Greening regional trade agreements: Subsidies related to energy and environmental goods



Shunta Yamaguchi | OECD

Many regional trade agreements (RTAs) contain chapters and articles that are environmentally specific. But Parties can elect to more broadly incorporate environmental objectives in their RTAs to promote their environmental concerns in such agreements. This report investigates in what ways RTAs could incorporate environmental objectives in chapters and articles related to subsidies for energy and environmental goods based on existing practice and information.

Subsidies can have trade effects and are therefore disciplined by the Agreement on Subsidies and Countervailing Measures (ASCM) at the World Trade Organization (WTO). The Agreement disciplines the use of trade distorting subsidies and stipulates actions which Members can take in response, including through the WTO dispute settlement mechanism to seek withdrawal of the subsidy or removal of its adverse effects, or remedial unilateral action in the form of countervailing duties to offset the effects of subsidised imports.

Some subsidies, such as those that support domestic renewable energy development and environmental goods and services, can have stated environmental objectives. On the other hand, certain subsidies may potentially contribute to over-exploitation of natural resources, or result in other environmental impacts, and can be flagged for reduction among Parties consistent with their national priorities.

This paper provides an overview of how trade disciplines on subsidies for energy and environmental goods in certain RTAs could address environmental concerns of Parties. While other subsidies including those for agriculture and fisheries could also have environmental implications, they are excluded from the scope of this report due to the complexity of the issue as well as resources required to develop the work.

In the absence of new multilateral disciplines, RTAs offer an opportunity for like-minded Parties to agree on disciplines. With respect to WTO rules, RTAs can provide an additional layer of disciplines by reaffirming WTO rules, agreeing to deepen or expand multilateral commitments; or agreeing to refrain from taking remedial actions between the Parties to the agreement. 

Two specific questions are examined in this paper: (i) to what extent can the objectives of particular subsidies for energy and environmental goods be considered in RTAs without prejudice to WTO obligations and (ii) how could RTAs serve to secure greater transparency of energy and environmentally related subsidies?

Subsidies for the energy and environmental goods can have environmental consequences as well as trade effects, and thus they are an important topic when considering how to green RTAs. The application of local-content requirements in renewable energy development has emerged in the past two decades and is a subject that requires consideration to ensure non- discriminatory measures, including for the environment.

As already observed in agreements such as the EU-Singapore Free Trade Agreement (FTA) that has been signed but not yet entered into force, Parties may agree to explicitly prohibit the use of such requirements in the framework of RTAs either in relation to renewable energy development or in a general sense as a way to signal the strength of their commitments to non-discriminatory forms of environmental regulation.

This approach can reaffirm the prohibition of local-content requirements under WTO rules that preclude quantitative and mandatory requirements on goods, and provide additional commitments to discipline those attached to services or qualitative requirements such as technology transfer, employment conditions, staff training, joint ventures, local procurement, or domestic equity participation.

In addition, Parties could agree on a set of non-actionable subsidies that clearly benefit the environment. These non-actionable subsidies would be protected from formal WTO challenges and remedial action between like minded Parties. Such an example is provided by the CARICOM Agreement. There are however several issues that require consideration. A first issue is the difficulty of identifying a special regime for the environment and to determine products that count as “environmental goods”.

As a possible solution, Parties may agree on common coding of those goods. A second limitation of creating such carve- outs in RTAs is that these could still be challenged by other WTO members outside of a RTA. Nevertheless, agreeing on non-actionable subsidies related to the environment could initially be a symbolic move between the Parties, it could create a reference point for other RTAs as well as a stepping stone for plurilateral and multilateral agreements.

Subsidy phase-outs based on stated environmental objectives are another area for consideration. Disciplines to progressively reduce fossil-fuel subsidies have been committed in only one RTA, the EU-Singapore Agreement, which has not yet entered into force. Nevertheless, these areas could be further explored between Parties of the willing to encourage reforms to phase-out certain subsidies based on national priorities.

Parties can also commit to increase the transparency of environmentally related subsidies, including by fulfilling their notification obligations under the WTO. For energy and environmentally related subsidies, Parties could reaffirm reporting obligations of the WTO, and also align reporting efforts with existing schemes such as through the OECD, or SDG Indicator 12.c.1 process to avoid unnecessary duplication. As in the EU-Korea FTA, these transparency commitments can also be legally binding and enforceable.

While this report suggests that governments can potentially incorporate environmental objectives in RTAs through chapters and articles related to subsidies in a number of ways, it is a retrospective exercise based on available information or existing provisions in RTAs and does not intend to speculate the effects of possible provisions and proposals. This study also does not intend to judge whether some options are superior to others. To answer the question of whether some of the available options would be more effective or realistic would require additional study on a case-by-case basis.



To view the full report, click here.