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Climate Finance and WTO Subsidies Law

Are bilateral and multilateral foreign aid subsidies consistent with the SCM Agreement? Regarding bilateral foreign aid, it is common practice to make the aid conditional on the use of suppliers from the donor country. However, such practices also can occur in the context of CDM projects that include bilateral official development assistance from Kyoto Annex 1 parties.[1] A UNFCCC study of technology transfer under the CDM found that there is a strong tendency for countries to receive CERs from projects for which they are technology suppliers. In the study’s sample, 91 percent of the CERs received by Denmark came from projects for which it was a technology supplier. The percentages for Spain, Germany, and Japan were 50 percent, 40 percent, and 37 percent, respectively. However, it is not known whether the CERs purchases were contractually linked with the technology supply.19 However, there is circumstantial evidence of making climate finance aid conditional on the use of suppliers from the donor country. More convincing evidence might come to light in the event of WTO litigation over this issue. These practices may divert scarce resources away from more cost-effective suppliers. They might also be inconsistent with the SCM Agreement.

SCM Agreement Article 1.1(a)(1) defines “subsidy” as “a financial contribution by a government or any public body within the territory of a Member” (emphasis added). It is unclear whether the phrase “within the territory of a Member” applies to “a government,” “public body,” or “financial contribution.” If the financial contribution must take place within the territory of a Member, “a Member” could be interpreted to mean the Member that makes the financial contribution or could mean any Member. The former interpretation might exclude foreign aid from the definition of subsidy and, thus, from the application of the SCM Agreement. Otherwise, the SCM Agreement would apply.

Let us assume that the SCM Agreement would apply. In accordance with Article 1.1(a)(1), the financial contribution may involve a direct transfer of funds, provision of goods or services other than general infrastructure, purchases of goods, payments to a funding mechanism, or any form of income or price support in the sense of Article XVI of GATT 1994. In the case of bilateral climate financing, there could be a direct transfer of funds or some other form of income or price support, depending on the terms of the aid package. In the case of multilateral climate financing, it might take the form of payments to a funding mechanism. This would require an affirmative demonstration of the link between the government and the specific conduct ofthe funding mechanism (see Chapter 3). Thus, this first element is likely to be met.

There must also be a benefit conferred. In CanadaAircraft, the Appellate Body interpreted of the term “benefit” under Article 1.1(b) as follows: “a financial contribution will only confer a ‘benefit’, i.e., an advantage, if it is provided on terms that are more advantageous than those that would have been available to the

Reconstruction and Development (IBRD) acted as Trustee of the Spanish Carbon Fund (SCF). Thus, while the PDD lists Spain as a project participant, the PDD also states, “There is no Official Development Assistance in this project and the project will not receive any public funding from Parties included in Annex I.” Project 4945: BRT Metrobus Insurgentes, Mexico

int/Projects/DB/AENOR1309257514.77/view> (accessed January 3, 2013).

19 UNFCCC, The Contribution of the Clean Development Mechanism under the Kyoto Protocol to Technology Transfer (2010) 32 (accessed January 3, 2013).

recipient on the market.”[2] One of the rationales behind foreign aid, and the CDM in particular, is that the investment would not occur in countries with limited resources in the absence of the funding. Thus, if the funding creates the necessary financing for the participation of the donor country’s suppliers, thereby creating an opportunity that would not have existed otherwise, it likely would qualify as a benefit. Alternatively, if, in the absence of the aid program, there is no market that can be used as an appropriate benchmark against which to measure whether a benefit is conferred then the subsidy would not be proved.[3]

The person or entity receiving the benefit does not have to be the same as the one who received the financial contribution.[4] Thus, the recipient country could receive the financial contribution but the supplier would still qualify as the recipient of the benefit within the meaning of the SCM Agreement. The assessment of benefit must examine the terms and conditions of the challenged transaction at the time it is made and compare them to the terms and conditions that would have been offered in the market at that time.[5] Thus, depending on the facts of each case, bilateral or multilateral climate financing could confer a benefit within the meaning of the SCM Agreement.

Export subsidies are deemed to be specific and are prohibited.[6] An export subsidy is defined as contingent, in law or in fact, upon export performance.[7] The standard of contingency in fact is met when the facts demonstrate that the granting of a subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation.[8] In the case of climate financing, the subsidy is tied to the exportation to the recipient country. Thus, climate financing could be found to be a prohibited export subsidy under the SCM Agreement.

However, this issue has not been addressed in the WTO jurisprudence. A conflict between multilateral agreements on climate finance and the SCM Agreement might be avoided by interpreting the latter so as to avoid such a conflict, in accordance with the presumption against conflict in international law, as noted above with respect to the definition of subsidy and the issue of benefit. Alternatively, if such an interpretation is not considered possible, the conflict might be resolved in favor of multilateral agreements on climate finance by applying the international rules of lex specialis (the specific prevails over the general) or lex posterior (the later treaty prevails over the earlier treaty). Another possibility would be to apply the exception in GATT Article XXI(c) regarding compliance with obligations under the United Nations Charter for the maintenance of international peace and security, which serves to divide jurisdiction between the security interests addressed by the UN and the commercial interests addressed by the GATT.[9] However, while climate change is likely to qualify as a matter of international peace and security,[10] it is not clear that GATT Article XXI could be applied to justify violations of the SCM Agreement. A final alternative would be to seek a waiver of the relevant WTO obligations, in accordance with Article IX:3 of the WTO Agreement.

  • [1] Public funding for clean development mechanism projects from parties in Annex I is not to resultin the diversion of official development assistance and is to be separate from and not counted towardsthe financial obligations of parties included in Annex I (17/CP.7, preamble). To this end, 3/CMP.1,Annex, Appendix B requires that any public funding for a CDM project activity be disclosed in theproject design document (PDD) (accessed January 3, 2013).For example, for the CDM Project for the Mexico City Metrobus, the International Bank for
  • [2] Appellate Body Report, Canada—Measures Affecting the Export of Civilian Aircraft (Canada—Aircraft), WT/DS70/AB/R, adopted 20 August 1999, para. 149.
  • [3] Panel Reports, Canada—Certain Measures Affecting the Renewable Energy Generation Sector(Canada—Renewable Energy), WT/DS412/R, and Canada—Measures Relating to the Feed-in TariffProgram (Canada—Feed-In TariffProgram), WT/DS426/R, adoptedMay24,2013, paras. 7.276—7.277.See also Appellate Body Report, WT/DS/426/AB/R, paras. 5.79, 5.219.
  • [4] Appellate Body Report, United States—Countervailing Measures Concerning Certain Productsfrom the European Communities, WT/DS212/AB/R, adopted January 8, 2003, para. 110.
  • [5] Appellate Body Report, European Communities—Measures Affecting Trade in Large Civil Aircraft(ECand CertainMember States—Large Civil Aircraft), WT/DS316/AB/R, adopted June 1,2011, para.838; Appellate Body Report, US—Large Civil Aircraft (2nd complaint), WT/DS353/AB/R, adoptedMarch 23, 2012, para. 636.
  • [6] SCM Agreement art. 2.3, 3.1(a).
  • [7] SCM Agreement art. 3.1(a).
  • [8] SCM Agreement fn. 5.
  • [9] Analytical Index, Guide to GATT Law and Practice (World Trade Organization, Geneva 1995)vol. I, 600.
  • [10] For example, the Draft ClimateAssessment Report recognizes that US security interests are affectedby climate changes experienced in other parts of the world. National Climate Assessment DevelopmentAdvisory Committee, Draft Climate Assessment Report (January 11, 2013) 12 (accessed January 12, 2013).
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