change International (steve@priceofoil.org) or Steven Herz, the author (steve.herz@sbcglobal.net).
Development. Section 2 reviews the general treatment of subsidies under the WTO Agreement on Subsidies and Countervailing Measures. Section 3 then considers three examples of specific subsidy limitations in international agreements that are not related to fossil fuels: (1) the Montreal Protocol on Substances that Deplete the Ozone Layer; (2) the OECD Arrangement on Officially Supported Export Credits; and (3) the WTO Agriculture Agreement. Section 4 then provides some concluding observations. 1. Specific Limitations on Fossil Fuel and Energy Subsidies. 1.1 The Kyoto Protocol. Article 2.1 of the Kyoto Protocol requires Annex I countries 5 to implement policies and measures to achieve their emission limitation and reduction commitments. While Article 2.1 does not require these countries to undertake any specific policy or measure, it lists a range of potential actions that they could decide to implement, including: (v) Progressive reduction or phasing out of market imperfections, fiscal incentives, tax and duty exemptions and subsidies in all greenhouse gas emitting sectors that run counter to the objective of the Convention and application of market instruments; 6 At the COP 11 in Montreal, the Parties to the Protocol strengthened and prioritized this provision. The Parties agreed that Annex II countries, 7 and Annex I countries in a position to do so should give priority to reducing these market distortions, and to [r]emoving subsidies associated with the use of environmentally unsound and unsafe Technologies; 8 The Parties took a much different approach with regard to subsides provided by developed to developing countries. There, they did not seek to limit all subsidies and other market distortions in greenhouse gas emitting sectors. Rather, they encouraged subsidies that could provide incremental improvements over existing patterns of use. Thus, they instructed Annex II countries, and Annex I countries in a position to do so to also give priority to: (d) Cooperating in the development, diffusion and transfer of less greenhouse-gas-emitting advanced fossil-fuel technologies, and/or technologies relating to fossil fuels that capture and store greenhouse gases, and encouraging their wider use; 9 At the COP 7 in Marrakesh, the Parties also prepared draft guidelines on how Annex I and II countries should report on how they give priority to these actions. However, it does not appear that these draft guidelines were ever formally adopted. 10 2
1.2 The Plan of Implementation of World Summit on Sustainable Development. The need to limit fossil fuel subsidies was also recognized by the governments that participated in the 2002 United Nations World Summit on Sustainable Development (WSSD). In order to advance the goal of changing unsustainable patterns of consumption and production, the WSSD Plan of Implementation calls on governments and relevant regional and international organizations to take actions to: (p) (q) [Implement] Policies to reduce market distortions [to]... promote energy systems compatible with sustainable development through the use of improved market signals and by removing market distortions, including restructuring taxation and phasing out harmful subsidies, where they exist, to reflect their environmental impacts, with such policies taking fully into account the specific needs and conditions of developing countries, with the aim of minimizing the possible adverse impacts on their development; Take action, where appropriate, to phase out subsidies in this area that inhibit sustainable development, taking fully into account the specific conditions and different levels of development of individual countries and considering their adverse effect, particularly on developing countries; 2. General Subsidies Under the WTO Agreement on Subsidies and Countervailing Measures. The World Trade Organization s Agreement on Subsidies and Countervailing Measures (ASCM) disciplines the use of certain trade distortive subsidies and prescribes actions countries can take to counter their effects. 11 Under the ASCM, a subsidy exists if there is (a) a financial contribution by a government or any public body within the territory of a Member; and (b) a benefit is thereby conferred. 12 The ASCM applies only to subsidies that are specific : i.e., that are available only to a specific enterprise, industry, group of enterprises, or group of industries in the country that gives the subsidy. The ASCM recognizes two categories of subsidies: prohibited and actionable. Prohibited subsidies are those that require recipients to meet certain export targets, or to use domestic goods instead of imported goods. These subsidies are per se prohibited because they are specifically designed to distort international trade, and are therefore likely to hurt other countries trading position. Actionable subsidies, on the other hand, are only prohibited where the complaining country can show that the subsidy has an adverse effect on its interests. 13 3
