Introduction

The year 2022 has witnessed a significant surge in subsidies within the fossil fuel industry, surpassing the $1 trillion mark. Notably, in India, expenditures on fossil fuel subsidies amount to Rs 60,316 crore, which is roughly five times more than the subsidies provided for renewable energy. Despite the fact that fossil fuels have numerous pernicious effects compared to renewable energy sources, they have managed to evade the challenges faced by renewable energy subsidies in the World Trade Organization (“WTO”). It is high time to address environmental sustainability with international trade, and the same was adopted in the agenda of the Marrakesh Agreement, which highlights that the WTO should also be concerned with environmental aspects in parallel with trading concerns and the reformation of fossil fuel subsidies will be a giant leap to fructify this agenda. 

Firstly, this blog endeavours to analyse the reasons for this paradox and identify the factors that influenced the members’ decision not to challenge fossil fuel subsidies. Lastly, it proposes a two-prong reformation that can be employed to regulate them according to environmental standards, with the aim of achieving the sustainable development goals by 2030: first, by introducing an independent agreement regulating fossil fuel subsidies, which have negative environmental externalities; and second, by liberating the environmentally friendly renewable energy subsidy from the current limitation.

Background

There is no universal definition of the term “Subsidy”. The most comprehensive agreement of the WTO that talks about subsidies is the Agreement on Subsidy and Countervailing Measure (“ASCM”), which define ‘subsidy’ in Article 1.1 as a financial contribution by the government or any public entity that confers benefit on the recipient. 

Further, the subsidy needs to satisfy the test of ‘specificity’ to be disciplined under ASCM. As per Article 2, subsidies are considered specific if it is given to particular enterprises, industries, or groups of industries. The Agreement categorises subsidies as prohibited, actionable, or non-actionable. Prohibited subsidies, as given under Article 3.1, are those subsidies that are conditional on export targets and the utilisation of domestic goods instead of imported goods and it should be discontinued without delay. Actionable subsidies are those subsidies that create a negative impact on the domestic industry of other members. A subsidy must be specific in order to be actionable. In the context of fossil fuels, subsidies are considered as governmental assistance provided either during the consumption or production stages of fossil fuels.

Renewable Energy Subsidy vs Fossil Fuel Subsidy: An Irony in Itself

As per the International Energy Agency, consumption subsidies for fossil fuels have reached a historic high of over $1 trillion in the year 2022, owing to the Russia-Ukraine conflict. It is axiomatic that such subsidies cause more harm than good, given their detrimental effects on the environment and the diversion of resources from crucial governmental expenditures such as healthcare, education, and research and development, etc. 

To date, the WTO has seen nine trade disputes initiated by its members concerning subsidies for renewable energy, while not a single dispute has been raised regarding fossil fuel subsidies. This has sparked debate over why renewable energy subsidies have attracted so much controversy, while subsidies for fossil fuels, which have greater adverse impacts on the environment, have not faced any disputes to date. 

1. Political Factor

It is evident that reforming fossil fuel subsidies can provide a mutually beneficial outcome for developing nations, as it can contribute to environmental preservation and redirect resources towards other areas of development. However, this task is particularly challenging, as subsidies have become deeply ingrained in political systems. Governments are inclined to support the interests of groups that vote for them, as their ultimate objective is to remain in power. In the case of India, subsidies for Liquefied Petroleum Gas (“LPG”) have historically targeted the vote banks of the lower and middle socioeconomic classes.

2. Legal Factor

ASCM exclusively addresses trade distortions and does not concern any trade activities that produce negative environmental externalities. Only subsidies that have an adverse impact on trade can be subject to discipline under the ASCM. There is no differentiation between subsidies in fossil fuel and renewable energy as the same WTO rules apply to them. Although because of its different characteristics, renewable energy subsidies are more prone to challenge in the WTO Dispute settlement mechanism than fossil fuel subsidies.

To challenge fossil fuel subsidies, they should come under the definition of actionable or prohibited subsidies. According to Article 3 of the ASCM, subsidies must be dependent on export performance or have local content requirements. However, subsidies are rarely granted on exports of fossil fuel, and they usually don’t use the local content requirement, thereby rendering them outside the purview of prohibited subsidies. But in the case of renewable energy, subsidies may fall within the purview of prohibited subsidies. This is due to the fact that at times, grants or support provided by the government in the form of subsidies are dependent on the utilisation of domestic goods, thus fulfilling the criteria of the local content requirement.

