On October 1, 2020, the International Institute for Sustainable Development (IISD) organized, together with the University of Eastern Finland, a virtual event entitled “Tackling Fossil Fuel Subsidies for a Greener Future: Is the WTO up to the task?” The session was part of the sustainability pillar of the Geneva Trade Week, a multistakeholder digital conference organized by the Graduate Institute of International and Development Studies.

Highlights:

• Beyond environmental impacts, fossil fuel subsidies can have a variety of economic and trade impacts.
• The prospects for current World Trade Organization (WTO) subsidy rules to effectively constrain fossil fuel subsidies are limited due to political, legal, and evidentiary challenges.
• Options exist to reform WTO rules and practices to encourage the reform of fossil fuel subsidies and support the much-needed clean energy transition.
• Governments looking to negotiate new rules on fossil fuel subsidies can do so using existing sources of information, without waiting for increased transparency through WTO notifications.
• Pioneering efforts are underway to promote fossil fuel subsidy reform through trade-related frameworks, both within and outside the WTO.

Summary

At the beginning of the session, Harro van Asselt, Professor of Climate Law and Policy at the University of Eastern Finland, emphasized the direct and indirect ways in which fossil fuel subsidies can affect trade, distorting international markets for crude fossil fuels, refined energy carriers, fossil fuel-intensive products, as well as alternative products such as those related to renewable energy. Although these trade impacts can allow successful challenges to some fossil fuel support measures under the rules of the WTO’s Agreement on Subsidies and Countervailing Measures, the prospects for doing so are limited by political, legal, and evidentiary challenges. He also noted that WTO subsidy rules focus exclusively on the trade-distorting effects of subsidies, meaning the environmental impacts of fossil fuel subsidies are not taken into account.

In light of these shortcomings, van Asselt outlined possible ways forward, including three broad ideas: better enforcing current WTO subsidy rules, strengthening transparency, and negotiating new rules. He offered the following practical recommendations to governments: (1) increase transparency through improved notifications, trade policy reviews, and reporting under Sustainable Development Goal (SDG) Target 12.c; (2) explore the possibility of challenging fossil fuel subsidies under current WTO subsidy rules; and (3) launch an informal dialogue on the prospects for disciplining fossil fuel subsidies at the WTO’s next ministerial conference. He also underlined the need for additional analysis of the trade impacts of fossil fuel subsidies and of how new disciplines could be best crafted to address the most environmentally harmful subsidies.

Ronald Steenblik, Senior Fellow at IISD, and Joy Aeree Kim, Senior Economics Office at the United Nations Environment Program (UNEP), zeroed in on questions related to data and transparency. While information on fossil fuel subsidies is scarce in WTO notifications, Steenblik indicated that better sources of information can be found elsewhere. He suggested that governments who would like to negotiate new disciplines on fossil fuel subsidies should not wait for enhanced transparency through WTO notifications, and instead should rely on existing data sources such as the Organisation for Economic Co-operation and Development (OECD) and the International Energy Agency (IEA). This approach, he argued, has, in fact, already been taken in past negotiations on agricultural subsidies and current negotiations on fisheries subsidies.

Kim focused on the reporting process under Target 12.c of the SDGs, which calls for the rationalization of inefficient fossil fuel subsidies. This reporting process, the speakers agreed, could play an important role in increasing transparency around fossil fuel subsidies, particularly thanks to its global coverage. Kim indicated that reporting will start this year, with preparatory work being organized to support countries in using the correct methodology and ensure information provided is as consistent as possible.

Building on previous interventions, Sara Meymand, Unit Manager, Trade Negotiations Division and Chief Negotiator for the Agreement on Climate Change, Trade and Sustainability (ACCTS) at the New Zealand Ministry of Foreign Affairs and Trade, highlighted ongoing efforts to use trade rules and frameworks to advance fossil fuel subsidy reform. In light of the current gap between ambitious rhetoric and insufficient action to address climate change, she emphasized that trade policy has an important role to play in supporting the elimination of fossil fuel subsidies. At the multilateral level, Meymand indicated that New Zealand and other WTO members plan to present a renewed statement on fossil fuel subsidy reform at the organization’s Twelfth Ministerial Conference in 2021. This will be a follow-up to the group’s joint statement on the same issue delivered in 2017, with the hope that they will now be joined by more countries. She also noted that a group of WTO members is preparing a proposal to establish an informal working group to complement the work of the WTO’s Committee on Trade and the Environment. This working group would be a space for like-minded countries to come together and explore practical ideas and recommendations for policy action.

Given the slow pace of multilateral discussions, Meymand explained that New Zealand and partner countries are also pursuing a plurilateral initiative in parallel to negotiate the ACCTS. Launched in 2019, the aim of the ACCTS negotiations is in part to establish legally enforceable disciplines to eliminate harmful fossil fuel subsidies.

“What ACCTS calls on is for us to envisage what modern trade rules, equipped to support the climate change challenge, could look like,” she emphasized. The hope behind this kind of initiative, Meymand said, is to create momentum toward multilateral solutions.

In the Q&A session, speakers discussed what kinds of subsidies are particularly harmful and could thus constitute top priorities for prohibition. Suggestions included focusing on subsidies for new fossil fuel infrastructure to avoid further carbon lock-in, as well as subsidies for certain types of fuels, such as coal or oil from tar sands, which are increasingly seen as unprofitable and particularly environmentally damaging. It was also suggested that, to avoid confusing and deterring negotiators, the emphasis should be kept on subsidies directly related to fossil fuel production and consumption without trying to cast the net too wide. Asked about what argument could incentivize more countries to join initiatives that promote the elimination of fossil fuel subsidies, Meymand stressed the matter of policy coherence, the issue being important from both a trade and climate policy perspective as well as on fiscal responsibility grounds.

Looking forward, speakers were asked whether the COVID-19 pandemic could make policy efforts to advance fossil fuel subsidy reform more difficult. They agreed that as governments respond to the far-reaching impacts of the pandemic, fiscal constraint is an important concern. In this context, the smart and efficient management of limited public resources is crucial, further highlighting the importance of reforming fossil fuel subsidies.

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