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Challenging Fossil Fuel Subsidies in the WTO

A Legal Analysis of Fossil Fuel Subsidies under the SCM Agreement

Clinic: Hebrew University, Fall 2020

Beneficiary: International Institute for Sustainable Development (IISD)

Executive Summary

Full Report can be read here

The global energy market is worth trillions of dollars and comprises a significant portion of international trade. This market is heavily subsidized, with an estimated $5.2 trillion spent on global fossil fuel subsidies in 2017 (IMF, 2019), by states such as China, the US, Russia, the EU, India, and Saudi Arabia. Fossil fuel subsidies have a highly detrimental impact on the environment, distort energy markets, encourage overconsumption of fossil fuels, and discourage investment in climate-friendly alternatives. Reducing or eliminating fossil fuel subsidies can help promote the transition from fossil fuels to renewable energy, and reduce carbon emissions and global warming.

Considering the widespread global effects of fossil fuel subsidies, attention has been directed to the role the World Trade Organization (WTO) can play in phasing them out. Thus far, WTO members have not used the WTO Subsidies and Countervailing Measures Agreement (SCM) to challenge fossil fuel subsidies through dispute settlement. Current research has focused on why this is the case, and why only renewable energy subsidies have been challenged in the WTO, as well as the possibility of challenging specific fossil fuel subsidies. This Memorandum aims to provide a broader analysis of the potential use of WTO litigation based on the SCM, by surveying the legal issues associated with seven alternative scenarios within three structural categories of fossil fuel subsidies, and addressing the various SCM elements that may apply (specificity, benefit, adverse effects and particularly serious prejudice, and prohibited subsidies).

The structural categories of subsidies discussed are:

• Direct fossil fuel production subsidies;

• Fossil fuel consumption subsidies as production inputs;

• Fossil fuel consumer subsidies to end users.

The alternative scenarios relate to the possible effects that each structural category might have on different components of fossil fuel production and consumption chains:

• Direct fossil fuel production subsidies:

- effects on non-subsidized fossil fuel;

- pass-through effects on inputs into the production of energy intensive products;

- effects on alternative energy products.

• Fossil fuel consumption subsidies as production inputs:

- effects on producers of energy-intensive products with similar production method;

- effects on producers of energy-intensive products with a different production method.

• Fossil fuel consumer subsidies to end users:

- effects on international trade of the subsidized product;

- effects on the use of complementary energy products.

Each category and scenario faces particular legal obstacles and opportunities. One legal obstacle evident in most scenarios is that many fossil fuel subsidizing countries – aside from the US and China - have non-diversified economies. In these cases, it remains unclear if the legal tools provided by the SCM can be effective in challenging fossil fuel subsidies as they are not likely to meet the specificity test. Moreover, in many scenarios, the factual evidence required to prove adverse effects may be difficult to obtain. Another hurdle in the adverse effects analysis is the ‘like’ product test.

Throughout the Memorandum we suggest possible legal avenues that under certain circumstances may be pursued to challenge a fossil fuel subsidy program in the WTO. Nevertheless, as noted by many commentators, the current SCM legal framework is not optimal in this respect, and substantial reform would be needed in order for the SCM to be a more effective tool for this purpose.

Read the full report here.

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