Energy Subsidies in World Trade Organizations agreements
I. Energy Subsidy
An energy subsidy is any government action that influences energy market outcome by lowering the cost of energy production, raising the price received by energy producers or lowering price paid by energy consumers. Production subsidy therefore is any government intervention such as the direct cash payment by a government to an energy producer to stimulate production by keeping the prices for producers above market levels or by reducing costs to producers. Consumption subsidy is any government intervention such as direct cash payment by a government to an energy consumer to use a particular fuel or form of energy thereby reducing costs to consumers. An economic definition of a subsidy is a government directed market distortion intervention, which decreases the cost of producing specific good or service, or increases the price. From the definition, one can conclude that economic definition of a subsidy is directly related to the central environmental principle of full cost pricing. Legal definition of a subsidy is responsive to the politics of national and international trade. Subsidies include within its scope any government intervention that has the effect of altering the cost of production and thus affecting the price of a good.
The subsidies are based on their direct or indirect effect on price. These energy subsidies are direct financial transfers such as grants, preferential tax instruments such as rebates, trade instruments, energy related services provided directly by government at less than full cost, and regulation on energy sector. Furthermore, the diverse reasons for energy subsidies are outlined by defending local producers and encouraging employment creation locally. Secondly is to remove the excessive imports and thus enhance internal security. Thirdly, subsidies are used to manage risks and thus making energy accessible, cheap specifically for certain social groups. In addition, subsidies are used to protect the environment by supporting the switching to renewable energy in terms of use and production.
The Size of Energy Subsidies
Energy subsidies vary greatly in import and type according to the fuel and amongst countries and they fluctuate over time. Energy subsidies size assessment is very complex due to the difference in defining, methodologies, and the transparency of the fiscal systems adopted by the different countries. Studies undertaken reveal that globally energy subsidies are large and are mostly accounted for by the non-OECD countries. The studies show that world fossil fuel subsidies at around 133 billion per annum. Similarly, producer subsidies usually in the form of direct payments or support for research and development with the fossil fuel and nuclear industries are rampant.
In measuring the size of an energy subsidy, the following measures can be used. To start with there is the effective rate of assistance (ERA) which is the fundamental measure of a subsidy in that it covers all the aspects of a subsidy be they direct or indirect action that affects the price of the good under consideration. It captures the full extent of the subsidy and thus it requires information on subsidies to industries upstream making it difficult sometimes to practically use. The producer subsidy equivalent (PSE) developed by OECD in another measure that has been used to quantify subsidies especially coal. The price gap approach encompasses actual end user prices of energy products with prices that will prevail in an undistorted market without any subsidy. The difference between the two is called the price gap.
Impact of energy subsidies
Energy subsidies in the non-OECD countries benefits consumers by enabling them pay lower prices and enabling producers receive higher prices for the energy they generate. Energy subsidy to producers greatly affects the funds available for investment in other essentially important sectors and thus lowers the rate of economic growth in developing countries. Moreover, the benefits may not trickle benefits to the intended poor because their consumption levels might not rise, as it will for the middle and high-income levels that therefore benefits with the energy subsidy. Economic, Social and Environmental Effects
Economic
Subsidies diminish incentives to use energy efficiently, act as a drain on government finances and hold back economic development. Moreover, energy subsidies are associated with high economic costs. Energy subsidies that reduce the price received by producers undermine the energy providers return on investment and their ability to invest in new infrastructure therefore continued reliance on outdated and dirtier technology. Production energy subsidies that cushion producers against competitive market pressures reduce incentive to minimize costs resulting in less efficient plant operation thus hampering efforts to improve productivity. Fuel subsidies encourage illegal trade of fuels to neighbouring countries where selling prices are higher. Moreover, subsidies to specific energy technologies inevitably weaken the development and commercialization of other technologies that are promising to become more economically attractive.
Economic changes because of energy subsidies result in the worsening of social conditions as a result energy-sector workers are made redundant. However, an increase in public investment in health care or education that could result from a redirection of public expenditures from energy subsidization leads to improvements in well-being, both in the present and in the future of the citizens.
Social effects
Subsidies to modern cooking and heating fuels such as kerosene, liquefied petroleum gas (LPG), and natural gas as well as electricity in developing countries improve the poor households living standards by making those fuels accessible and affordable. Other benefits include less indoor pollution, time reduction for children and women in gathering fuel and therefore more time for productive activities. However many energy subsidies intended to benefit the poor households by boosting their purchasing power or improving their access to modern energy may leave they worse off. This is because they consume very small amount or they may be very far from the national grid in electricity subsidies or diversion to the black market due to price caps. Additionally there are widespread social impacts that encompass the loss of employment due to reduced demand for the less subsidized energy thereby increasing hardships and reducing living standards. Moreover, education standards are affected due to the availability or non-availability of sufficient light for doing the homework. Likewise, there are increased problems of cold among the poor and mostly the poor elderly especially during winter season.
Environmental effects
Energy subsidies encourage production and use of fossil fuels, which inevitably have consequences to the environment both positive and negative. Energy subsidies that encourage more consumption due to lower price of respective fuels increase the emissions of noxious and greenhouse gases. Higher fossil-fuel production also damages the environment by polluting the water supplies and spoiling the landscape because of mining. Furthermore, subsidies on bio fuels trigger intensive farming increasing in the use of fertilizers and pesticides, which damage the local ecosystems increasing water and soil pollution.
Nevertheless, energy subsidies also have benefits as it reduces deforestation in poor and developing countries increasing carbon sinks and potentially offsetting the emissions from fuel combustion. In addition, energy subsidies reduce indoor pollution as consumers change from traditional energies to the subsidized ones.
II. Legal analysis of current agreements.
WTO Law
With the increased levels of international trade in both goods and services, rules to regulate the working of the market were needed in order to ensure that producers are faced with similar costs of production and that none was placed at a disadvantage due to the lack of support from local government. In addition, consumers were to have similar or equal market conditions prevailing. Given that the concentrated efforts of producers command a greater political support than the diffuse interest of the consumers, governments find it much easier to emulate the vices of protectionism rather than the virtues of free trade. This has therefore prompted the international trading community to set guidelines that distinguishes acceptable and non-acceptable subsidies measure codified in bilateral treaties and multilateral agreements such as GATTWTO. In the present era of increased interdependence among countries operating different markets, any government intervention by any one particular country has effects, which are felt in other countries or market segments. This has formed the basis for entering into international treaties to define governments obligations ensuring efficiency and equity in resource allocation and gains achievement. This led to a series of negotiation to come up with generally accepted rules to govern the operations of production and distribution. These round talks in Uruguay and other countries culminated in the formation of World Trade Organization (WTO), which had the mandate of formulating rules acceptable by all member countries to direct the operation of the market between member states and outlining the relationship with the non-member states.
Among the major functions of WTO law has been to provide structures and rules for the negotiated reduction of tariffs on goods and services under both General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade and Services (GATS). For purposes of attaining sureness, transparency and non-discrimination in international WTO law, WTO members are advised to communicate their devotion with respect to tariffs in terms of bound rate to be applied on an unconditional most favoured nation (MFN) basis. Unconditional MFN dealing means that this legal obligation extends equally to imports from all WTO Members regardless of their own tariffs or other trade policies.
The Subsidies and Countervailing Measures (SCM) agreement
The Subsidies and Countervailing Measures agreement forbids export of subsidies and subsidies contingent upon the use of domestic products over imported products. WTO law permits countervailing duties to be imposed only where the country imposing the duties can show that the subsidy has caused or threatened hurt to its domestic industry through the import of competing subsidized products.
According to SCM Article 1.1 (see appendix), the measure must fulfil the definition of a subsidy in the SCM agreement, which stipulates that there, should be a financial contribution by government that should confer a benefit to the recipient. The WTO Appellate Body asserts that to identify a benefit and whether it exists can be a complex matter in situations where the market conditions themselves have extensively been influenced by government intervention, and therefore a meaningful market benchmark for benefit should be established. Biofuels market has extensively been shaped in all the major producer nations by a variety of government interventions. Concerning this the question raised by the Appellate Body, in the event of a case being brought before it, would be whether there is a workable market benchmark against which one can isolate a given instance of financial support and determine whether a competitive benefit has been passed on, that is an advantage in relation to normal market conditions.
