Lack of Fossil Fuel Subsidies Discipline

This section provides an overview on WTO subsidies law aiming at the identification of relevant legal sources and provisions that need to be considered for the analysis of the UK’s CRM in Chapter 4. In contrast to the outlined legal bases for CRMs under EU law, there are no such specific provisions under WTO law. Further, WTO law does not include an energy specific agreement. But WTO law provides a subsidy control system which will be portrayed below. At the centre of WTO law is the GATT, which also provides a starting point for subsidies discipline with its Articles VI on anti-dumping and countervailing duties and Article XVI on Subsidies.²⁸⁶ The ASCM further consolidates the GATT’s provisions on subsidies and countervailing measures expanding above both Articles. Finally, WTO case law and analyses from other scholars have shown the importance of the TRIMS agreement.²⁸⁷

As mentioned in the introductory chapter, the WTO system is arguably lacking in effective rules on fossil fuel subsidies, which even lead to the statement that the WTO has missed the opportunity on a fossil fuel subsidies reform.²⁸⁸ The lack of effective disciplines for fossil fuel subsidies is not due to the absence of a subsidy control system. Instead, the design of current WTO law on subsidies seems to be unfavourable for controlling fossil fuel subsidies.

In the case of subsidy schemes to promote the scale up of renewable energy production for example, the picture looks different: Until May 2017, nine disputes had been initiated through the Dispute Settlement Body against renewable energy programs of which four of

285 TFEU, Art. 194(2); T-370/11, Poland v Commission, ECLI:EU:T:2013:113.

286 See Verkuijl et al. 2019, p. 320.

287 Ibid., p. 319.

288 See Section 1.1.

41 these cases have been logged against the EU.²⁸⁹ At the same time no case has been initiated against any fossil fuel subsidy.

Interestingly, during the aforementioned energy subsidy cases, GATT provisions on national treatment²⁹⁰ rather than ASCM provisions on subsidies played a central role.²⁹¹ The national treatment obligation prohibits discrimination between imported and domestic like products.

Subsidies with local content requirements like in the cases of the feed-in tariff programme for RES in Ontario²⁹² or the Indian support programme for solar cells and solar modules²⁹³ have finally been marked in breach of the GATT. Further, for subsidies directed towards RES the relevance of Article XX has been discussed as it allows exemptions to the GATT provisions inter alia to “protect human, animal or plant life or health”²⁹⁴. Considering the focus of this thesis is on fossil fuel subsidies there is no exemption that might be of importance.

In energy subsidy cases the TRIMS Agreement has also shown its relevance.²⁹⁵ Its aim is to discipline any “trade restrictive and distorting effects of investment measures”²⁹⁶ related to trade in goods. At the core of the TRIMS Agreement is the application of the GATT’s national treatment obligation to trade-related investment measures.²⁹⁷ Case law has shown that national treatment claims are typically raised under both the GATT and the TRIMS Agreement.²⁹⁸ The scope of the TRIMS Agreements extends above the GATT’s provisions on national treatment as not only measures about products themselves, but also investment measures related to products are targeted.²⁹⁹ An illustrative list provides examples of trade-related investment measures that are inconsistent with the GATT’s national treatment rule.³⁰⁰

289 Meyer 2017, p. 395.

290 GATT, Art. III.

291 Meyer 2017, p. 395–396.

292 Canada – Renewable Energy AB Report.

293 India – Solar Cells AB Report.

294 GATT, Art. XX (b).

295 Meyer 2017, p. 394.

296 TRIMS Agreement, preamble.

297 Ibid., Art. 2.

298 Meyer 2017, p. 394.

299 Meyer 2016, p. 160.

300 TRIMS Agreement, Annex.

42 3.2.2 The Definition of a Subsidy under ASCM

The ASCM is specially dedicated to subsidies and therefore the most relevant source of law for the analysis. It is an achievement of the Uruguay Round which also led to the creation of the WTO in 1994. Recognizing the need for national intervention in the economy by supporting certain sectors or groups of actors, the ASCM “represents a move towards tighter disciplines on subsidies”³⁰¹. As well as the GATT and the TRIMS agreement, the ASCM is understood to only apply to goods, not services because all three agreements are listed Annex 1.A of the Marrakesh Agreement, named ‘Multilateral Agreements on Trade in Goods’.³⁰² Fossil fuels are classified as goods.³⁰³ When it comes to electricity the classification gets more complex. Discussions on the classification of electricity as a good or service play an important role for the legal analysis of the selected CRM. This aspect will be dealt with in Section 4.3.

