In recent years, biofuels have been eagerly embraced by governments as a home-grown solution to a range of complex policy challenges, including climate change, dependence on foreign energy, and rural development. Biofuels have also been promoted to developing countries as opening new markets for their agricultural goods.
Government subsidies and other incentives have played a fundamental role in shaping domestic biofuel industries. This support has promoted and supported investment in biofuels where such businesses would not otherwise have been commercially viable. The growth of biofuel production has also attracted attention for its negative impact on global food prices. Less attention has been paid, however, to the broader trade and economic impacts of the subsidies and incentives underlying this growth in production and, in particular, their World Trade Organization (WTO) implications. Considering these subsidies through a WTO prism is not an end in itself. Rather, the WTO disciplines on subsidies provide an important framework to constrain the proliferation of tradedistorting
subsidies that can lead to global inequities, particularly for developing and least-developed countries. Moreover, the history of trade negotiations, especially in the agricultural sector, indicates that, once in place, trade-distorting subsidies prove very difficult to reform.
This paper reviews biofuel measures that are commonly used in major producing countries against WTO subsidies disciplines. These measures are found in a range of laws and policies relating to energy, the environment and agriculture. There is little evidence that domestic policymakers have taken into
account WTO disciplines when crafting these measures. This paper identifies a number of issues for policymakers to consider, including the following:
• WTO subsidy disciplines do not prohibit all subsidies or support to biofuels. Rather, the WTO rules concern themselves with subsidies that have a trade-distorting effect.
• Although often cited in discussions about the WTO and biofuel subsidies, the green box provisions of the WTO Agreement on Agriculture (AoA) do not provide a broad category sheltering measures on the basis that they offer some environmental benefits. To qualify as green box support, specific requirements must be met. For example, payments under environmental programmes must be limited to the costs of compliance with the programme.
• The issue of whether subsidies have been passed on to the benefit of other participants in the biofuel production chain may be particularly relevant in a biofuels context, where subsidies are provided at various stages of the production and use chain.
• Attempts to provide assistance by way of decoupled payments are likely to be scrutinized closely and the requirement that a payment not be “related to” production will be applied strictly. Importantly, if there is some condition attached to the payment that would have an impact on production – positive or negative, direct or indirect – then it is not likely to qualify as a decoupled payment.
• Many countries have sought to foster domestic production and use of biofuels, raising the prospect of policies that favour domestically sourced biofuels. For this reason, biofuel polices that express a preference for domestic over foreign-sourced biofuels raise may present problems as prohibited on local content subsidies.
In addition, this paper identifies some complex issues that arise from the interaction between trade rules and biofuel subsidies that warrant further examination. These include the following:
• How ethanol subsidies should be notified under the WTO, in particular the scope of ethanol subsidies that should be properly included in a WTO Member’s aggregate measurement of support (AMS) calculation. Given that ethanol is an agricultural product, it is conceivable that some subsidies to ethanol producers are provided “in favour of the producer of the basic agricultural feedstock” and thus should be included in the AMS.
• The multiplicity of biofuel subsidies and other incentives can lead to situations where the interaction between two measures has a trade-distorting impact. In such a case, a question arises as to whether the combination of the measures could be an actionable subsidy, where taken individually neither measure would meet the threshold requirements.
• Given the shifting focus of support in many countries to second- and third-generation biofuels, how would these biofuels and their feedstocks, such as switchgrass, be classified for WTO purposes?

By: ICTSD

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