WORLD TRADE
ORGANIZATIONWT/CTE/W/185
13 February 2001
(01-0679)
Committee on Trade and Environment Original:  English
ENVIRONMENTALLY HARMFUL AND TRADE DISTORTING MEASURES
AND POLICIES IN ENERGY MARKETS
Communication from the European Communities
1. In its note WT/CTE/W/67 of 7 November 1997 the CTE Secretariat undertook a preliminary
analysis of the environmental benefits of removing trade restrictions and distortions.  The note
addressed some general concerns regarding the relationship between removing trade restrictions and
distortions (notably direct subsidies and some forms of direct taxation) and potential environmental
benefits, as well as examining the potential positive impacts in certain sectors, including the energysector.  The part devoted to the energy sector (paragraphs 49-82), whilst duly noting the array of
measures that have market trade and environment distortion effects, shied away from an analysis of
all types of measures.  The lack of information and reliable studies in many of the areas related to the
energy sector was given as the explanation.  One of the consequences is the note’s concentration on
the impact of direct subsidies to coal.
2. It should be noted that there has been a substantial evolution in the years since the reference
period examined in WT/CTE/W/67 (which stopped at 1994) and that more recent figures could show
a markedly different picture.  Accordingly, this pa rt of the note should be updated.  Furthermore, the
coal sector, as well as other energy sub-sectors, ar e the object of other types of distorting measures
that should be included in any update of WT/CTE/W/67 (see below).
3. In addition, work undertaken in the ambit of the OECD (notably its Joint Working Party on
Trade and Environment) and of the IEA now makes available a wealth of data on a larger range ofinstruments and policies used by many countries, including those beyond the OECD.
4. We therefore would like to request the Secretariat to produce a new section on energy as an
addendum to WT/CTE/W/67.  This revised section will, as the previous one, address the relationship
between removing trade restrictions and distortions and environmental benefits, with a first part
containing an overview of the main characteristics of the sector, a second part an analysis of the mostprevalent trade restrictions and direct or indirect distortions, followed by an examination of the
environmental benefits associated with the elimination of these trade barriers or distortions.
5. The specificity of energy is already widely recognized.  It is an “intermediary good” i.e. an
input to other industries and activities.  Energy depends on the way it is treated in its various forms of
production and trading.  As a result, any analysis should take into account a larger range of policiesand measures, as well as examining distorting effects and their potential redress.  It should also be
kept in mind that “market failures” in the energy area have an upstream consequence on the use of
best available and environment-friendly techno logies through unhindered procurement/sale of
equipment, know-how and services (topics addressed in other WTO fora and on which the CTE might
wish to give its advice in due time, since this could be the area for “win-win-win” negotiateddecisions).WT/CTE/W/185
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6. As a supplementary dimension, the need to ascertain the environment and climate change
effects of present policies and measures as compared to possible changes in policies has now become
part and parcel of all analyses in this area.
7. In other words, the price formation of energy as delivered to users is the results of many
factors which may be deemed to have “distorting effects” on prices, trade and environment.  A fewexamples brought to light in the aforementioned studies are:
• Local entities or local-state regulations or measures may help keep certain types of
power plants in operation, therefore encouraging the use of certain primary sources in
power generation.  This may take place through various types of subsidies,
investment control and procurement control, which raises questions of WTO rules
compatibility and affects opportunity costs, also in relation to externalities and
environmental cost.
• Absence of regulation or fiscal policies to internalize environmental costs can
encourage profligate use of energy generally and reduce incentives to develop and
invest in more energy efficient technologies .  Artificially cheap energy, i.e. energy
whose price does not reflect even an approximate environmental cost associated with
its consumption, can also be equated to a subsidy.  Industry which is able to enjoy
such artificially cheap energy can benefit from a competitive advantage by offloading
the real cost of its energy use on to society as a whole, including on to othergenerations and people living in other jurisdictions.  This runs counter to the concept
of sustainable development.  This type of “non-action” by countries in which such
energy pricing prevails is pernicious and is deemed by most analysts as having
negative welfare and environment impact both on the local and on competitors’
markets.
• A package of such measures may create artificial competitive advantage, resulting in,
inter alia,  lower prices as compared to other energy sources.  These in turn have a
distorting competitive effect on high energy-intensity tradable products.
8. Climate Change concerns and work done under the implementation of the Kyoto Protocol are
of clear relevance in this field.
9. Indeed, as long as cleaner and sustainable forms of energy are not generalized in production
and use, this is an area where the interest of liberalization and apparent cost effectiveness might be
mitigated by negative effects of increa sed consumption (use ) and emi ssion of GHG.
10. The progressive reductions or phasing out of market imperfections, fiscal incentives, tax and
duty exemptions and subsidies in all greenhouse gas-emitting sources that run counter to the objectiveof the Convention on Climate Change and application of market instruments  is fully embodied in the
text of the Kyoto Protocol (Art.2.1 provides a non-exhaustive list of eight areas to be considered by
industrialized countries to mitigate climate change).  As far as subsidies are concerned, this also
implies that well-targeted subsidies may constitute a valuable instrument to meet the climate change
objective and that one should therefore not treat all subsidies in the same way nor conclude that they
all have negative environmental implications..
11. Industrialized countries shall implement domestic policies and measures to mitigate climate
change (i) compatible with sustainable development and (ii) which should minimise adverse effects,
inter alia  effects on international trade, and social, environmental and economic impacts on other
Parties, especially developing countries.WT/CTE/W/185
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12. These issues are currently debated in the context of the implementation of the Kyoto Protocol,
and it a restructuring of industrialized countries’ tax system has been suggested to reflect the carbon
content of fossil fuel, from coal to gas, as the current rates of taxation are not applied in an
harmonized way across all fossil fuel.1   Overall, climate change matters should be taken into account
where relevant to provide a better understanding for the analysis of energy trade and market distortingmeasures, but are not directly the object of the intended request.
13. As explained under 2, the European Community requests that the Secretariat produce a new
section on energy as an addition to WT/CTE/W/67 as exposed above, on the basis of available reports
and research.  The importance of energy matters for trade and the environment make it necessary, in
our opinion, for the CTE to devote some of its attention to these points on a regular basis.
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1Gas:  4.8% (UK) until 29% (FIN);  oil:  39% (US) until 85% (UK);  coal:  1.2% (CH) until 48%
(FIN).  These are IEA figures.