According to SCM agreement apart from meeting the requirements of financial contribution and benefit, in order to be actionable, a subsidy must also be specific whereby the terms of the government support program must target the subsidy to some definite or limited class of users, be they particular industries or firms. On one end, there are obviously specific subsidies such as the bailout of a single enterprise while at the other end there are obviously non-specific subsidies, such as government provision of universal health care, which are used throughout the entire economy. In addition, SCM agreement states that a subsidy must cause certain unpleasant effects in order to be successfully disputed as actionable in the WTO. Articles 5 of the SCM Agreement list some of the adverse effects and include injury to domestic producers of a similar product in competition with the imported subsidized product, nullification or damage of benefits accruing directly or indirectly under the GATT Agreement, in particular tariff concessions, or serious injustice to the interests of another Member.
SCM Agreement Article 6.3 further explains that to show serious unfairness the complaining WTO Member must show that the effect of the subsidy is to dislocate imports of a similar to product into the market of the subsidizing Member or to relocate exports of the complaining Member to a third country market, or significant price repression or price reduction in the same market with respect to like products, or finally the effect of the subsidy is an increase in the world market share of the subsidizing Member in a particular subsidized primary product or commodity as compared to the average share it had during the previous period of three years and this increase follows as a steady trend over a period when subsidies have been granted.
An additional important issue in the biofuels context is that of upstream and downstream subsidies. One firm or industry may receive the financial contribution but it is the benefit that flows to an upstream or downstream industry that is the source of concern. For instance, a subsidy paid to domestic feedstock producers might be disputed by foreign producers of biofuels on the basis that the subsidy results in a lower price of feedstock to domestic producers of biofuels. In the Canada-Lumber case, the Appellate Body held that while a subsidy may be actionable where the financial contribution and the competitive benefit are not received by the same entity or even the same industry, the Appellate Body suggested that it could not be simply assumed that the reduction of costs to a downstream industry would result in a benefit in terms of lower prices of inputs to the upstream industry rather the benefits have to be shown.
Evolution of the subsidies
Before the Uruguay Round of negotiations, the international trading system had no legally enforceable discipline on local subsidies (government support) including subsidies on energy. However while acknowledging the ability of a subsidy to distort trade and cause material injury to domestic industry in one way or another self-help policy were permitted in form of countervailing duties. The Uruguay Rounds Subsidy and countervailing Measures (SCM) Agreement placed export subsidies and domestic content requirements in the category of prohibited measures. Any subsidy meeting the definition of a subsidy in the SCM Agreement was challengeable in a WTO dispute settlement where it could be remedied by removal after showing the existence of certain adverse effects. These adverse effects as listed in Article 5 (see appendix) of the SCM Agreement are injury to the domestic producers of similar products, nullification of benefits accruing either directly or indirectly, and serious prejudice to the interest of another member. Serious prejudice according to the Agreement is further elaborated as that which displaces imports of similar products into the market of the subsidizing member, displaces the exports of the complaining member to a third country market, suppresses the prices in the same market with respect to like products and increases the market share of the subsidizing member. Article 8 of SCM Agreement had non-actionable subsidies such as that on research and development and environmental protection which were applied for the first five years that the SCM Agreement was in force but currently there are no non-actionable subsidies.
Critical analysis of the subsidies indicate that they are used to correct market failures or to reflect positive externalities that occur to the society due to reduced emissions in the case of renewable energy subsidies. In many energy markets today the existing networks for the distribution and retailing of energy whether electricity grids or chains of service stations are largely designed to favour fossil fuels and thus placing the production of renewable energy at a disadvantage. Moreover, tax systems and subsidies schemes distort the choices among energy sources and reduce incentives for energy efficiency by relieving the users from paying the full cost. Thus, a better solution is suggested as the removal of subsidies to allow efficiency in the market operations. Although even after the elimination of some energy subsidies the environmental harm and market distortion cannot be eliminated at once due to past investments their future term benefits should motivate subsidies elimination measures. Similarly, the social cost of emissions must be analyzed so as to attain the full benefits in elimination of harmful energy subsidies and optimal allocation of energy productive resources.
Energy subsidies are sometimes hard to determine because energy is classified as a good and a service. Therefore, subject to the different agreements of the WTO. In addition, there is also energy produced from fossil fuels, (some form of electrical energy) and another one from renewable sources (Biofuels). Critics of each source will therefore view the application of subsidies rules differently. In addition, each energy source has different policies application in the different domestic markets thus confounding the issue of energy subsidy when analysed in the multilateral setting of WTO. Taxes, mandates, support of input sources are just but to name a few of ways in which these different governments are promoting and discouraging energy production in their jurisdictions. Discussed herein are their operations and relationship with the WTO Agreements.
Non-Tariff measures on electrical energy
In times gone by, electrical energy has not been traded across borders except for a few countries and states such as Canada, United States and in the European Union. However, non-tariff measures that regulate goods and services that are inputs in the production, distribution, transmission. Sale of electrical energy usually arises from the regulatory framework in the inputs that is of great concern. Some regulatory framework for electricity require that a certain amount of electricity being fed into the grid be renewable energy and that only certain sources and methods of generation meet the requirements. This among other reasons affect the competitive opportunities of goods, their technologies, equipment and the services involved in the production, distribution of renewable energy. With the demonopolization of electricity in an increasing number of countries and the building of functions such as production, grid operation, transmission and retailing as well as the development of complex financial tools such as futures and options contracts for energy which is changing the structure of the entire market WTO laws analysis is becoming difficult and complicated.
This being said, electrical energy differs from other, or most other, traded commodities in that it cannot be stored and production and consumption of electricity must be instantaneous. Hence, to distinguish between the process of producing energy and some separate commodity that is consumed appears to be at odds with the physical characteristics of electricity itself. Moreover energy is considered a process and thus in considering physical characteristics in the context of determining whether renewable energy is like or unlike non-renewable energy, the WTO arbitrator would automatically, be required to consider the physical nature of a process. The WTO law does not have any definite provisions on electricity. Given the lack of disciplines on services under GATT 1947, electricity was defined as a good despite its peculiar physical properties in the Harmonized System (HS) Nomenclature12 on the codification of commodities. Electrical energy qualifies as a good under WTO law and is therefore subject to the rules of the GATT as formulated in 1994. In the Almelo case in 1994 the European Court of Justice (ECJ) explicitly stated that the rules on the free circulation of goods also applied to electricity.
Renewable (Biofuels) energy
Renewable energy comprise of a very wide range of energy sources such as biomass, hydro, geothermal, wind, solar, marine commonly known as ocean energy. It also encompasses conversion processes and applications such as combustion, thermal, electromagnetic, chemical and photovoltaic processes. The total potential of generating renewable energy keeping in mind the challenges, available resources, manpower, technologies and losses in the generation process is very high even to fit the present energy demand. This leads to the inquiry why do not we embark on generation of renewable energy for sustainable development instead of subsidizing fossil fuel generated energy, which is harmful to the environment and at the same time depletes funds in the economy.
The recent rapid growth in the generation of Biofuels, considered a renewable fuel, in both the developed and developing countries has been encouraged by the government incentives and mandates. This has in turn increased trade of feedstocks and finished Biofuels within and across borders necessitating the creation of regulating framework to govern the trade of Biofuels with the main aim of ensuring optimum use of resources without overlooking sustainable development. Moreover the inclusion of the rules governing biofuels trade in the international trade on the Doha round agreement were propelled by the tension existing between some major producers over subsidies. According to WTO rules, Biofuels are agricultural or chemical products covered within rules regarding agricultural products. Bio-diesel is an industrial good governed by the WTO Agreement on Subsidies and Countervailing Measures (SCM). Subsidies on production of biofuel feedstocks, the biofuels themselves and their by-products encourage domestic production but being agricultural products they are subject to limits, which will not apply if they were considered environmental products. Moreover, the Subsidies and Countervailing Measures Agreements for non-agricultural products prohibit subsidies for the use of domestic products rather than imported one.
The fundamental approach of WTO has been that of equal treatment with no discrimination between domestic products and imported products and among various potential importers. According to WTO regulations import of like products are to be treated with no less favouritism than domestic products for standards and internal tax purposes. For instance, the case where United States disagreed with European Union over its standards for bio-diesel that favours production of rapeseed, which is widely grown in the European Union over soybean oil-based bio-diesel. Furthermore, environmental issues for sustainable development are also becoming a point of concern with European Union aiming at restricting palm oil exports from Indonesia because of their replacing rain forests with palm plantations.
