Turkish Law Blog

The Legality of Subsidies in the field of Energy with regard to International Trade and Investment Law Part 1: An Overview

Selin Bräuning Selin Bräuning/ Friedrich-Schiller-Universität Jena
21 January, 2019
1422

Starting Point: Subsidizing versus Free Trade

 

From Paris Agreement to One Planet Summit all considerations are on how to assess the sustainability. Hereby is the green energy and therefore the renewable energy investments are crucial for the developing countries. However, the problem is how to accomplish it. Considering the dependence of developing economies on foreign direct investment on one hand and the state support need of energy providers on the other, it is not that easy at all. Developing states do necessitate to promote the renewable energy industry, regarding the fact that the renewable energy industry, unlike in the developed countries, is not ready to survive on its own yet and this takes place mostly by two ways: (i)Subsidizing and (ii) Receiving Foreign Direct Investment in the area of renewables. Nonetheless, these two vehicles present conflicting interests from time to time, when they are attempted to be applied at the same time. This can also be seen as the following: Subsidizing may bring protectionism together, whereas foreign investment goes hand in hand with the degree of mercantilism and free trade.

Governments intervene in the economy to achieve their economic and social objectives. In this regard subsidies[1] are to be seen as one of the most significant tools of governments to influence the economy according to these objectives. On one hand, subsidies assist the governments to obtain their purposes, but on the other hand, they can have a negative impact on compliance with international trade and investment law. As the energy sector plays a key role in developing countries, the management of the energy sector and hence government policy in the energy sector has become very substantial. And these energy policies are to be arranged mainly depending on the energy development of each country, including energy production, distribution and consumption. Thereby, as mentioned in the previous sentences, subsidies are one of the most fundamental instruments for regulators to implement their energy development policy.

 

Energy and Its Subsidies

The energy sector consists of all the activities of the industries involved in the production, sale,  refining and distribution of energy. The energy industry contains in particular the oil industry, the gas industry, the electricity industry, the coal industry, the nuclear energy industry and the renewable energy industry. This diversity of activities and industries included in the energy sector induces different types of energy subsidies. The categorization of energy subsidies is based on the particular structure of public support, the range of support they provide, and the type of industry (fossil fuel subsidies[2] and renewable energy subsidies[3]) that they provide affect.

 

Ecological Concerns and the Legal Boundaries

From an ecological point of view, which has been receiving more and more global support lately, the latter classification is of particular importance. Due to the global tendency to reduce greenhouse gas emissions to mitigate climate change, reducing and eliminating fossil fuel subsidies and increasing and supporting renewable energy subsidies is of great importance. [4]

But from a legal perspective, although renewable energy subsidies barely account for one-sixth of fossil fuel subsidies[5], they have recently been questioned[6] at the WTO more than fossil fuel subsidies, which is unlikely to change in the near future. The reason for this is that, firstly the inconsistency of double pricing (mostly used fossil fuel subsidies) is not easy to prove and that it has not received much attention so far. Secondly, the requirements in government programs (mostly feed-in tariffs), which require compliance with domestic values make it easy to challenge the legitimacy of renewable energy subsidies.

At first glance, it seems that the legitimacy of subsidies in the energy sector depends on the question of whether it is a fossil fuel subsidy or a renewable energy subsidy. However, it does indeed depend on the structure and requirements of government support to decide if a subsidy is discriminatory, violates the law and therefore is illegal. In this sense, a fossil fuel subsidy could be completely legal under certain circumstances, whereas a FIT renewable energy program could be absolutely illegal.

 

The Legal Framework of WTO and the Questions to be raised

From the international trade aspect under WTO law, subsidies[7] are first to be examined according to the WTO Subsidies Convention (SCM Agreement). The SCM Agreement[8]  regulates the use of subsidies and the countermeasures of countries, which can secure them against the effects of subsidies provided by other countries. To define a measure, program or incentive as a subsidy in the sense of SCM Agreement, it must entail a financial contribution from a government or from a public body, which brings a benefit to the recipient. Afterwards if it is to recognize that there exists a subsidy under the definition given by the SCM Agreement, it is secondly to determine under which group of subsidies fall the subsidy in question. In this sense the agreement divides subsidies into two groups: Subsidies are prohibited (prohibited subsidies) under the SCM Agreement if they are based on export performance or if they depend on the use of domestic products. Even if they are not prohibited, subsidies can still be actionable (actionable subsidies) if they fulfill the requirement of "specificity" and adversely affect the interests of the Member States. [9]

