Exploring the Trade Impacts of Fossil Fuel Subsidies

Key Messages

• There are multiple pathways through which fossil fuel subsidies can affect competitiveness and trade at various stages of fossil fuel product value chains. These include both direct and more indirect effects.
• The trade impacts of fossil fuel subsidies are likely very important in markets for crude fossil fuels, transformed energy products, as well as non-energy but energy-intensive products, which are enormous and often highly competitive. Markets for substitute products, such as those related to renewable energy, can also be significantly affected.
• Fossil fuel subsidies are highly relevant from an international trade policy perspective, in particular for the World Trade Organization (WTO). Various options exist for the WTO to engage more meaningfully with fossil fuel subsidies and their reform.

In recent years, growing attention has been given in various contexts to fossil fuel subsidies and the need to reform them. Discussion on the topic, however, has focused almost exclusively on the environmental impacts of these support measures. This paper focuses on another, much less explored aspect: the trade impacts of fossil fuel subsidies. Despite the obvious trade implications that fossil fuel subsidies can have, those impacts have not yet been discussed in detail.

After an overview of the current state of the literature on the topic, the paper presents a conceptualization and explanation of the various pathways through which fossil fuel subsidies can affect trade at different stages of fossil fuel product value chains, and then looks at empirical evidence to shed light on the potential scale of those trade impacts. The paper also presents a series of options for how the WTO could engage more with fossil fuel subsidies and contribute to advancing their reform.