Renewable Energy Fiscal Measures
Taxes on renewable energy trading can either promote or discourage production of renewable energy and can be viewed as a subsidy when there can be established hat the energy tax confers benefit to either the producers or the consumers. Renewable energy fiscal measures that tax products can be differentiated into several kinds of measures. The first could be described as an excise tax on inputs in the production of energy that occurs in the taxing jurisdiction, which in the European Court context is the most convenient system for taxing energy. When energy is tax during production, apply even at distribution. The early application in the generation process combines the benefit that the number of economic agents performing taxable transactions is small and easily checked and that the tax burden is instantaneously shifted onto all energy consumers by either increasing or reducing the cost of using the energy, thereby directly affecting their behaviour. In a world where there is no synchronization of such taxes, the problem is that consumers in the taxing country can evade the incentive effects of the tax by purchasing imports of energy from another country where inputs into the production of energy are taxed in a different manner such as without any distinction between renewable and fossil fuels.
Another way of addressing this problem is border tax adjustment (BTA), when the final product that is energy, comes across the border, the importing state levies a tax on the inputs in its production in the foreign jurisdiction equivalent to the tax that would be levied if the energy had been produced domestically. This places imported and local energy at par thereby promoting domestic production and allowing market forces to determine the effective market trading. Moreover, a different way of addressing the problem is by taxing energy itself differently depending on the method of its generation which a very controversial issue given the technological advancement and investments by different countries. Taxing energy generated from fossil fuels higher than that generated from renewable energy plays an important role in promoting the production and consequent use of energy from renewable sources. However, this tax may be a subsidy in that it benefits the producers of renewable energy and takes the market share of the energy produced from fossil fuel.
Different taxation on fossil fuels as inputs in the production of energy is very likely to be constant with the GATT Agreement. This is because the fuels under consideration are physically quite different from the technologies and materials involved in the generation of renewable energy and the consumers may well care about the environmental consequences that come out from these physical differences of non-renewable energy and renewable energy processes. Furthermore, though it could be argued that the end uses of electrical energy are the same based upon the existing jurisprudence it is impossible that such a common end use would overcome the other evidence pointing to dissimilarity such as that of the sources inputs of production. This idea can be strengthened by a similar examination with respect to whether the products are directly competitive or substitutable to which one can clearly see that environmental conscious individuals will see the two energies as substitutable. In addition, unless somehow the border tax is designed or structured to favour domestic producers, such a tax could not be found to afford favouritism to domestic producers. This observation leads to an important caution of the fact that a tax scheme generally treats renewable inputs more favourably than fossil fuel inputs will not make this scheme run afoul of the GATT Agreement. Nevertheless the legitimacy of favouring renewable through taxation instruments will not save a tax scheme that is inequitable in other respects, for instance, as between different fossil fuels such as oil versus coal. Similarly, the examination of likeness or directly competitive or substitutable might have a different taste were the WTO arbitrators to be faced with a scheme that favours domestic renewable inputs over imports. While issues of intent or motivation are not to influence determinations of likeness or directly competitive or substitutable, practically in a case-by-case and highly related kind of determination and in weighing the relative significance of the various probative factors such as physical characteristics versus end uses, the arbitrator may well be influenced, at least unknowingly, by the general purpose of National Treatment, in the GATT Agreement, which is to shun protection of domestic products.
The Excise tax on inputs with border tax adjustment issue was the focus of arbitration in the GATT Superfund case, in which the EC challenged a tax on certain chemical inputs, which, in the case of imported products, were collected as a tax on the final product at the border. According to the EC, such a tax was not permitted under the GATT because the polluting effects to which the tax was aimed at occurred not in the taxing country but the country of generation. The GATT jury held that the intention of the tax was inappropriate to the right to border tax adjustment in GATT practice, and so the United States was permitted to tax inputs based on their polluting effects in the foreign country of production, as long as the amount of the tax did not exceed the amount imposed on like domestic inputs. The Superfund ruling makes it clear that a WTO Member will be able to tax adjust an excise tax on inputs in energy production at the border through imposing the similar tax when the final product, that is energy, is traded across the border. Nevertheless WTO law remains uncertain about the appropriateness of taxes on products for adjustment based on lack of consensus in the 1970 Working Party on Border Tax Adjustment concerning whether certain particular kinds of taxes should be singled out as appropriate for border tax adjustment or not.
Another kind of tax measure to promote renewables would entail taxing home and imported energy differently, depending on the generation source, whether renewable or non-renewable. In evaluating this kind of measure under the GATT Agreement, the WTO arbitrator have to consider whether electrical energy from a non-renewable source is similar to, or directly competitive or substitutable with, electrical energy from a renewable source. This will go against the idea of GATT Agreement that does not permit differential treatment of products based on their method of production as opposed to their properties as products for consumption. Therefore the Appellate Body has stressed the need for the arbitrator to study all pertinent factors in a given case and context, and to consider all the evidence pointing either in the direction of a finding of likeness or otherwise.
This being said, electrical energy differs from other, or most other, traded commodities in that it cannot be stored and production and consumption of electricity must be instantaneous. Hence, to distinguish between the process of producing energy and some separate commodity that is consumed appears to be at odds with the physical characteristics of electricity itself. Moreover energy is considered a process and thus in considering physical characteristics in the context of determining whether renewable energy is like or unlike non-renewable energy, the WTO arbitrator would automatically, be required to consider the physical nature of a process.
Evidence that consumers are concerned whether energy is renewable or not is highly probative of likeness or direct competitiveness or substitutability Finally, while distinguishing in taxation between renewable and non-renewable sources would quite possibly be permitted under the GATT Agreement, some schemes of this character may also contain favouritism against imports, which would run afoul of the GATT Agreement. An example is found in the Finnish scheme that was found unacceptable under the Treaty of Rome policy on free trade by the European Court of Justice because Finland taxed domestic energy under rules that provided for different rates of tax depending on the method of generation. However, Finland also applied the highest of these rates to imported energy, not considering of its production method, on grounds that it was not easy to prove the sources of imported energy. The Court found that European domestic trade law allowed differences in taxation based on production process and raw materials used in the creation of energy, but that the scheme was nevertheless not permitted in that it was not applied evenly to domestic and imported energy. This feature of the Finnish scheme that was found problematic by the European Court because it was also likely direct a WTO adjudicator to find a violation of the GATT Agreement, since imported renewable sourced energy is being taxed at a higher rate than domestic renewable sourced energy.
Other renewable energy subsidies
Diversified range of subsidy programs are available to address climate change by reducing the cost of producing or consuming energy from non-carbon emitting sources in comparison to carbon emitting sources. To foster Green House Gas reductions, price supports in the production of renewable energy have been set at attractive levels (Intergovernmental Panel on Climate Change, 2007). In addition, significant expansion in the renewable sector in OECD countries is due to price supports and requirements that electric power producer purchase electricity from the renewable sector at favourable prices (Gupta et al., 2007, p. 762). Biofuels, one of the modern day renewable energy, illustrate the complex relationship between renewable energy subsidies and environmentally damaging impacts. Various subsidies are used to encourage production and consumption of biofuels, which are promoted as a way to simultaneously increase energy security, reduce Green House Gases emissions, and encourage rural development. These subsidies are provided at different points in the supply chain and include support for intermediate inputs and value adding factors, output linked subsidies, subsidies to distribution infrastructure, consumption incentives and high import tariffs. Several countries have also introduced targets and mandatory requirements that encourage biofuel development. However, recent analysis suggests that large-scale expansion of biofuels promoted by subsidies, targets and mandates will likely increase net Green House Gases through direct and indirect land-use change.
Renewable energy subsidies are used to encourage the development and use of renewable (non-fossil) energy sources in order to fight global warming and achieve long-term energy security. However, these may have other environmental consequences. For instance, hydroelectric dams can result in the loss of wildlife habitat and reduce biodiversity. Batteries for solar home systems can leak toxic heavy metals. Wind farms can have significant biodiversity impacts, especially if inappropriately located. These impacts need to be carefully assessed and considered in decisions on whether and how to support the development and use of renewable energy sources. Many developed and developing countries are attempting to legislate biofuels as evidenced by their national energy bill andor in specific legislation for instance on blending targets, tax exemption, tax incentives, refunds on Value Added Tax, subsidies and loans.
Bio fuels Output-related subsidies
Tax credits and reductions associated with biofuels production are prevalent form of government support. Under Subsidies and Countervailing Measures, a financial contribution comprises not only a shift of funds or the providing of goods and services but also foregone revenue by the government that would otherwise be earned. Therefore, a tax measure that reduces the amount of tax owed by a taxpayer is seen on the face as government foregoing revenue that is otherwise due. However, the foregoing of revenue should not be presumed but should be proved. Further more in order to prove that a tax measure is a financial contribution it has to assessed and established against a benchmark and given that WTO does not impose any tax regime the appropriate benchmark will therefore be dependent on the specific tax rules of the individual WTO member.
