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  • Simran Lunagariya and Niveditha R

Solving the Fossil Fuel Subsidy Reform Puzzle Through the ASCM

Introduction

Subsidies are intended to safeguard consumer interests by ensuring low prices. However, they have substantial fiscal costs that lead to higher taxes or debt; encourage inefficient allocation of the nation’s resources that may hinder development, and condone pollution by contributing to climate change. Most importantly, they are not focused on the poor. In particular, fossil fuel subsidies (“FFS”) immensely contribute to global greenhouse-gas emissions. These subsidies compromise global efforts to mitigate climate change; exacerbate pollution; drain the nation’s budget; cause market distortions, and increase the cost of public health. Moreover, they also have distorting impacts on trade by causing a displacement of the competitor’s imports, reduce the market share of the competitors, as well as impact the development of clean energy alternatives. Eliminating subsidies can thus advance sustainable and equitable progress. However, the World Trade Organization (“WTO”) rules pose a complication for members to challenge FFS. The purpose of this blog is to analyze the trade impacts of fossil fuel subsidies by way of a case study and to highlight the legal and evidentiary challenges posed by the Agreement on Subsidizing and Countervailing Measures (“ASCM”). The blog also attempts to shed light on the global efforts to reform FFS, in addition to suggesting recommendations for such reform.


WTO Rules

Like other subsidies, FFS are covered under the ambit of the ASCM along with the relevant provisions of the General Agreement on Tariffs and Trade, 1994 (“GATT”) and Agreement on Trade-Related Investment Measures (“TRIMs”). While GATT provisions apply to such subsidies that amount to a quantitative export restriction, the ASCM elaborates upon Articles VI and XVI of GATT that deal with anti-dumping & countervailing duties and subsidies.


FFS have remained unchallenged under the WTO rules largely because of the legal and evidentiary difficulties posed by the ASCM. Under the WTO dispute settlement system, a subsidy is defined under Article 1 of the ASCM. A subsidy under Article 1 is a ‘financial contribution’ by a government or a public body within the territory of a member or is a form of income or price support as given under Article XVI of GATT 1994 that confers a benefit on the recipient. Such a financial contribution under the ASCM may take the form of the following:

  1. A government practice that involves a potential/direct transfer of funds;

  2. Government revenue that is otherwise due is foregone;

  3. Provision of goods or services other than general infrastructure or purchase of goods by government, or

  4. Government making payments to a funding mechanism, or entrusting or directing a private body to carry out the above functions.


This being said, the WTO rules are applicable only if the measures are either prohibited or actionable subsidies. Pursuant to Article 3 of the ASCM, prohibited subsidies are those that are contingent upon export performance. According to Articles 2.3, 5 and 6 of the ASCM, subsidies that are specific and create adverse effects are considered actionable subsidies. Furthermore, given the intensive nature of FFS, details pertaining to the subsidy has to be notified to other WTO members under Article 25 of the ASCM. It is also to be observed that subsidies may be granted at different stages namely, production, consumption and general services.


Thus, on the face of it, the WTO legislation provides a clear demarcation regarding the elements of a subsidy. However, as stated previously, challenging a FFS under the ASCM is legally and politically intricate and the same can be understood through a case study.


Adani’s Case

The recent sparks about Adani’s Carmichael project in Australia are a classic example of how FFS impacts trade. Carmichael is a thermal coal mine under development in Central Queensland’s Galilee Basin that has been sanctioned by both the Queensland and Federal governments. The project has been very contentious, with disagreements regarding its purported economic advantages, financial feasibility and environmental impact. Given that the Carmichael project’s declared purpose is to export coal to India and other Asian nations, the subsidies will undoubtedly impact the worldwide coal market. The subsidy seems to prioritise exports, indicated by the fact that royalties are computed depending on the export price. Additionally, the Adani Royalties Deferral Agreement may be characterised as a direct transfer of cash in form of a loan since it requires Adani to repay and charges interest. The reduced interest rate offered to Adani (at the state bond rate), while seen against the commercial rates might also result in a loss of government income. Furthermore, the railroad provided by the government for transport of coal also falls under the ASCM category of the supply of goods or services. Also, as the Royalties Deferral Agreement only applies to Adani, it might be claimed that the subsidy is only accessible to particular firms and not to other sectors in the area. In other words, pursuant to Article 2.1 of the ASCM, this subsidy is likely to be labelled “specific.” Lastly, the subsidy causes adverse effects since the mine’s Australian exports to India are likely to replace other members’ exports, particularly Indonesia’s. Thus, without a doubt, the loan provided to Adani may be deemed to be a subsidy under Article 1 of the ASCM. However, challenging the said subsidy under WTO rules proves to be a mammoth task, and a few challenges posed by the ASCM are discussed in the following section.


