Explaining Energy Disputes at the World Trade Organization
26 Pages Posted: 10 May 2016 Last revised: 18 Oct 2016
Date Written: May 9, 2016
The WTO and the broader international trade regime have seen an explosion of challenges to government support for renewable energy in the last seven years, while no country has brought a formal dispute challenging fossil fuel subsidies in the GATT/WTO’s history. This pattern is puzzling because global fossil fuel subsidies dwarf global renewable energy subsidies. Moreover, it suggests that WTO rules may slow the transition to clean energy. Renewable energy technology must compete with highly subsidized fossil fuels, while trade disputes effectively restrict subsidization only for the former. Existing explanations for the absence of trade challenges to fossil fuels support policies have focused primarily on the lack of a mandate within the WTO. Major fossil fuel exporters have not historically been GATT/WTO members; WTO rules allegedly do not apply to energy or are inadequate to deal with the specifics of energy trade; or even if they do, nations have developed separate institutions, such as the IEA or the Energy Charter Treaty, to govern energy.
This article argues that, although these explanations have some explanatory power, they cannot fully or satisfactorily account for the pattern of WTO energy disputes in light of the recent focus on some forms of energy in the WTO but not others. Instead, I hypothesize that the economic diversification of energy-producing countries plays a major role in driving challenges to renewable energy support policies, but not fossil fuel support policies. It does so in two ways. First, states challenging energy support policies expect to have greater success in changing the respondent’s behavior when the respondent has diversified exports. Renewable energy technologies tend to be produced in countries with diversified economies, while fossil fuel reserves are located overwhelmingly in countries with little diversification in their exports. Second, under what I term the loss aversion hypothesis, states may be more likely to challenge new trade restrictions, rather than similar but long-standing trade restrictions. The loss-aversion hypothesis suggests that trade challenges will arise more in sectors of the economy in which innovation leads to competition, as opposed to in mature sectors of the economy. Economic diversification, in turn, is a good predictor of innovation. As applied to energy, economic diversification contributes to innovation and competition in the renewables sector – and hence triggers demand for new trade restrictions – but not the fossil fuel sector, even though trade restrictions have a long history in that sector as well.
Keywords: World Trade Organization, renewable energy, fossil fuels, subsidies, climate change, dispute resolution
JEL Classification: K33, K32, K40
Suggested Citation: Suggested Citation