The 2021 United Nations Climate Change Conference, popularly known as COP26, concluded with the signing of the Glasgow Climate Pact. This aimed at strengthening member commitments towards the ever-increasing issue of climate change which is a defining challenge for all nations in the 21st century. Among its highlights was the explicit recognition of the need to reduce, and eventually end coal power and fossil fuel subsidies. This raises several pertinent questions regarding the interplay of strategies to address climate change within the international trade regime, and whether existing legal instruments do enough to counter climate change.
This article will focus on the prevalent issues and challenges faced in combating climate change within the WTO framework. It will begin by specifically focusing on issues in dispute settlement regarding renewable energy subsidies. It will then analyze a few shortcomings in the Agreement on Subsidies and Countervailing Measures (“ASCM”). It would conclude by critically analyzing existing WTO mechanisms to address environmental issues, and suggest measures that can possibly be taken to incorporate international commitments towards climate change within the trade regime.
Dispute Settlement in WTO and Measures for Climate Change and Environmental Protection: Canada- Renewable Energy Case
The Canada-Renewable Energy case was the first dispute regarding renewable energy to come before the Dispute Settlement Body of the WTO. The issue occurred in Ontario, Canada where a law had been enacted in 2009 to incentivize the production of electricity from renewable sources such as solar or wind generators. It also included a scheme to source a minimum level of services and component parts from producers within Ontario. This Local Content Requirement (“LCR”) was a part of a Feed-in Tariff (“FIT”) program which is defined as a form of “long-term contract by a government agency to secure wholesale electricity at a set price that reflects a rate of return attractive to investors and developers.” This LCR of the FIT program was challenged by Japan and the European Union for being inconsistent with Canada’s obligations under the General Agreement on Tariffs and Trade (“GATT”) and the Agreement on Trade-Related Investment Measures (“TRIMS”) as discriminatory investment-related measures and prohibited import substitution duty, specifically violating Article III:1, III:4, and III:5 of the GATT and Article 2.1 of the TRIMS. Japan and the EU were successful in their arguments on the issue of violation of the non-discrimination obligations under GATT and TRIMS. This is normatively important as discrimination against foreign-produced goods, especially those used for the production of renewable energy does not bode with well-intended moves to encourage the production of renewable energy.
However, the Panel and Appellate Body refused to adjudicate satisfactorily on a more important issue – whether the measures constituted a prohibited subsidy and were inconsistent with Article 3.1(b) of the ASCM. In addition to the inconclusive findings under Article 3.1(b), another issue that went unexamined was the contentious issue of whether the measures in question could be justified under the general exceptions contained in Article XX of GATT and whether they apply to ASCM, possibly because the same was not invoked by Canada at any stage. The fact that the former was not decided clearly by the Panel as well as the Appellate Body shows a reluctance to address head-on the intersecting issues of subsidies, trade, and climate change – a trend that needs to change in order to legitimately address all of them. With the latter issue of Article XX of the GATT, the Panel could not have adjudicated on it without it being invoked by Canada. However, the applicability of Article XX to the ASCM remains a contentious issue that would have to be considered to bring clarity to this debate.
Agreement on Subsidies and Countervailing Measures and Climate Change: Key Challenges
Under Article 1 of the ASCM, a subsidy is defined as a financial contribution by a government or any public body within the territory of a member which involves, among others, direct transfer of funds, forgoing government revenue, or provision of goods and services other than general infrastructure which confers a benefit. The key phrases in question are the words ‘benefit’ and ‘financial contribution’, both of which have been the subject of disputes among members.
A subsidy in the context of climate change can take diverse forms, such as the reduction of subsidies on heavy polluters, subsidies to foster a reduction in emissions, and subsidies to foster the use of renewable sources of energy. Most of these would fall within the definition mentioned in the ASCM because of how broadly a subsidy is understood under WTO law. These apprehensions regarding the ‘over-inclusive’ understanding extends to the word ‘benefit’ as well, which can be an impediment to government attempts at introducing environmental subsidies. A benefit is understood in relation to the market and what would occur in the market as it existed at the time of introduction i.e., whether an advantage is conferred upon the recipient which would otherwise have not existed in the market. Moreover, the effects on output is not a factor that affects the determination of a subsidy. Thus, a beneficial subsidy that incentivizes renewable energy production may be included within the definition, thereby not only prohibiting a commendable measure but interfering with domestic sovereignty. For instance, if a government were to provide subsidies to incentivize renewable energy producers in the form of grants for production or guaranteed prices above market rate, such as a feed-in tariff, such a measure would fall within the definition and would be considered a prohibited subsidy under the ASCM.
