Trade and the promotion of green energy

On this podcast episode, Ilaria Espa joins Kellie and Belén for a conversation about the challenges that current trade rules present for sustainable development and the promotion of green energy.

Ilaria Espa is a Senior Assistant Professor of International Economic Law at the Università della Svizzera italiana (USI), Senior Research Fellow at the World Trade Institute (WTI) and Adjunct Professor at the Law Faculty of the Università Cattolica del Sacro Cuore. She serves as CISDL Lead Counsel for Natural Resources, the Secretary-General of the Swiss Energy Law Association (SELA), a member of the IUCN World Commission on Environmental Law and a Fellow of the Cambridge University Centre for Environment, Energy and Natural Resource Governance (C-EENRG) Platform on Global Energy Governance.

Kellie Kemock: Welcome to this episode of the TradeExperettes podcast. My name is Kelly Kemock, and on today's episode, we also have a fellow TradeExperette and podcast producer, Belén Gracia, joining me. You'll hear her joining the conversation as a co-host on today's episode and hopefully future episodes. 

Belén Gracia: Hi Kelly! 

Kellie Kemock: Hi Belén! Thanks for joining us today. 

Belén Gracia: Thank you. It is great to be here today to join this conversation about WTO trade rules and the promotion of renewable energy.

Kellie Kemock: We are building on a session that the TradeExperettes organized for the 2022 WTO Public Forum, titled, Rethinking Trade Rules on Subsidies to Enhance Sustainable Development. 

And our guest today, Ilaria Espa, is a Senior Assistant Professor of International Economic Law at the University of Lugano, a Senior Research Fellow at the World Trade Institute and Adjunct Professor at the Law Faculty at the Catholic University in Milan. She serves as CISDL Lead Counsel for Natural Resources, the Secretary General of the Swiss Energy Law Association (SELA), a member of the IUCN World Commission on Environmental Law, and a fellow of the Cambridge University Center for Environment, Energy and Natural Resource Governance Platform on Global Energy Governance.

So we absolutely have an expert on sustainability this morning, so welcome to the Podcast! We are so happy to speak with you today. 

Ilaria Espa: Thank you so much. I'm thrilled. 

Kellie Kemock: So at the session that the TradeExperettes organized for the WTO Public Forum in 2022, Luca Rubini, Alice Tipping and Inu Manak agreed that the current WTO rules on subsidies in trade in goods give sufficient policy space to members to adopt measures that promote sustainable development. In the paper that you wrote together with Gracia Marin Duran, “Renewable Energy Subsidies and WTO Law”, you argue that when it comes to renewable energy subsidies, that conclusion depends greatly on the type of measure and that some forms of government support targeting renewable energy technologies, might need another type of legal shelter. Can you share with us the reasoning behind that statement? 

Ilaria Espa: Yes. Thank you so much for the question. What Gracia Marin Duran and I wrote in a recent article that appeared in the Journal of International Economic Law is that there are many, many different types of renewable energy subsidies. So it's a very short label, but it speaks of a very, very big universe and we can differentiate these types of subsidies depending on whether they're granted to electricity generation itself or to renewable energy technologies, meaning equipment components used to produce that green electricity. And, of course, this entails lots of different consequences because the environmental benefit attached to a certain type of subsidy may differ; it may be more or less direct, depending on whether the subsidy is granted to increase the share of renewable produced electricity and capacity deployment, or whether it is granted directly to manufacturing industries of renewable energy components. This is the first type of categorization we do in the paper. 

The second type of difference concerns the types of subsidies. So there can be direct expenditures, such as, for instance, grants or loans, there can be tax expenditures, basically meaning, tax exemptions or reductions, but there can also be prices support mechanisms, such as in the case of feed-in-tariffs granted, for instance, to renewable electricity or renewably produced electricity. And here, we argue that these distinctions have a direct bearing on the way such subsidies may fall under WTO disciplines related to subsidies. And this is because, first of all, depending on the type of subsidy, it can fall or not under the scope of the agreement of the WTO subsidies and countervailing measures, and it can be more or less difficult to prove that there are adverse effects attached to the subsidy. This is mainly because, for instance, renewably produced electricity is not as much traded across borders, as it is the case for renewable components and equipment. And this is due to geographical and infrastructural constraints to cross border trade in electricity.

