by Arunabha Ghosh
For the last two years, the world’s leading economies (via the G20) have been debating how – and committing – to reduce subsidies for fossil fuel-based energy. These subsidies, amounting to more than US$550 billion annually, artificially keep prices low, distort energy choices and contribute to carbon emissions. Compared to this level of support, subsidies for renewable energy were estimated at US$43-46 billion in 2010. Counting energy subsidies is no easy task, and estimates vary. But there is no doubt that support for clean energy is a fraction of the public funds devoted to sustaining fossil fuel sources. Yet, the governance of clean energy subsidies is beginning to emerge in global and national policy discourse. Nearly two billion people have no access to modern sources of energy. Increasing energy access is going to be one of the key ingredients for human development. At the same time, energy-related CO2 emissions are also expected to increase over the next two decades, especially in developing countries. Clean energy subsidies are, therefore, needed to support two simultaneous transitions: from no energy to energy access; and from fossil fuel-based energy to a low-carbon energy pathway. But are clean energy subsidies entirely uncontroversial? If not, what are the sources of contention – and what can we do about them? These questions are answered in my latest policy brief, published by the International Centre for Trade and Sustainable Development. See here.
International competition in the area of renewable energy is only going to intensify. On the flipside, investment is often lacking, due to uncertainties in the policy framework. Among the issues needing further clarification is the role of renewable energy subsidies, with potential new cases looming at the WTO. At least four imperatives are going to drive a growing international debate on the governance of clean energy subsidies.
• Environment imperative – Whether incremental costs are covered from domestic or international funding sources, clean energy subsidies are needed until renewable energy reaches “grid parity” with fossil fuel energy. The other environmental imperative is the notion of a “green economy”, one of the two defining themes for the Rio+20 Sustainable Development Summit. Many developing countries have stressed that pursuit of a green economy should not constrain their flexibility over financing and supportive policies.
• Technology imperative – Technological innovation and leadership in emerging clean tech sectors are partly a function of a country’s indigenous scientific prowess, but also depend on bilateral ventures and multilateral technology development mechanisms. The question is how partner countries support these joint ventures – through direct financial transfers or by contributions in kind – and how the fruits of such labour are shared.
• Economic imperative – Subsidies for clean energy sectors during a recession could assume a mercantilist purpose, especially if domestic industrial development, manufacturing capacity and employment generation come at the expense of other countries. Governments, and firms, are interested not only in the collective good of cleaner, low-carbon energy, but also in industrial and economic competitiveness.
• Trade imperative – And mercantilist policies can also discriminate between imported clean energy products and local manufactures. Subsidies could be granted to promote clean energy exports, making domestic firms more competitive in the international market. But these rationales have different economic and legal implications for trade partners.
Why should policy-makers and stakeholders in the trade community care about the imperatives for clean energy subsidies and the emerging tensions? The number of countries seeking to scale up renewable energy investments, driven by some or all of the four imperatives, is growing. Emerging economies, which still have to provide access to energy to many of their citizens and stand at the crossroads of choosing between alternate energy technologies, stand out in this regard in particular. Meanwhile, calls for transparent notification of subsidies are intensifying and some legal cases in the area of renewable energy have already entered the WTO arena. Such legal challenges could have a dual impact: constraining countries’ policy space and lowering investor sentiment, if the continuity of policies supporting clean energy is called into doubt.
As the global debate picks up, the governance of clean energy subsidies will need attention on several fronts: improved measurement and transparency of subsidies; reducing fossil fuel subsidies in favour of clean energy; greater clarity about the purpose of the subsidy regimes while retaining policy flexibility; independent assessments of alleged adverse impacts of subsidies; and greater coordination between rules governing international trade, energy flows and climate change.