Payments designed on the basis of biofuel output can take a number of forms. Among these payments, we have volumetric payments for ethanol and biodiesel production. According to WTO, payments of direct transfer of funds from government to biodiesel producers are likely to meet prerequisites for actionable subsidy. This because there will be a financial contribution, straight forward benefit and that it will be directed towards an industry or industries that are likely to be specific. Moreover, to determine whether an Act is forbidden under Subsidy and Countervailing Measures it must be revealed to have undesirable effects on the interests of another WTO member. This may happen if the subsidy enabled the producers to export ethanol or biodiesel at low cost causing injury to the local industry of the importing WTO member or it had impacted the exports of another WTO member.
Although a mandate which is a directive or requirement by a government on the working of certain sector do not generally involve any financial contribution as in the SCM meaning, the rules established to implement or enforce a mandate might constitute some form of a subsidy in terms of preferences. For instance, a requirement that 2 of the ethanol sold in a domestic market must emanate from non-crops produced in the domestic market may run the risk of being prohibitive local-content subsidies.
Support for factors of production
Loans, loan guarantees and other forms of financial assistance to assist with the infrastructural costs are another form of assistance, which unlike tax credit its primary issue is not whether there is a financial contribution but whether a benefit exists. According to the Appellate Body any financial assistance or loan to qualify as a subsidy, either a financial contribution or a benefit, which are separate legal elements, must exist considering whether the benefits are superior to those to be received in the market. According to Article 14 of the SCM, a loan is considered to have benefited the recipients if the amount they have to pay to the government is less that what they would have paid in a similar commercial loan. Regarding a loan guarantee, the guarantee do not have to be invoked before there can be a benefit. Therefore to a certain degree there will be a benefit if there is a difference in the amount the recipient pays on the loan guarantee and the amount that a similar commercial loan would have cost without the guarantee. Thus if there is a benefit and the measure is definite, the subsidy will be actionable and the complaining WTO member have to show that the measure had adverse effect within the definition of SCM.
For example, when we consider the case on 19th January 2009, Guatemala requested consultations with China regarding certain measures of offering grants, loans and other incentives to enterprises in China. Guatemala indicated that these grants, loans and other incentives were reflected in a number of measures, including the measures relating to the China World Top Brand Programme and the Chinese Famous Export Brand Programme. According to Guatemala these measures provided grants, loans, and other incentives that are dependent upon export performance. For that reason, the measures appeared to conflict with Article 3 of the SCMAgreement on subsidies that are prohibited. In addition, Guatemala stated that the extent that these measures provided subsidies for agricultural products appeared to be inconsistent with the Agreement on Agriculture. The measures also appeared to be inconsistent with Chinas obligations under paragraph 12.1 of Part I of its Accession Protocol, as well as paragraph 1.2 of Part I of its Accession Protocol, which forms part of the terms of accession agreed between China and the WTO and is a central part of the WTO Agreement. Finally, the grants, loans, and other incentives appeared to be not in agreement with the GATT Agreement of 1994 to the level that the measures benefited products of Chinese origin but not imported products.
Subsequentially biofuel feedstocks are a key factor in biofuel productions costs and thus their subsidies are expected to have a significant effect on the cost of the final product that is the biofuel, due to their impact on the production costs. For instance, in another case on 8th January 2007, Canada requested consultations with the United States concerning three different categories of measures. To start with, Canada claimed that the United States provided subsidies to the US corn industry that are specific to US producers of primary agricultural products andor to the US corn industry. Canada stated that the measures at issue are not in agreement with Articles 5(c) and 6.3(c) of the SCM Agreement. Secondly, Canada claimed that the United States made available to its exporters premium rates and other terms more favourable than those which the market would otherwise provide through export credit guarantee programmes under the Agricultural Trade Act of 1978 and other measures such as the GSM-102 programme and SCGP as well as the programmes, legislation, regulations and statutory instruments providing the support. Canada considered that these programmes provide subsidies dependent upon export performance contrary to Article3.1(a) and 3.2 of the SCM Agreement, and they also violate several Articles of the Agreement on Agriculture. Thirdly, Canada claimed that, through the improper exclusion of domestic support, the United States provided support in favour of domestic producers beyond the commitment levels specified in Section I of Part IV of the Schedule, which was contrary to Article3.2 of the Agreement on Agriculture.
Ethanol subsidies and the Aggregate Measurement Support
The Aggregate Measurement of Support, which is the yearly level of sustenance, expressed in monetary terms whereby the support aims at an agricultural product support or non-product-specific support in favour of the producers of the basic agricultural product. The Agreement on Agriculture provides for a rule in the computation of Aggregate Measurement of Support, which stipulates that measures focussed at agricultural processors shall be included to the degree they help producers of the basic agricultural product. For instance, ethanol is an agricultural product and therefore if a subsidy to ethanol producers had the result of escalating the price of feedstock, which can be subsidized through payment to producers then the subsidy, have to be considered in the Aggregate Measurement of Support computation.
Subsidies in the production of biofuels may benefit other industries in the chain as held by the Appellate Body with regards to direct or indirect bestowing of financial contribution and the receiving of benefits. Thus, financial contribution to one industry may benefit another industry. For instance, subsidies to feedstock farmers may be passed to biofuel producers in terms of cheaper prices in what is known as downstream subsidy. Moreover in analysing the likelihood of a downstream subsidy the Appellate Body explained that if the producers in the upstream and downstream subsidy are similar the benefit is assumed to be passed while if they are not similar in that they are unrelated entities such as the farmer growing feedstocks and the ethanol producer then an analysis must be conducted to find out whether a benefit exists and its degree to the ethanol producer. In addition, no Article of the GATT or any provision of the WTO treaties prevents a WTO Member from applying a tariff that is lower than its MFN bound rate. However, a WTO Member must do so on an unreserved MFN basis, by virtue of Article I of the GATT, except in the context of regional or bilateral free trade agreements that are constant with WTO rules on such agreements such as Article XXIV of the GATT or of preferences for developing countries that are operated consistently with WTO rules. For example if the US MFN bound rate for widgets is 10, it is free actually to apply a tariff of 3 to such imports but it is not free to apply 3 to imports from some WTO Members and a higher or lower rate to those from others.
The Harmonized Commodity Description and Coding System, or HS classification for ethanol does not distinguish between fuel and non-fuel uses of ethanol therefore its left for the WTO member countries to structure and introduce tariffs based on the knowledge of HS. For instance in 1980 the United States introduced a secondary import tariff of 50 cent a gallon on fuel ethanol added to the tariff stated by the HS for all imported ethanol whether for fuel or non-fuel use. Although this violated its obligation under Article II with respect to applying a higher rate of tariff to some imports of ethanol, its singling out fuel ethanol for lower applied tariff rate counteracted this action.
Biofuels Subsidies and WTO Law
Government subsidization has been vital to the economic feasibility of the biofuels industry. For instance, Brazils ethanol industry enjoyed significant government subsidies during its first twenty years beginning in 1975 after the start of the first oil crisis. Facing rapidly escalating oil and import bills, the military dictatorship governing Brazil launched the Brazilian National Ethanol Program, important measures of this program included the building of a national distribution infrastructure for ethanol, low-interest loans to sugar companies for distillery construction, a mandatory blend of 20 ethanol with all gasoline sold and subsidies at the fuel pump to ensure that ethanol blended fuels and later all ethanol fuels remained competitive with, or cheaper than 100 gasoline at the retail pump. In the late 1990s after the end of the armed dictatorship, rising domestic production of oil combined with the arrival of low international oil prices in the international trade led the demand for ethanol to fall and the government of the day discontinued the traditional subsidy programs retaining only subsidized prices at the fuel pump. However, despite an industry shakeout after subsidies stopped, the Brazilian ethanol industry was able to carry on until the return of higher international oil prices brought renewed demand and profitability.
