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Would Agricultural Soil Carbon Offset Projects Contravene WTO trade law?

October 23, 2009

Proposition:  soil carbon sequestration projects, as project offset projects that create carbon credits under an emissions trading scheme, such as the CPRS in Australia, may be classified as actionable, specific, and contestible, subsidies under international trade law.


There is much discussion about how agriculture should be included within a framework to address greenhouse gas emissions, particularly in the context of a construct of an emissions trading scheme. 

Farmers don’t even seem to be able to agree with their own association on the approach to take. 

In a previous post, I outlined the importance from a trade and food security perspective to get the treatment of agriculture right. 

There are some potential issues in relation to the possible treatment of agriculture under the domestic climate change programme.  It appears likely that some of the proposals for agriculture within emissions trading may fall foul of international trade law.  More specifically of concern are proposals to enable offsets to be generated by farmers from carbon sequestration activities.

The potential issues are reasonably academic in the short term, but potentially extremely problematic in the medium- and long-term when carbon pricing becomes more influential for commodity prices.

Some of the issues relating to agriculture and trade may be less salient than other potential issues in this space.  For example, the CPRS has provisions relating to ‘Emissions Intensive Trade Exposed’ (‘EITE’) industry free permit compensation (based on a formula including emissions intensity per value add of unit of production, typically).  Both the EU and US have, or are considering, similar allocation of free permits.

Another example are the penalties, stipulated within the US ‘Climate Bill’, foreseen for countries trading with the USA which do not set limits on their own GHG emissions.  There have been similar proposals in the EU.

For a broad-ranging discussion of the interface between Kyoto and WTO, I can recommend reviewing a paper by Thomas Brewer on this subject.

As far as agriculture is concerned in the ETS debate here, current provisions are not to include the sector any time before 2015.  However, agricultural industries are indirectly affected through increase in fuel and electricity prices.  It is proposed that they receive fuel tax credit by means of compensation. 

It is apparent that standards, incentives, and R&D will have to be the main mechanisms to include agriculture within a framework to reduce greenhouse gas emissions.  The position of the National Farmers Federation (NFF)  in Australia would suggest that their preferred option includes the participation of farming in an ETS through the generation of carbon credits from carbon offset (baseline-and-credit) projects.  The Liberal party in Australia are certainly pushing this policy.

Already along this line, are provisions for inclusion of forestry sequestration as a carbon offset, which has trade and food-security implications.  In trade terms, it raises the possibility of that measure being considered a ‘cross-subsidy’ to other crop production through the artificial creation of a market designed to generate additional revenue from land otherwise unsuitable for profit-generation.  In addition, a carbon sequestration deal has recently been signed in the ‘wheat belt’ for reforestation activities, which raises the spectre which has of late plagued the bio-fuels industry – that measures ostensibly aimed at greenhouse gas mitigation have the effect of reducing food-crop production land, in turn raising food-crop product prices.

There is also strong interest and pressure to include other forms of sequestration activity – particularly soil carbon sequestration enhancement through application of biochar – but perhaps also no-tillage.

The inclusion of either would imply revenue surpassing implementation costs, which have a positive impact on production levels through productivity enhancement. 

In following points, I rely heavily on the paper Greenhouse Gas Reduction Policies and Agriculture: Implications for Production Incentives and International Trade Disciplines published earlier this year by the International Centre for Trade and Sustainable Development and International Food & Agricultural Trade Policy Council (IPC), co-authored by David Blandford (Professor in the Department of Agricultural Economics and Rural Sociology, Pennsylvania State University) and Tim Josling (Senior Fellow at the Freeman Spogli Institute for International Studies, at Stanford University).

While I won’t go into the range of potential mitigation measures for agriculture and trade law implications that the paper goes into, standards, taxes, and subsidies all have potential implications that will need to be assessed and managed.

 The WTO, through its incorporation of the GATT (1994), includes a “general exceptions” provision (Article XX) that allows considerable scope to governments in imposing trade restrictions to support domestic objectives.  Among those objectives is environmental preservation.  Any measure that is justified on grounds of health and safety falls under the scope of the Sanitary and Phytosanitary Measures Agreement (SPS), other regulations fall essentially within the purview of the Technical Barriers to Trade Agreement (TBT).

 Trade rules focus on actions by governments that injure other parties through discrimination against, or unfair treatment of, their products or services.  Adoption of best practices in one country(…) is not likely to have a negative impact on the international competitive position of agriculture in other countries, unless these practices have a significant output-enhancing effect.

 The WTO Subsidies and Countermeasures Agreement (SCM) gives a legal definition of the term “subsidy”. According to the SCM (SCM Article 1), a subsidy must have three basic elements:

 – It must entail a financial contribution.

 – It must be made by a government or any public body within the territory of a Member.

 – It must confer a benefit.

 The SCM defines an ‘actionable subsidy’ as

(1) a non-de minimis ‘financial contribution’ that

(2) is bestowed on ‘specific’ enterprises or industries; and

(3) causes or threatens ‘injury’ or ‘serious prejudice’ to foreign manufacturers of like products.

 The contribution is non-de minimis if it yields, directly or indirectly, a benefit that is greater than 1 percent of the receiving firm’s total sales of all products

 The ICTSD authors are of the view that the most likely area of conflict with WTO rules relates to subsidies, which are dealt with primarily under the SCM.  These are not necessarily inconsistent with the articles of the GATT/WTO, but are closely circumscribed.

More problematic is adoption stimulated by public policy. Thus, for example, a subsidy (or tax relief ) designed to encourage the use of minimum tillage could potentially be challenged by other countries.   If the subsidy were to be given to agricultural producers, then it would probably be covered by the Agreement on Agriculture.  If it can be shown to have a significant output-enhancing effect, then it might also be covered under the Subsidies and Countervailing Measures Agreement (SCM).

