WTO Disciplines and Biofuels: Global Market Opportunities

1. WTO Disciplines and Biofuels: Opportunities and Constraints in the Creation of a Global Marketplace Presented at: World Bank – Rural Day 9 November, 2006 By: Charlotte Hebebrand International Food & Agricultural Trade Policy Council (IPC) www.agritrade.org

2. Main Drivers for Biofuel Production Some are predicated on domestic production and use: • Desire for greater energy independence • Additional market for agricultural commodities • Potential contributor to rural development

3. Main Drivers for Biofuel Production But others are not: • Search for more environmentally-friendly transportation fuel • Desire for cost-effective biofuels

4. Trade in Biofuels May Increase Given mandates… • US Mandate: 4b gallons in 2006; 7.5b in 2012 • EU target: 5.75% of transportation fuel by 2010 • JA contemplating 10% blending mandate …and logic of demand and supply OECD countries with limited land availability, possibly higher production costs

5. Developing Countries Perceive Opportunities • Comparative advantage – more land; better climate; more suitable crops; lower labor costs • Interest in domestic production and use to reduce expenditure on imported oil and to promote rural development • Endless demand by rich countries offers potential export opportunities

6. But Should Proceed with Caution • Price of fossil fuel • Weigh against other opportunities • Unable to subsidize to the same extent as OECD countries • Potential trade may be stifled by overly exclusive focus on domestic production in OECD countries • Sustainability concerns and criteria may limit trade

7. Need to Clarify How WTO Rules Apply • Focus on trade can highlight comparative advantage • Focus on trade can lead to use of biofuels produced from feedstocks which are most effective at reducing GHGs and are most cost effective • Transparent trade regime can attract stable financing and capital investment • Address increased production of by-products • Clarify subsidy issues

8. Key WTO Issues • Classification – agricultural, industrial or environmental goods? II. Subsidies/Incentives III. Domestic regulations and standards

9. Classification Biofuels are produced from agricultural products; replace industrial products; used to achieve environmental benefits • WTO rules provide structures and rules for negotiated tariff reduction – countries “bind” tariffs • Most WTO members use WCO’s Harmonized Commodity Description and Coding System (HS)

10. I. Classification • HS headings determine whether product is agricultural or industrial product • WTO Agreement on Agriculture Annex 1: HS Chapters 1-24 (and some others) • Ethanol in Chapter 22 = agricultural product; no differentiation based on end use • Biodiesel in Chapter 38 = industrial product

11. I. Classification Negotiation on Environmental Goods & Services • Could Biofuels be considered environmental goods and thus be subject to faster liberalization? • Difficulty defining parameter of what may be included • Unresolved whether agricultural goods can be included or NAMA only

12. I. Classification Policy Responses: • Amend HS to introduce distinctive headings for biofuels – allows better tracking of trade; liberalization • Amend Annex I of AoA • Liberalize multilaterally, unilaterally, preferential arrangements

13. II. Subsidies Importance of Classification – SCM / AoA • Expiration of the Peace Clause • Subsidies and Countervailing Measures Agreement (SCM) • Prohibits export subsidies and subsidies contingent upon use of domestic products over imports

14. II. Subsidies – SCM: Actionability • Financial contribution by government: includes range of measures besides direct cash payments • Benefit received by recipient which confers competitive advantage on recipient (in market shaped by government interventions, “market benchmark” not easy to determine) • Subsidy must be specific • Upstream and downstream subsidies

15. II. Subsidies – SCM: Actionability Adverse Effects • Injury to domestic producers of like product in competition with imported subsidized product • Nullification and impairment • Serious prejudice – displace imports of like products; displace exports to third market; price suppression • Increase in world market share

16. II: Subsidies -AoA • URAA – amber, blue and green boxes • Capped amber box, unlimited green box • Biofuels support programs (support to industry and/or to agricultural products??)

17. II. Subsides – AoA – Green Box Green box criteria • Fundamental requirements: program publicly funded; no transfers from consumers; no provision of price support to producers • Must meet specific criteria (Annex 2 URAA) – R&D; general services (no direct payments to producers/processors); decoupled income support; payments in exchange for removing land from agricultural production; environmental subsidies

18. II. Subsides – AoA – Green Box • Environmental subsidies limited to those that are intended to compensate producer for costs of complying with governmental environmental programs • Issue of set-aside land – farmers receive payments for removing land from marketable agricultural production – is biomass an agricultural good? • Increased production of by-products (glycerine, DDGs)

19. III. Regulations & Standards WTO approach to domestic regulations • Principle of non-discrimination • Most Favored Nation • National Treatment • “like” products – physical characteristics, end uses, consumer habits • Production-process distinction

20. III. Regulations & Standards • TBT Agreement – applies to mandatory technical measures that specify characteristics of products and their related processes and production methods • Urges members to use international standards • Regulations not more trade restrictive than necessary

21. Conclusion: Potential for trade given increased demand, but need to clarify rules • Uncertain classification • Wide range of government measures – tax incentives, high tariffs, subsidies • Web of separate technical and environmental standards