Issues and Considerations for Negotiating a Sustainable Energy Trade Agreement1 This sheet is a Q&A based summary of the issues paper ‘Issues and Considerations for Negotiating a Sustainable Energy Trade Agreement (2012) by Gary Hufbauer and Jisun Kim, produced by ICTSD in collaboration with the Peterson Institute for International Economics and the Global Green Growth Institute. The paper finds that the key issues to be addressed by a Sustainable Energy Trade Agreement (SETA) are: the type of products to which the agreement would apply, the identification of the key players that have a stake in participating in SETA, the list of non-tariff barriers to be included in the agreement and the institutional framework in which the SETA would be negotiated. How Many Environmental Goods Could be Contained in a SETA? There is no internationally agreed definition of an environmental good. The proposed list for a SETA could begin with a short list that would then serve as a launching pad for negotiations. It would initially comprise of the 32 environmental goods listed under the category “renewable energy” in the WTO compilation of environmental goods proposed by Members, as well as the six environmental goods categorized under “renewable energy” and “environmental technologies.” The list would also include ethanol (widely used for fuel). Which are the ‘Core’ and ‘Candidate’ Countries for a SETA? NAFTA, EU, Chile, Colombia, Peru, Australia, New-Zealand, Singapore, Japan and Korea have been identified as core countries highly likely to join SETA negotiations because of their interest in opening markets in sustainable energy goods and services. Six candidate countries – China, Brazil, India, Turkey, Indonesia and South-Africa – hold great commercial and environmental interest for the core countries. Should Tariff Barriers be Addressed First? Although tariffs do not represent the highest barrier to trade in environmental goods, they have to be eliminated first and are most likely to be addressed first in negotiations. The advantage to this is that as many tariffs are already low, the negotiations are likely to be relatively free of contention. However, the disadvantage is that the gains in increased trade from eliminating residual tariffs are limited.
1
Hufbauer, Gary; Jisun Kim; (2012); Issues and Considerations for Negotiating a Sustainable Energy Trade Agreement; ICTSD Global Platform on Climate Change, Trade and Sustainable Energy; International Centre for Trade and Sustainable Development, Geneva, Switzerland. The full paper is accessible at: http://ictsd.org/i/publications/133314/.
What About Non-Tariff Barriers? In recent years, countries have extended various forms of public support to promote renewable energy. Although these measures are welcome from an environmental perspective, negotiators and advocates must use caution in assessing the effectiveness of such measures because they deviate from national treatment principles and therefore distort trade. Local Content Requirements (LCRs) are among the most significant measures for a SETA to address. Although LCRs are often part of domestic policies to increase jobs in the renewable energy sector, their effectiveness is lessened when they reduce competition by excluding foreign suppliers, thereby raising the cost of renewable energy. See Figure 1 below. Table 1. Some cases of LCRs in place (as of January 2012) Country/ Province
Project/Program
Description
“United States/ Ohio”
Renewable energy in general
Mandating half of its renewable energy to be supplied through in-state production
“United States/ Colorado, Missouri “
Renewable energy in general
Applying a 1.25 multiplier to renewable energy certificates produced from in-state resources
“Canada/ Ontario”
“Solar and wind projects (Green Energy and Green Economy Act 2009)”
Requiring, from 2009-2011, 25% of costs for wind projects to be local and 50% of solar projects. From 2012 onward, these restrictions increase to 50% and 60% respectively to benefit from FIT program
“Canada/ Quebec”
Calls for tenders for the creation of wind farms
Requiring wind farms be located in the Gaspesie region of the province with regional content requirement of 30 % minimum
Italy
“Solar ContoEnergia 4 (solar subsidy law, approved in May2011) “
Offering PV projects that contain at least 60 % of local content with an additional 5-10 percent premium over normal FIT rates
India
“Solar Jawaharlal Nehru National Solar Mission (JNNSM, launched in 2010)”
Mandating cells and modules for solar PV projects based on crystalline silicon to be manufactured in India and for solar thermal, mandated 30% project to have domestic content to benefit from FIT program
