COP27 highlighted the need for countries to work together to reduce emissions of greenhouse gases and combat climate change, while also promoting a sustainable international trade regime. The World Trade Organisation (WTO) trade regime plays an important role in this effort, as it affects countries’ ability to balance free trade with climate change objectives.
However, there are several issues with the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM), such as restrictions on the use of subsidies to promote renewable energy technologies and limits on the ability of countries to apply punitive measures against companies that engage in practices which are detrimental to the climate. Consequently, there is a need for the WTO to address these issues and work to develop a more effective trade regime that takes into account climate change objectives.
The year 2020 has marked an important milestone in the global effort to combat climate change. As the world tackles this urgent problem, it is essential to analyse the impact of existing international trade regimes, such as the WTO, on climate change initiatives.
This article will examine the role of the WTO’s trade regime in addressing climate change and identify opportunities to improve its effectiveness. In particular, the focus will be on investigating how the ASCM can be improved in order to bridge the gap between free trade and climate change objectives by assessing several judicial pronouncements in Indian and global context.
ASCM is an international trade agreement that seeks to limit the “injury” caused by subsidies. This agreement contains provisions that seek to prevent the unfair advantage of importing countries, by requiring countries to not provide subsidies to their domestic producers that are contingent on export performance. This agreement also restricts countries from providing subsidies that cause injury to other countries and requires all member countries to treat like products equally.
ASCM is an important tool for incentivizing renewable energy and combatingc climate change. The agreement restricts the type and number of subsidies that countries can provide to their domestic producers, while allowing countries to provide incentives to promote renewable energy sources. This helps to level the playing field between countries, as well as ensuring a fair and sustainable international trade market that supports climate action. Additionally, the agreement also requires all member countries to treat like products equally, which helps to ensure that renewable energy sources are being developed in an equitable manner.
The Curious Case of Canada: Dispute Settlement in WTO
The first incident involving renewable energy to be considered by the WTO’s Dispute Resolution Body was Canada-Renewable Energy. In 2009, a legislation was enacted in Ontario, Canada, to promote the generation of electricity from renewable sources, such as solar or wind generators. This is when the issue originated. It also included a strategy for purchasing a certain number of services and component parts from Ontario-based producers.
The panel found that Canada breached several provisions of the ASCM, including Article 3.1(b), requiring that subsidies not be contingent on export performance; Article 3.2, which prohibits subsidies from distorting international trade flows; and Article 4, which prohibits certain types of subsidies from providing a benefit to domestic producers or an advantage to their products. Canada was also found to be in violation of the General Agreement on Tariffs and Trade (GATT) Article III, which requires that all like products be treated equally.
The WTO’s dispute settlement panel held that several aspects of Canada’s green energy policy violated international trade regulations, such as subsidies for renewables, restrictions on imports of renewable energy goods, and preferences for domestic producers. The panel ultimately held that Canada should reduce its subsidies and preferences for domestic producers, and allow for greater imports of renewable energy goods from other countries. The panel further argued that Canada should promote the use of renewable energy sources in an equitable manner, and in a way that is compatible with its WTO obligations.
The WTO panel found that Canada’s renewable energy policy violated export performance provisions by providing subsidies contingent on exports. This means that Canadian producers of renewable energy sources were given preferential treatment and an advantage over other countries when it came to their products entering the market.
This type of policy unfairly advantages certain countries and hampers international trade, as well as the development of different renewable energy sources, which can have a negative impact on climate change by slowing the transition to a low-carbon future.
Nuances of ASCM & Climate Change
ASCM has been criticized for its potential impacts on climate change. Specifically, the agreement imposes restrictions on the use of subsidies to promote renewable energy technologies and clean production processes. This can make it difficult for countries to incentivize these technologies, as well as potentially decreasing their competitiveness in global markets. Additionally, the agreement’s trade dispute resolution mechanisms can delay or even prevent countries from addressing climate change-related issues.
One of the main issues with the ASCM’s articles is that it stipulates that subsidies must be provided to “like products” from all countries. This has been argued to limit governments’ ability to provide subsidies for renewable energy and clean production technologies, as these technologies are often not “like” other products in the market.
Firstly, Article 5.2 of the Agreement states that subsidies must not distort trade, which has been argued to limit the ability of countries to use subsidies to incentivize clean production processes.
Another issue with the Agreement is that it makes it difficult for countries to apply punitive measures against companies that engage in practices which are detrimental to the climate. For example, the ASCM does not provide a country with the right to apply trade measures, such as countervailing duties, to products that are produced or manufactured in ways that are detrimental to the environment.
WTO & CLIMATE CHANGE: A REVIEW AND ANALYSIS
The Article XX of the GATT does not specifically include environmental preservation or climate change as exceptions. Article XX(b) i.e. “necessary to protect human, animal or plant life or health,” essentially looks after the actions taken to safeguard the ecosystem, mankind, animals, or plant life and health, and Article XX(g) i.e. “relating to the conservation of exhaustible natural resources,” covers actions taken to conserve natural resources, and these are the only relevant exceptions. Environmental safeguarding and combating climate change may be included here, but progress towards these ends has been slow and fraught.
The precedent set by the Shrimp Turtle II case, which legalized unilateral trade penalties, could have far-reaching effects on the ability of individual states to establish and enforce their own environmental protection laws.
Similar to the ‘Canada-Renewable Energy case’, the Dispute Settlement Body’s inability to resolve the issue of scope of application of Article XX to the ASCM leaves a crucial question unanswered and demonstrates the challenge of reconciling commerce with environmental protection.
Taking actions and pursuing Environment Protection and Climate change are within the existing framework of Article XX. However, an exception should be introduced to the existing clause to include implementation of Public Policy objectives to eliminate the slightest of non-inclusion risk.
