WTO Subsidies Law in a post-COP21 world:
to maintain the legal status quo or to strive for change?
Miguel L. Patrício
WTO Subsidies Law in a post-COP21 world:
to maintain the legal status quo or to strive for change?
Miguel L. Patrício
June 2016
Master’s thesis
Supervisor
Dr. Ingo Venzke
1 Abstract
WTO Law has gone past its most accentuated self-centred phase. However, despite this gradual (and ongoing) change of approach towards a more cosmopolitan reading of WTO law, the fact remains that the relationship between WTO law and other sources of Public International Law remains opaque, at best. In a context of growing climate change and expanding international environmental commitments, WTO law risks becoming a thorn to the enactment of a sound environmental public policy.
This contribution explores how the WTO discipline of subsidies addresses environmentally motivated public support measures, in the context of the commitments undertaken by WTO Members under the COP21’s Paris Agreement. It is my proposition that the WTO’s rigidness on environmental subsidies is perhaps more apparent than it really is. Accordingly, this exposition will delve into (i) the history, context and aims of the WTO’s Agreement on Subsidies and Countervailing Measures [SCM Agreement], and how those elements may guide an interpretative exercise of the SCM Agreement’s provisions; (ii) the current regime of the subsidies discipline on environmentally motivated subsidies; and (iii) the possible ways available to impact the SCM Agreement’s literal element seeming rigidness on environmental subsidies.
I. Introduction
The relationship between the WTO industrial subsidies discipline and international environmental law is a predicament for developed and developing countries alike, due to the seemingly rigid system modelled by the Agreement on Subsidies and Countervailing
Measures (SCM Agreement),1 which, on a superficial reading, does not seem to provide
any justification (namely on environmental grounds or compliance with international environmental law) when a subsidy is found to be in breach with its provisions.
This rigidness poses a significant challenge to developing countries, which, due to more modest means to cope with emissions reduction and climate adaptation, may require increased public support in order to attain national environmental targets. This is a subject
that has been bestowed with greater urgency in the aftermath of the Paris Agreement.2
1 ‘Agreement on Subsidies and Countervailing Measures’ (adopted 15 April 1994) 1867 UNTS 14 [herein
SCM Agreement].
2 UNFCCC, Paris Agreement (adopted 12 December 2015), FCCC/CP/2015/L.9/Rev.1, Annex. [herein Paris
2 Adopted within the framework of the 1992 United Nations Framework Convention on
Climate Change (UNFCC),3 the Paris Agreement, the outcome of the 21st Conference of
the Parties of the UNFCCC,4 has been heralded as a momentous step towards effective
action by states in respect of climate change and sustainable low carbon future development.
Signing is underway and recent news point towards a favourable outcome in what concerns its entry into force, which is contingent upon the ratification, acceptance, approval or accession by at least 55 parties accounting for at least 55% of the total greenhouse gas emissions – 177 participants have signed the Agreement on 22 April 2016 and it is possible that probable constraints to the ratification of the Agreement by some of the world’s largest emitters of greenhouse gases, such as United States, may be
overcome.5
In enhancing the implementation of the UNFCCC, the agreement provides that it aims to hold “the increase in the global average temperature” to values “well below 2 ºC above pre-industrial levels”, to increase “the ability to adapt to the adverse impacts of climate change and foster climatic resilience and low greenhouse gas emissions development” and to make “finance flows consistent with a pathway towards low greenhouse emissions
and climate-resilient development”.6
Such aims are to be attained through “nationally determined contributions” – in other words, each party sets its own targets, but these have to be progressively reviewed, giving place to continuously more ambitious targets, as laid down on Article 3 of the Paris Agreement.
Not surprisingly, this voluntarist approach has been met with substantial criticism, with critics arguing that it represents a step back in comparison with the model of the 1997
Kyoto Protocol.7 However, supporters to the Agreement argue that, what might seem as
a shortfall relative to the Kyoto Protocol is, in fact, a successful feature, and that many of
3 United Nations Framework Convention on Climate Change (adopted 9 May 1992, entered into force 21
March 1994) 1771 UNTS 107 [herein UNFCCC].
4 The 2015 United Nations Climate Change Conference [hereinafter COP 21], held in Paris, France, from
30 November to 12 December 2015.
5 See Daniel Bodansky, 'Legal Options For U.S. Acceptance Of A New Climate Change Agreement' (Center
for Climate and Energy Solutions 2016) <http://www.c2es.org/docUploads/legal-options-us-acceptance-new-climate-change-agreement.pdf> accessed 29 May 2016.
6 Supra, footnote 2, Article 2.
7 Conference of the Parties to the Framework Convention on Climate Change, Kyoto Protocol (adopted
3
Kyoto’s shortcomings are nonetheless addressed by the Paris Agreement.8 Without such
a voluntarist approach, they say, the Paris Agreement would simply not be, as this
approach was, in part, the price for co-opting developing countries.9
The reason for this is that, from the very own onset of the UNFCCC, international environmental law divided the world in two categories: developed countries (the UNFCCC’s “Annex 1 countries”) and developing countries (the UNFCCC’s “non-Annex 1 countries”). Subjacent to this bifurcation lied the understanding that developed countries would (and should) tackle emissions at a much quicker pace than developing countries and, for that reason, “common but differentiated responsibilities”, in tackling
global emissions and climate change, should arise.10 The Paris Agreement abandons this
hemispherical division of responsibilities between developed and developing countries at the cost of a compromise on the extent of its legal bindingness, which is, however, freely and individually set.
Thus, whereas the participation of developing countries in the Kyoto Protocol was limited to the selling of energy credits under the Clean Development Mechanism (one of the so-called “Flexible Mechanisms” part of the Kyoto Protocol, which allowed for developed countries to meet part of their emission reduction commitments in exchange for emission
reduction investments in developing countries),11 without any reduction targets for
developing countries, developing countries are now at the forefront of the Paris Agreement, alongside developed countries, all equally bound by their individual commitments and the global aims of the Paris Agreement.
It is therefore understandable that the tackling of climate change will be an operation where the involvement of developing countries will be significant. However, it is nonetheless true that developing countries face increased challenges in both addressing and adapting to climate change. Indeed, that understanding is what warrants the nuanced reading of the principle of ‘common but differentiated responsibility’, that provides for a
8 Jack Fitzpatrick, ‘Is Paris Climate Accord “Kyoto 2.0”?’ Morning Consult (Washington D.C., 21 April
2016) < https://morningconsult.com/2016/04/paris-climate-agreement-kyoto-2-0/> accessed 21 May 2016.
9 Ibid.
10 Paul G. Harris, ‘Common But Differentiated Responsibility: The Kyoto Protocol and United States
Policy’ (1999) 7 N.Y.U. Envtl 27, 28-30.
