1
SHELTERING GOVERNMENT SUPPORT TO ‘GREEN’ ELECTRICITY:
THE EUROPEAN UNION AND THE WORLD TRADE ORGANIZATION
Abstract
Since the Canada – Renewable Energy (2013) dispute at the World Trade Organization
(WTO), the WTO Agreement on Subsidies and Countervailing Measures (SCM) has
been the focal point of academic debate on the trade and environment interface, with a
growing consensus that WTO subsidy rules need to be revisited with a view to securing
‘policy space’ for government support to renewable energy. This article explores whether,
as suggested by some scholars, the European Union (EU)’s system of justifications for
renewable energy aid could serve as a source of inspiration for the WTO. While this
proposition may appear attractive at first sight, it is hardly conceivable, or even desirable,
that the EU’s approach to sheltering renewable energy government support could be
transposed to the WTO. This is because the two systems of subsidy control are
fundamentally different in both substantive and procedural terms and, importantly, these
differences reflect distinct objectives and political/institutional contexts. Nonetheless,
this comparative analysis is used to shed light on where the key challenges lay for the
WTO in ensuring mutual supportiveness between international trade rules and climate
change mitigation objectives. It is argued that the case for reviewing the SCM Agreement
cannot be made by simply forging parallels with the EU’s regulatory model, but needs to
be carefully construed on the basis of a proper understanding of whether and how green
policy space is actually constrained under the current WTO subsidy and trade remedy
rules. However, this requires better information on existing WTO members’ practice in
relation to renewable energy subsidies, as well as on their environmental effectiveness
and possible trade-distortive impact. In this sense, the most valuable lesson that the
WTO can draw from the EU’s regulatory experience is the imperative of improving the
transparency and knowledge-enhancing side of its subsidy control system.
I. INTRODUCTION
Following the World Trade Organization (WTO) Appellate Body report in the Canada –
Renewable Energy (2013) dispute,
1
the need for reforming the WTO Agreement on
Subsidies and Countervailing Measures (SCM) has been increasingly voiced in the
literature, in particular with a view to safeguarding ‘policy space’ for government support
to renewable energy (RE).
2
The essence of the call for reform is that the current SCM
1
WTO Appellate Body Report, Canada — Certain Measures affecting the Renewable Energy Generation
Sector/Measures relating to the Feed-in Tariff Program, WT/DS412/DS426/AB/R, adopted 24 May 2013
[Canada – Renewable Energy (2013)].
2
Pioneering this call for reform is: L. Rubini, ‘Ain’t Wastin Time No More: Subsidies for Renewable Energy,
the SCM Agreement, Policy Space and Law Reform’ (2012) 15(2) Journal of International Economic Law 525.
Subsequent contributions in this direction include: L. Casier and T. Moerenhout, ‘WTO Members, Not the
Appellate Body, Need to Clarify the Boundaries in Renewable Energy Support’ (International Institute for
Sustainable Development, July 2013),
https://www.iisd.org/pdf/2013/wto_members_renewable_energy_support.pdf; A. Cosbey and P.C.
