PDF Print Version                                                        Vol 2, Issue 8
Editorial board: Anne van Aaken, Jutta Brunnée, Jan Klabbers, André Nollkaemper (editor-in-chief)

Anna Marhold
European University Institute

The World Trade Organization and Energy: Fuel for Debate

 

 

The WTO can no longer afford to neglect energy. While out of focus for many decades, the realization that the Organization needs a discourse on energy has finally sounded through to the WTO itself. During the first ever workshop on the issue at the WTO headquarters in Geneva, former Director-General Pascal Lamy emphasized the necessity of a dialogue on energy trade in the WTO.[1] Questions pertaining to the legal aspects of energy trade in the WTO can be expected to emerge with increasing frequency. But is the WTO ready and capable of addressing these issues and provide clear answers?

This ESIL Reflection will first briefly show that the GATT/WTO legal framework has in fact always – at least de jure – covered trade in energy. Then, it will discuss some of the major legal challenges that the regulation of energy trade poses to the WTO legal framework. It will also touch upon the relevance of the Energy Charter Treaty (ECT) for solving some of these problems.

Historical Context 

It is widely believed that trade in energy for a long time was at least de facto, and perhaps even de jure, excluded from GATT/WTO coverage. This was the result of a combination of several factors.[2] First of all, the main petroleum producing and exporting countries were not original parties to the General Agreement on Tariffs and Trade 1947 (GATT 1947).[3] Second, the reigning so-called ‘Seven Sisters’ oil company cartel dominated the petroleum industry from the 1940’s until the 1970’s and preferred to settle its business outside the global trading system.[4] Third, as a strategic commodity, energy was a particularly sensitive topic in international trade, a view poignantly reflected in the 1962 UNGA Resolution 1803 on Permanent Sovereignty over Natural Resources. With this in mind, a 1998 Background note by the WTO Secretariat concluded that ‘energy goods have been treated for a long time as being outside the scope of the reach of GATT rules, by relying on the general exception relating to the conservation of exhaustible natural resources (Article XX(g) GATT) and on the national security exception (Article XXI GATT)’.[5]

However, there is nothing in the provisions of the GATT 1947 or WTO Agreements stipulating that trade in energy is actuallyexcluded from their scope. Quite to the contrary: tariffs on fossil fuels, such as crude oil, have been present in Members’ Schedules of Concessions (Article II(a) GATT 1947) from the start and ever since. Crude petroleum and derived products also have their own chapter in the Harmonised System (HS) Convention, which classifies virtually all globally traded goods and on which Members to the WTO base their Schedules of Concessions.[6] It is true that tariff concessions on crude petroleum are often ‘free’ or ‘unbound’, meaning that the WTO Member in question did not take on any commitment to bind its tariff. In theory, the WTO Member could thus apply as high a custom duty as it pleases on the imported good. But this does not alter the fact that WTO Members in their Schedules are not allowed to agree on treatment that is inconsistent with the basic GATT obligations; Article III (National Treatment) applies to bound as well as unbound items (except for Article III.8).

In sum, de jure, trade in energy is, and has always been, covered by the disciplines of the GATT/WTO. But de facto, energy trade has been treated as mostly outside of the GATT for several decades. For this reason, difficult questions concerning the relation between energy and trade could be ducked in the GATT/WTO forum.

This is now no longer possible. After the establishment of the World Trade Organization in 1995 a shift in perceiving energy from ‘out of’ to ‘within’ the scope of the WTO forum occurred: By the start of the Doha Development Agenda (DDA) ‘energy services’ emerged as a separate topic on the negotiating agenda.[7]  But the realization that WTO legal framework does indeed cover trade in energy has opened up a Pandora’s box of unresolved issues.

Unresolved Issues

Fitting energy goods and services into the WTO system is anything but a simple task. The problem is that although the WTO Agreements evidently cover trade in energy, they were simply not drafted with the realities of energy in mind. This leaves us with the question whether the WTO legal framework as it is now is capable of adequately regulating the complexities of trade in energy.

Several unresolved issues can be identified. For instance, the list of ‘energy services’ is only provisional and so far there is no definition of ‘energy goods’ in the WTO. A related point is that it might be difficult to distinguish between the ‘goods’ and ‘services’ aspects of trade in the energy sector – most globally traded energy is likely to posses elements of both. In EU law, electricity is considered a ‘good’ and not a ‘service’, but there is still no conclusive categorisation of electricity in the WTO.[8] And what are ‘like’ energy products?[9] Are non-renewable energies ‘like’ renewables? Another consequence of the absence of clear definitions is that it is undecided whether GATT Article V.1 on the freedom transit of goods covers fixed infrastructures such as gas pipelines as a ‘means of transport’.[10] If it does, it is not unthinkable that the WTO could serve as a forum to resolve potential gas transit disputes between Members.