4 casuistic approach to the responsibilities of developing countries, in light of their own
national circumstances.12
This interpretation of the principle of common but differentiated responsibilities was one of the considerations behind the creation of the Green Climate Fund, a fund within the framework of the UNCCC (and the Paris Agreement) that aims to ‘attract new sources of private finance to catalyse investment in mitigation and adaptation projects in the developing world’, thus allowing for funds to be allocated from developed to developing
countries.13 Several developing countries lack the resources, the infrastructure, the
economies of scale and, some argue, political conditions (the discussion on whether environmental concerns trump the right to development is a political and moral
quagmire)14 to foster climate change combat and mitigation, and thus are dependent upon
foreign support and investment.
However, it is likely that the disbursement of the Green Climate Fund will only partially cover the drawbacks developing countries are faced with in their accomplishment of the commitments taken under the Paris Agreement. States will look for other ways of ameliorating the performance of their commitments – the subsidisation of ‘green goods’ (i.e. goods which, directly or indirectly, play a role in the tackling of climate change) and of the research and development of green technologies could be, in principle, examples of such methods. In doing so, it is possible that the adoption of suh public policies may lead to outcomes which, although coherent with the SCM Agreement, are incongruent with the commitments undertaken (by parties to the SCM Agreement) under the Paris Agreement.
It is my purpose with this paper to make an evaluative assessment of the current WTO subsidies discipline in what concerns its approach towards environmentally-centred subsidies, particularly when these are found to be prima facie in breach of the SCM Agreement, in which I will try to identify whether the subsidies disciplines appropriately balances the interests leading up to the SCM Agreement, an effort which, as was shown above, is made even more pressing in a world where countries (especially developing
12 See the third paragraph of the Paris Agreement preamble and the Decision’s Article 4, Section 19. 13 'Green Climate Fund: Bold Ideas' (Green Climate Fund, 2016)
<http://www.greenclimate.fund/ventures/funding#bold-ideas> accessed 29 May 2016.
14 On the possible balance between these two interests, see Thierry Ngosso, ‘The right to development of
5 countries) are expected to do more on the tackling of climate change and may face great challenges in doing so.
Accordingly, and in view of finding what is the current regime for environmentally-motivated subsidies within the WTO subsidies discipline, and if whether or not such regulation remains appropriate, I will first start by making an exposition on the history, context and aims of the SCM Agreement, which will provide us with tools to delve into its normative content and, hopefully, help us shed some light onto its possible justificatory mechanisms, if these do exist.
Secondly, we will turn to the relationship between the SCM Agreement and environmentally-motivated subsidies, engaging in a brief summary of the SCM Agreement’s operation and normative content before assessing how so-called ‘green subsidies’ are dealt with under the Agreement. Here, we will try to identify possible challenges posed by the current SCM Agreement’s normative content to the enactment of these subsidies, and we will consider the SCM Agreement’s axiology on green subsidies within the WTO system.
Finally, after assessing how the SCM Agreement deals with ‘green subsidies’, I will then argue that it is possible, and ultimately necessary, to interpret the SCM Agreement’s operation in a manner less rigid and more adaptable to current environmental concerns, especially by bearing in mind recent jurisprudential developments within the WTO that may offer a pathway towards a more inclusive and open approach by WTO law to public international law as a whole.
II. The SCM Agreement – History, Context and Aims A. GATT 1947
The SCM Agreement was by no means the first time the subject of subsidies was brought up on multilateral trade negotiations and regulated within the international trade law system. Indeed, coverage of the subsidies discipline can be first found within the original
GATT 1947.15 Three decades later, in 1980, the Tokyo Round’s Agreement on the
15 General Agreement on Tariffs and Trade (entered into force 1 January 1948) 55 UNTS 194 [hereinafter
6 Interpretation and Application of Articles VI, XVI and XXIII of the GATT entered into
force, paving the way towards a more thorough regulation of the discipline.16
While Article XVI deals with the general regulation of subsidies, Article VI deals with the imposition of antidumping and countervailing duties in response, and in order to compensate, for “any bounty or subsidy bestowed […] upon the manufacture, production or export of any merchandise”.
Article XVI laid down a restrictive framework for the conferral of subsidies. While an a
contrario interpretation of its provisions points towards the general admissibility of
subsidies, it is nonetheless held that not all subsidies are lawful under the GATT.
Accordingly, Paragraph 1 provides that, when granting a subsidy that affects import-export flows, the granting party shall notify the other contracting parties of the ‘extent and nature of the subsidisation” and “of the circumstances making the subsidization
necessary’.17 In addition, when there is ‘serious prejudice’, or a threat of it, to the interests
of other contracting parties, and when said ‘serious prejudice’ can be traced back to the subsidisation act, the granting party shall discuss, upon request and with other contracting
parties, the possibility of limiting the granting of subsidies.18
Paragraph 2 of Article XVI further postulates that subsidies on exports may cause “harmful effects for other contracting parties”, may “cause undue disturbance to their normal commercial interests”, and “may hinder the objectives of the GATT”, thus making clear that these subsidies on exports could very well be a cause of ‘serious prejudice’ as
per the previous paragraph.19
Finally, Paragraph 3 and 4 lay down the most striking restrictions to the granting of subsidies under the GATT. The former holds that, when granting a subsidy “which operates to increase the export of any primary product”, said subsidy cannot result in the granting party having more than an “equitable share of the world export trade” of the subsidised product, whereas the latter requires the contracting parties to cease “any form of subsidy on the export of any product other than a primary product” which results in the
16 Agreement on the Interpretation and Application of Articles VI, XVI and XXIII of the General
Agreement on Tariffs and Trade (entered into force 1 January 1980) BISD 26S/56 [hereinafter Subsidies Code].
17 Supra, footnote 15, Article XVI:1. 18 Ibid.
7 exportation of that product at a “price lower” than the relative price being charged for the
same product in the subsidising country’s market.20
Article VI, in its turn, provides a definition for “countervailing duty” (a “special duty levied” in order to compensate “any bounty or subsidy bestowed […] upon the manufacture, production or export of any merchandise”) and lays down the criteria for
the admissibility the levying of countervailing duties.21
Increased reliance on subsidisation by states, on both primary and non-primary products, during the period between the GATT [1947] and the Tokyo Round negotiations [1979] ultimately led to a reinvigorated discussion on the merits and regulation of
subsidisation.22 States, acceding to internal political and social pressures, initiated a
global subsidisation spree during this period, intent on supporting underperforming domestic industries and (often, either as a goal or as an inevitable consequence) promote exports which, ultimately, led to the disruption of the competitive reality, with several countries becoming producers and exporters of goods that would otherwise not be
produced nor exported were it not for the existence of trade-distorting subsidies.23
B. The 1979 Subsidies Code
The Tokyo Round’s 1979 Subsidies Code emerged as a response to these developments and worries. With it, the usage of export subsidies was further restricted, procedural rules on the investigations that may lead to the levying of countervailing duties were laid down in more detail and the criteria “to be examined in determining whether subsidized imports were a cause or threat of material injury” (i.e. “serious prejudice”) was more densely set,
with an illustrative index of export subsidies accompanying the Code as an annex.24
The Subsidies Code, just like the GATT provisions that it interprets, does not offer an outright, general ban on subsidies. In disciplining subsidies, the Subsidies Code maintains the GATT’s “two track approach”, discerning rules on the levying of countervailing
20 Ibid, Article XVI:3 and Article XVI:4, respectively. 21 Ibid, Article VI.
22 Terence P. Stewart, The GATT Uruguay Round, Volume I (Kluwer Law and Taxation Publishers 1993)
809 – 815; see also GATT Activities 1988 (GATT 1989) 47.