A country that believes that it has been adversely affected by a subsidy has two choices. First, it can use the WTO s dispute settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. Or, it can undertake its own investigation and impose a countervailing duty on subsidized imports that are found to be hurting domestic producers. 14 3. Limitations on Subsidies in Other International Agreements. 3.1 Montreal Protocol on Substances that Deplete the Ozone Layer. The Montreal Protocol on Substances that Deplete the Ozone Layer requires each Party to undertake to the fullest practicable extent to discourage the export to non-parties of technology for producing or using substances controlled under the Protocol. 15 Towards this end, it prohibits each party from: 6. providing new subsidies, aid, credits, guarantees or insurance programmes for the export to States not party to this Protocol of products, equipment, plants or technology that would facilitate the production of controlled substances. 16 3.2 OECD Arrangement on Officially Supported Export Credits. The OECD Arrangement on Officially Supported Export Credits (Arrangement) is a gentleman s agreement among OECD countries to limit the subsidies they can provide through export credit agencies. The Arrangement specifies acceptable parameters for export credits to encourage competition among exporters based on quality and price of goods and services exported rather than on the most favourable officially supported financial terms and conditions. 17 3.3 WTO Agriculture Agreement. The WTO Agriculture Agreement limits the use of export subsidies on agricultural products. Under the Agreement, the right to use export subsidies is limited to certain specified circumstances. All such export subsidies are subject to reduction commitments, expressed in terms of both the volume of subsidized exports and the budgetary outlays for these subsidies. The reduction commitments are shown in the schedules of WTO Members on a product-specific basis. Developed country Members have steeper reduction commitments than developing country members, who can make use of a special and differential treatment provision of the Agreement. 4
4. Conclusions and Observations. International Agreements Limitations on subsidies are a common tool for advancing public policy objectives in international agreements. The Kyoto Protocol alone provides an ample basis for introducing more robust limitations on fossil fuel subsidies in the post-2012 climate framework, at least for developed countries. Developed Countries Fossil fuel subsidies in developed countries are actually only a relatively small share of global fossil fuel subsidies. 18 Thus, a new subsidies agreement that, like Kyoto, was limited to developed countries would leave much of the problem unaddressed. A number of countries, such as the UK, Czech Republic, and Netherlands, have already sharply reduced coal subsidies. Others such as the United States, Canada and Japan continue to provide large fossil fuel subsidies. 19 Governments of former countries are potential supporters of subsidy limitations, as they may incur less domestic political costs for doing so. Developing Countries The lion s share of global fossil fuel subsidies are provided by developing countries to lower energy prices for their consumers. 20 For this reason, an agreement that did not address subsidies in developing countries would forego much of the potential climate benefits of subsidy reform. Developing countries, however, do not have any emission reduction obligations under the UNFCCC or Kyoto. Rather, the UNFCCC provides that their first and overriding priority is development and poverty eradication. Their mitigation obligations depend entirely on the extent to which rich countries keep their own promises to provide financing and technology. Nevertheless, a number of major-emitting developing and transition states have already taken significant steps to reduce coal or other fossil fuel subsidies on their own, including China, India, Poland, Russia, and Brazil. 21 These countries presumably have recognized the economic, social, and environmental benefits of reducing these subsidies, and may be encouraged to go further, perhaps as part of a deal that includes subsidies reductions in the developed world and financial and technical assistance for subsidy reform. 5