 A subsidy is only subject to the full disciplines of the SCM if it is a specific subsidy (SCM Article 2).  Specific subsidies are divided further into two categories: those that are prohibited and those that are allowed, subject to constraints.

 Subsidies to farmers that followed certain practices would seem to qualify as a ‘specific subsidy’ and thus be covered by the SCM.  It is likely that measures that would single out categories of farmers for climate change subsidies would also tend to make those subsidies specific.  

 A subsidy is contestible if it has the effect of displacing imports into the market of the subsidizing country; or displace exports to third country markets; create significant price suppression; or an increase in world market share by the subsidizing country.

 All agricultural subsidies will tend to cause adverse effects for competing producers.  

 The IPC paper authors argue that

subsidies for sequestering carbon are unlikely to have a production -enhancing effect, although they may in some cases reduce production costs.

– therefore that the subsidy would not cause adverse effects on other WTO members and be ‘actionable’

 I would dispute this.  No-tillage, biochar, and other soil carbon-enhancing farming techniques that might be eligible for carbon offset scheme participation are all production-enhancing, and reduce production costs.

 How, therefore, would agricultural subsidies for climate purposes be categorised, within the Ageement on Agriculture ‘boxes’ ?  If they fall within the green box, then there’s no problem.  If it’s the Amber box, then it’s potentially ‘actionable’.

 The overarching requirement to be ‘green box’ eligible is that green box payments should have “no, or at most minimal trade-distorting effects or effects on production” (Paragraph 1). Three general criteria are specified as a way of meeting this requirement:

 Support should be provided through a publicly funded government programme, should not involve transfers from consumers, and should not provide price support to producers.

 A strict interpretation of the price support general condition would cast doubt on the green box conformity of government schemes that result in the creation of a market for a previously unpriced service, such as carbon sequestration.

However, the concept of “price support” might be interpreted to mean support of the price of the agricultural product. This price could even go down if payments for previously unpriced services became available. The question would arise in such cases as to whether carbon credits that could be sold to other industries for use as offsets are “products” whose price is being supported.  It is not unreasonable to consider carbon sequestration as a part of farming activity and the rewards as part of farm revenue.

 The type of subsidy that is most likely to be used in any green box defence is Paragraph 12.

12. Payments under environmental programmes

(a) Eligibility for such payments shall be determined as part of a clearly-defined government environmental or conservation programme and be dependent on the fulfilment of specific conditions under the government programme, including conditions related to production methods or inputs.

(b) The amount of payment shall be limited to the extra costs or loss of income involved in complying with the government programme.

 Therefore, payments for sequestration would be allowed under a clearly defined environmental programme if they compensated farmers for the cost of such actions.  It is possible (and I would argue likely) that ‘overcompensation’ for costs may in fact be necessary and inherent to ensure sufficient participation in an offset programme. That could make the payments potentially subject to challenge.

 Clearly, the receipt of monies by farmers in exchange for selling carbon credits associated with sequestration offset projects does not fit this condition.

Happily, it seems that carbon soil and other sequestration projects under the Clean Development Mechanism of the Kyoto Protocol, or associated measure, will not be adversely impacted by trade law:

 “Developing countries can also exclude investment support for agriculture and input subsidies for low-income and resource-poor farmers (special and differential treatment) that in developed countries would be subject to constraint as trade-distorting.”

 In a climate change mitigation context, this is critically important if such measures are required to address greenhouse gas emissions.  Emissions from the agricultural sector account for roughly 14 percent of global greenhouse gas (GHG) emissions.  Most emissions from agriculture (74 percent of the 14 percent total) and most of the technical and economic mitigation potential from agriculture (70 percent) are in developing countries.

 The FAO estimates that agricultural production will have to expand by 100% in developing countries in the  period to 2050, requiring an annual net investment of $83 billion dollars.  An issues paper from the FAO-convened High-Level Expert Forum that met in October in Rome states:

 Agriculture currently contributes about 14 percent to GHG emissions (6.8 Gt of CO2), but also has the technical potential to mitigate between 5.5–6 Gt of CO2 per year, mainly through soil carbon sequestration and mainly in the developing countries

 It is essential that measures that can both act to leverage private sector investment into activities that both mitigate greenhouse gas emissions, and increase food security, are permitted to be developed without legal constraint of trade requirements.

 For carbon sequestration offsets, it is not clear that funds from the sale of carbon credits would be considered as a subsidy.  The SCM Agreement defines a subsidy as a financial benefit that comes from a governmental or public entity.  Whether leaving the operation of the carbon market to the private sector makes the offset mechanism less of a subsidy remains to be resolved. 

 In Designs for Domestic Carbon Emissions Trading: Comments on WTO Aspects for the H. John Heinz III Center for Science, Economics and the Environment, Richard W. Parker of the University of Connecticut School of Law argues:

 The fact that the cash derives from non-governmental third parties is irrelevant – indirect subsidies are subsidies. The fact that a subsidy is received as partial compensation for much higher fuel costs and/or fuel conversion costs or other regulatory compliance costs is likewise irrelevant

 In conclusion, from my assessment ,it is possible that an agricultural carbon sequestration offset in an OECD country such as Australia might be considered a specific production output-enhancing subsidy which is not de minimus, funded by private sector participants in response to an explicit provision and property right created within a government programme, which could cause ‘injury’ or ‘serious prejudice’ to producers in other countries.  It is therefore likely to be an ‘actionable’ subsidy within the ‘amber box’.

Given the difficulty to renogiate or carve-out trade law, it is likely that Governments will have to be very careful in the way that they structure their climate policy in this regard.

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