23 Ibid, 816.
24 Alan O. Sykes, 'The Economics Of WTO Rules On Subsidies And Countervailing Measures' The Chicago
Working Paper Series (2003) < http://www.law.uchicago.edu/files/files/186.aos_.subsidies.pdf > accessed 29 May 2016
8 duties, as a consequence (and a response to) of the granting of materially injuring
subsidies, from rules on the granting of subsidies.25
In what concerns the latter, and as a development of Article XVI GATT, the Subsidies Code recognises that there are legitimate uses for subsidies, such as the accomplishment of social and economic policy objectives – however, the pursuance of these objectives cannot rely upon the granting of subsidies susceptible of causing or threatening material
injury to any other contracting party (e.g. export subsidies).26 Cooperation remains the
cornerstone of the Subsidies Code, just as it was in the GATT articles it develops, with litigious subsidies being subject to consultation and, should that fail, conciliation, with any of the relevant parties being able to request the establishment of a dispute panel if a
disagreement remains in place after conciliatory attempts.27
The treatment of developing countries was also a major part of the discussions that led to the Subsidies Code and, indeed, the Subsidies Code laid down rules that, for the first time (in what concerned the granting of subsidies) “afforded special and differential treatment while still maintaining meaningful disciplines on the use of subsidies by developing
countries”.28 Out of this, the most significant example of special treatment involves the
discipline of export subsidies on industrial products by developing countries, to whom “the basic prohibition on export subsidies on nonprimary products” did not apply, under “the recognition that subsidies are an integral part of many [developing countries]
development programs”.29
Ultimately, the Subsidies Code fell short of its envisaged goals. The fact stands that “the problems of subsidisation were not resolved by the Subsidies Code, either because it lacked enough clarity to make its obligations operational, posing a challenge to its own effectiveness, or because the years that immediately followed it were marked by severe economic recessions, or, more likely, as a result of the cumulated effect of these
elements,”.30 Continued reliance on subsidisation and a muddy understanding of the
25 Supra, footnote 31, 817. 26 Subsidies Code, Article 11.
27 Ibid Code, Article 12, 13(3), Article 17, Article 17(3) and Article 18(1). 28 Supra, footnote 22, 821.
29 Richard Rivers and John Greenwald, 'Negotiation of a Code on Subsidies and Countervailing Measures:
Bridging Fundamental Policy Differences' (1979) 11 Law and Policy in International Business 1447, 1481.
9 Subsidies Code’s provisions led to an increased number of disputes that helped highlight
the inadequacy of the then-current solution for the discipline of subsidies.31
C. The 1994 SCM Agreement
Several debates on the future of the Subsidies Code, and the GATT discipline on subsidies as a whole, marked the 1980s. The 1982 Ministerial Meeting, the Launchpad for the Uruguay Round, put in motion a process which would culminate with the adoption of the SCM Agreement in 1994, which would be an integral part of the newly-created WTO and
would bind all of its Member States.32
The SCM Agreement arose out of the competing national interests and stances that marked these negotiations. If, on the one hand, countries such as the United States were “guided by an economic and political philosophy which presumes that subsidies distort resource allocations and international trade flows, undercut economic efficiency, and flout the law of comparative advantage”, it nonetheless cannot be said that such a rigid
understanding was commonplace amongst the negotiating parties.33
Most other participants in the negotiations held that “subsidies are legitimate instruments of social and economic policy”, with several developed countries underscoring that this is so for subsidies are a “necessary ‘safety net’ to ease industries and geographic regions
through periods of economic transition”.34 Developing countries, in their turn, placed
great stress in the legitimate usage of subsides not as a “safety net” but as “tools for
economic development”.35
Thus, the SCM Agreement, on its subsidies dimension, was purposed to correct many of the complaints addressed to the Subsidies Code (namely having to do with its uncertainty, ambiguity and seeming ineffectiveness), while maintaining a compromise that respected the negotiating parties’ background interests. This led to a vast array of definitions that were not present in the previous agreements (such as the very own definition of what
entails a subsidy)36, therefore tackling many of the critiques made to the Subsidies Code,
31 Ibid, 825.
32 M. J Trebilcock and R. Howse, The Regulation Of International Trade (3rd Edition, Routledge 2005),
266.
33 Supra footnote 22, citing Lorentzen, ‘Antidumping and Countervailing Duty Issues in the Uruguay Round
of Multilateral Trade Negotiations’ (1990) 2 The Commerce Department Speaks, 1990: The Legal Aspects of International Trade, 459, 468-71
34 Ibid. 35 Ibid.
10 as well as to a more transparent set of rules for the contracting parties to adhere to, with a categorical distinction of different types of subsidies being made (e.g. prohibited
subsidies vs actionable subsidies; actionable subsidies vs non-actionable subsidies)37 in
order to accommodate the contending national and regional interests behind the SCM Agreement.
In what especially concerns our analysis, it should be noted that this allocation of subsidies in distinct categories shall be read under the guiding light of the proposals presented at the negotiating tables, leading up to the SCM Agreement, which offer us great tools to determine what makes a specific set of subsidies more worrisome (and unwelcome) than another in other to justify its inclusion (or lack thereof) in the category of actionable subsidies but not in the non-actionable category. Out of these, five proposals in particular stand out.
In the first of these proposals, the United States submitted that “given the fungible nature of money, it [was] not that at all clear that any subsidies should be non-actionable”, having nonetheless held that, if there was such a category, then the providing of “basic human services”, for instance, and the research and development services, alongside di minimis subsidies could, under certain circumstances, potentially qualify for the non-actionable category.38
The Nordic countries (Finland, Iceland, Norway and Sweden), on the other hand, submitted a much tamer proposal, stating that “any subsidy whose direct practice was to create unfair competitive advantage for export prohibited should be prohibited” but that subsidies should be non-actionable when these are “[…]generally available” and, perhaps more importantly for what specifically concerns our analysis, when these are granted with certain purposes in mind, such as “research and development, aid to rationalization,
regional development aid, and environmental aid”.39 Australia’s proposal was submitted
on grounds similar to those of the Nordic countries, in regards to the [general] availability criteria being the draw line between actionable and non-actionable subsidies, but further added that an illustrative index of non-trade-distorting subsidies “should be explored”,
37 Supra, footnote 1, Article 3, Article 5-7 and Article 8-9, respectively.
38 Elements of the Framework for Negotiations, Submission by the United States (22 November 1989)
MTN.GNG/NG10/W/29 <https://www.wto.org/gatt_docs/English/SULPDF/92080203.pdf> accessed 29 May 2016.