World Bank The World Bank is entirely schizophrenic on the issue of public subsidies for fossil fuels. On the one hand, it provides considerable public subsidies to fossil fuels on a project-by-project basis. On the other hand, its energy lending is often linked to market reforms that include subsidy reductions. Thus, the World Bank has pushed countries to eliminate subsidies that keep energy prices artificially low for consumers, even over concerted public opposition. The Bank s ongoing support for incrementally more efficient fossil fuel projects in the developing world may be egregious climate policy, but it is consistent with Parties to the Kyoto Protocol decision to instruct developed countries to prioritize cooperating in the development, diffusion and transfer of less greenhouse-gas-emitting advanced fossil-fuel technologies Revision of this and similar language in the climate agreements could increase the pressure on the World Bank to end this kind of funding. World Trade Organization Advocates may also wish to explore campaign opportunities to partner with a sympathetic government to use WTO mechanisms to challenge fossil fuel subsidies in certain developed countries. Some may have reservations about using the WTO proactively in this way, but it does offer at least two strategic advantages: (1) it already exists and has well-settled procedures; and (2) unlike existing UNFCCC regimes, it imposes consequences for noncompliance. 1 UNEP, Reforming Energy Subsidies: Opportunities to Contribute to the Climate Change Agenda (2008). 2 Trevor Morgan, Energy Subsidies: Their Magnitude, How they Affect Energy Investment and Greenhouse Gas Emissions, and Prospects for Reform, UNFCCC Secretariat Financial and Technical Support Programme (2007). It is Oil Change International s position that this number, while indicative, does not capture the full extent of annual or historical developed country public support for the fossil fuel industries. 3 International Energy Agency, World Energy Outlook (2006); UNEP, Reforming Energy Subsidies: Opportunities to Contribute to the Climate Change Agenda (2008). 4 OECD, Environmental Effects of Liberalising Fossil Fuels Trade: Results from the OECD Green Model, Unclassified Document No. COM/TD/ENV(2000)38/FINAL (2000); UNEP, Reforming Energy Subsidies: Opportunities to Contribute to the Climate Change Agenda (2008). 5 Annex I countries are developed and transition countries that have taken on emission limitation or reduction commitments under the Protocol. 6 Kyoto Protocol, 2.1(a)(v). 7 Annex II countries are a subset of developed Annex I countries that have committed to provide financing to developing countries to meet the costs of implementing their commitments under the UNFCCC. 8 Conference of the Parties serving as meeting of the Parties, Decision -/CMP.1: Matters relating to Article 3, paragraph 14, of the Kyoto Protocol, para 5(a) and (b). 9 Conference of the Parties serving as meeting of the Parties, Decision -/CMP.1: Matters relating to Article 3, paragraph 14, of the Kyoto Protocol, para 5. 6
10 COP 7, Draft guidelines for the preparation of the information required under Article 7 of the Kyoto Protocol, I(H)(13)(a) and (b). 11 http://www.wto.org/english/docs_e/legal_e/24-scm_01_e.htm 12 ASCM, Article 1. 13 http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm8_e.htm 14 http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm8_e.htm 15 Montreal Protocol, Article 4(5). 16 Montreal Protocol, Article 4(6). 17 OECD, Arrangement on Officially Supported Export Credits, Article 1(b) (2009 revisions) http://www.olis.oecd.org/olis/2008doc.nsf/linkto/nt00007a1e/$file/jt03257627.pdf 18 Trevor Morgan, Energy Subsidies: Their Magnitude, How they Affect Energy Investment and Greenhouse Gas Emissions, and Prospects for Reform, UNFCCC Secretariat Financial and Technical Support Programme (2007). 19 Richard Ottinger and Fred Zalcman, Legal Measures to Promote Renewable and Energy Efficiency Resources, in Adrian Bradbook and Richard Ottinger, ed., ENERGY LAW AND SUSTAINABLE DEVELOPMENT, at 92 (IUCN 2003). 20 Trevor Morgan, Energy Subsidies: Their Magnitude, How they Affect Energy Investment and Greenhouse Gas Emissions, and Prospects for Reform, UNFCCC Secretariat Financial and Technical Support Programme (2007). 21 Richard Ottinger and Fred Zalcman, Legal Measures to Promote Renewable and Energy Efficiency Resources, in Adrian Bradbook and Richard Ottinger, ed., ENERGY LAW AND SUSTAINABLE DEVELOPMENT, at 92 (IUCN 2003). 7