WTO: Anti-Subsidy Machine (Except When It Comes to Fossil Fuels)?

Helpful @climatestrat study on the WTO implications of fossil fuel subsidies from 2017 by @cleoverk @harrovanasselt Tom Moerenhout @Liesbeth_C87 @PWooders. Thread (climatestrategies.org/publication/ta…)

The tl;dr is that the WTO is generally an anti-subsidy machine, there are a bunch of types of fossil fuel subsidies, but it is not a slam dunk that any of them violate WTO rules. This is because schemes subsidize consumption rather than production, and all else equal the WTO rules are more concerned with the latter.

The report goes through the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM) case law, and offers this handy road map to whether and how FF subsidy schemes would be implicated.

They then go through five case studies of fossil fuel subsidies, including expensing of intangible drilling costs in the US.

(Fun fact: Obama wanted to get rid of fossil fuel tax benefits for the whole of his terms, but Congress wouldn’t go along. (oecd.org/fossil-fuels/p…)

That experience is why Biden’s recent climate EO only pledged to eliminate those fossil fuel subsidies by 2022 that he could wrangle by executive action. (usatoday.com/story/news/202…) And those congressional hurdles aren’t going away anytime soon.) (readsludge.com/2019/09/24/fac…)

Back to report: 2 of the five case studies that the authors examine (by Mexico and Indonesia) seem likely compatible with the ASCM. The three others (US, EU, Australia) seem potentially at odds with ASCM rules, but a lot more data would be needed to determine their trade impacts.

Indeed, while it’s more a subtext than a major theme of the study, it seems that the types of energy subsidies that are more likely to run afoul of WTO rules are those for renewables, not fossil fuels. This is for several reasons. First, as the authors point out, renewables support tends to be for the producers, not the consumers (as in many fossil fuel schemes). As pointed out above, consumption subsidies are usually on solider ground.

Second, and relatedly, renewables support is geared towards production out of necessity. You can’t subsidize consumption of something that isn’t yet being produced. Green energy policy is about bringing new producers and production into being — more interventionist than simply giving out goodies to incumbent industries. Finally, the only outright prohibited subsidies (as opposed to the lesser, merely so-called “actionable” subsidies that might / might not be kosher) are subsidies contingent on export targets or local content requirements (LCRs). Renewables are non-incumbent industries, and bringing them into being means creating political coalitions to back them. In practice, this means leaning heavily on LCRs, as a way of creating political allies in manufacturing firms and unions. That’s based on sound social science, as @dcullenward @greenprofgreen @leahstokes @bentleyballan and many others show. (amazon.com/Making-Climate…) Cue Build Back Better, which wants to build up a green energy industry, and unsurprisingly has a lot of LCRs and benefits for national /local production. (joebiden.com/clean-energy/) In contrast, oil is already powerful. It wants handouts, it has already got friends. (newyorker.com/news/annals-of…) Anyway, it’s telling that there have been now at least three cases against renewable subsidies (all successful), and none brought against fossil fuel subsidies. (washingtonpost.com/politics/2019/…) The authors of the @climatestrat report offer several plausible political reasons why that might be, as well as some of the legal challenges like defining the right “unsubsidized” markets to use as a benchmark.

There’s also the “standing” question. The folks that are most opposed to fossil fuel subsidies are environmentalists. But only states can bring claims at the WTO. And the states with the most compelling economic interest in doing so would be rival fossil fuel exporters. Indeed, the likely outcome of compliance proceedings would be to boost oil trade. Tho note

The offer up a number of policy recommendations, including unobjectionable improvements in transparency of subsidy notification. Their kicker is really smart: launch negotiations to add fossil fuel subsidies to the definitionally per se prohibited subsidy list, where LCRs are now

Whether it will go anywhere in a WTO that counts Saudi Arabia and Russia among its members is another matter.

That’s why the idea of a climate club that creates a new in-group, out-group may have more legs. (Plus take LCRs off prohibited list.) (rooseveltinstitute.org/publications/g…) See also this great report from @JeffDColgan and @fredshaia, which lands in a similar place though is nearer term in focus.

Anyway, kudos to @climatestrat for delving into the thicket that is the ASCM, and for drilling into specific potential cases.

(Adapted from this thread.)

I write about democracy, political economy, and trade. Fellow at the Roosevelt Institute and Roosevelt Forward.