In general, the ASCM provides a two-tier framework for regulation of subsidies with a traffic lights approach: export subsidies and local content subsidies are ‘red light subsidies’ which are outright forbidden “with no discretionary or evaluative assessment involved”³⁰⁴. ‘Amber light subsidies’ are identified through their specificity and an effect-based test assessing adverse effects. Originally, there was a ‘green light category’ which is no longer in force since 1 January 2000.³⁰⁵

The ASCM defines a subsidy as a financial contribution by a government that confers a benefit.³⁰⁶ Case law has clarified that this definition consists of two separate legal elements,

‘financial contribution’ and ‘benefit’, which together determine whether a subsidy in the meaning of the ASCM exists or not.³⁰⁷ In what follows, two questions will be dealt with in order to identify which kind of government support falls under this definition of a subsidy:

What qualifies as a financial contribution and when has a benefit been conferred? Annex 1 of this thesis contains an ASCM test checklist which leads through the different steps of

301 Rive 2019, p. 113.

302 See WTO 2020a, section legal texts: the WTO agreements.

303 Rive 2019, p. 116.

304 Ibid., p. 114.

305 Ibid., p. 115.

306 ASCM, Art.1.1.

307 Slattery 2019, p. 120; Rubini 2009, p. 108; Brazil – Aircraft AB Report, para. 157; US − Export Restraints Panel Report, para. 8.20; US – Softwood Lumber IV AB Report, para. 51.

43 identifying if a policy measures constitutes a subsidy under the ASCM and how it might be disciplined.

The definitional list in Article 1.1 (a)(1)(i–iv) ASCM provides guidance on where a financial contribution exists. This list of financial contributions is a closed list with an exclusive character.³⁰⁸ Financial contributions include, for example, direct transfers of funds like grants and loans³⁰⁹, forgone government revenue such as fiscal incentives³¹⁰ or the provision of goods or services through the government³¹¹. Case law has further clarified that assessing a financial contribution must concentrate on the nature of governmental actions not on their possible effects.³¹² In US – Export Restraints the Panel highlighted that financial contributions always include a clear transfer of economic resources in the form of a transfer of something of value.³¹³ At the same time, not all transfers of economic resources constitute a financial contribution under the ASCM which limits the scope.³¹⁴ The overall function of the ‘financial contribution’ element of ASCMs subsidy definition is “to ensure that not all government measures that confer benefits can be deemed to be subsidies”³¹⁵.

The financial contribution further must be granted “by a government or any public body”³¹⁶. Whereas the identification of a government is straightforward, “a public body […] must be an entity that possesses, exercises or is vested with governmental authority”³¹⁷. Determining such a public body is a straightforward exercise “when a statute or other legal instrument expressly vests authority in the entity concerned”³¹⁸.

Article 14 ASCM assists how to calculate a benefit for investigating countervailing measures and thereby also indicates when a benefit is conferred. But mainly case law has helped to elaborate this concept.³¹⁹ In Canada – Aircraft the Appellate Body introduced a market-place test³²⁰ which specifies when a benefit is conferred: “A ‘benefit’ arises […] if the

308 Rive 2019, p. 123; Slattery 2019, p. 120; US − Large Civil Aircraft (2nd complaint) Panel Report, para.

7.955.

309 ASCM, Art. 1.1 (a)(1)(i).

310 Ibid., Art. 1.1 (a)(1)(ii).

311 Ibid., Art. 1.1 (a)(1)(iii).

312 Rubini 2009, p. 109–110.

313 US − Export Restraints Panel Report, para. 8.73.

314 Ibid., para. 8.74.

315 Rubini 2009, p. 110.

316 ASCM, Art. 1.1 (a)(1).

317US – Anti-Dumping and Countervailing Duties (China) AB report, para. 317–318.