The WTO’s political and social attitude is just as worrisome as the measure itself. The WTO and the UNEP issued a joint report on “Trade and Climate Change” in 2009 and 2021. Several academicians and research scientists have critiqued optimistic claims about the report’s possible conclusions and findings, such as the ambiguous wordings of the clauses and its advocacy for climate change goals, inclusion of sustainable development. It does not address or lays a restriction on border taxes or limits trade and commerce. Thus, the said report not only lacks practical, but finer details also which are necessary to tackle climate change.
The abovementioned report findings have been criticized, including the statement that “WTO regulations do not trump environmental requirements,” which is technically incorrect. Although several headlines might have you believe otherwise, the report does not oppose the usage of trade measures as a response to foreign environmental policies, as well as border taxes, the need for trade restrictions, and the notion that WTO rules should be used to combat climate change. Therefore, the prospect of trade and climate change is still uncertain.
The Netherlands Sinking case is a dispute between the Netherlands and the European Union (EU) over EU subsidies to the Dutch fishing industry that the Netherlands argued were distorting global markets and harming the environment. The court found in favour of the Netherlands and held that the EU had failed to adequately assess the environmental impact of its subsidies, violating the ASCM.
The case underscores the need for governments to take a balanced approach to trade policies and subsidies in order to protect both free trade and environmental protection. This case is also an important reminder of the link between trade and climate change, as ending harmful subsidies and ensuring international cooperation on trade initiatives can help mitigate the impacts of climate change. In the Netherlands Sinking case, the court found that the EU had breached its obligations under the ASCM.
Specifically, the court determined that the EU had failed to adequately assess the environmental impact of its subsidies, which could lead to overfishing and harm marine ecosystems. The court also noted that the EU had failed to provide the Netherlands with the opportunity to challenge the subsidies in the course of proceedings before the WTO and had not sought to reach an agreement with the Netherlands regarding the subsidies.
The case of the United States – Countervailing Duties on Certain Products from China did not directly impact climate change. However, the ruling of the Appellate Body in that case emphasized the need for governments to comply with their obligations under the ASCM, which helps ensure that subsidies are not provided to industries that produce large amounts of greenhouse gas emissions. By ensuring that subsidies are not given to polluting industries, governments can help reduce global emissions and contribute to mitigating the effects of climate change.
A suggestion would be expanding the WTO’s general exceptions to a broader scope. The GATT is only concerned with trade in commodities, so the general exceptions do not include domestic measures such as subsidies, investment agreements, trade regulations and standards, services etc.
INDIA AND WTO’S TRADING REGIME
The case of India and the European Union – In 2012, India challenged the EU’s Renewable Energy Directive in the WTO dispute settlement body. The Directive imposed tariffs on imports of certain products from countries such as India, to protect European producers of renewable energy. India felt that this measure was a breach of WTO rules and that it went against India’s efforts to lower its emissions of greenhouse gases. The result was an uneasy stalemate between India and the EU.
Another example is the case of India and the US. In 2011, India challenged US tariffs on steel imports in the WTO dispute settlement body. India argued that US tariffs discriminated against certain imports from India and violated WTO rules. The judgement was given in 2020 highlighting the WTO’s role in enforcing its rules and regulations, and how these rules can impact India’s efforts to reduce emissions of greenhouse gases and combat climate change.
India’s climate change efforts have been severely affected by WTO trade rules in several cases. In the US-India Solar Panel Dispute, for example, the WTO Appellate Body ruled that the EU had violated WTO rules by imposing anti-dumping duties on imports of solar panels and modules from India. This ruling highlighted the conflicting interests between free trade and climate change and demonstrated how WTO rules can be used to impede countries’ sustainable development goals. Other cases include India’s dispute over shrimp imports from the US and Canada’s restrictions on imports of Indian steel, both of which illustrate how WTO rules can be detrimental to India’s climate change efforts.
The author is of the opinion that the WTO is on the path of successfully marching towards a doomed global trade regime where free trade takes place in the era of globalization, despite the uncertainty of the future caused by rise of the global temperatures, the excessive exhaustion of non-renewable and fossil fuels, and the difficulty of restricting the emissions.
To take a comprehensive and urgent stance on the problem of climate change and environmental protection, this piece has attempted to outline a few of the primary concerns which must be tackled by the WTO regime of International Trade. All the member states will be forced to make this decision within the next few decades.
While it was deliberated to focus only on beneficial subsidies and how pre-existing rules may impede beneficial change policies, a wide variety of other problems remain unaddressed. Some of these include the need to handle the problem of ongoing subsidies of agriculture and fossil fuel, which pose a particularly serious obstacle in developing countries with inadequate infrastructure for the advancement of renewable energy.
There are several policy recommendations that can be made to address the relationship between the WTO’s trade regime and climate change. Firstly, it is important to ensure that WTO agreements such as the ASCM are effectively implemented and enforced in order to prevent the subsidizing of polluting industries. Additionally, trade facilitation agreements should be used to reduce emissions from international transportation.
Secondly, WTO dispute resolution mechanisms should be utilized to ensure compliance with global trade rules and enforce environmental standards. Finally, WTO members should work together to craft an international agreement on climate change that all parties can sign onto.
Urja Joshi and Saaransh Shukla are fourth year BBA LL.B. (Hons.) students at NMIMS, School of Law, Bengaluru.
Image: Fabrice Coffrini/Agence France-Presse — Getty Images
One thought on “WTO’s Agreement on Subsidies, Countervailing Measures, and Climate Change”
The WTO’s Agreement on Subsidies and Countervailing Measures is an important tool for regulating government support of industries. With the addition of provisions addressing climate change, the agreement recognizes the importance of promoting sustainable development and protecting the environment. This is a positive step towards creating a more equitable and sustainable global economy. Good post