In addition, if the subsidy concerned depends on the use of domestic values, it may infringe the Article III: 4 of GATT on national treatment[10]. Furthermore, the application of these kind of energy subsidies may also be regarded as a violation of Article II of TRIMS[11], as TRIMS considers violation of national treatment and prohibition of quantitative restrictions as a local content requirement, which also presents according to TRIMS Agreement a prohibited investment measure.

 

Impacts on the International Investment Law

From an international investment law perspective, energy subsidies, which demand the use of domestic values or which favor domestic investors or domestic investment may result in as a violation of the national treatment clause[12] under the BITs. The national treatment clause could be then contravened, if the government act in question deals with "similar investments" and if there is no legal ground for the discriminatory act. Moreover, the intention of the government in the background plays no role in this sense by determining whether the government’s act in question violates the national treatment clause.

Apart from this, if the requirements for the achievement of an energy subsidy also include  a performance claim with a local content, the subsidy may violate the fair and equitable treatment clause (FET clause)[13]. Because the ambiguity and the broad understanding of the FET clauses may lead to the conclusion that such performance requirements are to be defined as unfair treatment, and thus these may be declared as contrary to the fair and equitable treatment clause.  ***In order to assess the legitimacy of energy subsidies under international trade and investment law, it is therefore of great importance to understand what makes a subsidy discriminatory and how it might be justified. This first article, as part one, provides a general introduction to the topic, which will continue to be examined in details in the following articles. 

 

Sources:

[1] FIESP, The Regulation of the International Energy Trade: Fuels and Electricity (2013), p.157


[2] Asmelash, Energy Subsidies and WTO Dispute Settlement: Why Only Renewable Energy Subsidies Are Challenged, in: Journal of International Economical Law, Volume 18, Issue 2 (2015), p.266(7), web: https://www.researchgate.net/publication/277927254_Energy_Subsidies_and_WTO_Dispute_Settlement_Why_ Only_Renewable_Energy_Subsidies_Are_Challenged

[3] Ehrlich, Renewable Energy: A First Course(2013), p.13-14 


[4] Geitmann, Erneuerbare Energien & Alternative Kraftstoff: Mit neuer Energie in die Zukunft (2005), p.11 


[5] International Energy Agency, World Energy Outlook 2012 (2012), p.211(2), web:

http://www.worldenergyoutlook.org/media/weowebsite/2012/WEO2012_Renewables.pdf

[6] Canada-Certain Measures Affecting the Renewable Energy Generation Sector, Canada-Measures Relating to the Feed-In Tariff Program, Appellate Body Report, WT/DS412/AB/R, WT/DS426/AB/R (May 6, 2013), web: http://www.wto.org/english/tratop_e/dispu_e/412_426abr_e.pdf ; India Certain Measures Relating to Solar Cells and Solar Modules, Request for Consultations by the United States, WT/DS456/1, G/L/1023 G/TRIMS/D/35, G/SCM/D96/1 (Feb. 11, 2013), web: http://www.wtocenter.org.tw/SmartKMS/fileviewer?id=131133.

[7] Herdegen, Internationales Wirtschaftsrecht (2014), p.179

[8] Agreement on Subsidies and Countervailing Measures, web: https://www.wto.org/english/docs_e/legal_e/24-scm.pdf

[9] WTO E-Learning, Detailed Presentation of Subsidies and Countervailing Measures in the WTO, p.7 a. p.14, web:

https://ecampus.wto.org/admin/files/Course_385/Module_1594/ModuleDocuments/SCM-L2-R1-

E.pdf   

[10] Jackson, The Jurisprudence of GATT and the WTO: Insights on Treaty Law and Economical Relations (2000), p.423


[11] Stoll/Schorkopf, WTO: World Economic Order, World Trade Law (2006), p.250


[12] Subedi, International Investment Law Reconciling Policy and Principle (2016), p.71


[13] Tudor, The Fair and Equitable Standard in International Law of Foreign Investment (2008), p.109


 

 

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