So, at the end of the day, we came up with this taxonomy of renewable energy subsidies to basically argue that based on existing jurisprudence, and I'm referring for instance, to the cases on Canada-Renewable energy, US-Renewable energy, India-solar cells, we definitely know that WTO settlement bodies are gonna condemn any of these subsidies I just refer to, only to the extent they incorporate an industrial local content requirement, meaning that the eligibilities attached to any of these form of subsidies, be it a fiscal or financial type of subsidies, or a price support mechanism is attached to a minimum percentage of domestically produced inputs. In that case, for sure, those are gonna be condemned, but not necessarily under the Agreement on Subsidies Countervailing Measures of the WTO, but definitely under the non-discrimination principles that is enshrined both in the GATT agreement and in the TRIMS Agreement. 

Now, the picture is very much different and nuanced when it comes to all of the other types of subsidies whenever they are non-discriminatory, meaning that they do not include a local content requirement. We distinguish the case of those price support mechanisms and other types of subsidies that are directly attached to renewable electricity itself. In that case, we say that for a number of reasons, taken from the existing jurisprudence, they face a very slim chance of being condemned under WTO rules. Whereas, when it comes to subsidies, given to renewable energy manufacturers, the case is not so evident. Of course, the final conclusion will depend on a case-by-case basis and the exact details, but we do argue that those subsidies have a less immediate environmental benefit on the one hand, and they may de facto benefit domestic manufacturing, that, of course, has a higher penetration than foreign companies within a specific WTO member jurisdiction. And for these reasons we say of course, evidence is inconclusive, it depends on a case-by-case assessment, but still, it is not for sure that they will not be condemned depending on whether adverse effects are found. And this is one of the main limitations of the WTO Agreement on Subsidies and Countervailing Measures; it has a trade injury focus, there is no exemption clause for the purposes of renewable energy subsidies itself based on their rationale. So, to the extent that they would have adverse effects, they would be either condemned or also countervailable.

And we say that it is not just by chance that current disputes at the WTO have all targeted discriminatory subsidies. This is because of course it is evident that they are against WTO rules, whereas when it comes to other types of non-discriminatory subsidies, we face a high level of uncertainty. But, it is for sure that the SCM agreement requires a high level of evidentiary burdens. So, countries have refrained from challenging those subsidies. What they did, they imposed unilaterally countervailing duties and anti-dumping duties.

Kellie Kemock: So you're saying that these countervailing duties and anti-dumping duties could be something used in addition to subsidies or instead of subsidies.

Ilaria Espa: What I'm saying is that, contrary to the conventional wisdom that the main problem when it comes to fostering renewable energy technologies deployment is the lack of policy space under the SCM Agreement for renewable energy subsidies, without any distinctions, the main problem actually arises out of the fact that with respect to non-discriminatory subsidies, because of the uncertainties entailed in WTO rules and the lack of jurisprudence, countries have not taken their chances to go to WTO settlements, they'd rather engaged into imposing, very high, sometimes even punitive tariffs under trade remedy laws, within the context of the WTO framework. Those tariffs also endangered the tit-for-tat retaliation, there's been an escalation in that, and I'm saying that sometimes such trade remedy tariffs have actually resulted in very huge environmental costs. This is obvious because of course it is domestic investigating authorities that are determining whether domestic industries are injured by the fact that renewable energy components and equipment are subsidized into another country. So, there is this inherent bias that has led to lots of investigations and the imposition of very high trade remedies tariffs against renewable energy components, and it's estimated that the environmental costs of these are quite huge. 

Belén Gracia: So, basically your take is that countervailing duties, antidumping duties and safeguards that target renewable energy and other types of green technologies can greatly jeopardize green policy space. And in this context, should we actually be talking about how to modify WTO rules related to countervailing duties, antidumping duties and safeguards instead of the rules applicable to subsidies. 