To add to this, energy is clearly not an isolated matter in international trade. Besides ‘energy services’, the closely related ‘environmental goods’ and ‘environmental services’ have also made their way as a negotiating topic on the Doha Agenda.[11] Examples of environmental goods such solar panels and equipment for biogas production can be directly linked to clean energy production and energy efficiency. The larger debate on climate change thus unveils how energy and the environment are intertwined and in addition raises important questions regarding the legality of so-called green and renewable energy subsidies. Could such subsidies be justified under the WTO legal framework as an incentive to promote green energy or do they risk being abused by WTO Members as a form of disguised protectionism?[12] In the recent Appellate Body (AB) Report in Canada–Feed-in Tariffs, the AB did not want to go down a slippery slope and provide decisive answers on the matter.[13] But with a new string o
f renewable energy disputes waiting to be settled in the WTO, it seems that the AB cannot keep evading these issues any longer.[14]

Concerning subsidies on traditional energy products, i.e. fossil fuels, the age-old debate on energy dual pricing and export taxes is no less of an issue now than it was during the Oil Crisis forty years ago. In brief, ‘dual pricing’ entails that countries sell their fossil fuels on the world market for a higher price than they do on their own domestic market, on which prices for energy are kept artificially low.[15] Through dual pricing, energy-exporting countries attempt to maximise the revenues of their energy trade. Mainly major fossil fuel-importing countries like the EU and the US continue to oppose to this practice. They argue that dual pricing, because of the allegedly export-restrictive effect, is trade distortive and inconsistent with the obligations set out in Article XI GATT on Quantitative Restrictions. Additionally, they claim it might be a form of ‘inverted subsidies’ contrary to the SCM Agreement: as a result of dual pricing, domestic producers can be favoured over foreign ones by access to cheaper input materials (i.e. cheaper energy leading to lower production costs).[16] This example shows one of the peculiarities of energy as a tradable good and the nature of the rules of the WTO in that respect. There is a market access bias in the WTO, i.e. the goal is to reduce import barriers between nations. While in global energy trade, the problem is rather linked to export taxes and export restrictions. The matter of energy dual pricing and export taxes remains undecided in the WTO until this day.

Albeit in a different way, disputes over export taxes on raw materials continue to pose new, and perhaps unintended, challenges to both the WTO and public international law. Since the controversial outcome of the AB report in China–Raw Materials, even the previously seemingly sacred notion of Permanent Sovereignty over Natural Resources is now debatable in the WTO forum. As a rule, Members tend to use the Article XX(g) exception to justify otherwise GATT-inconsistent measures for the conservation of their exhaustible natural resources (such as oil and gas).[17] Following the judgment, however, China is not allowed to invoke the same GATT Article XX(g) exception with regard to commitments on export taxes made in its Accession Protocol.

These unresolved issues have practical consequences. Russia, the major Eurasian energy producing and exporting country, acceded to the Organization in August 2012, after protracted negotiations of almost two decades. But, perhaps owing to the absence of consensus on many energy-related issues (such as dual pricing) among the Members of the WTO, Russia was able to negotiate the accession with almost no ‘WTO-plus’ commitments in the energy sector.[18] As a result, Russia’s state-owned energy exporter, Gazprom, is practically free of trade barriers and free to apply export taxes when exporting their energy (raw mineral materials and fuels) abroad.[19]

From key definitions of energy good and services, to transit, to renewable energy subsidies, to dual pricing, to sovereignty over natural resources – it is clear that the list of energy issues in need of further elaboration in WTO law is extensive.

WTO and ECT: Cross-fertilization?

Should the WTO maybe ‘learn’ from other treaties in the field? A more specialized international law instrument, tailored to regulate trade and investment in the energy sector, does exist: the Energy Charter Treaty (ECT). The ECT was born as an alternative to the wish of energy net-importing countries in the West to conclude an energy specific agreement within the GATT/WTO framework after the Cold War had ended.[20] The trade provisions of the ECT draw largely upon the GATT, but are better adapted to the needs of energy trade, for instance by providing extensive definitions of energy products and services and clearly incorporating gas pipelines as a means of transport in Article 7 ECT on Transit.[21]

It is to be added that the ECT is not  of  more  help than the  WTO in regulating the energy section of Russia at present. The Russian Federation, the major Eurasian energy producing and exporting country, has not ratified the Treaty. Moreover, it has also stepped back from provisional application of the Treaty in 2009, allegedly in connection with the controversial pending Yukos arbitration case.[22]

But apart from this, compared to the ECT, the WTO regime seems to be lagging behind in almost every aspect when it comes to energy trade regulation. The WTO has only woken up now and realized that a great task lies ahead. Perhaps it does not seem too far-fetched to examine the possibilities to negotiate energy and the environment as a separate sector in the WTO, following the model of the Framework Agreements on Agriculture and Textiles.[23] Such an agreement could potentially better address the complexities of the sector, e.g. by setting clear rules on the permissibility of (green) energy subsidies. The Energy Charter Treaty could be a particularly helpful instrument in this regard. Although the ECT deals with investment in addition to trade, and the regulation of investment has thus far been largely absent in the WTO, it should be explored to what extent the provisions of the ECT could serve as a basis for a potential Framework Agreement.

The global trading landscape is changing and with that, the international terms of trade: An increasing number of energy producing and exporting countries has either recently joined the WTO (Saudi Arabia, China, Russia, Oman, Ukraine) or is currently negotiating accession (Kazakhstan, Azerbaijan, Iraq, Iran and Algeria). Apart from that, we are witnessing rapid changes in the type of energy we trade and how we trade it (one can think of the unexpected Liquefied Natural Gas (LNG) ‘boom’ in past years). Questions pertaining to the legal aspects of energy trade in the WTO can be expected to continue to provide substantial fuel for debate, one which has been undeservedly marginalized in the WTO up until now.