318 Ibid.

319 See Verkuijl et al. 2019, p. 323–324; Slattery 2019, p. 121.

320 Rive 2019, p. 126.

44 recipient has received a ‘financial contribution’ on terms more favourable than those available to the recipient in the market”³²¹. This test is based on the assumption that the second element of the definition of a subsidy, ‘benefit’, is concerned with the benefit conferred on the recipient by governmental action as opposed to the ‘financial contribution’

which is concerned with the nature of that governmental action.³²²

The market-place test implies a comparison³²³: If the financial contribution makes the recipient be better off than without the contribution, a benefit is conferred.³²⁴ Defining the relevant market for the test requires to consider the demand and supply sides. From Canada – Renewables it can also be learnt that government action which leads to the creation of a new market does not in itself, amount to a subsidy.³²⁵ Identifying the correct benchmark when investigating the conferred benefit of a financial contribution is a central exercise of classifying a policy measure as subsidy under ASCM. Rubini clarifies that according to the two different possibilities a government can intervene in the economy, by an economic or a non-economic activity, the benchmark either can be found in the market (market benchmark) or in the relevant regulation or legal system (normative benchmark).³²⁶

3.2.3 Specificity and Prohibited Subsidies under ASCM

Measures that fall under the definition of a subsidy as outlined above further need to be specific to certain enterprises in order to be disciplined.³²⁷ How is specificity determined?

Firstly, prohibited subsidies are per se specific which means that they do not have to undergo any further test of specificity.³²⁸ This makes the ‘red-light category’ of particular interest when investigating the opportunities provided by the ASCM to control fossil fuel subsidies.³²⁹ Secondly, if not per se specific, like ‘red-light subsidies’, specificity can be determined if access to a subsidy is restricted.

321 Canada – Aircraft AB report, para. 158.

322 See Ibid., para. 156.

323 See also Rubini 2009, p. 203.

324 Canada – Aircraft AB report, para. 157.

325 See Shadikhodjaev 2015, p. 487; Canada – Renewable Energy AB report, para. 5.188.

326 Rubini 2009, p. 205.

327 ASCM, Art. 1.2.

328 Ibid., Art. 2.3.

329 See also Rive 2019, p. 127; Verkuijl et al. 2019, p. 327.

45 Prohibited subsidies are subsidies contingent upon export performance and subsidies contingent upon the use of domestic over imported goods.³³⁰ Measures that meet the definition of an export subsidy are exemplarily listed in Annex I ASCM. This illustrative list is non-exhaustive.³³¹ Noteworthy, the contingency upon export or local content requirements of measures under scrutiny can be de jure or de facto. This is straightened out by the wording of Article 3.1 (a) ASCM on export subsidies, but also applies for local content subsidies as case law has shown.³³² De jure contingency is shown by the existence of a legal provision.

De facto contingency is shown in absence of a legal provision but with evidence for the subsidy under scrutiny having the “effect of making availability of the subsidy contingent on export performance or the use of local content”³³³. The reasoning behind generally banning these two kinds of subsidies is that their raison d’être is to affect trade which most likely causes adverse effects to other members of the WTO.³³⁴

The specificity test outlined in Article 2 ASCM distinguishes between several types of specificity: enterprise specificity, industry specificity, and regional specificity.³³⁵ The main indicator for a subsidy being specific is that access to the subsidy is restricted.³³⁶ Analogous to contingency which was dealt with above, this restriction in access can be set out by law (de jure) or be present in fact (de facto).

3.2.4 Actionable Subsidies under ASCM

If a measure is proven to be a financial contribution by a government that confers a benefit, but does not meet the criteria for specificity, it does not fall under the remits of the ASCM.

If a measure passes the three thresholds, being classified a financial contribution by a government and conferring a benefit according to Article 1 ASCM and additionally being deemed specific according to Article 2 ASCM, but does not qualify as a prohibited subsidy like indicated in Article 3 ASCM, it can still be actionable under ASCM: Causing adverse effects to the interests of other WTO Members through the use of any subsidy under ASCM

330 ASCM, Art. 3.1 (a–b).

331 Verkuijl et al. 2019, p. 326.

332 Canada – Autos AB Report, paras. 135–143.

333 Rive 2019, p. 127.

334 Van den Bossche – Zdouc 2013.

335 Verkuijl et al. 2019, p. 324–325.

336 Rive 2019, p. 129.

46 through (i) injury to the domestic industry of another Member, (ii) nullification or impairment of benefits accruing to other Members under GATT 1994 or (iii) serious prejudice is actionable.³³⁷