Ilaria Espa: So, I think here there are several layers of answer to the question. Certainly what I argue in several papers is that to the extent that we only take care of the existing shortcomings in existing WTO disciplines related to subsidies, we are just gonna capture a part of this bigger picture, right? Because, a number of solutions have been proposed to try to use WTO subsidies disciplines in a way that is more responsive to the need to accelerate the deployment of renewable energy technologies. But these solutions entail several limitations to the extent that they do not target this proliferation of unilateral trade remedies on such technologies. And, this proliferation, as I said, is problematic to the extent that it is a tool of industrial policy, or it can be used as a tool of industrial policy in and of itself. And so, in this regard, some of the solutions that have been out there involved, for instance, suggesting the applicability of Article XX GATT to renewable energy subsidies that may be targeted by the WTO Agreement on subsidies, but, of course, in this way, we would not take care of the problem of unilateral challenges. Another solution would entail renegotiating an exemption clause within the agreement on subsidies itself. There was at some point Article VIII which shelters certain types of environmental subsidies, but that clause expired. And then they're suggesting that another exemption clause could be renegotiated. Apart from the political practical challenges entailed in designing this sufficiently calibrated exemption clause, of course, this would only target unilateral challenges that lead to countervailing duties, but not to antidumping duties that have been very much on the rise, and due to the limitations and flexibilities in anti-dumping laws also being quite significant and higher than countervailing duties. And in this respect, I argued that a solution to this problem should be targeting both dimensions. There have been a number of proposals, for instance, an interesting one that's also backed by one of the most qualified WTO experts, James Bacchus, is the suggestion to perhaps adopt a so-called climate waiver, pursuant to Article XI(3) of the Marrakesh Agreement. A climate waiver is interesting to the extent that, of course, it could be formulated as a temporary or not so temporary exemption from subsidies rules under the SCM agreement for the purposes of sheltering renewable energy subsidies. But, it could also envisage that covered subsidies under the waiver be exempted from unilateral trade remedy action. So, this is the type of solution that could target the two dimensions, both encouraging certain types of renewable energy subsidies, of course, we should get into a discussion of what are those, what are good renewable energy subsidies? But also taking care of the fact that renewable energy trade remedy tariffs could be used as an industrial tool and jeopardize the country's effort towards greater deployment of renewable energy technologies.

Kellie Kemock: Well, the next question got us to talk about preferential trade agreements. But before we go there, do you want to dive in a little bit more about the types of renewable energy subsidies that you were just talking about? Can we dive into a little bit more about the good ones versus not so good ones?

Ilaria Espa: Yes. Well, it is really difficult to come up with sort of traffic-light distinction of different types of renewable energy subsidies in abstracto. But, of course, for our purposes, I would argue that certainly those subsidies that incorporate local content requirements would be facing a virtually certain outcome of being condemned under WTO rules, whereas in the case of non-discriminatory subsidies granted directly to the generation of renewably produced electricity, I would argue that those stand at the other end of the spectrum, right? So those are the ones that face the least legal risk to be condemned under existing rules. In the middle, there is a whole lot of fiscal and financial incentives that could be granted to renewable energy manufacturers. And that of course, depending on the industrial fabric of specific WTO members, but also on the conditions that are attached there could lead to an unfavorable outcome under WTO subsidies rules. So, we argue that the higher risk lies for those subsidies that are granted to renewable energy technologies and, hence, to manufacturers, and those subsidies that are granted through fiscal and financial types of support programs.

Belén Gracia: In another paper that you published titled “Promoting Green Energy through EU Preferential Trade Agreements,” you argue that EU PTAs could and should have gone further regarding subsidy and trade remedy disciplines that enable renewable energy promotion, and you also affirmed that their potential was untapped due to inconsistency in policy practice. Could you perhaps elaborate further on this? And could you also tell us if you see any changes in this aspect considering the review of the EU Commission's Trade and Sustainable Development Policy?

Ilaria Espa: Thank you so much for the question. Yes, we've looked at what happens in the preferential trade agreements, with a specific focus on those agreements that have been either negotiated or concluded by the European Union among the actors that have been more active in pleading for greater and more effective reform with respect to subsidies and trade. And here we found that the EU has been perhaps not as bold as it could have been with respect to trying to use PTAs to shelter certain types of green or renewable energy subsidies. And we also found an explanation for that, mainly due to the fact that based on WTO jurisprudence and in particular the Peru-Agricultural products case, WTO members engaging in preferential trade agreements could, include in those agreements some carve outs or some exemption clauses for renewable energy subsidies. But, they do not relinquish their right to challenge those subsidies under the multilateral dispute settlement. So, this is maybe partly an explanation why efforts have been relatively timid. But efforts have also been quite inconsistent. 

