Rethinking International Trade Rules on Green Subsidies: Three Possible Pathways

Thanks, Bruegel for the invitation. I am happy to be here with so many friends and colleagues on this occasion.

When I was much younger, I was once told by a professor that a 20 minutes speech could only address 3 questions - What is the issue? When should it be dealt with? And Where? - and that the danger, to be absolutely avoided, was to wander into the solutions. My challenge today is, of course, to follow the lesson for the 3 questions while venturing, rapidly, into some possible solutions.

Let’s start with question n°1: 

The issue relates to the need to tweak the current international trade rules to make more space for green subsidies. Stopping environmental degradation, and possibly reversing it, is now humanity's most important collective endeavour, whether about climate or biodiversity. It necessitates mobilising a wide array of public policy instruments, such as CO2 pricing or taxation, regulations, monetisation of green assets - just to name a few -, and of course using taxpayers’ money to overcome market insufficiencies and incentivise massive, unprecedented behavioural changes.

All these instruments have one thing in common: they de-level the playing field in international trade.

The odds that it happens are increased by the bottom-up model of the 2015 Paris Climate Agreement with its Nationally Determined Contribution (NDCs) leading to driving to a place called zero carbon with different vehicles, different trajectories, different speeds, and no traffic law. A recipe for collisions, as any trade expert will tell you. We call this “trade frictions”, and it’s happening in a big way with the EU Carbon Border Adjustment Mechanism (CBAM), the EU Deforestation-free Products Regulations (EUDR), or the soon-to-be-adopted Corporate Sustainability Due Diligence (CSDD) Directive, or the US Inflation Reduction Act (IRA) legislation. 

These frictions give the answer to question n°2: 

Now, because the existing international trade disciplines on green subsidies are no longer fit for purpose, as they do not provide sufficient policy space for the huge amounts of investment indispensable for greening our production and consumption systems.

Broadly speaking, and without entering into legal details, the WTO subsidies regime contained in the Agreement on Subsidies and Countervailing Measures (ASCM), which applies to industry, establishes three categories of subsidies: I) prohibited; II) actionable; and III) allowed. 

I)  The category of prohibited subsidies includes, for example, export subsidies or subsidies conditional to local content requirements, such as some of those provided by the US IRA.

 II) Actionable subsidies are subsidies that can be subject to countervailing duties, if the proof is made that they distort trade; 

 III) The allowed subsidies category includes, for example, subsidies provided for research or regional policy subsidies. A specific, temporary, unless renewed, exemption was part of the ASCM in its original 1994 version for some narrowly defined green subsidies. However, no WTO member really fought for its renewal in 1999, when this exception provision was set to expire, for a variety of reasons -starting with the EU with my predecessor as Trade Commissioner, Sir Leon Brittan.

So, all in all, there is a very narrow corridor for green subsidies based on the concept of an exception - in line with Article XX of the General Agreement on Tariffs and Trade (GATT) - which is obviously at odds with today's major global priority of environmental protection.

Finally, this leads us to question n° 3, which is:

This is also easy to answer: at the WTO! The WTO is the only relevant forum for such a discussion, and if possible, negotiation, as bilateral trade rules do not usually deal with subsidies, and a plurilateral agreement without the United States, China, the EU, or India would make no real sense. Therefore, a multilateral approach should be the way to go. 

Let me overstep the rule of my professor by concluding with question n° 4, the most important one for many trade wonks, a majority in this room as far as I can judge:

- Option 1 is a full-fledged renegotiation of part of the ASCM in order to create a large enough corridor of WTO compatibility for green subsidies. This can only succeed if: a) there is enough consensus for a negotiating mandate; and b) if the devils in the details of such a carve-out do not take decades to negotiate. I believe it would be very hard to meet these two conditions; the first one because it would entail a US-China agreement; and the second one because of the legal technicalities of defining the borders of compatibility, or the inevitable flexibilities for developing countries.

Option 2 is to have a peace clause according to which WTO members agree not to question, litigate against, or rebalance with countervailing duties, green subsidies, under some conditions. This is an easier route as it can be done unilaterally, bilaterally, plurilaterally, or multilaterally. Of course, here there are also some devils in the details, but smaller devils in lesser details.

- Option 3, which is even softer, is to create a specific forum within the WTO’s Committee on Trade and Environment, which would be dedicated to discussions of green subsidisation measures taken by members, with the view to outlining their environmental benefits versus their trade-distorting costs. This could establish a sort of balance between the two sides of the equation, which could help framing these domestic measures in a more concerted way. This idea is similar to the EJD proposal for a WTO Comparability Forum dedicated to the discussion and comparison of environmental measures with trade consequences, which could possibly lead - if it was to work in practice- to a more effective compatibility forum.

To conclude, my own advice as a silverback for your important and timely work on this issue would be to resist the charms of legal exegesis and propose concrete formulas, which would have a chance to work in practice and as soon as possible. As soon as possible, because reversing the environmental degradation of this planet is now a race against time.

Thank you.