39 Supra, footnote 22, 862, emphasis added, citing Elements of the Framework for Negotiations, Submission
by the Nordic Countries (27 November 1989) MTN.GNG/NG10/W/30 <https://www.wto.org/gatt_docs/English/SULPDF/92090009.pdf> accessed 29 May 2016.
11
similarly to what was already in vogue for export-contingent subsidies.40 Canada and
Switzerland’s proposals, although dating from before the Nordic countries’ suggestions, followed a much similar approach, submitting that generally available public support measures and, alongside other specifically mentioned subsidies, environmental “support
measures” should not be deemed as actionable subsidies.41
The European Community [EC], by their turn, stressed that the only basis for identifying a domestic subsidy as an actionable subsidy is that the subsidy causes, or threatens
causing, serious prejudice to the trade interests of another country.42 An a contrario
analysis of this statement suggests that the enactment of domestic subsidies is permitted, in whatever form, insofar as these do not cause prejudice to the interests of the other contracting parties. The leeway for the enactment of so-called “green subsidies” (i.e., environmentally focused subsidies), under this understanding, would thus be quite vast. Such a conclusion becomes more clear in light of the reference made to “environmental aid” in its proposal, where it is stated that, due to its diminutive (or even non-existent) effect on international trade and competition, environmental aid should not be considered
as an actionable governmental intervention.43
The EC’s understanding that environmental aid does not affect international trade and competition warrants some remarks. The EC does not seem to base its assumption that environmental aid has little to no effect on international trade (and/or competition) on the idea that environmental aid does not result in the disbursement of funds on a large enough scale to tip the international trade balance. Environmental aid usually involves large amounts of funds – indeed, the European Union alone, from 1992 to 2013 alone, disbursed €1.35 billion in intra-EU environmental aid, and aims to provide a further €3.4 billion in
funding for environmental projects within the European Union between 2014 and 2020.44
40 Ibid, 864-5, citing Elements of the Framework for Negotiations, Submission by Australia (30 November
1989) MTN.GNG/NG10/W/32 <https://www.wto.org/gatt_docs/English/SULPDF/92090016.pdf> accessed 29 May 2016.
41Ibid, 903, citing Elements of the Framework for Negotiations, Submission by Canada (28 June 1989)
MTN.GNG/NG10/W/25 <https://www.wto.org/gatt_docs/English/SULPDF/92070089.pdf> and Elements of the Framework for Negotiations, Communication by Switzerland (13 September 1989) MTN.GNG/NG10/W/26. <https://www.wto.org/gatt_docs/English/SULPDF/92080052.pdf >
42Elements of the Framework for Negotiations, Submission by the European Community (27 November
1989) MTN.GNG/NG10/W/31 https://www.wto.org/gatt_docs/English/SULPDF/92090006.pdf accessed 29 May 2016
43 Ibid, 8.
44 European Commission, ‘Environment – LIFE Programme’ (8 February 2016)
<http://ec.europa.eu/environment/life/funding/background/index.htm#liferegulation> accessed 29 May 2016.
12 Regardless of whether these projects have a greater or lesser susceptibility of affecting international trade dynamics, being, in principle, strictly domestic (i.e. European) subsidies, the fact stands that the magnitude of funds disbursed renders null the possibility of there not existing any effects being produced on international trade, even if indirectly. It is therefore possible to conclude that the EC might have understood environmental subsidies not to be actionable subsidies because environmental subsidies account for negative externalities that are, themselves, a cause of trade distortion. Environmental subsidies, in such case, would be a factor towards the approximation of international trade to the competitive reality, and not the other way around.
Finally,, India devoted much of its proposal to the challenges developing countries face, and how that should be accounted for when disciplining subsidies. Stressing that, as a general rule, “actionable subsidies should be defined as those which are non-distortive”, India further provided examples of non-distortive subsidies, with “generally available subsidies” and “basic infrastructure” subsidies serving as flagships of such subsidies, especially in developing countries, that need to “assist their entire territory by subsidies”.45
In all these proposals, it is possible to see that due credit was paid to the problematic linking environmental concerns with the discipline of subsidies. Two proposals, in specific, addressed the regulation of environmental subsidies (the Nordic countries’ and the EC’s) and the remaining proposals that equal the actionableness of a subsidy with its effect on international trade may benefit from the reasoning offered by the EC’s proposal, that seems to underscore the causal relationship between the non-actionable nature of environmental subsidies with their inherent trade distortion corrective effects. If a subsidy serves to address an existing distortion then such subsidy, because it was not a cause of trade distortion (but the exact opposite of that), shall not be deemed as an actionable subsidy.
Even hardliners on the discipline of subsidies, such as the United States, ultimately acquiesced, albeit only indirectly, that, if there is such thing as a non-actionable category of subsidies, within this category would lie the subsidies that have little to no distortive effect on international trade. When bringing forth di minimis subsidies as an example of
45 Supra, footnote 22, 865, citing Elements of the Framework for Negotiations, Submission by India (30
November 1989) MTN.GNG/NG10/W/33
13
non-actionable subsidies (as the United States did)46, one is, arguably, placing a key
importance on the causal link between subsidies and trade distortion, as di minis subsidies would qualify for another category of subsidies were it not for the fact they do not affect trade on a large enough scale. If that were the underlying notion behind the category of non-actionable subsidies (as several other parties directly alluded to), then it is possible to assume that, pooling the EC’s exposition on the matter, environmental subsidies, insofar they do not give rise to trade distortions but instead address them, would seemingly be non-actionable subsidies.
It is thus possible to conclude that, to a great extent, the identification of environmental subsidies as non-actionable subsidies was something quite prevalent in the proposals brought forward during the SCM Agreement’s early negotiations, and which ultimately
got ingrained into the final draft of the Agreement, even if subject to certain limitations.47
The SCM Agreement emerged as an agreement to tackle the problematic of extensive governmental subsidisation of industrial subsidies, purposed to address many of the complains direct to the preceding Subsidies Code, but it was not limited to that. Indeed, other concerns permeated the SCM Agreement, of which two of those were the equilibrium between socio-economic development (not only of developing but also of developed states, that very often stressed the non-actionableness of regional development aid schemes) and environmental sustainability with the curbing of subsidisation.