Injury to the domestic industry of another Member State of the WTO entails material injury to an industry, that evidently takes place, as well as the threat of such an injury or “material retardation of the establishment of such an industry”³³⁸. The existence of adverse effects through injury is proven, besides showing its evidence, by demonstrating causation between the subsidized imports and the material injury.³³⁹ Nullification or impairment of benefits ultimately intends to prevent that tariff concessions are “systematically” offset or counteracted by a subsidy program.³⁴⁰ It can be noted that adverse effects caused by injury to the domestic industry of another WTO Member (i) occur in the domestic market of other Members, while the nullification of benefits (ii) causes adverse effects on the export industry of other Members in the market of the subsidizing country.³⁴¹

Most detailed guidance on how adverse effects of a subsidy can be demonstrated is provided for the type of ‘serious prejudice’. There are several cases of when a subsidy causes adverse effects to the trade interests of another WTO Member in terms of serious prejudice.³⁴² These cases concern negative effects for other WTO Members on volumes sold or prices of a product.³⁴³ The focus of these cases is on the trade effects of subsidization.³⁴⁴ Showing that one of the cases of serious prejudice outlined in Article 6.3 ASCM exist, is up to the complainant.³⁴⁵

All three kinds of adverse effects to the interests of other WTO Members outlined above, require demonstration by the complaining Member.³⁴⁶ The demonstration of their existence can be “burdensome and expensive”³⁴⁷. However, the causation standards slightly differ: All categories (i, ii and iii) require demonstrating evidence for the existence of adverse effects.

337 ASCM, Art. 5.

338 Ibid., Art. 15, footnote 45.

339 Verkuijl et al. 2019, p. 330.

340 Coppens 2014, p. 146; US – Offset Act (Byrd Amendment) Panel Report, para. 7.127; EEC – Oilseeds I, GATT Panel Report, para. 148.

341 Coppens 2014, p. 147.

342 ASCM, Art. 6.

343 See Ibid., Art. 6.3.

344 US – Upland Cotton Panel Report, footnote 1503.

345 Verkuijl et al. 2019, p. 328; Coppens 2014, p. 147.

346 Coppens 2014, p. 144.

347 Wold – Wilson – Foroshani 2012, p. 685.

47 Showing that the existence of adverse effects is caused by subsidization of the alleged WTO Member is required by the categories (ii) and (iii). Demonstrating injury to the domestic industry requires only to prove that the adverse effect is a result of the subsidized imports³⁴⁸. There is no need to show that the adverse effects are caused by the challenged subsidy itself.³⁴⁹

3.2.5 Objectionable Subsidies under WTO Law

Once “the measure in question is found to be a prohibited subsidy, the panel shall recommend that the subsidizing Member withdraw the subsidy without delay”³⁵⁰. The procedure for actionable subsidies intends for the WTO Member granting or maintaining such subsidy to take appropriate steps to remove the adverse effects or withdraw the subsidy.³⁵¹ If this does not happen the complaining Member is authorized to take countermeasures.³⁵²

Generally, the ASCM applies more directly to production-based subsidies rather than to subsidies that are targeted at energy consumption.³⁵³ This can be concluded from the exhaustive definitional list of subsidies in Article 1.1(a)(1) ASCM. Furthermore, the ‘red-light’ category of prohibited subsidies is of special interest for the investigation of possible fossil fuel subsidy control through the ASCM because evidence can be demonstrated much easier. For example, if the measure in question can be identified in the Illustrative List of export subsidies in Annex I ASCM not only the specificity test (as for all prohibited subsidies) can be bypassed, but also the export contingency test³⁵⁴ and the subsidy test³⁵⁵.³⁵⁶ Section 3.2 has shown that WTO subsidies law currently only captures subsidies as far as they distort trade. Environmental concerns such as climate change which arise related to fossil fuel subsidies “do not necessarily enter the equation”³⁵⁷.