So we sort of, again, categorize these PTAs depending on whether they exhibit high ambition, medium ambition, and low ambition, and only in a handful of instances we can qualify renewable energy subsidies-related provisions as high ambition, and in very specific cases. For instance, in the case of the Association Agreement between the European Union and Ukraine, which of course reflects very specific political conditions, it is being concluded in the context of the European Neighborhood policy, and here we really have the incorporation of the EU policies on renewable energy subsidies and on subsidies more generally. So, this is quite an important normative technique to incorporate anything that EU law says on renewable energy subsidies. And then another very interesting case is the Trade and Cooperation Agreement between the EU and the UK. Here you have very, very ambitious provisions in the sense that you have a number of provisions where parties agree that subsidies can be allowed. We also have specific disciplines for what concerns energy and environmental subsidies. Again, the reason is that the UK was a former member state of the European Union, so of course this leads them to negotiate particularly stringent and interesting rules. Here you have a number of principles that should guide parties with respect to allowing certain subsidies conditions such as, you know, the subsidy needs to be proportionate, needs to be appropriate, it has to be basically the least trade distortive means to achieve the goal of promoting renewable energy deployment. But it also should bring about a change in the economic behavior of the recipient, it should bring a positive contribution to achieving the objective, in this case, the environmental objective and these contributions should outweigh any negative effect that it has on trade. Right? So those are quite detailed conditions. I could even get into more details, but this is just an example, as to the type of conditions that are there to evaluate whether a renewable energy subsidy in our case could be still considered legitimate, even if it does distort trade to a certain extent at least. 

There are also a number of other agreements which do not go as far that we categorize as medium ambition agreements. And the reason is basically that these agreements, such as the EU-Singapore PTA or the EU-Vietnam PTA, contain in different forms, certain clauses that would allow certain subsidies that minimally distort trade to the extent that they achieve a public policy objective. And then sometimes you also have a list of what are the public policy objectives that would qualify, and the categories that are provided there could be interpreted as granting the possibility to also grant renewable energy subsidies, such as subsidies for research, developmental innovation purposes, but also subsidies for training and for the creation of employment, subsidies for environmental purposes, and subsidies in favor of small and medium sized enterprises.

So, we categorize them as medium ambition because, on the one hand, they provide for a number of categories that could be interpreted as to allow renewable energy subsidies, but also because, sometimes, such provisions are not matched with procedural requirements, for instance, consultation requirements or transparency requirements that are sufficiently ambitious, and most times they're not subject to dispute settlement. So, this may also be a factor that is plugged-in in order to categorize them as medium ambition. 

Belén Gracia: And it sounds very similar to article XVIII of the SCM agreement, right? 

Ilaria Espa: Yes, exactly, exactly. It is not really renewable energy specific, it is not really energy, even specific, but there are some categories that could be interpreted in a way that it's in accordance with the idea of promoting renewable energy also through subsidies. But yes, there is not really anything extraordinary there. There are also low ambition agreements, and basically in low ambition agreements, there's no room based on the existing provisions to draw the inference that parties could have a larger policy space than is allowed under WTO rules.

So, in our paper, we say basically that it is true, there's not a consistently used model on the part of the EU when negotiating renewable energy relevant subsidies disciplines in its PTAs, but there are some interesting examples on the high ambition end of the spectrum that could definitely or should definitely be replicated. And this is not because parties will be sheltered by WTO dispute settlement in case some member would want to challenge those subsidies, but just because politically it would be very important, it would be a very good signal. And also because it would provide a premise for prospective multilateralization efforts. And I think in this context it's very important to mention that the so-called TESSD initiative, the Trade and Environmental Sustainability Discussions at the WTO, have also included the topic of low carbon transition subsidies among the items that should be granted priority. And I think here we have lots to learn from PTAs, but most probably we will also have a lot to learn from the agreement on climate change, trade and sustainability that's been negotiating between a minority of members at the WTO, but like-minded countries such as New Zealand, that's been taking the lead also with respect to fossil fuel subsidies reform, but countries also like Costa Rica, Switzerland, Iceland, Fiji, Norway. And they also aim at including very ambitious - this is of course the mandate - subsidies rules. And I think we should be closely following their efforts as well.

Kellie Kemock: Well, you mentioned fossil fuel subsidies reform. That was definitely the next topic we wanted to discuss. So, subsidies for many years have been associated with an industrial policy tool contrary to the promotion of sustainable development because of their use to promote fossil fuels, unsustainable fisheries and agriculture. So regarding fossil fuel subsidies, there's a consensus that tackling them is key for transition to the green economy. At the COP 26 states agreed for the first time to formally phase down the use of coal, but, unfortunately, at the COP 27 no agreement was reached regarding a commitment to phase down all fossil fuels. However, at the WTO level in December 2021, some members adopted a Ministerial Statement that pushes for fossil fuel subsidy reform to rationalize and phase out inefficient fossil fuel subsidies. In your view, what are the prospects for this type of initiative? 