Where subsidies fail to satisfy the conditions specified for prohibited subsidies, the only recourse for challenging them is through the  ASCM as actionable subsidies. Nonetheless, the conditions that must be met to establish the existence of an actionable subsidy are substantially more complex than those necessary to demonstrate the presence of a prohibited subsidy. To establish the presence of  an actionable subsidy, the complainant must satisfy the specificity criteria and demonstrate a negative impact on the interests of other members, in addition to meeting the financial contribution and benefit requirements.

The most difficult task in the case of fossil fuel subsidy is to establish the requirement of specificity as the fossil fuel subsidies are mostly given on the consumption side whereas renewable energy is primarily given on the production stage like tax benefit and R&D Support etc. In the context of renewable energy, since subsidy is mainly given on the production side, it is highly found to be specific towards certain industries or groups of industries. For instance, the dispute that has arisen in the WTO concerning renewable energy is those in which subsidies were given to the producers of wind, solar, and other renewable sources.

Contrarily, fossil fuel subsidies are predominantly given on the consumption side. It is widely available throughout the economy to customers, which may also include industrial customers; hence, it is unlikely to be found to be specific. Another argument is the dual pricing nature of fossil fuels, whereby the price of fossil fuels in the domestic market is comparatively lower than the export one. Since dual pricing is available throughout the economy and does not constitute export performance, it does not meet the specificity criteria, rendering it incompatible with the ASCM . In the case of fossil fuel subsidies, it is very hard to satisfy the “specific” criteria, and even if they satisfy this test, it becomes difficult to show the adverse effect on trade.

Agreement on Fishery Subsidies: A Prospective Guide

The Agreement on Fishery Subsidies addresses the sustainable use of the world’s fishery resources by eliminating harmful subsidies that contribute to overfishing, overcapacity, and overexploitation of fish stocks. Fossil fuel subsidy increases fossil fuel consumption, which in turn impacts environmental sustainability. Although, the WTO failed to address the issue of fossil fuel subsidies first, given its negative externalities, which is indeed an ironic situation. 

Looking at the brighter side, this agreement could set a precedent for the reform of fossil fuel subsidies, given that it is the first multilateral trade agreement of the WTO that places a primary emphasis on environmental sustainability. This shows that the WTO has now recognised that trade and environmental policies are mutually reinforcing. Similarly, the WTO can agree on introducing an independent agreement which focuses on reforming of fossil fuel subsidies by taking inspiration from the fishery subsidies agreement, and the fossil fuel subsidies that have greater negative externalities could be included in the ambit of prohibition subsidies.

The Way Forward for Renewable Energy Subsidy

The ASCM initially included Article 8, which enumerated a list of non-actionable subsidies known as “green light” subsidies. This provision offered protection from legal action to subsidies that facilitated the adaptation of existing facilities to meet new environmental requirements. Article 8 was introduced on a provisional basis and expired at the end of 1999. Its presence effectively shielded energy subsidies having environmental benefit from legal scrutiny. In light of the significant potential of renewable energy subsidies to address the challenge of climate change, this article should be reintroduced to provide a safe harbour for the renewable energy subsidies. This move would serve to encourage members to increase subsidies in the renewable energy sector compared to those offered for fossil fuels, which are at an all-time high. Doing so would help meet the 2030 Agenda for Sustainable Development Goal (“SDGs”) on climate change.

Conclusion and Suggestions

There is no consensus among scholars on whether fossil fuel subsidies are acceptable or not. Some support them, while others oppose them. Despite this, there have been informal initiatives to phase out such subsidies, which could be seen as bypassing the traditional multilateral trade rules. 

However, in order to effectively phase out fossil fuel subsidies, efforts must be made on multiple fronts, including negotiations in the WTO, regional and plurilateral trade instruments, and non-trade arenas such as the UNFCCC and G20. To do this, there needs to be a common concept of what constitutes a fossil fuel subsidy, and whatever disciplines are imposed should not be weaker than those set out in the ASCM. The WTO has the capacity to monitor and enforce such agreements, using mechanisms such as the Trade Policy Review Mechanism. Additionally, curbing dual pricing policies could contribute substantially to reducing emissions in line with the 2030 SDGs, and the WTO could play a crucial role in facilitating this. To promote green energy, the WTO should consider drafting guidelines for its members and amending its subsidy rules to exempt certain forms of support for green energy.

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Anshupal Singh is a fourth-year B.A. LL.B. (Hons.) student at the National Law University, Jodhpur.

Harsh Mittal is a second-year B.B.A. LL.B. (Hons.) student at the National Law University, Odisha.

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Image Credits: Photocreo Bednarek