The fact that Article 8.2, which in its relevant part provided the most illustrative example of these concerns, has now succumbed to the expiration previsioned in Article 31 shall
not preclude any conclusion one might derive from our previous analysis.48 Indeed, the
concerns leading up to the SCM Agreement remain relevant and are part of its context and indicative of its object and purpose, thus serving as tools for interpreting the SCM Agreement as a whole, as per Article 31 of the Vienna Convention on the Law of Treaties.49
The understanding that the contracting parties’ concerns for a balanced relationship between environmental policy and the curbing of subsidisation have not ceased to exist
46 Supra, footnote 38, 9.
47 Supra, footnote 1, Article 8.2(c). 48 Ibid, Article 31.
49 ‘Vienna Convention on the Law of Treaties’ (Adopted 23 May 1969, entered into force 27 January 1980)
14 and that these shall not be disregarded when interpreting the SCM Agreement’s provisions is further strengthened by the various statements proffered at the Committee on Subsidies and Countervailing Measures’ special meeting held on 20 December 1999. The meeting was held in order to conclude “the review under Article 31 of Article 6.1, 8 and 9” of the SCM Agreement, that had been halted due to Chairman Söderberg’s proposal of extending the application of these articles until the fourth Ministerial
Conference (due to take place in November 2001).50
Even though the consensus needed to extend the provisions application was not reached,
such outcome was far from being without controversy.51 The representatives of several
countries were vocal in their support to the Chairman’s proposal of extending the application of the provisions referred to in Article 31 of the SCM Agreement, some basing their stance on the need for having these provisions (namely Article 8, dealing with the category of non-actionable subsidies), despite these never having been used up till then, others arguing that extending the application of the provisions would allow for identifying the effectiveness and merits of the mechanisms operating under each one of these articles, something that had not been made entirely clear during the 5 years preceding to the
meeting and that thus warranted an extension of the provisions.52
III. The SCM Agreement and Environmental Subsidies
As the SCM Agreement does not distinguish environmentally motivated subsidies from other kinds of subsidies, and for that reason general rules on subsidies will be applied to environmental subsidies, an analysis of how the SCM Agreement addresses environmental subsidies benefits from a prior overall assessment of how subsidies are, in general, regulated by the SCM Agreement.
Article 1 of the SCM Agreement ordains a two-step process in order to classify a certain
measure as a subsidy.53 Accordingly, a “subsidy shall be deemed to exist” if either “there
is a financial contribution by a government or any public body within the territory of a Member” (which will be the case where there is a “direct transfer of funds”, either
50 Committee on Subsidies and Countervailing Measures, ‘Minutes of the Special Meeting Held on 20
December 1999’ (17 February 2000) G/SCM/M/22, 1 <https://docsonline.wto.org/dol2fe/Pages/FormerScriptedSearch/directdoc.aspx?DDFDocuments/t/G/SC M/M22.doc> accessed 29 May 2016.
51 Ibid, 27.
52 Canada, Japan, Poland, Colombia, Bulgaria, Cyprus, Korea, Turkey, the Czech Republic, the European
Community, Switzerland, the United States and Slovenia; see Ibid.
15 effectively or potentially, or where the government assumes a liability; where “government revenue that is other due is foregone or not collected”; where a government purchases goods or services other than general infrastructure, or purchases goods; and where a “government makes payments to a funding mechanism” or “entrusts or directs a
private body to carry out” any of the foregoing tasks)54 or “there is any form of income
or price support” mechanism (within the meaning of Article XVI of the GATT)55 or,
alternatively, if there “any form of income or price support” measure, and if the recipient
is benefitted by the financial contribution or by the income or price support measure.56
The Appellate Body has engaged in a significant concretization of the meaning of the terms “financial contribution”, “income or price support” and “benefit” under Article 1
of the SCM Agreement.57 Whether a measure entails a financial contribution will depend
on its formulation and mechanisms, with a general rule of thumb not existing for the characterisation of a measure as a financial contribution but for the examples listen down in Article 1.1(a)(1), of which the Appellate Body has made extensive use and helped
interpret in ascertaining the true extent of each one of the subparagraphs.58 In interpreting
Article 1.1(a)(2), the Appellate Body has noted that the provision broadens the range of “government measures capable of providing subsidies”, which is thus not limited to the
aforementioned list of measures.59
The last final step in classifying a measure as a subsidy under Article 1 will depend on identifying whether a benefit has arisen from an earlier financial contribution, an identification to be made by recourse to the general benchmark previously recognised by the Appellate Body. Accordingly, in order to confer a “benefit”, a financial contribution must “[be provided] on terms that are more advantageous than those that would have been
available on the recipient”.60 The frame of reference for assessing whether the recipient
has had access to terms more advantageous shall be that of the market value, in other
54 Ibid, Article 1.1(a)(1), (i), (ii), (iii) and (iv). 55 Supra, footnote 15, Article XVI, para. 1. 56 Supra, footnote 1, Article 1.1(a)and (b).
57 See for more Peter van den Bossche, The Law And Policy Of The World Trade Organization (2nd edition,
Cambridge University Press 2008), 562–7.
58 Supra, footnote 32, 266-7.
59 Appellate Body Report, United States – Final Countervailing Duty Determination with Respect to
Certain Softwood Lumber from Canada WT/DS257/AB/R (adopted 17 February 2004), para. 52
60 Appellate Body Report, Canada – Measures Affecting the Export of Civilian Aircraft WT/DS70/AB/R
16
words, what the recipient would have access to “absent that contribution”.61 However,
this shall not be read as only allowing an assessment on whether a benefit has been conferred in comparison with current market practice. Indeed, the Appellate Body, reversing a previous ruling by a Panel, has held that the “benchmark [may be other] than private prices in the country of provision, when it has been established that [the] prices in question […] are distorted […]”, thus there being a circumstance when something other than market practice is relevant in assessing whether the conferral of a benefit has
occurred.62
Subsidies, as defined in paragraph 1 of Article 1 of the SCM Agreement, are divided in three distinct categories: prohibited subsidies, actionable subsidies and non-actionable subsidies. Prohibited subsidies are those subsidies that fall within the scope of Part II of the SCM Agreement. Thus, “subsidies contingent […] upon export performance” and “subsidies contingent upon the use of domestic over imported goods” are considered
prohibited subsidies, and Members “shall neither grant nor maintain” such subsidies.63
An illustrative index of such subsidies contingent upon export performance is available,
a legacy of the Subsidies Code.64 As the discipline of prohibited subsidies of Part II of
the SCM Agreement does not pose any particular challenges in respect of environmental subsidies, we will not be focusing our analysis on this category of subsidies.