Similarly in the United States, federal government support for ethanol became established during the time of the second oil shock in the late 1970s, when price and energy security concerns were high first with provisions in the Energy Security Act of 1978 providing for a .40gallon exemption on the federal motor fuels tax and followed by the Energy Tax Act of 1980, which offered insured loans to small producers with under 1,000,000gallonannum producers of ethanol. Over time other measures have been added for funding for research in renewable fuels, usage mandates and so on. An example of EU support is the energy crop premium it provides to EU farmers in addition to their single farm payments. However, due to the undeveloped states of the technologies involved, and the often-high cost of the relevant feedstocks, the biofuels industry throughout the world has had to rely on subsidies and other public support to grow.
Subsidization can have multiple purposes and these purposes may be different in their consistency with the underlying norms of world trade law. For example, a government may for environmental or energy security reasons, subsidize consumers to provide them with an incentive to switch from conservative fuel to biofuel by compensating, for the added cost. Moreover, it may attempt to achieve the same objective by subsidizing research and development that can lead to more efficient technologies for the production of biofuels. However, none of these kinds of subsidies need affect the relative competitive position of domestic and foreign producers. On the other hand, a government may subsidize the domestic production of biofuels, a better and cost-efficient way of providing a motivation for consumers to switch from fossil fuels to biofuels, since the lowest-cost, most efficient producers of the biofuels in question may be foreign producers. Therefore, the way in which biofuels are classified is important as far as tariffs are concerned and in determining which set of WTO disciplines on domestic subsidies to apply.
Agreement on Agriculture - with respect to bioethanol The WTO Agreement on Agriculture (AoA) divides agricultural support into three categories, or pillars. These are export competition, market access and domestic support with each of them being subject to different disciplines. For example in the case of biofuels, the most appropriate category is that of domestic support which is divided into three categories. These are amber, blue and green which are according to the trade-distorting effects of each payment. The category into which a particular biofuel measure is categorized is crucial in deciding whether that subsidy must be removed or reduced. The amber box covers subsidies that are most trade distorting, such as price supports and production subsidies. Although WTO Members have not agreed to stop providing all amber category support they have agreed to cap their annual total expenditure on domestic support expressed in aggregate measurement of support and have also agreed to reduce this domestic support over time without exceeding their limit.
The green category covers subsidies that have no trade-distorting or production-distorting effects. Moreover, these subsidies are not counted in a Members Aggregate Measurement of Support and there is no condition for a Member to limit or lessen such payments. However, there are general requirements and policy specific conditions, which must be, met which vary depending on the nature of the payment in question. The general requirements are that a measure must have no trade-distorting effects or effects on production. Moreover the measure must be part of a publicly funded government programme. Furthermore the measure must not involve transfers from consumers and must not have the effect of providing price support. The policy specific requirements cover among other measures food security policies, domestic food aid direct payments to producers, producer and resource retirement programmes, investment aids and environmental programmes.
In the production of bioethanol subsidies on intermediate inputs such as maize sugar beet, wheat and sugar cane consumed in its generation process should not cause trade distortions, as they will fall under the amber category, which is actionable. Taxes on the production intermediate inputs should conform to WTO members legislation of not favouring their domestic producers. Moreover, bioethanol subsidies on value adding factors such as capital goods land and sometimes labour employed directly in the production process, which comes in form of form of grants, or reduced-cost credit, for the building of ethanol refineries, should not place the domestic producer at an advantage to produce bioethanol at prices that are lower due to their reduced costs. Similarly, in localities where land is being provided for free or at below market prices for biofuel plants should not cause any significant trade distortion within and without the domestic market as well. Most of these types of subsidies lessen both the fixed costs and the investor risks of new plants, improving the return on investment, which is a benefit, conferred upon a targeted producer or investor well within the subsidy principles.
Output linked support, which has the forms of protection from overseas competition through import tariffs on ethanol, exemptions from fuel-excise taxes and grants, or tax credits related to the volume produced, sold or blended is another form of subsidy that should be analysed to ensure that it is well within the WTO agreement on Agriculture. Moreover credit to help reduce the cost of storing biofuels, which often have to be segregated from fossil fuels until just before blending, grants, tax credits and loans to build dedicated infrastructure for the wholesale distribution and retailing of biofuels supports the generation of biofuels such as ethanol and should not be trade distorting.
III Designing and Reforming Energy Subsidies
Accessibility to modern kinds of energy like electricity and cooking gas is a key component in attaining economic and social development and improving the living standards of the population. Nevertheless, environmental and climatic change reforms require a clean and efficient production, supply and use of energy. Therefore, subsidy removal and reform on fossil fuels combined with other policies such as taxation should be used to direct development in the correct path. However great consideration should be given to the development of guidelines for the design of new subsidies or reforming the existing ones and to prevent excessive subsidization in terms of the length of the subsidy, lock-in effects of promising technologies and the mis-targeting of beneficiaries effects. Therefore, as times changes the rigid and inactiveness of subsidy plans coupled with institutional and political changes are all indicating the need to redesign the subsidy programmes and reform where necessary. Important design insights for new subsidies or for reform of the existing ones are as follows. The subsidy design should be vindicated by effective and relevant public interest necessitating adequacy and proportionate of those interests. In addition, the subsidy design should be selective, brief and applied within plainly defined time and provisional to participation and compliance with principles by the beneficiaries. Moreover, the subsidy design should only cover part of the polluters costs in tax reductions rather than tax exemptions. Furthermore, the subsidy design should not be for long time rather it should have a natural life with a beginning and a definite end.
For any design to be successful, the designers must be able to act the role of the recipient and think how they will respond to inducement. Moreover, the designers should be clear concerning the aims of the policy to entrench in a way that will lessen the likelihood of diversion to non-targets beneficiaries. Furthermore the designers need to be definite on the outcomes whether in the environment or in the social arena. Likewise, the designer should incorporate an assessment, regular review, and revision potential till completion during its natural life or lifetime. No design should be undertaken without sufficient supportive data and evidence keeping in mind that subsidization should be a cost-effective choice of allotment of public resources for a specified period of time.Grounds for Subsidising Energy
On their own energy market do, not function effectively because they do not take into consideration any social and environmental benefits and costs that arises in the use of certain energy sources. Furthermore, it is the role of every government to intervene in energy markets to protect the social welfare and the environmental objectives given that the cost is acting as a hindrance to addressing issues relating to these important aspects of a country. For instance, it is the responsibility of the government to intervene to protect the quality of air, considered to be a public good accessible to all, by regulating the emissions from energy-related and other activities. Making the polluters pay for the environmental damage they cause. Social considerations for the poor, infirm and the disadvantaged provide another reason for subsidizing energy because society benefits as a whole when everyone has access to modern energy services. Existence of barriers to market entry such as the high up-front costs of developing cleaner energy technologies and the delicate technical and financial risks that discourage investors provide an opportunity for the government to subsidize a particular energy source or technology so as to encourage investment.
In some occasions, reforms are propelled by economic and budgetary concerns. Reduction or increase of taxes will either increase or decrease the amount of money in the treasury whereby it reduces the consumers burden or it increases the producers burden forcing him to decrease production. In a similar note subsidies reform have the aim of creating a level playing field, which increases competitiveness while at the same time not unfairly supporting domestic industries. Another propellant of subsidy reform is the demands and requirements from international institutions such as the International Monetary Fund and the World Bank. Also to some extent, subsidy reforms are driven by political and ideological battles with the intentions to reduce power. Subsidy programmes are meant to support several objectives simultaneously. For example, subsidies might be designed to protect jobs, support regional development, to reduce energy import dependence, to contribute to environmental protection, and the protection of domestic energy industries all in the interest of national and social development. Any subsidy can be justified if the benefits and gains in social welfare or environmental improvement it attains exceed the net economic cost. Therefore, if any of the intended purpose and benefit is not achieved due to mis-targeting, corruption or any other vice, reform is necessary. Moreover, if the targeted beneficiaries do not deserve the subsidy such as the subsidy on liquefied petroleum gas used by the middle class and the rich people the subsidy should be reformed. Similarly, when the implementation process cannot clearly alienate the specific beneficiaries and thus cannot target the required beneficiaries reform is essential. Reforms are essentially critical when a better way of conferring benefits to the intended beneficiaries is to increase efficiency in resource utilization and welfare improvement.
Similarly, the introduction of renewable energy to protect the environment has come at a better time when countries are advocating the conservation of the environment with the reduction of emissions of noxious and green houses gases. However, the undeveloped systems, mechanisms and technologies are acting as barriers to renewable energy generation and thus translating to high investments costs and high prices to the consumers of renewable energy. Subsidy reform is therefore essential to facilitate shifting of resources from supporting the generation of energy that has harmful effects to the environment and social interactions.
