Time to “Green” the SCM Agreement?

Professor Sherzod Shadikhodjaev published his article entitled ‘Renewable Energy and Government Support: Time to “Green” the SCM Agreement?’ in World Trade Review (a top-tier WTO-initiated journal),

Vol. 14 (2015) DOI : http://dx.doi.org/10.1017/S1474745614000317.  This paper highlights the need for WTO rule book reforms to better accommodate green energy policies across the globe. 

With global warming becoming today’s reality, many countries have implemented various programmes for reduction of greenhouse gas emissions, development of green technologies, or replacement of fossil fuels with eco-friendly substitutes. Government-driven stimulation of the production and consumption of renewable energy – typically, wind power, solar energy, and biofuels – has become part of national climate mitigation agendas. These efforts are partly encouraged by internationally pursued initiatives.

As of early 2013, at least 138 countries had policy targets for development and deployment of renewable energy technologies; 127 countries pursued renewable energy support policies, with two-thirds of them being developing or emerging economies. According to the International Energy Agency, the estimated amount of renewable energy subsidies in 2011 stood at $88 billion, with $64 billion going to electricity and the remainder to biofuels. Solar photovoltaic received more than any other green technology for electricity generation ($25 billion), followed by wind power ($21 billion) and bioenergy ($15 billion). The size of all renewable energy subsidies is projected to increase significantly over the next two decades at least. Many governments provide such subsidies to shift from ‘dirty’ but cheap fossil fuels to ‘clean’ but expensive renewable energy. For most countries, these subsidies are subject to the disciplines of the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures (SCM), a multilateral trade treaty on subsidization and anti-subsidy measures.

Recently, public incentives in the renewable energy sector have been challenged through both WTO dispute settlement procedures and domestic countervailing duty investigations. As of 31 December 2013, there were 102 dispute cases brought under the SCM Agreement, and six of them concerned renewables. All six cases were triggered from 2010 onwards vis-à-vis green subsidies contingent upon the use of local content. At issue were government incentives granted in relation to renewable energy (e.g. biodiesel) and/or power generating inputs and equipment (e.g. solar cells). Apart from WTO cases, the United States investigated two countervailing duty cases on renewable energy goods, namely Chinese solar cells and wind towers. Compared to the United States, the European Union launched a larger number of investigations, with three on imports of renewable energy as such (biodiesel and bioethanol) and two on green-energy-generating products (solar panels and solar glass). One may expect that trade frictions in this field will intensify over time. Although the Appellate Body made a few climate-friendly interpretations in Canada – Renewable Energy / Canada – Feed-In Tariff Program, it is now members’ turn to carry out meaningful rule-making reforms.

This article examines the state of play in anti-subsidy actions on renewable energy and argues that the SCM Agreement should be amended to prevent the escalation of trade tensions in this sphere. For this purpose, it first reviews domestic policies of energy promotion that affect fossil fuels and renewables. Then, it considers both WTO disputes and countervailing duty investigations, and offers some proposals on (i) exemption of green subsidies from legal challenges, (ii) relaxation of the countervailing mechanism, and (iii) application of WTO general exceptions to such subsides. The author concludes that with the missed opportunity to effectively restrain fossil fuel subsidies under the WTO system, expanding the policy space for the clean energy promotion remains a more practical solution to make renewables competitive.

By Professor Sherzod SHADIKHODJAEV