Fossil Fuel Subsidies: Extent, Impact, and Solution

Clinic: European Public Law Organization (EPLO), Greece, Spring 2021

Beneficiary: Colombia Mission to the WTO

Executive Summary

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So far, purported attempts to eliminate fossil fuel subsidies by governments have lacked sincerity. Instead of reducing fossil fuel subsidies, they have focused instead on providing even more subsidies, such as tax/duty relief, which is not disciplined by WTO Law. Tracing and measuring subsidies are important first steps towards appreciating the significance and prevalence of such fossil fuel subsidies.

These subsidies can cause trade distortions, which have a direct or indirect effect. Distortions are felt at different stages of the fossil fuel value chain, but also impact upstream, midstream, and downstream markets.

Trade impacts of subsidies for production include import substitution and an increase of exports. Subsidies at the manufacturing stage generally lower the cost of local products. And subsidies at the final consumption stage impact trade by increasing the demand for cheaper subsidized products, implying a bigger market share for local companies and, potentially, the smuggling of lower priced products to other markets. Subsidies granted to oil, gas and coal producers to explore, extract and refine fossil fuels, as well as building new power plants, are the most important since they account for tens of billions in US dollars granted each year by some individual countries. Russia, USA, Brazil, China and UK are amongst the top fossil fuels subsidy providers.

The increase in the production and consumption of fossil fuels also causes irreparable harm to the environment, as well as to the health and productivity of humans. Climate change and air pollution are two important environmental phenomena generated by the continued subsidization and use of oil, gas and coal. Climate change, on one hand, has caused increases in forest fires, melting ice in the Arctic, sea level rise, human migration, and illness, among others. Air pollution, on the other hand, has affected the health and life expectancy of humans and, consequently, increased insurance premiums and the overall cost of health care.*

It has therefore become imperative that a multilateral legal regime on fossil fuel subsidies be introduced, mandating that all countries phase out all future fossil fuel subsidies. At the very least, the Agreement on Subsidies and Countervailing Measures (SCM Agreement) should be modified to explicitly prohibit exploration, extraction and refining subsidies for the oil sector as well as coal and gas.

The definition of adverse effects and injury for actionable subsidies should also include the impact on the environment, taking into account the full effect of a subsidy and encouraging more sustainable subsidies, such as those for renewable energy, on a non-discriminatory basis.

*Masson-Delmotte, V., P. Zhai, A. Pirani, S. L. Connors, C. Péan, S. Berger, N. Caud, Y. Chen, L. Goldfarb, M. I. Gomis, M. Huang, K. Leitzell, E. Lonnoy, J.B.R. Matthews, T. K. Maycock, T. Waterfield, O. Yelekçi, R. Yu and B. Zhou, Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis. Contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change, CAMBRIDGE UNIVERSITY PRESS, August, 29, 202, available at: https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_SPM.pdf

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