Actionable subsidies are covered in Part III of the SCM Agreement. Subsidies not tagged as prohibited or non-actionable, and which as specific as per Article 2 of the SCM Agreement, fall within this category. Actionable subsidies may be contended should they cause “injury to the domestic industry of another Member”, nullify or impair “benefits accruing […] to other Members under GATT 1994”, namely the “benefits of concessions under Article II of GATT […]” (i.e., the GATT’s Schedule of Concessions
commitments)65 or cause “serious prejudice to the interests of another Member”, which
shall be read “in the same sense as it is used in Paragraph 1 of Article XVI of [the]
GATT”.66 A list of measures that bindingly cause serious prejudice within the meaning
of Article 5(c) is found on Article 6.1, insofar these measures also result in the effects
61 Ibid; see also Appellate Body Report, United States – Countervailing Measures Concerning Certain
Proucts from the European Communities (9 December 2002) WT/DS212/AB/R, para. 98.
62 Supra, footnote 59, paras. 119-120.
63 Supra, footnote 1, Article 3.1(a) and (b) and Article 3.2 64 Ibid, Annex I.
65 Supra, footnote 15, Article II.
17
listed down on Article 6.3 (as per an a contrario reading of Article 6.2)67. Other measures
which, despite not being any of those listed in the subparagraphs of Article 6.1, but nevertheless result in any of the effects indicated in Article 6.3, may circumstantially be
found to give rise to serious prejudice within the meaning of Article 5(c).68
Finally, the category of non-actionable subsidies is found on Article 8 of the SCM
Agreement, which, as noted before, lapsed in 1January 2000, pursuant to Article 31 of
the SCM Agreement.69 The lapsing of Article 8 represents one of the greatest challenges
posed to the granting of environmental subsidies within the context of the Paris Agreement. Article 8 provided that non-actionable subsidies were those subsidies that were not “specific within the meaning of Article 2 [of the SCM Agreement]” and those which, despite being specific within the meaning of the aforementioned article, fell within
the conditions provided in Article 8.2.70
Thus, in accordance with Article 8.2, subsidies which, even if specific, provided assistance for “research activities conducted by firms or by higher education or research establishments on a contract basis”, for “disadvantaged regions within the territory of a Member given pursuant to a general framework of regional development”, and as long as the subsidy is not specific within eligible regions and for promoting the “adaptation of existing facilities to new environmental requirements imposed by law and/or regulations which result in greater constraints and financial burden on firms” were to be deemed non-actionable, as long as the quantitative thresholds and material restrictions, laid down in
each one of the respective subparagraphs, were abided by.71
While the expiration of Article 8 greatly limits the leeway available for implementing environmental support measures, it is nonetheless true that, insofar these measures do not fall within neither the prohibited nor the actionable categories of subsidies, then these support schemes will be coherent with the obligations undertaken by the parties in the SCM Agreement and are therefore undoubtedly allowed. At glance, it would seem that only specific (within the meaning of Article 2) environmental subsidies, that could, in
67 Ibid, Article 6.1(a), (b) and (c), Article 6.2 and Article 6.3(a), (b), (c), (d). 68 Ibid.
69 Supra, 16.
70 Supra, footnote 1, Article 8.1(a) and Article 8.1(b).
18 theory, fall within Article 8.2(b) of the SCM Agreement, and thus would not be actionable, have been affected by the lapsing of Article 8.
Having exposed the general framework for the regulation of subsidies under the SCM Agreement, I will now turn to how environmental subsidies are specifically dealt with under the SCM Agreement, where I will argue that, in various ways, the current normative regime already allows for implementing certain types of environmental subsidies, even if, more generally, these are inherently in conflict with the SCM Agreement. The measures we will now consider are measures aimed towards the tackling of climate change and towards the mitigation of its effects, that is, measures aimed towards the attainment of the goals of the Paris Agreement. Bearing in mind the fundamental cause of global climate change – which is mostly owed to the expansion of Earth’s greenhouse effect, mainly derived from the human-caused emission of greenhouse gases (of which the production of energy out of fossil sources is, by a significant margin, the main
source)72 –, we will be specifically focusing on energy-related support measures, namely
those measures more commonly adopted to support the production of low-carbon energy (i.e. measures based on “tax incentives, minimum quantitative requirements and pricing
requirements”)73 but also measures adopted with the intent of fostering the development
and deployment of low-carbon technology.
A. Green fiscal policies and the ‘financial contribution’ criteria
As noted above, for there to be a subsidy under the SCM Agreement, a “financial
contribution” that confers a “benefit” needs to occur.74 The point of departure for an
analysis on whether a certain tax scheme is compatible with the SCM Agreement will thus involve an evaluation of whether the scheme at issue is a financial contribution or not, which will be contingent upon the possibility that that scheme results in a situation
where “government revenue that is otherwise due is foregone or not collected”.75 Thus, it
would seem that determining whether a certain fiscal regime entails a financial
72 Intergovernmental Panel on Climate Change Secretariat, Climate Change 2007: The
Physical Science Basis, Summary for Policymakers (IPCC WGI Fourth Assessment Report, 5 February 2007), 2 < http://www.ipcc.ch/pdf/assessment-report/ar4/wg1/ar4_wg1_full_report.pdf> accessed 29 May 2016.
73 L. Rubini, 'Ain't Wastin' Time No More: Subsidies for Renewable Energy, The SCM Agreement, Policy
Space, And Law Reform' (2012) 15 Journal of International Economic Law 522, 544.
74 Supra, 14-17.
19 contribution requires a “contrafactual analysis” that allows for ascertaining whether a
certain measures is a deviation “from the otherwise applicable benchmark norm”.76
Environmental tax schemes generally operate either by taxing “bad behaviour” or by
incentivizing “good behaviour”, if not both at the same time.77 An example of the former
would be a carbon tax, whereas the latter would be, for instance, a tax break for buying electric vehicles. Nonetheless, despite this generalisation, the concrete latitude available for policymakers when laying down tax schemes make it difficult to reach a general identification of the “applicable benchmark norm”.
It has been suggested that, in light of this difficulty, Article 1.1(a)(1)(ii)’s “benchmark
norm” shall be established by recourse to a teleological analysis of the relevant tax rules.78
In other words, in assessing whether a tax incentive (in whichever form) results in “government revenue that is otherwise due” not being collected, one should look to “the
structure of the domestic tax regime and its organizing principles”.79 From these two
elements one can derive the “benchmark norm” against which the measure at hand shall be compared with. Should that measure fully comply with that benchmark (i.e. the domestic tax regime’s structure and organizing principles), then there is no financial
contribution within the meaning of Article 1.1(a)(1).80
Therefore, a tax regime guided by the ‘polluter pays principle’ would render a tax break for low-carbon industries an admissible measure that does not entail a financial contribution under the SCM Agreement– and, perhaps more controversially, the same could be said about environmental technology R&D tax reliefs in a tax system that is guided by a nuanced reading of the ‘neutrality’ principle (in the sense that R&D businesses have special features, namely having to do with their increased risks and unassured viability, that make them different from other forms of business and, thus,
should be treated differently).81 In both scenarios, which are, ultimately, materially
similar, the fact that an entity is being lightly taxed in comparison with another will not
76 Supra, footnote 60, para. 533.
77 United Nations Environment Programme, Green Economy Fiscal Policy Briefing Paper (2013), 1
<http://www.greenfiscalpolicy.org/wp-content/uploads/2013/08/Briefing-paper-on-Fiscal-Policy.pdf> accessed 29 May 2016
78 Supra, footnote 73, 534.
79 Ibid, citing Appellate Body Report, US – Measures Affecting Trade in Large Civil Aircraft (Second
Complaint) WT/DS353/AB/R (adopted 23 March 2012), para. 815.