Moreover, given the variation level of development of different countries in many aspects such as the amount of energy needed, amount of energy generated, method of generation, policy objectives and priorities, market conditions, economic conditions, available finances and institutional framework subsidy intentions vary. It is however good to note that any energy subsidy plan must be in such a way that producers and suppliers are motivated to provide a service efficiently and the consumers are encouraged to use energy efficiently.
Reforming Harmful Energy Subsidies (fossil fuels subsidies)
A good subsidy is one that improves access to sustainable modern energy or has a positive impact on the environment while sustaining incentives for efficient delivery and consumption. Owing to the growing concerns about environmental impacts, the governments are querying the goodness of some kind of energy subsidies regarding their effectiveness in meeting their social objectives and their economic and financial cost. Therefore, the main objective of subsidy reform is to reduce the overall size of the subsidies or eliminate them completely especially, where they harm the environment, bring limited social benefits and carry with them huge economic costs. However, the government have to tread carefully in the reform direction as it entails serious trade-offs between economic, social, and environmental effects. Policy makers have to consider among many other issues the national and local circumstances that will entail the countrys stage of economic progression, market and economic conditions, institutional framework and the state of public finances. Moreover there are basic principles that must be applied when designing subsidies and implementing changes to existing programmes.
These principles enumerates that subsidies should be well targeted in that they should go to those who are meant to benefit from them and should not clash with other instruments and goals. Secondly, the subsidies should be efficient in that it should not weaken the motivation for suppliers or consumers to provide or use the service efficiently lessening market distortion. Thirdly, the subsidies should be justified by a thorough analysis of all associated costs and benefits. Fourthly, the overall amount of the subsidy should be reasonable and the administration of the subsidy programme has to be at reasonable costs. In addition, the subsidy programme should be transparent allowing transparency of the information on amount spent and recipients. For better results, the subsidy should be limited in time to avoid consumers and producers to be overly dependent on this support making the costs to spiral out of control. Proper mechanisms should be put in place when undertaking a reform of any subsidy because even when analyses show that costs are more than benefits derived there will be hostility from its current beneficiaries of even rioting and demonstrating. The difficulty in clearly demonstrating the economic advantages of reforming a particular subsidy coupled with the desire of the beneficiaries to keep it at the current state due to the obvious benefits they enjoy complicates the process of reforming a subsidy.
Reforming energy subsidies particularly fossil fuel related requires a strong will to undertake hard decisions that have benefits to the society as a whole rather than for specific individuals. Moreover, to overcome resistance these approaches can be used. Firstly, the reform should be introduced and implanted gradually to lessen the financial pain of those who will lose. Secondly, the relevant authorities can initiate compensating measures if the energy subsidy lessens the purchasing power of a definite social group and if they find out that, the initiation of compensating measures is socially acceptable. Thirdly, clear information should be availed to the public on the overall benefits of any subsidy reform to the economy and the society to counter political inactiveness and resistance.
Largely, lending institutions, aid providers and international organizations play a vital part in assisting developing countries and transition economies in designing and implementing changes through the transfer of expertise and technical know how and by enforcing well thought conditions for lending and development support. However, the designing of changes should considerate social requirement of the residents.
Among the harmful subsidies that need to be reformed are those that are environmentally harmful. For instance, subsidies to coal extraction lead to overproduction and thus increasing the amount of green house gases emissions produced through fossil fuel burning and energy consumption. Moreover, energy subsidies inhibit changes in the industry such as the transition to renewable and low pollution energy sources. Furthermore, subsidies to fossil related fuels bring about high costs of environmental damages a drain from the countrys financial resources.
Although reforming destructive subsidies is difficult and requires a number of drivers and conditions, key lessons to bring about reform can be identified and applied differently depending on the case at hand. These lessons are need for quality information and transparency in any process, the reform package broadness, strong leadership and coalition and a well-managed process.
Implications of phasing out subsidies on global energy and climate trends The phasing out of energy subsidies can have both beneficial effects and harmful effects on the economy and the environment, which is a key player in the climatic changes in the world. This is because the existence of the energy subsidies affect the environment and economy by leading to the utilization of uneconomical levels of resources such as fuels causing unproductive levels of pollution, for example the emission of greenhouses gases. Removing energy subsidies will reduce primary energy consumption and increase the countries Gross Domestic Product through higher economic efficiency. Furthermore removing energy subsidies lowers CO2 emissions and yields domestic environmental benefits, including reduced local air pollution. Moreover, some estimates suggest that changing agricultural practices on 20 of the land could take care of 9 of country reduction commitments under the Kyoto Protocol on the reduction of emission of harmful gases to the environment. Moreover the OECD estimated that consumer subsidies removal in the 20 largest developing countries would reduce global GHG by 2 in 2020, rising to 10 in 2050. In addition, the degree of any negative effect, which promotes the removal of the energy subsidies, depends on factors such as the details of the subsidy and other policy measures and social-economic characteristics of the subsidized activity. The removal of energy subsidies liberates money for environmentally beneficial investments, which may also generate employment.
Furthermore the phasing out energy subsidies liberates industries from lock-in to certain technologies and thus opens up avenues for innovation. Similarly, energy subsidy removal will improve resource efficiency of generation and consumption of energy and therefore lessens environmental footprints and facilitates moving towards living within the limits of the planets resources and eco-systems. However to achieve this benefits in the economy and the environment both in the sort-run or in the long-run there must be the existence of proper policy filters and availability of environmentally friendly energy production and consumption technologies and better inputs for these technologies. On this note, gradual introduction of any energy subsidy removal should be undertaken to allow the development of and accessibility of alternatives as well as the socials responsive behaviour and concerns. Instances like the sudden removal of coal subsidy in the UK and the social hardships that ensued strengthen the idea of gradual introduction. The removal of subsidies on the coal industry will bring a reduction in carbon dioxide (CO2) emissions and also reduce acid gas emissions.
Eliminating subsidies that are economically costly as well as environmentally harmful is a win-win policy reform that will reduce over-consumption of energy and saving tax revenues, which can be directed to other development, projects and protect the environment. Moreover, the removal of energy subsidies will increase the cost of production and consequently increase what the consumers have to pay affecting their living standards negatively.
Given that most governments provide financial assistance to boost energy supply or reduce prices energy consumers in the fossil fuels or fossil fuel-based energy industry making them a powerful driver of increased greenhouse gas emissions a solution to this has to be sought. Moreover at a time when governments are trying desperately to reduce climate change, the reduction or complete phasing of fossil fuel subsidies which represent hundreds of billions of dollars worth of acceleration in the wrong direction of heightening climatic changes due to the emission of noxious and harmful green house gases will be a step in the right direction. Research and development and commercial deployment subsidies have well intended basis but are identified as technology transfer impendent. Therefore WTO rules for subsidies on research and developments are to require that such subsidies be consistent with cooperative research and that the recipients of subsidies allow for technology transfer.
Appendices
Part I General Provisions
Article 1 Definition of a Subsidy
1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if
(a)(1)there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as government), i.e. where
(i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees)
(ii) Government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits
(iii) a government provides goods or services other than general infrastructure, or purchases goods
(iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments
or
(a)(2)there is any form of income or price support in the sense of ArticleXVI of GATT1994
and
(b) a benefit is thereby conferred.
1.2 A subsidy as defined in paragraph1 shall be subject to the provisions of PartII or shall be subject to the provisions of PartIII orV only if such a subsidy is specific in accordance with the provisions of Article2.
Article 2 Specificity 2.1 In order to determine whether a subsidy, as defined in paragraph1 of Article 1, is specific to an enterprise or industry or group of enterprises or industries (referred to in this Agreement as certain enterprises) within the jurisdiction of the granting authority, the following principles shall apply
(a) Where the granting authority, or the legislation pursuant to which the granting authority operates, explicitly limits access to a subsidy to certain enterprises, such subsidy shall be specific.
(b) Where the granting authority, or the legislation pursuant to which the granting authority operates, establishes objective criteria or conditions governing the eligibility for, and the amount of, a subsidy, specificity shall not exist, if the eligibility is automatic and that such criteria and conditions are strictly adhered. The criteria or conditions must be clearly spelled out in law, regulation, or other official document, so as to be capable of verification.
(c) If, notwithstanding any appearance of nonspecificity resulting from the application of the principles laid down in subparagraphs (a) and (b), there are reasons to believe that the subsidy may in fact be specific, other factors may be considered. Such factors are use of a subsidy programme by a limited number of certain enterprises, predominant use by certain enterprises, the granting of disproportionately large amounts of subsidy to certain enterprises, and the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy. In applying this subparagraph, account shall be taken of the extent of diversification of economic activities within the jurisdiction of the granting authority, as well as of the length of time during which the subsidy programme has been in operation.