Mavroidis, ‘A Turquoise Mess: Green Subsidies, Blue Industrial Policy and Renewable Energy – the Case
for Re-drafting the Subsidies Agreement of the WTO’ (2014) 17(1) Journal of International Economic Law 11;
P. D. Farah and E. Cima, ‘The World Trade Organization, Renewable Energy Subsidies, and the Case of
Feed-in Tariffs: Time for Reform Towards Sustainable Development’ (2015) 27 Georgetown International
Environmental Law Review 515; R. Howse, ‘Securing Policy Space for Clean Energy under the SCM
Agreement: Alternative Approaches’ (International Centre for Trade and Sustainable Development/World
Economic Forum, December 2013), http://e15initiative.org/publications/securing-policy-space-for-clean-
energy-under-the-scm-agreement-alternative-approaches/; S. Shadikhodjaev, ‘Renewable Energy and
2
disciplines, which were negotiated and designed in the late 1980s and early 1990s, are no
longer suitable in the face of the imperative of addressing climate change among other
global public goods. In the particular case of RE support measures, their legal status as
‘subsidies’ that can be challenged under the SCM Agreement is unclear, and this legal
uncertainty itself is claimed to be a constraint on policy space. Most fundamentally, it is
argued that the problem with the SCM Agreement is that there is no basis for
accommodating trade-distortive renewable energy subsidies: if these are contingent on
export performance or import-substitution (Article 3 SCM), or are otherwise shown to
cause ‘adverse effects’ (Article 5 SCM) to the import-competing or export-competing
interests of another member, there are WTO-illegal with no possibility of defence. This
is so irrespective of the rationale for subsidization: the text of the SCM Agreement is not
any more tolerant towards the trade-distortive effects of a subsidy that contributes to
mitigating climate change or any other legitimate policy objective. Against this growing
consensus on the need to review the SCM Agreement, some scholars have suggested
turning to the European Union (EU) as a possible source of inspiration, given it is the
only other polity that has a centralised system of subsidy control.
3
While this proposition may appear attractive at first sight, it necessitates closer
analysis and careful reflection. In this sense, the present article is a first attempt at
thoroughly exploring which lessons, if any, may the WTO draw from the EU in terms of
sheltering government support to the development and use of renewable energy, with a
particular focus on electricity produced from renewable energy sources (or ‘green’
electricity). In order to do so, it begins by examining the relationship between climate
change mitigation, renewable energy and government intervention so as to place the
comparative analysis into its broader legal and policy context. It will be shown that while
renewable energy has been widely recognized to play an important role in achieving the
internationally-agreed 2°C climate target, and the need for government intervention to
boost renewable energy generally accepted, a more controversial issue remains which
specific forms of public support are most appropriate or effective towards combating
climate change (Section 2). And yet, as will be seen, this question is particularly relevant
from a WTO law standpoint, as different support measures will fare differently when
examined under the microscope of the SCM Agreement. The article then proceeds with
an in-depth comparative analysis of the EU and WTO regulatory frameworks on
government support to green electricity. It will be shown that whilst the two systems
present some similarities in their approach to negative integration, they are fundamentally
different in important respects. Overall, EU substantive disciplines and control
mechanisms are comparatively much stronger, which is a direct reflection of the more
ambitious objectives of EU State aid law. This, in turn, goes a long way in explaining why
the EU’s regulatory model is also distinct for having progressively established a
sophisticated system of justifications for State aid to renewable energy, using a
combination of both hard-law and soft-law instruments (Section 3). However, it will be
Government Support: Time to Green the SCM Agreement?’ (2015) 14(3) World Trade Review 479. For a
more nuanced stance, see D. P. Steger, ‘Green Energy Programs and the WTO Agreement on Subsidies
and Countervailing Measures: A Good FIT?’ (2015) Ottawa Faculty of Law Working Paper 2015/20,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2591083.
3
This has been mainly advocated by Luca Rubini, but without in-depth elaboration: see Rubini (n 2), at
577, and L. Rubini, ‘Rethinking International Subsidies Disciplines: Rationale and Possible Avenues for
Reform’ (International Centre for Trade and Sustainable Development/World Economic Forum,
November 2015), at 4-5, http://e15initiative.org/publications/rethinking-international-subsidies-
disciplines-rationale-and-possible-avenues-for-reform/. See also, S. Z. Bigdeli, ‘Resurrecting the Dead? The
Expired Non-Actionable Subsidies and the Lingering Question of “Green Space”’ (2011) 8(2) Manchester
Journal of International Economic Law 2, at 10-23, drawing lessons from the EU’s regulatory approach for the
WTO but preceding Canada – Renewable Energy (2013).
3
argued that the EU’s experience in sheltering renewable energy aid cannot be easily
replicated at the WTO level for a variety of legal, political and institutional reasons
(Section 4).
