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Energy subsidies: The ball is now in the WTO’s court

An oil refinery is silhouetted against the setting sun in Kawasaki, near Tokyo, in 2012.

Toru Hanai/REUTERS

In calling last week for the reform of energy subsidies, the International Monetary Fund (IMF) has given the World Trade Organization (WTO) an opportunity for increased relevance in a world where the hottest trade issues are passing the WTO by, and instead being addressed in bilateral or regional trade talks.

A new IMF report estimated that subsidization of fossil fuels, to the tune of $1.9-trillion (U.S.) globally, results in an extra 4.5 billion tons of CO2 emissions from additional energy consumption. The IMF estimated that removing the subsidies would lead to a 13-per-cent reduction in total global carbon emissions, a very significant contribution to the mitigation of climate change, as well as to public health from the reduction of other pollutants. The IMF proposed domestic policy changes as the route to capturing these benefits, but acknowledged that the local politics of energy are often difficult.

Here is where multilateral leadership through the WTO can be a game-changer. The WTO already has a complex general legal framework that places disciplines on subsidies where they have adverse effects on global competition. But despite the obvious importance both to climate change and competitiveness issues, the WTO has largely avoided addressing the energy sector. (Indeed, energy is not even a trade topic listed on the WTO's website.)

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This needs to change. With the accessions of China, Russia, Saudi Arabia and other gulf states to the WTO, almost all the major players in world energy markets, whether consumers or producers, are WTO members. (Iran's application is in the works.)

A sectoral accord on agriculture is already one of the key WTO agreements; the time is right for a pact on energy.

Indeed, in many respects the approach to subsidies on agriculture could provide a useful model for the energy sector. WTO members could be required to notify the organization of their energy subsidies; then they would be obliged to reduce them by a minimum percentage over specific period of time.

Such an agreement would allow the conversion of subsidies on fossil fuels into cash transfers or vouchers to households, as is envisaged by the IMF in its proposals for domestic reform. And there could be a "green box" for clearly defined renewable energy subsidies, which would be exempted from commitments to reductions. A more complex issue would be how to treat subsidies aimed at making the production and consumption of fossil fuel energy sources "cleaner."

As Iranian trade expert Sadeq Bigdeli has pointed out, another relevant precedent for energy subsidies negotiations is the current talks on fisheries subsidies in the WTO. Here there is also the potential of a win-win for free trade and the environment.

As Kenya's Amina Mohammed, one of the candidates for the post of WTO Director General, has pointed out, the WTO needs to find new stakeholders to maintain its relevance. Instead of working to fend off charges by environmentalists that trade rules are an obstacle to needed climate policies such as border carbon adjustment, the WTO ought to enlist environmentalists as supporters of open multilateral trade and the WTO as an institution. Aggressively targeting fossil fuel subsidies would be a big step in that direction.

Robert Howse is a professor of international trade law at New York University.

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