Ilaria Espa: I think the topic of fossil fuel subsidies and fossil fuel subsidies reform is really central to sustainable development and climate change mitigation, obviously. And these forms of subsidies have been extremely problematic. Also if you look at numbers, I mean the numbers are quite astonishing. And if you look at renewable energy subsidies, the volume of renewable energy subsidies has been dwarfed by the volumes of fossil fuel subsidies. I think in 2020 still, the total volume of fossil fuel subsidies has been estimated to be larger than USD 350 billion. And if you look at the numbers of renewable energy subsidies, it is really much lower. 

Fossil fuel subsidies are extremely problematic to the extent that both developed and developing countries adopted them, both have producer and consumer-related fossil fuel subsidies, but in the case of developing countries, the larger volume is represented by so-called dual pricing policies that are basically granted across the board to consumers and they're very difficult to be targeted through existing WTO rules on subsidies. And indeed, for a long time there's been the problem of: there's an increase in disputes regarding renewable energy subsidies, provided they are discriminatory, incorporate local content requirements, but, at the same time, the story for fossil fuel subsidies is very much different; we have no single dispute tackling fossil fuel subsidies, notwithstanding their magnitude and their environmentally harmful effects, and of course also with respect to climate change. 

Now there have been certain efforts to tackle the issue for a number of years now. There's been an interesting initiative that led in 2017 to the Friends of Fossil Fuel Subsidy Reform, a statement that also called for basically more transparency in countries practice. And this would seem okay, but you know, this is nothing, but indeed this would already be quite something because transparency with respect to fossil fuel subsidies has been lacking for a long time. There's a notification regime under the WTO Agreement on Subsidies, but the compliance record is very poor. We still do not agree on what is the actual definition of fossil fuel subsidies, and depending on the existing definitions, the numbers may also considerably vary. And, in this sense, transparency still definitely needs to be tackled better, but arguably we would also need more ambitious rules to at least prohibit the most egregious types of fossil fuel subsidies. 

But here again, let's not underestimate the difficulties entailed in this exercise, just remember that existing rules in the agreement on subsidies really have a trade injury focus. If we wanna tackle fossil fuel subsidies, we need to change the perspective, we need to look at adverse effects on climate change. And here, of course, it can be problematic to identify some criteria to come up with a ranking and look at the bad ones and still save some of the others. And also, this issue is extremely problematic to the extent that some of these programs are social safety nets for the most vulnerable segments of the population. And hence, it's been argued that a subsidy phase out should be linked at least to technical assistance or capacity building and instruments to tackle the equity implications of phasing out such programs. This is an important dimension, I think, that would need to be taken care of in order to achieve an ambitious deal. At the moment, there is no significant progress multilaterally, but there are interesting examples of ambitious fossil fuel-related disciplines in PTAs. And here again, I'm gonna refer to one of the recently negotiated agreements between the UK and New Zealand. Here, you have an article on fossil fuel subsidy reform and transition to clean energy, Article 22(8), and it's - I would say - probably the most ambitious type of provisions on fossil fuels that's been so far incorporated in a PTA. It basically contains language that imposes to each party to take steps to eliminate the harmful fossil fuels where they exist, it provides limited exceptions in support of legitimate public policy objectives, but also, it requires parties to end unabated coal-fired electricity generation in their territories, to encourage transition to clean energy for electricity to end new direct financial support as well as officially supported export credits for fossil fuel energy. And I think this is a very, very welcome step forward.

Kellie Kemock: Thanks for that very specific example. I feel like you are just a wealth of information on this topic, and I definitely appreciate you sharing your knowledge with us and the listeners on the TradeExperettes Podcast. So thank you so much for your time today. 

Belén Gracia: And you know, Kelly, that Ilaria was going to join us at the session that we organized at the WTO Public Forum, but due to a conflict of schedules, she couldn't make it. So we are very glad that we can have her today at the TradeExperettes Podcast.

Ilaria Espa: Thank you so much for the opportunity. And again, I'm so sorry we've been so unlucky so far uh, in cooperating, but this is perhaps just the start! 

Kellie Kemock: Absolutely.

The TradeExperettes Podcast is hosted by me, Kelly Kemock

Belén Gracia: and by me Belén Gracia, and I'm also the executive producer. 

Kellie Kemock: If you would like to know more about the TradeExperettes, you can find us online at tradeexperettes.org on LinkedIn and Twitter. Join us!