80 Ibid.
81 See OECD, Addressing the Tax Challenges of the Digital Economy (2014), 30 <
20 give rise to a financial contribution. A state bent on making use of a green fiscal policy should then account for this state of affairs and create a cogent taxation system followed by the levying of environmentally-positive taxes that are part of the system and not an exception to it.
B. Domestic environmental regulations and the ‘financial contribution’ criteria Quantitative and pricing requirements on the energy sector, enacted within the context of a state regulatory exercise, are popular regulatory mechanisms used by states to support
the renewable energy sector and can be found all throughout the world.82
An analysis of the negotiations of the SCM Agreement makes clear that, regardless of the goals behind the Agreement, all states shared the understanding that, in a way or another, the constraints posed by the SCM Agreement, albeit made necessary by the extensive reliance on trade-distorting subsidisation, should not give rise to an insurmountable
impairment to the exercise of regulatory powers.83 Naturally, this does not mean that all
regulatory activity is admissible under the SCM Agreement.
By putting in place quantitative and pricing requirements, states are weaving the relationship between demand and supply. A regulation which requires a certain energy supply mix (usually by involving a minimum mandatory quantity or ratio for energy obtained from green sources), or that creates a mandatory and purpose-made compensation scheme for the supply of electricity from certain sources, could, in theory, give rise to a financial contribution within the meaning given to such term under the SCM Agreement.
Firstly, it is possible to consider that, when laying down these requirements, what a government is ultimately doing is purchasing goods from the supplying entity itself or
‘entrusting’ or ‘directing’ a private body, that is bound by law, into doing so. 84 At this
point, a parallel discussion on the drawline between the buying of energy goods or services emerges (with the SCM Agreement only referring to the former), but it is nonetheless arguable that most quantitative and pricing requirements on energy relate to
energy goods and it is on those we will focus our analysis.85
82 Supra, footnote 73, 540. 83 Ibid.
84 Supra, footnote 1, Article 1.1(a)(1)(iii) and Article 1.1(a)(2).
85 See, on the duality between energy as a good or as a service, Simonetta Zarilli, ‘International Trade in
21 A purchase of goods within the meaning of Article 1.1(a)(1)(iii) occurs when “a ‘government’ or a ‘public body’ obtains possession […] over a good by making a
payment of some kind”.86 This would be the case when the government, or a public body,
is in charge of the distribution of energy within a certain market and is obliged to buy a certain amount of energy from a particular source due to quantitative requirements, or, quite simply, when the government or a public body buy a good while adhering to a certain pricing requirement. In such situations, a financial contribution would have taken place.
When the distribution of energy is assured by a private entity, the creation of quantitative and pricing requirements would give rise to a financial contribution, as per Article 1.1(a)(1)(iv), when that private entity is ‘entrusted’ or ‘directed’ by the government into purchasing energy from a particular source and when that purchasing conduct “would normally be vested in the government” and the practice does not differ from “practices normally followed by governments”. The Appellate Body has previously interpreted the meaning of these two conditions, stating that the former refers to “what would normally be considered part of governmental practice” whereas the latter to “within WTO Members
generally”.87 Thus, when the buying of energy is “normally part of [domestic]
governmental practice” and normally considered to be part of WTO Members practice, a financial contribution would have taken place, even if it had been materially performed by a private entity.
This approach, however, still leaves many doubts, namely related to the exact meaning of the adverb “normally” present in the provision. Rubini (in light of the Appellate Body’s
obiter dictum in US – Softwood Lumber)88 suggests that, considering the inherent
difficulty in giving a meaningful content to “normally”, one should make use of the notion of “any price support” in Article 1.1(a)(2) and thus overcome the hardship in characterising measures materially performed by private entities as financial
contributions.89 Yet, if the Appellate Body did, indeed, state that paragraph (2) of Article
Objectives and Development Priorities UNCTAD/DITC/TNCD/2003/3 23 <http://unctad.org/en/Docs/ditctncd20033_en.pdf> accessed 29 May 2016.
86 Panel Report, Canada – Measures Relating to the Feed-in Tariff Program (19 December 2012)
WT/DS412/R and WT/DS426/R, para. 7.231.
87 Appellate Body Report, United States – Definitive Anti-Dumping and Countervailing Duties on Certain
Products from China (11 March 2011) WT/DS379/AB/R, para. 297.
88 Supra, footnote 59. 89 Supra, footnote 73, 544.
22 1.1(a) broadened the set of measures susceptible of being considered subsidies beyond those listed in the subparagraphs of Article 1.1(a)(1), it did not say that the paragraph (2) of Article 1.1(a) overlapped with the measures of the subparagraphs of Article 1.1(a)(1), namely paragraph (iii). To broaden the range of measure tantamount to subsidies does not imply a reworking of already-covered measures, especially because the threshold of Article 1.1(a)(1)(iv) is uncertain. Thus, only if it was proven that the purchase of energy is “normally part of governmental practice” and does not differ from WTO Members general practice would the buying of energy by a private entity ‘directed’ or ‘entrusted’ by the government entail a financial contribution.
C. Environmental technology R&D, direct support measures and the ‘financial contribution’ criteria
Public R&D support may take many forms. Although a R&D-enhancing fiscal policy is less contentious and is, arguably, more easily adjusted to be compatible with the SCM
Agreement (as we have highlighted before)90, the fact stands that governments often
engage in more direct means of R&D support, disbursing grants, providing loans and, on the whole, making use of varied forms of direct transfer of funds, either potential or effective, or even providing collaterals for the financing of R&D projects.
The policy reasons that motivate states into directly supporting research and development projects are plentiful, but, on the whole, direct support measures are arguably more targeted, and thus potentially more effective, measures, that may ultimately help achieve environmental goals at a much quicker and economic (for the state) pace in comparison with more indirect means, such as a green fiscal policy, that tends towards a more universalistic approach and which may englobe entities without a significant environmental impact in comparison with others, but that, nevertheless, are all subjected
to the same (beneficial) tax regime.91
The direct nature of these measures, which are generally composed out of the disbursement of funds by the government or by public bodies (or private, but upon a ‘direction’ or ‘entrustment’ by the government, in which case these remarks would remain
relevant)92, give way to a substantially straightforward framing of these measures within
90 Supra, 18-19.
91 On the ‘directedness’ of a measure being an element of a sound environmental policy, see infra, 24. 92 Supra, footnote 1, Article 1.1(a)(1)(iv)
23 criteria found in Article 1.1(a)(1)(i) of the SCM Agreement. Thus, any environmental direct support measure, namely one that involves the disbursement of grants, loans or the assumption of liabilities, will likely give rise to a financial contribution.
