Fit for Purpose? Toward trade rules that support fossil fuel subsidy reform and the clean energy transition

How can the World Trade Organization (WTO) better support fossil fuel subsidy reform? This report examines the challenges and opportunities of tackling public support to fossil fuels more effectively through the WTO. It assesses the potential of existing WTO subsidy rules to constrain fossil fuel subsidies and suggests ways for the WTO to better encourage the phase-out of these harmful support measures.

By Harro van Asselt, Tom Moerenhout on November 30, 2020
  • The WTO has an important role to play in tackling fossil fuel subsidies, but for this to happen, something needs to change.

  • Existing WTO subsidy rules focus exclusively on the trade implications of subsidies, leaving environmental concerns unaddressed, and even trade effects are only imperfectly disciplined.

  • For the WTO to more effectively support fossil fuel subsidy reform, WTO members should: (1) boost transparency, (2) better enforce existing rules, and (3) negotiate new, stronger rules on fossil fuel subsidies.

Estimated at USD 478 billion in 2019, fossil fuel subsidies strain the public purse, contribute to climate change, slow the uptake of renewable energy, and lead to local air pollution and associated impacts on public health. Their reform could thus lead to a wide range of socioeconomic and environmental benefits.

As the only global institution with binding rules to regulate subsidies, the World Trade Organization (WTO) would seem well positioned to support such reform. For this to happen, however, something would need to change. In contrast with measures to support renewable energy, fossil fuel subsidies have so far remained largely unchallenged under the global trade body’s dispute settlement mechanism.

Against this backdrop, this report explores whether WTO rules and practices are fit for purpose in addressing fossil fuel subsidies and encouraging the clean energy transition. While some fossil fuel support measures could be challenged under the WTO’s existing subsidy rules, the report highlights that there are important strategic, political, and legal–evidentiary hurdles that limit this possibility. It also emphasizes that the WTO’s disciplines are squarely focused on the trade effects of subsidies, leaving environmental concerns unaddressed.

The report suggests ways to strengthen the WTO’s role in supporting fossil fuel subsidy reform and the clean energy transition. In particular, WTO members should: (1) boost transparency around public support to fossil fuels, (2) better enforce the WTO’s existing subsidy rules, and (3) start an informal dialogue with a view to establishing new, stronger rules on fossil fuel subsidies. More research would also be needed on the trade impacts and legality of fossil fuel support measures, as well as on how new rules could best be crafted.

Report details

Climate Change Mitigation
Sustainable Development Goals
IISD Global Subsidies Initiative
Focus area
Nordic Council of Ministers
Nordic Council of Ministers, 2020