Nonetheless, this comparative analysis is used to shed light on where the key
challenges lay for the WTO in ensuring mutual supportiveness between international
trade rules and climate change mitigation objectives. Arguably, the most pressing one is
to improve the transparency and knowledge-enhancing side of the WTO subsidy control
system, so that it is becomes clearer which green policy space is actually at stake. In other
words, what RE support measures are being implemented by WTO members and is
there a conceivable risk these are constrained under current WTO rules? In this regard, it
will be questioned whether what needs to be revisited is the SCM Agreement alone or
rather WTO trade remedy rules more generally (including the Anti-dumping Agreement),
on which the EU can hardly offer any guidance (Section 5).
II. CLIMATE CHANGE MITIGATION, RENEWABLE ENERGY AND
GOVERNMENT SUPPORT
A. International Framework and Practice
It is largely uncontested that climate change is possibly the greatest sustainable
development challenges presently facing the international community.
4
The 1992 United
Nations Framework Convention on Climate Change (UNFCCC), with its near-universal
membership, represents the global response to this challenge with the ultimate objective
of stabilising ‘greenhouse gas emissions concentrations in the atmosphere at a level that
would prevent dangerous anthropogenic interference with the climate system.’
5
To this
end, the main scientific authority for climate policymaking –the Intergovernmental Panel
on Climate Change (IPCC)– has estimated that global greenhouse gas (GHG) emissions
would need to be reduced to close to zero during the second half of this century in order
to achieve the global target of limiting average temperature increase to below 2°C from
pre-industrial times.
6
This commitment has been recently enshrined into the landmark
Paris Agreement, which entered into force on 4 November 2016, and whose overarching
goal of ‘holding the increase in the global average temperature to well below 2°C above
pre-industrial levels’
7
is to be implemented by all Parties through ‘nationally determined
contributions’.
8
Similarly, there is broad acceptance that replacing conventional ‘brown’
or ‘dirty’ energy (i.e. generated from fossil fuels such as coal, natural gas and oil) with
4
See, inter alia, United Nations Environment Programme/World Trade Organisation, Report on Trade and
Climate Change (2009) [UNEP/WTO Report 2009], at v.
5
United Nations Framework Convention on Climate Change, signed on 9 May 1992, 771 U.N.T.S. 107,
Art 2.
6
Intergovernmental Panel on Climate Change, ‘Summary for Policymakers’ in O. Edenhofer et al. (eds),
Climate Change 2014: Mitigation of Climate Change - Contribution of Working Group III to the Fifth Assessment Report
of the Intergovernmental Panel on Climate Change (Cambridge University Press, 2014) [IPCC Report 2014], at 12.
7
Paris Agreement, concluded 12 December 2015, Art 2(1)(a).
8
Ibid., Arts 3 and 4(2). Note that this was ground-breaking vis-à-vis the UNFCC division between ‘Annex
I Parties’ (43 in total, considered ‘developed countries’ with first- or second-period Kyoto GHG emission
reduction targets) and ‘non-Annex I Parties’ (the vast majority, considered ‘developing countries’ with no
GHG emission reduction targets), the latter group being greatly heterogeneous and including large
emerging economies with significant GHG emissions (such as Brazil, China, India and South Africa) and
rich fossil-fuel producing nations (such as Saudi Arabia, Qatar and United Arab Emirates). Scientific
estimates, however, have shown that it was not possible to achieve the 2°C climate target without
‘developing-country’ action: see further, K. Kulovesi, ‘Real or Imagined Controversies? A Climate Law
Perspective on the Growing Links Between the International Trade and Climate Change Regimes’ (2014)
6(1) Trade, Law and Development 54, at 64-65.
4
renewable ‘green’ or ‘clean’ energy (i.e. generated from naturally replenished resources
such as solar, wind, geothermal and hydropower) can play an important role in mitigating
climate change and achieving the internationally agreed 2°C climate target.
