Fossil fuel subsidies undercut the international community’s Sustainable Development Goals (SDGs) and climate change objectives in many ways. One example of this is by diverting investment from development objectives such as health care, education and access to renewable energy, and by locking in carbon-intensive energy systems for decades into the future.
Estimated at several hundred billion dollars a year, such subsidies also affect fossil fuel prices, and can therefore have distorting impacts on trade and investment.
Given its central role in disciplining trade-distorting subsidies across ectors, the World Trade Organization (WTO) is an obvious candidate for advancing fossil fuel subsidy reform (FFSR) internationally. However, their engagement on this topic has been limited. While a growing body of disputes on renewable energy support measures have been brought before the WTO, Members have yet to initiate legal proceedings against subsidies for oil, coal or gas. This working paper highlights the range of explanations for this puzzling discrepancy.
The report analyses the compatibility of five selected fossil fuel support measures in the Group of 20 (G20) countries with the WTO’s 1994 Agreement on Subsidies and Countervailing Measures (ASCM). The exercise has never been attempted before, and doing so, it identifies some of the key legal questions and challenges faced at the WTO.
Specifically, the findings highlight the difficulty of litigating fossil fuel consumption subsidies, measures that remain substantial. While enhanced transparency could help address some of the challenges complainants may face, fossil fuel subsidy notification rates within the WTO system remain disappointingly low.
In light of these shortcomings, the paper identifies five complementary avenues for reform of international trade policy to enable countries to better address fossil fuel subsidies:
- Promote technical assistance and capacity building
- Enhance transparency
- Pledge subsidy reform and ensure credible follow-up through reporting and review
- Adopt a political declaration
- Expand the category of prohibited subsidies (with possible exemptions)
In the current political climate, some of these avenues may be more feasible than others. However, options could also be pioneered by one or several WTO Members, or through regional, mega-regional and plurilateral trade agreements.
The adoption of the 2030 Agenda and the Paris Agreement represent a call for more decisive action on climate change and sustainable development, providing a clear mandate for deeper engagement of the international trade community in this space.
This work is part of the Climate Strategies project, Making the International Trade System Work for Climate Change, funded by the KR Foundation. A complementary policy brief is also available to download.