D. Environmental subsidies and the ‘benefit’ requirement
As alluded to above, the mere existence of a financial contribution would not give rise to
a subsidy in the absence of the conferral of a benefit.93 Therefore, the identification of a
measure as a financial contribution would not automatically render it a subsidy. An answer on the existence of a benefit arising out of a certain measure would depend on the exact formulation of the measure and on the recipient’s conditions, as the conferral of a benefit to the recipient depends on the recipient’s circumstances relatively to the
circumstances found on the relevant benchmark (i.e. the ‘marketplace’).94
It has been noted that the benefit analysis to be undertaken under Article 1.1(b) is seemingly of a different nature from that of Article 14 of the SCM Agreement, in the sense that it operates “by reference to a positive alteration of the status quo” and is not
based on an exhaustive assessment on the extent and content of a presumable benefit.95
Thus, the mere compensation of a disadvantage dealt with by the recipient of the financial contribution will, “in all likelihood”, “result in a no-negative-effects determination”, that, by not consubstantiating a “positive alteration of the status quo” would thus not result in
a benefit being conferred.96 This is, defensibly, the general case for all environmentally
motivated (but insofar that is their real motivation and effect, and not a disguised distortion of trade) subsidies: early adopters of new technologies and new production methods often face increased costs which are a result of the novelty and the lack of economies of scale posed by the recent introduction of a new technology. When a government implements tax incentives on purchases of new electric cars, the recipients are not being made better off than buyers of already-established and cheaper internal combustion vehicles nor are the latter buyers being made worse than the buyers of electric cars. Identically, when suppliers of electricity are guaranteed a premium in their compensation formula, they are not being made better off than fossil energy suppliers,
93 Supra, 14-18. 94 Ibid.
95 Supra, footnote 73, 546, citing Alan O. Sykes, ‘The Questionable Case for Subsidies Regulation: A
Comparative Perspective’ (2010) 2 Journal of Legal Analysis 473, 502.
24 benefitting from larger economies of scale and, as is often the case, from cheaper inputs and investment costs.
E. Environmental subsidies and the ‘specificity’ requirement
The next step in our analysis, if the measures at hand were to be considered subsidies, would involve categorising each one of them as either a prohibited or an actionable subsidy (or, alternatively, as none of these). As prohibited subsidies are outside the scope of our analysis, we will now turn to the preceding step to consider a subsidy as an actionable subsidy – and that is the identification (or lack thereof) of the measure at hand as a specific subsidy, as laid down by Article 2 via Article 1.2 of the SCM Agreement. The situation has now been made evermore complex in light of the Paris Agreement’s own provisions, that recognise the importance of making use of “holistic and balanced
non-market approaches” in order to promote the achievement of global climate goals. 97
In response to a request by the FCCC’s Subsidiary Body for Scientific and Technological Advice for a technical paper non-market-based approaches, a document, accounting for the experiences and practices of FCCC’s parties, was issued identifying (and commending) several non-market approaches, which included “grants, loans and project financing initiatives [to] develop, promote [and] implement” clean energy projects, fiscal instruments (such as tax incentives), regulations (namely quantitative and pricing requirements) and also R&D funding support for carbon capturing technologies and research on “advanced nuclear fission […], solar, geothermal and […] hydrogen power
technologies”.98 The concrete nature of the measures being referred to in the Paris
Agreement seem to imply that the conferral of these subsidies will be specific to certain sectors and technologies (e.g. the ‘low-carbon sector’). Thus, legitimised and pressed by the obligations undertaken within the Paris Agreement, it is plausible that states will increasingly rely on these ‘non-market-based approaches’ to address the causes of climate change, despite the fact that these measures are probably “specific” under Article 2 of the SCM Agreement.
This is so as specificity, according to Article 2, may arise in various ways. The most straightforward of these ways occurs when the “granting authority, or the legislation
97 Supra, footnote 2, Article 6.8.
98 UNFCCC, Non-market-based-approaches technical paper (24 November 2014) FCCC/TP/2014/10,
25 pursuant to which [it] operates, explicitly limits access to a subsidy to certain enterprises”.
99 But specificity will also arise when access to a subsidy is not guided by “objective
criteria or conditions” (i.e. “criteria or conditions which are neutral, which do not favor certain enterprises over others, and which are economic in nature and horizontal in
application”)100 , in which case the subsidy will be deemed de jure specific, and when
access to a subsidy, despite appearing non-specific “from the application of the [aforementioned criteria and conditions]”, effectively transpires specificity due to the “use of a subsidy by a limited number of enterprises, predominant use by certain enterprises, the granting of disproportionately large amounts of subsidies to certain enterprises, and the manner in which discretion has been exercised […] in the decision to
grant a subsidy”, in which case the subsidy will be deemed as de facto specific.101
Some authors, namely Rubini, have noted the latent paradox in the relationship between these provisions and the enactment of environmentally motivated subsidies, in the sense that, good environmental policy, aware of the possible unwarranted trade distorting effect of its tools, and interested in achieving its goals with maximum effectiveness, would preferably be as “targeted as possible”, and the SCM Agreement’s legal provisions require otherwise, thus giving rise to a situation where “policy prescription and the legal
requirements are at variance with each other”. 102 This is, thus, one of the areas where a
conflict between the conduct prescribed by the Paris Agreement and that prescribed by the SCM Agreement is more evident.
F. Environmental subsidies and the finding of ‘adverse effects’
If a subsidy is specific under Article 2 of the SCM Agreement, and it is not a prohibited subsidy, only one step is missing for it to be considered an actionable subsidy – and that is the assessment of whether the subsidy causes adverse effects to the interests of other countries or not.
In terms of the compatibility between environmental policy and the SCM guidelines, this is where the effect of the lapsing of the category of non-actionable subsidies has been felt
99 Supra, footnote 1, Article 2.1(a) 100 Ibid, footnote 2 of the SCM Agreement
101 Ibid, Article 2.1(b) and Article 2.1(c), respectively. On de jure and de facto specificity, see WTO
Analytical Index: Subsidies and Countervailing Measures (WTO Publications 2016), Interpretation and Application of Article 2, Article 2.1(c): de facto specificity
<https://www.wto.org/english/res_e/booksp_e/analytic_index_e/subsidies_01_e.htm#article2B3>