Hence, while the ASCM does cover a great deal of ‘bad’ subsidies which affect international trade, it can also cover the ‘good’ subsidies which are economically and strategically necessary to address issues of emissions and promote renewable energy. Distinguishing between the two and clarity within existing rules is imperative to tackle this issue.
Furthermore, it is also important to incorporate the use of emission permits and make them legally viable under trade law, as in current circumstances, emission permits are not necessarily resolved to be included within ‘intangible goods’ under the ASCM which makes the correct application of the ASCM difficult and favors complaining members. In the calculation of benefit under the ASCM, the additional costs imposed on an industry due to emission permits are not included. Thus, as soon as a complaining member can demonstrate the existence of adverse effects on its domestic industry because of the benefit, they can avail remedies under Article 7 of the ASCM. Lauren Henschke further argues that there is a need for exceptions for non-actionable subsidies directed at legitimate public policy goals which undoubtedly include environment protection and climate change, similar to the now defunct Article 8 of the ASCM. Whether these changes take place in the near future remains to be seen.
WTO and Environmental Protection: A Critical Appraisal
GATT does not explicitly recognize environmental protection and climate change within its general exceptions under Article XX. The only relevant exceptions are Article XX(b), which covers measures that are necessary to protect human, animal, or plant life or health, and Article XX(g), which covers measures relating to the conservation of natural resources. While these could arguably be said to include the goals of environmental protection and repelling climate change, the path to the same has been rocky. As B.S. Chimni has argued, the legitimization of unilateral trade sanctions in the Shrimp Turtle II case has had potentially disastrous consequences for the sovereign rights of states to have their own environmental protection regimes.
As discussed earlier regarding the Canada-Renewable Energy case, the non-addressal of the applicability of Article XX to the ASCM leaves an important issue hanging in the balance and shows the difficulty that the Dispute Settlement Body has in addressing issues of trade and environmental protection. While it is recognized that environmental protection and climate change may be pursued within the existing definitions carved under Article XX, it is still recommended that an explicit exception should be carved out for these public policy goals to remove any doubt and risk of its inclusion.
Equally worrying as the measure is the political and social stance that the WTO takes. On 26 June 2009, the WTO and UN Environment Programme released a Joint Report titled Trade and Climate Change. While news headlines made encouraging claims about the potential conclusions and findings of the report, including support for climate change goals, border taxes, and trade limits, the final report fell short of the sharpness many felt was needed. Criticism has been aimed at some of the conclusions of the report such as “WTO rules do not trump environmental requirements”, even though it is possible for them to do so. In sharp contrast to bold claims made in several news headlines, the report does not condemn any possible use of trade measures in response to foreign environmental policies, nor does it back border taxes, the necessity of trade limits or suggest that WTO rules should be used to fight climate change. As a result, the future of trade and climate change remains uncertain.
While the future remains sketchy with rising global temperatures, difficulty in reducing consumption of fossil fuels, and cutting down on emissions, the WTO continues its (un)failing march towards a global trade regime where free trade takes place in the era of globalization. This article has tried to highlight some of the key issues which need to be addressed in the WTO regime of international trade to approach the issue of climate change and environmental protection holistically and urgently. It is no longer a choice that member nations can avoid for the coming decades.
While a choice has been exercised to limit the scope to beneficial subsidies and how existing rules can potentially hamper useful policies for change, there are a range of other issues which could not be captured within it. Among these is the need to address the issue of fossil fuel subsidies which continue to exist and create a major challenge specifically for developing countries where the infrastructure is still considerably weak for the development of renewable sources of energy. COP26 highlighted this issue, where the world saw how global talks have been mired in considerations dictated by political motives, with allegations being aimed at India and China on the replacement of the phrase ‘phase out’ with ‘phase down’ which India has counter alleged to be a result of a US-China joint statement. Until there can be a definitive consensus among countries regarding the urgent need to address climate change, specifically highlighting the role that international trade has to play within it, it seems that the international community would end up trading one bleak future for another.
Milind Malhar Sharma is presently pursuing his B.A. LL.B. (Hons.) at Jindal Global Law School.
Image: Andrea D’Aquino for NY Times