WTO Disciplines and Biofuels: Opportunities and Constraints in the Creation

of a Global Marketplace

Presented at:

World Bank – Rural Day

9 November, 2006By:

Charlotte Hebebrand

International Food & Agricultural Trade Policy Council (IPC)

www.agritrade.org

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

Main Drivers for Biofuel Production

But others are not:• Search for more environmentally-friendly

transportation fuel• Desire for cost-effective biofuels

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 supplyOECD countries with limited land availability, possibly

higher production costs

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

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

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

Key WTO Issues

I. Classification – agricultural, industrial or environmental goods?

II. Subsidies/Incentives

III. Domestic regulations and standards

I. Classification

• 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)

Biofuels are produced from agricultural products; replace industrial products; used to achieve environmental benefits

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

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

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

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

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

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

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??)

II. Subsides – AoA – Green Box

Green box criteriaI. Fundamental requirements: program publicly

funded; no transfers from consumers; no provision of price support to producers

II. 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

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)

III. Regulations & Standards

• Principle of non-discrimination • Most Favored Nation• National Treatment• “like” products – physical characteristics, end uses,

consumer habits• Production-process distinction

WTO approach to domestic regulations

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

Conclusion:

• Uncertain classification • Wide range of government measures – tax

incentives, high tariffs, subsidies• Web of separate technical and environmental

standards

Potential for trade given increased demand, but need to clarify rules