2.2 A subsidy, which is limited to certain enterprises located within a designated geographical region within the jurisdiction of the granting authority, shall be specific. It is understood that the setting or change of generally applicable tax rates by all levels of government entitled to do so shall not be deemed to be a specific subsidy for the purposes of this Agreement.
2.3 Any subsidy falling under the provisions of Article3 shall be deemed to be specific.
2.4 Any determination of specificity under the provisions of this Article shall be clearly substantiated on the basis of positive evidence.
Part II Prohibited Subsidies
Article 3 Prohibition
3.1 Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article1, should be prohibited
(a) subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance, including those illustrated in AnnexI
(b) subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.
3.2 A Member shall neither grant nor maintain subsidies referred to in paragraph1.
Article 4 Remedies
4.1 Whenever a Member has reason to believe that a prohibited subsidy is being granted or maintained by another Member, such Member may request consultations with such other Member.
4.2 A request for consultations under paragraph 1 shall include a statement of available evidence with regard to the existence and nature of the subsidy in question.
4.3 Upon request for consultations under paragraph1, the Member believed to be granting or maintaining the subsidy in question shall enter into such consultations as quickly as possible. The purpose of the consultations shall be to clarify the facts of the situation and to arrive at a mutually agreed solution.
4.4 If no mutually agreed solution has been reached within 30 daysof the request for consultations, any Member party to such consultations may refer the matter to the Dispute Settlement Body (DSB) for the immediate establishment of a panel, unless the DSB decides by consensus not to establish a panel.
4.5 Upon its establishment, the panel may request the assistance of the Permanent Group of Experts (referred to in this Agreement as the PGE) with regard to whether the measure in question is a prohibited subsidy. If so requested, the PGE shall immediately review the evidence with regard to the existence and nature of the measure in question and shall provide an opportunity for the Member applying or maintaining the measure to demonstrate that the measure in question is not a prohibited subsidy. The PGE shall report its conclusions to the panel within a time-limit determined by the panel. The PGEs conclusions on the issue of whether or not the measure in question is a prohibited subsidy shall be accepted by the panel without modification.
4.6 The panel shall submit its final report to the parties to the dispute. The report shall be circulated to all Members within 90days of the date of the composition and the establishment of the panels terms of reference.
4.7 If the measure in question is found to be a prohibited subsidy, the panel shall recommend that the subsidizing Member withdraw the subsidy without delay. In this regard, the panel shall specify in its recommendation the timeperiod within which the measure must be withdrawn.
4.8 Within 30 days of the issuance of the panels report to all Members, the report shall be adopted by the DSB unless one of the parties to the dispute formally notifies the DSB of its decision to appeal or the DSB decides by consensus not to adopt the report.
4.9 Where a panel report is appealed, the Appellate Body shall issue its decision within 30 days from the date when the party to the dispute formally notifies its intention to appeal. When the Appellate Body considers that it cannot provide its report within 30 days, it shall inform the DSB in writing of the reasons for the delay together with an estimate of the period within which it will submit its report. In no case shall the proceedings exceed 60 days. The appellate report shall be adopted by the DSB and unconditionally accepted by the parties to the dispute unless the DSB decides by consensus not to adopt the appellate report within 20 days following its issuance to the Members.
4.10 In the event the recommendation of the DSB is not followed within the timeperiod specified by the panel, which shall commence from the date of adoption of the panels report or the Appellate Bodys report, the DSB shall grant authorization to the complaining Member to take appropriate countermeasures, unless the DSB decides by consensus to reject the request.
4.11 In the event a party to the dispute requests arbitration under paragraph 6 of Article 22 of the Dispute Settlement Understanding (DSU), the arbitrator shall determine whether the countermeasures are appropriate.
4.12 For purposes of disputes conducted pursuant to this Article, except for timeperiods specifically prescribed in this Article, timeperiods applicable under the DSU for the conduct of such disputes shall be half the time prescribed therein.
Part III Actionable Subsidies
Article 5 Adverse Effects
No Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article1, adverse effects to the interests of other Members, i.e.
(a) injury to the domestic industry of another Member
(b) nullification or impairment of benefits accruing directly or indirectly to other Members under GATT1994 in particular the benefits of concessions bound under ArticleII of GATT1994
(c) serious prejudice to the interests of another Member.
This Article does not apply to subsidies maintained on agricultural products as provided in Article 13 of the Agreement on Agriculture.
Article 6 Serious Prejudice
6.1 Serious prejudice in the sense of paragraph (c) of Article5 shall be deemed to exist in the case of
(a) the total advalorem subsidizationof a product exceeding 5per cent
(b) subsidies to cover operating losses sustained by an industry
(c) subsidies to cover operating losses sustained by an enterprise, other than one-time measures which are non-recurrent and cannot be repeated for that enterprise and which are given merely to provide time for the development of long-term solutions and to avoid acute social problems
(d) direct forgiveness of debt, i.e. forgiveness of government-held debt, and grants to cover debt repayment.
6.2 Notwithstanding the provisions of paragraph1, serious prejudice shall not be found if the subsidizing Member demonstrates that the subsidy in question has not resulted in any of the effects enumerated in paragraph3.
6.3 Serious prejudice in the sense of paragraph(c) of Article5 may arise in any case where one or several of the following apply
(a) the effect of the subsidy is to displace or impede the imports of a like product of another Member into the market of the subsidizing Member
(b) the effect of the subsidy is to displace or impede the exports of a like product of another Member from a third country market
(c) the effect of the subsidy is a significant price undercutting by the subsidized product as compared with the price of a like product of another Member in the same market or significant price suppression, price depression or lost sales in the same market
(d) the effect of the subsidy is an increase in the world market share of the subsidizing Member in a particular subsidized primary product or commodity as compared to the average share it had during the previous period of three years and this increase follows a consistent trend over a period when subsidies have been granted.
6.4 For the purpose of paragraph 3(b), the displacement or impeding of exports shall include any case in which, subject to the provisions of paragraph7, it has been demonstrated that there has been a change in relative shares of the market to the disadvantage of the nonsubsidized like product (over an appropriately representative period sufficient to demonstrate clear trends in the development of the market for the product concerned, which, in normal circumstances, shall be at least one year). Change in relative shares of the market shall include any of the following situations (a)there is an increase in the market share of the subsidized product (b)the market share of the subsidized product remains constant in circumstances in which, in the absence of the subsidy, it would have declined (c)the market share of the subsidized product declines, but at a slower rate than would have been the case in the absence of the subsidy.
6.5 For the purpose of paragraph 3(c), price undercutting shall include any case in which such price undercutting has been demonstrated through a comparison of prices of the subsidized product with prices of a non-subsidized like product supplied to the same market. The comparison shall be made at the same level of trade and at comparable times, due account being taken of any other factor affecting price comparability. However, if such a direct comparison is not possible, the existence of price undercutting may be demonstrated on the basis of export unit values.
6.6 Each Member in the market of which serious prejudice is alleged to have arisen shall, subject to the provisions of paragraph3 of AnnexV, make available to the parties to a dispute arising under Article7, and to the panel established pursuant to paragraph4 of Article7, all relevant information that can be obtained as to the changes in market shares of the parties to the dispute as well as concerning prices of the products involved.
6.7 Displacement or impediment resulting in serious prejudice shall not arise under paragraph3 where any of the following circumstances existduring the relevant period
(a) prohibition or restriction on exports of the like product from the complaining Member or on imports from the complaining Member into the third country market concerned
(b) decision by an importing government operating a monopoly of trade or state trading in the product concerned to shift, for non-commercial reasons, imports from the complaining Member to another country or countries
(c) natural disasters, strikes, transport disruptions or other force majeure substantially affecting production, qualities, quantities or prices of the product available for export from the complaining Member
(d) existence of arrangements limiting exports from the complaining Member
(e) voluntary decrease in the availability for export of the product concerned from the complaining Member (including, interalia, a situation where firms in thecomplaining Member have been autonomously reallocating exports of this product to new markets)
(f) failure to conform to standards and other regulatory requirements in the importing country.
6.8 In the absence of circumstances referred to in paragraph7, the existence of serious prejudice should be determined on the basis of the information submitted to or obtained by the panel, including information submitted in accordance with the provisions of AnnexV.
