In a recent article ("A New Agenda for Global Warming"), Joseph Stiglitz, Nobel laureate in economics and former Chief Economist at the World Bank, suggests that Japan, Europe, and the other signatories of Kyoto should immediately bring a WTO subsidy case against the United States for not ratifying the Kyoto Convention and for not taxing adequately CO2 emissions by US firms.

The economic rationale behind Siglitz's proposition is that not paying the cost of damage to the environment is a subsidy, inasmuch as the firm is not facing the full costs of its production. While this view may make sense to some economists, does it make sense from a legal point of view? This question is crucial because many people make the mistake of confusing the economic and the legal definitions of a subsidy, a fact which leads to an excessive use of the term "subsidy" to make it fit any case.

If the potential complainants elected to lodge a complaint at the WTO against the US or any other potentially targetable country, they would first have to demonstrate to a panel that this contested situation involved a challengeable subsidy in the legal sense. Under the WTO's Agreement on Subsidies and Countervailing Measures (ASCM), a practice is a potentially challengeable subsidy if it simultaneously satisfies three distinct criteria: it must entail a governmental "financial contribution", it must be "specific", and it must confer a "benefit" on its recipient. It is in meeting the first test - demonstrating the existence of a governmental financial contribution - that the shoe pinches.

The ASCM specifies clearly that a governmental financial contribution exists not only when a government provides outright financial assistance, such as through a grant, but also if a government practice involves a direct or a potential transfer of funds (e.g., through loan guarantees) and when a government provides goods or services other than general infrastructure, or purchases goods. It exists also when government revenue that is otherwise due is foregone or not collected (e.g., through offering tax credits for certain kinds of investment), or when a government makes payments to a funding mechanism or entrusts or directs a private body to grant financial contributions which would normally be vested in the government.

The crucial point is that these categories are exhaustive and not illustrative, a fact recognized by the Export Restraints panel when it declares that these categories constitute "a finite list [of] the kinds of government measures that would, if they conferred benefits, constitute subsidies." In other words, the absence in these categories of reference to lax emission standards coupled with the exhaustive nature of these categories does not leave any room for considering lax emission standards as embodying a governmental financial contribution.

Alternatively, a member could turn to a "failure to tax" argument, namely that insufficient or no charges are being levied on emissions of CO2. One could be tempted to say that there is here a governmental financial contribution since a "government revenue that is otherwise due is forgone or not collected". However, I would argue this view also has no merit. In the US FSC case, which tested an "otherwise due" tax scenario, the Appellate Body agreed with the panel that the basis of comparison (namely, the situation "otherwise due") must be tax rules applied by the Member in question. It rejected the idea that WTO obligations somehow compel Members to choose a particular kind of tax system. In other words, if a country does not tax emissions from any firms emitting CO2, there are by definition no firms "in a comparable situation" (i.e., emitting CO2) that are paying the tax, and thus no governmental financial contribution in the form of "revenue foregone" on an "otherwise due" tax.

Before a WTO panel, this conclusion would for all intents and purposes close the complaint, since it would be impossible for the panel to examine allegedly violated subsidy disciplines in the absence of such a financial contribution. This means that the panel could even dodge the issue of "specificity" (namely, are CO2 emitting firms a "sufficiently discrete segment" of the economy?) and the issue of "benefit" (namely, are these firms "better off" than they would otherwise have been, absent the financial contribution?). The absence of financial contribution would also make it impossible for the complainants to impose through their national forum Countervailing Duties (CVDs) on imports produced by CO2-emitting factories based in the United States. This is the case because the ASCM obliges national investigative authorities to establish the existence of a subsidy in the legal sense before imposing CVDs.

In sum, one could conclude that recourse to WTO subsidies disciplines do not offer much for a climate change strategy, other than possibly through challenging those classical or standard subsidies to fossil fuels that could be considered trade-distorting. This does not mean however, that other WTO disciplines or legal avenues such as the imposition at the border of a carbon tax on imports from the United States could not have a chance to succeed, since a carbon tax would be for technical legal reasons conceptually different from a countervailing duty. Environmentalists may also be hoping that, in the future, the WTO definition of a governmental financial contribution could be amended in a more "green friendly" way.

Marc Benitah is a professor of international law at the University of Quebec. Heis the author of The Law of Subsidies under the GATT/WTO System (Kluwer Law International, 2001). Contact: marc_benitah@uqar.qc.ca