9
This is
because the energy sector is by far the largest source of greenhouse gas emissions, being
responsible for more than two-thirds of worldwide GHG emissions, with fossil fuels
being the source of about 80% of those emissions and in particular electricity produced
from fossil fuels accounting for 40% of them.
10
A much more complex question, however, is whether government support to
renewable energy is needed to ensure the transition to a low-carbon green economy.
According to economic theory, government intervention may be warranted whenever the
market fails to deliver desirable public goods or/and to tackle externalities. From this
angle, climate change is often posited as the ‘greatest and widest-ranging market failure
ever seen’ whose overall costs, if unaddressed, have been estimated as equivalent to
losing at least 5% (and as much as 20%) of the world’s gross domestic product ‘each
year, now and forever’.
11
Part of the problem is that market prices do not properly factor
the climate-related benefits (or positive externalities) of green energy, and as a result profit-
maximising private companies will typically under-produce or under-invest in renewable
energy and associated technologies due to private production/investment costs
exceeding private benefits.
12
This provides a persuasive justification for public support as
a means to incentivize and compensate renewable energy producers for their
contribution towards achieving a significant global public good –i.e. a stable climate.
13
In
addition, the case for government support is made stronger by the need for a rapid and
extensive dissemination of renewable energy, given the undisputed urgency of addressing
climate change and reducing global GHG emissions substantially (i.e. by 40-70% in 2050
compared to 2010 and close to zero in 2100 if the 2°C climate target is to be achieved).
14
The other part of the problem is that market prices also fail to capture the real
climate-related costs (or negative externalities) of conventional energy, making it relatively
cheap vis-à-vis renewable energy.
15
This market failure is further exacerbated by the fact
that the end-user price of conventional energy continues to be artificially lowered
through heavily subsidised fossil fuels. According to the latest data by the International
Energy Agency (IEA), worldwide fossil-fuel subsidies totalled $510 billion in 2014 –an
equivalent incentive of $115 per tonne of carbon dioxide emitted.
16
Correcting these
market distortions, however, is only a second-best reason for government intervention in
support of green energy.
17
From an economic efficiency standpoint, the first-best
government response to put renewable energy on an equal footing with competing and
underpriced conventional energy would be to internalise climate-related costs by
imposing a carbon tax at the socially optimum level, coupled with a (gradual) phasing-out
9
On this point, see Kulovesi (n 8), at 85-88.
10
International Energy Agency, Redrawing the Energy-Climate Map – World Energy Outlook Special Report (2013)
[IEA Report 2013], at 15; and Energy and Climate Change – World Energy Outlook Special Report (2015) [IEA
Report 2015], at 20.
11
N. Stern, The Economics of Climate Change: Stern Review (Cambridge University Press 2007), Executive
Summary, at i and iv, referred to in inter alia: Cosbey and Mavroidis (n 2), at 29 and Rubini (n 2), at 528.
12
Shadikhodjaev (n 2), at 484.
13
See inter alia, International Institute for Sustainable Development/United Nations Environment
Programme, Trade and Green Economy – A Handbook (2014) [IISD/UNEP Handbook 2014], at 94; S.
Charnovitz, ‘Green Subsidies and the WTO’ (2013) EUI Working Papers RSCAS 2014/93, at 1-3,
http://cadmus.eui.eu/bitstream/handle/1814/32791/RSCAS_2014_93.pdf?sequence=1.
14
IPPC Report 2014 (n 6), at 13.
15
Charnovitz (n 13), at 2; P. D. Farah and E. Cima, ‘WTO Law and Renewable Energy: Lessons from the
Case Law’ (2015) 49(6) Journal of World Trade 1103, at 1105.
16
IEA Report 2015 (n 10), at 90.
17
D. Rodrik, ‘Green Industrial Policy’ (2014) 30(3) Oxford Review of Economic Policy 469, at 470.
5
of distortive fossil-fuel subsidies.