6.9 This Article does not apply to subsidies maintained on agricultural products as provided in Article13 of the Agreement on Agriculture.
Article 7 Remedies
7.1 Except as provided in Article 13 of the Agreement on Agriculture, whenever a Member has reason to believe that any subsidy referred to in Article1, granted or maintained by another Member, results in injury to its domestic industry, nullification or impairment or serious prejudice, such Member may request consultations with such other Member.
7.2 A request for consultations under paragraph1 shall include a statement of available evidence with regard to (a) the existence and nature of the subsidy in question, and (b)the injury caused to the domestic industry, or the nullification or impairment, or serious prejudicecaused to the interests of the Member requesting consultations.
7.3 Upon request for consultations under paragraph1, the Member believed to be granting or maintaining the subsidy practice in question shall enter into such consultations as quickly as possible. The purpose of the consultations shall be to clarify the facts of the situation and to arrive at a mutually agreed solution.
7.4 If consultations do not result in a mutually agreed solution within 60 days, any Member party to such consultations may refer the matter to the DSB for the establishment of a panel, unless the DSB decides by consensus not to establish a panel. The composition of the panel and its terms of reference shall be established within 15 days from the date when it is established.
7.5 The panel shall review the matter and shall submit its final report to the parties to the dispute. The report shall be circulated to all Members within 120days of the date of the composition and establishment of the panels terms of reference.
7.6 Within 30 days of the issuance of the panels report to all Members, the report shall be adopted by the DSBunless one of the parties to the dispute formally notifies the DSB of its decision to appeal or the DSB decides by consensus not to adopt the report.
7.7 Where a panel report is appealed, the Appellate Body shall issue its decision within 60 days from the date when the party to the dispute formally notifies its intention to appeal. When the Appellate Body considers that it cannot provide its report within 60 days, it shall inform the DSB in writing of the reasons for the delay together with an estimate of the period within which it will submit its report. In no case shall the proceedings exceed 90 days. The appellate report shall be adopted by the DSB and unconditionally accepted by the parties to the dispute unless the DSB decides by consensus not to adopt the appellate report within 20 days following its issuance to the Members.
7.8 Where a panel report or an Appellate Body report is adopted in which it is determined that any subsidy has resulted in adverse effects to the interests of another Member within the meaning of Article 5, the Member granting or maintaining such subsidy shall take appropriate steps to remove the adverse effects or shall withdraw the subsidy.
7.9 In the event the Member has not taken appropriate steps to remove the adverse effects of the subsidy or withdraw the subsidy within six months from the date when the DSB adopts the panel report or the Appellate Body report, and in the absence of agreement on compensation, the DSB shall grant authorization to the complaining Member to take countermeasures, commensurate with the degree and nature of the adverse effects determined to exist, unless the DSB decides by consensus to reject the request.
7.10 In the event that a party to the dispute requests arbitration under paragraph 6 of Article 22 of the DSU, the arbitrator shall determine whether the countermeasures are commensurate with the degree and nature of the adverse effects determined to exist.
Part IV Non-Actionable Subsidies
Article 8 Identification of Non-Actionable Subsidies
8.1 The following subsidies shall be considered as non-actionable
(a) subsidies which are not specific within the meaning of Article2
(b) subsidies which are specific within the meaning of Article2 but which meet all of the conditions provided for in paragraphs2(a), 2(b) or 2(c) below.
8.2 Notwithstanding the provisions of Parts III and V, the following subsidies shall be non-actionable
(a)assistance for research activities conducted by firms or by higher education or research establishments on a contract basis with firms if the assistance covers not more than 75percent of the costs of industrial researchor 50 per cent of the costs of pre-competitive development activity and provided that such assistance is limited exclusively to
(i) costs of personnel (researchers, technicians and other supporting staff employed exclusively in the research activity)
(ii) costs of instruments, equipment, land and buildings used exclusively and permanently (except when disposed of on a commercial basis) for the research activity
(iii) costs of consultancy and equivalent services used exclusively for the research activity, including boughtin research, technical knowledge, patents, etc.
(iv) additional overhead costs incurred directly as a result of the research activity
(v) other running costs (such as those of materials, supplies and the like), incurred directly as a result of the research activity.
(b) assistance to disadvantaged regions within the territory of a Member given pursuant to a general framework of regional development and non-specific (within the meaning of Article2) within eligible regions provided that
(i) each disadvantaged region must be a clearly designated contiguous geographical area with a definable economic and administrative identity
(ii) the region is considered as disadvantaged on the basis of neutral and objective criteria, indicating that the regions difficulties arise out of more than temporary circumstances such criteria must be clearly spelled out in law, regulation, or other official document, so as to be capable of verification
(iii) the criteria shall include a measurement of economic development which shall be based on at least one of the following factors
- one of either income per capita or household income per capita, or GDP per capita, which must not be above 85 percent of the average for the territory concerned
- unemployment rate, which must be at least 110per cent of the average for the territory concerned
as measured over a three-year period such measurement, however, may be a composite one and may include other factors.
(c) assistance to promote adaptation of existing facilities to new environmental requirements imposed by law andor regulations which result in greater constraints and financial burden on firms, provided that the assistance
(i) is a one-time non-recurring measure and
(ii) is limited to 20 per cent of the cost of adaptation and
(iii) does not cover the cost of replacing and operating the assisted investment, which must be fully borne by firms and
(iv) is directly linked to and proportionate to a firms planned reduction of nuisances and pollution, and does not cover any manufacturing cost savings which may be achieved and
(v) is available to all firms which can adopt the new equipment andor production processes.
8.3 A subsidy programme for which the provisions of paragraph2 are invoked shall be notified in advance of its implementation to the Committee in accordance with the provisions of PartVII. Any such notification shall be sufficiently precise to enable other Members to evaluate the consistency of the programme with the conditions and criteria provided for in the relevant provisions of paragraph2. Members shall also provide the Committee with yearly updates of such notifications, in particular by supplying information on global expenditure for each programme, and on any modification of the programme. Other Members shall have the right to request information about individual cases of subsidization under a notified programme.
8.4 Upon request of a Member, the Secretariat shall review a notification made pursuant to paragraph3 and, where necessary, may require additional information from the subsidizing Member concerning the notified programme under review. The Secretariat shall report its findings to the Committee. The Committee shall, upon request, promptly review the findings of the Secretariat (or, if a review by the Secretariat has not been requested, the notification itself), with a view to determining whether the conditions and criteria laid down in paragraph2 have not been met. The procedure provided for in this paragraph shall be completed at the latest at the first regular meeting of the Committee following the notification of a subsidy programme, provided that at least two months have elapsed between such notification and the regular meeting of the Committee. The review procedure described in this paragraph shall also apply, upon request, to substantial modifications of a programme notified in the yearly updates referred to in paragraph3.
8.5 Upon the request of a Member, the determination by the Committee referred to in paragraph4, or a failure by the Committee to make such a determination, as well as the violation, in individual cases, of the conditions set out in a notified programme, shall be submitted to binding arbitration. The arbitration body shall present its conclusions to the Members within 120 days from the date when the matter was referred to the arbitration body. Except as otherwise provided in this paragraph, the DSU shall apply to arbitrations conducted under this paragraph.
Article 9 Consultations and Authorized Remedies 9.1 If, in the course of implementation of a programme referred to in paragraph2 of Article8, notwithstanding the fact that the programme is consistent with the criteria laid down in that paragraph, a Member has reasons to believe that this programme has resulted in serious adverse effects to the domestic industry of that Member, such as to cause damage which would be difficult to repair, such Member may request consultations with the Member granting or maintaining the subsidy.
9.2 Upon request for consultations under paragraph1, the Member granting or maintaining the subsidy programme in question shall enter into such consultations as quickly as possible. The purpose of the consultations shall be to clarify the facts of the situation and to arrive at a mutually acceptable solution.
9.3 If no mutually acceptable solution has been reached in consultations under paragraph2 within 60days of the request for such consultations, the requesting Member may refer the matter to the Committee.
9.4 Where a matter is referred to the Committee, the Committee shall immediately review the facts involved and the evidence of the effects referred to in paragraph1. If the Committee determines that such effects exist, it may recommend to the subsidizing Member to modify this programme in such a way as to remove these effects. The Committee shall present its conclusions within 120 days from the date when the matter is referred to it under paragraph3. In the event the recommendation is not followed within sixmonths, the Committee shall authorize the requesting Member to take appropriate countermeasures commensurate with the nature and degree of the effects determined to exist.
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