Portugal
Wind tender
Awarding contracts only to bidders engaged in research collaborations with local universities
Ukraine
“Renewable energy in general (Law of Ukraine on the Electric Power Industry, passed in June 2011)”
Requiring producers of electricity from renewable energy sources to meet a certain share of materials, works and/or services of Ukrainian origin that is used to construct a power plant in order to benefit from FIT program
Sources: Global Trade Alert website and various sources
Subsidies will remain necessary for the sustainable energy sector to compete against fossil fuels, especially while subsidies to fossil fuels remain high. Hence, it seems unreasonable to limit renewable energy subsidies as part of SETA. From an environmental and economic standpoint, curtailing fossil fuel subsidies as well as subsidies that are linked to LCRs is more feasible and will have a greater potential impact. Mandatory technical regulations and voluntary standards can achieve both public and commercial objectives but at the same time can place a barrier on trade by discriminating against foreign firms and limiting competition. Under the WTO framework, governments are encouraged to use international standards where they exist. A possible approach under a SETA would be for Members to agree on national, regional or international standards which can be considered equivalent, rather than trying to negotiate on one single standard. Also, SETA Members could consider adopting features of a mutual recognition agreement (MRA) for assessing national conformity to agreed standards. Finally, a SETA could require its members to consult with each other before introducing a new standard. With regards to trade in services, it is recommended that SETA negotiations focus on a limited list of services applied to renewable energy, especially services directly related to the installation, operation and maintenance of renewable energy projects. A SETA should call for free trade and investment (Modes 1 and 3), phased over a reasonable period of time, for these services. Negotiating Approaches for a SETA: Which One is Preferable? There are several considerations to be made with regards to the negotiating approaches for the institutional framework, for the environmental goods and services list and finally, for the approach towards possible members. If SETA were to be an agreement within the framework of the WTO, it could either follow the model of the Information Technology Agreement (ITA) or the Government Procurement Agreement (GPA). Given the differences between the context in which the ITA was negotiated and in which SETA would be negotiated it is not very likely that SETA could follow the ITA model, which permits unconditional Most Favoured Nation Status (MFN) access to nonmembers, meaning that also non-signatories of the SETA would benefit from the concessions made by parties to the agreement. It is politically not very feasible to negotiate a SETA based on that model because it would not be attractive for members to join. On the contrary, the GPA model is based on a conditional MFN principal, whereby only members to the agreement enjoy MFN treatment in the particular market that is negotiated upon. The SETA would have to obtain a waiver to deviate from the unconditional MFN principle under the WTO. If this seems impossible, the option exists to have a SETA outside of the WTO context. This would however mean that it would lose the possibility of using the dispute settlement mechanism.
ICTSD is grateful for support from the Ministry of Foreign Affairs of Denmark (Danida), the Ministry of Foreign Affairs of Norway and from the Global Green Growth Institute to the SETA-project. In addition, ICTSD wishes to thank its core and thematic donors including; the UK Department for International Development (DFID); the Swedish International Development Cooperation Agency (SIDA); the Ministry of Foreign Affairs of Denmark (Danida); the Netherlands Directorate-General of Development Cooperation (DGIS); the Ministry for Foreign Affairs of Finland; Australia’s AusAid; the Inter American Development Bank (IADB); Oxfam Novib and the Deutsche Gesellschaft fßr Internationale Zusammenarbeit (GIZ). About the International Centre for Trade and Sustainable Development (ICTSD) Founded in Geneva in September 1996, the International Centre for Trade and Sustainable Development (ICTSD) aims to influence the international trade system such that it advances the goal of sustainable development. In advancing its mission, the Centre has become a leading broker of knowledge and information on trade policy and sustainable development. www.ictsd.org