18
Indeed, both measures have been singled out as an
essential component of the climate policy mix by the IPCC,
19
as well as by the IEA in its
recent ‘Bridge Scenario’ to secure the decarbonisation of the energy sector in order to
stay below the 2°C climate limit.
20
In this regard, Howse rightly notes that there is ‘a very
limited logic to giving policy space for clean-energy incentives or support to WTO
Members who undermine the sought-after environmental benefits by, at the same time,
continuing to subsidize dirty energy.’
21
And yet, this ideal approach of pricing carbon and
removing climate-harmful subsidies to conventional energy may be politically difficult to
implement and only gradually introduced in practice.
22
These political economy
considerations may further reinforce the case for (even imperfect) government
intervention to level the playing field, at least in favour of those climate-friendly
technologies that are not yet cost-competitive (absent that public support) with other
brown energy sources.
23
But even if ones accepts there is a reasonable theoretical justification for
government intervention to boost renewable energy at the general level, this still leaves
open the question of which specific support measures are most appropriate or effective
towards combating climate change. The UNFCC regime does not provide much
guidance on this question since, as most multilateral environmental agreements, it leaves
the issue of instrument choice to the Contracting Parties.
24
This decentralised approach is
sensible as there is no one-size-fits-all approach to climate change mitigation for over
190 States with highly divergent GHG emissions profiles and potentials for renewable
energy.
25
When looking at policy practice, the promotion of green electricity generation
(particularly using solar photovoltaic (PV) and wind technologies) continues to be the
focus of government stimulus,
26
with the single most common form of support being
feed-in tariff (FIT) schemes that offer long-term guaranteed prices for renewably
generated electricity fed into the grid. According to the global Renewable Energy Policy
Network (REN21), as of year-end 2015, 110 jurisdictions at the national or
state/provincial level had FIT programmes in place.
27
Significantly, this implies an
increase by 11 vis-à-vis 2013
28
when the Appellate Body’s ruling in Canada – Renewable
18
Bigdeli (n 3), at 28.
19
IPCC Report 2014 (n 6), at 28-29.
20
IEA Report 2015 (n 10), at 13 and 135; see also IEA Report 2013 (n 10), at 11.
21
Howse (n 2), at 1.
22
IEA Report 2013 (n 10), at 67-90; and IEA Report 2015 (n 10), at 91-93 for an overview of selected
national experiences with fossil-fuel subsidy reform.
23
See, for example, International Renewable Energy Agency, REmap 2030: A Renewable Energy Roadmap –
Summary of Findings (2014), at 11-12, aimed at achieving a RE share of at least 30% in the global energy mix
to secure the 2°C climate target and whose implementation assumes worldwide RE subsidies to rise to
$315 billion in 2030; see also, International Energy Agency, World Energy Outlook – A Renewable Energy
Outlook (2012) [IEA Report 2012], at 234-235, estimating total renewable energy subsidies to reach almost
$240 billion per year by 2035 in its ‘New Policies Scenario’, with solar PV and offshore wind technologies
requiring public support worldwide (outside of limited niche applications) through 2035; and IEA Report
2015 (n 10), at 21.
24
See, for example, Art 2.1(a) (iv) of the Kyoto Protocol to the United Nations Framework Convention on
Climate Change, signed on 11 December 1997, 2303 UNTS 148, which generally recognizes that GHG
emission reductions may be achieved through the “promotion, development and use of new and renewable
forms of energy” but leaves Parties ample scope to decide which RE promotion measures to implement.
25
Kulovesi (n 8), at 69.
26
REN21, Renewables 2016 – Global Status Report (2016) [REN21 Report 2016], at 8; see also IEA Report
2012 (n 23), at 234, estimating that renewable energy subsidies stood at $88 billion in 2011, with $66 billion
going to electricity and solar PV receiving more than any other technology for green electricity generation
($25 billion), followed by wind ($21 billion) and bioenergy ($15 billion).
27
REN21 Report 2016 (n 26), at 8.
28
REN21, Renewables 2013 – Global Status Report (2013) [REN21 Report 2013], at 68.