Explaining energy disputes at the World Trade Organization

The international trade regime has seen an explosion of challenges to government support for renewable energy in recent years, yet fossil fuel subsidies, which dwarf renewable energy subsidies, have remained unchallenged. Existing explanations for this puzzling discrepancy have focused on four rationales: major fossil fuel exporters have not historically been members of the General Agreement on Tariffs and Trade/World Trade Organization (WTO); WTO subsidies rules are inadequate to deal with the specifics of the fossil fuel trade; nations have developed separate institutions to govern energy; and all states have fossil fuel subsidies, so a challenge to one country’s subsidies will prompt a reciprocal challenge. This article makes two contributions. First, it uses a survey of existing renewable energy trade disputes to critique the existing explanations. Most importantly, the article shows that the threat of reciprocal litigation exists in the renewable energy sector, and that WTO subsidies rules are rarely used to challenge renewable energy subsidies. Hence, neither the threat of reciprocal litigation nor the relative ease of applying WTO subsidies rules explains the discrepancy in the number of disputes. Second, the article hypothesizes that the economic diversification of energy-producing countries is correlated with and may drive whether energy-producing countries face WTO challenges to their energy support policies. Most major fossil fuel producers lack significant non-fossil fuel exports that could be restricted in order to induce them to reform their fossil fuel policies, the usual mechanism for enforcing a WTO judgment. States may also be more likely to challenge new, rather than long-standing, trade restrictions. This suggests that trade challenges will arise more frequently where innovation leads to competition and a demand for new trade restrictions (as in renewable energy), as opposed to in mature sectors of the economy (i.e., the fossil fuel industry). Economic diversification, in turn, is a good predictor of innovation.