Challenges posed by the ASCM

Challenging FFS under the ASCM poses a high evidentiary burden on the claimant. The first and foremost challenge revolves around the establishment of the grant or loan or any other form as a ‘Subsidy’ under the ASCM, wherein, the elements of financial contribution and benefits have to be proved. The second challenge, especially in cases of actionable subsidies, revolves around the demonstration of the ‘specificity’ of a particular subsidy. This is a challenge for subsidies that are granted at the consumption stage, as such subsidy caters to a large number of recipients. Lastly, the most difficult challenge is to illustrate the adverse effects caused by the alleged subsidy.


Additionally, as stated previously, the trade effects of FFS are difficult to be captured in the ASCM. FFS have an immense effect on renewable energy products. These effects can negatively impact competitiveness and slow the innovation of alternatives to fossil fuels. Given that FFS and its alternatives are not ‘like products’ wherein they do not compete in the same market, the said trade effects are not taken into consideration. Even if we accept the doubtful premise that trade effects of FFS are covered under the ASCM, challenges would still remain as the subsidizing member rarely meets the requirements like notifying the measure, or other mandates that are expensive and time-consuming. It is pertinent to note that the ASCM does not focus on the environmental and societal impacts of the subsidies. Even from an economic perspective, it fails to account for the social and environmental elements that may cause market distortion. These challenges along with the strategic and political factors involved, make it difficult for FFS to be challenged.



Recommendations

The fight to end FFS started over a decade ago. Despite the global commitments to rationalize and phase out the use of FFS in COP26, G7 and the G20 summits, elimination of FFS seems to be a far-fetched aim. For FFS reform to be an attainable reality, certain elements must be included in the plan such as a comprehensive strategy with long-term goals; transparent communication with governments regarding the size and impact of subsidies; gradual price increases, and automatic pricing mechanisms. Added to this, WTO members should also be more transparent about FFS and meet the requirements like providing a notification, advocating peer reviews and SDG reporting. Further, they should challenge the FFS under the WTO rules; encourage an informal dialogue at the Ministerial Conferences, and conduct an in-depth analysis of trade effects including the environmental and societal impacts. Such analysis should primarily include an assessment of the legality of the subsidy and the likelihood of it being an export contingent subsidy. Ideally, emphasis should be laid on conducting practical research on the trade-offs between economic and sustainable development.


Conclusion

Given that the Adani Carmichael Coal Mine problem arose over a decade ago, it is astonishing that the subsidy is yet to be challenged under the ASCM. This emphasises the ASCM’s evidential and legal burden. Despite the project’s disastrous trade consequences, it is impossible to contest the subsidies under WTO standards as external environmental and social repercussions are not taken into consideration in the ASCM. Also, pursuant to Articles 2 and 5 of the ASCM, the aforementioned subsidy, in addition to being specific, should also have adverse effects on the interests of other members. The Australian and Indian governments’ subsidies, although large, are difficult to challenge since trade consequences are not real-time, as per this requirement. Although the real-time requirement can be solved as the ASCM addresses ‘threat to serious prejudice’ as an adverse effect, establishing the ‘likeness’ of renewable energy and fossil fuel goods remains an uncharted area. As a result, an in-depth investigation of the ASCM is necessary to solve the conundrum surrounding FFS reform. The authors assert that eliminating FFS would aid in addressing energy security issues connected with fluctuating fossil fuel sources.


Since September 2021, the import of coal from the Carmichael Coal Mine has increased significantly. India and Australia have joined the Glasgow Treaty on Renewable Energy in order to achieve zero carbon emissions by 2025, yet, they are aggressively encouraging coal trade across their borders. Hence, a robust framework to avoid the horrors of FFS is required under the ASCM.

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