348 Verkuijl et al. 2019, p. 328

349 Ibid., p. 330.

350 ASCM, Art. 4.7.

351 Ibid., Art. 7.8.

352 Ibid., Art. 7.9.

353 Slattery 2019, p. 117.

354 ASCM, Art. 3.1(a).

355 Ibid., Art. 1.

356 Verkuijl et al. 2019, p. 326.

357 Ibid., p. 319.

48

4 LEGAL REVIEW OF THE UK’S CAPACITY REMUNERATION MECHANISM

The goal of the following legal review of the UK’s CRM is twofold: Firstly, the analysis will reveal, based on the case example of the UK’s CRM, to what extent fossil fuel subsidies through CRMs are compatible with EU State aid law and WTO subsidies law. Secondly, the analysis will lay the basis for comparing the results of the legal reviews with each other in order to learn lessons for an effective fossil fuel subsidy discipline under EU and WTO law.

It shall be noted that the analysis of relevant legal sources for subsidies through CRMs in EU law carried out in Chapter 3 already provides answers to the question to what extent fossil fuel subsidies through CRMs are compatible with EU State aid law as the CO2

emissions threshold effectively bans coal, lignite and oil-fired power plants from participating in CRMs. The Commission assessed the UK’s CRM regarding its compatibility with the internal market and finally approved the State aid measure in October 2019.³⁵⁸ Despite little reference in the final State aid decision on the UK’s CRM to the Recast Electricity Regulation, it can be expected that the Commission’s decision is coherent with the updated rules on CRMs, meaning it fully takes into account the provisions set out by the Recast Electricity Regulation.³⁵⁹ This background suggests following analysis procedure:

After introducing the context for the UK’s CRM and its design, the legal review under EU State aid law will comprise a short description of the Commission’s assessment of the UK’s CRM and then focus on legal questions that arise in light of the Recast Electricity Regulation.

The existence of aid under TFEU will be analysed in order to have a comparable parameter for the comparison with WTO law which also provides guidance if a subsidy exists. The legal review under WTO law has explorative character and proceeds along the provisions set out by the ASCM.

358 COM (2019) C 7610 final.

359 See also ClientEarth 2019a, p. 5.

49 4.1 The UK’s Capacity Remuneration Mechanism

4.1.1 The UK’s Electricity System

In 2014, the UK introduced a quantity-based CRM with a market-wide design. The reason for this governmental intervention was estimated critical levels of resource adequacy around 2017/2018.³⁶⁰ Since 2005, the UK’s electricity market has been arranged through the British Electricity Trading and Transmission Agreements. Electricity is traded bilaterally, the only centrally managed part of the electricity market is the balancing mechanism which enables the System Operator, National Grid, to balance supply and demand close to real time.³⁶¹ In this system, generators of electricity “must decide to invest based on their expectation of recovering the costs of this investment through selling electricity in the wholesale electricity market”³⁶². In other words, the UK’s electricity market was an electricity-only market.³⁶³ The UK’s electricity system is facing similar changes as other countries undergoing the energy transition.³⁶⁴ The UK’s CRM was set up to address two upcoming challenges for resource adequacy: Firstly, a large number of conventional power plants are expected to close in the next years and secondly, the rising share of RES in the energy system brings

In 2014, the UK introduced a quantity-based CRM with a market-wide design. The reason for this governmental intervention was estimated critical levels of resource adequacy around 2017/2018.³⁶⁰ Since 2005, the UK’s electricity market has been arranged through the British Electricity Trading and Transmission Agreements. Electricity is traded bilaterally, the only centrally managed part of the electricity market is the balancing mechanism which enables the System Operator, National Grid, to balance supply and demand close to real time.³⁶¹ In this system, generators of electricity “must decide to invest based on their expectation of recovering the costs of this investment through selling electricity in the wholesale electricity market”³⁶². In other words, the UK’s electricity market was an electricity-only market.³⁶³ The UK’s electricity system is facing similar changes as other countries undergoing the energy transition.³⁶⁴ The UK’s CRM was set up to address two upcoming challenges for resource adequacy: Firstly, a large number of conventional power plants are expected to close in the next years and secondly, the rising share of RES in the energy system brings

In document Paying the polluter? Lessons learnt from a review of the UK’s capacity remuneration mechanism under EU state aid law and WTO subsidies law (sivua 59-0)