Environmental Law

10/11/2016

WTO limitations for domestic climate smart agriculture policies

Achieving the Paris Agreement’s climate goals will require states to start focusing both on reducing emissions from agriculture and on the sequestration potential of agriculture and land use.  The imminent rise in global food demand coupled with the decline in fertile agricultural land caused by climate change will further necessitate the drafting and implementation of effective policies. These policies have to aim for mitigation, adaptation and food security, the three pillars of ‘climate smart agriculture’. Climate smart agriculture is an approach to developing the technical, policy and investment conditions to achieve sustainable agricultural development for food security under climate change (FAO 2013).  Examples of climate smart practices are the introduction of rotational grazing management schemes, crop rotation, minimum tilling, permanent native vegetation on farmland and the use of compost and other soil additives to increase soil carbon levels.  Examples of climate smart technologies are sophisticated, computerized drip-irrigation systems, and methane capture and conversion technologies in animal raising facilities.  A comprehensive regulatory framework to incentivize the agricultural sector to convert from conventional practices to become climate smart is still largely lacking, not just in the EU, but worldwide. Incentives that already are applied on a small scale are subsidies and tradable offsets under a carbon pricing mechanism. It is expected that future policies aimed at advancing the implementation of climate smart practices and technologies in the farming sector will use one of these or both instruments.

Both are voluntary instruments in the sense that farmers can choose not to apply for a subsidy or participate in an offset scheme, yet both do have an impact on trade because these instruments incentivize certain agricultural practices thus favouring some domestic farmers and their products over foreign farmers and their (imported or exported) products. When drafting a policy aimed at stimulating climate smart agriculture, it is, therefore, important to remain within the legal boundaries set by international trade law. There has been remarkable little attention for these trade law limitations to domestic policies in the area of climate smart agriculture. In Australia, for example, there does not seem to have been any debate on possible WTO requirements for the domestic Australian carbon farming initiative, which is a scheme aimed at stimulating farmers to reduce emissions or increase sequestration through offsets that are bought up by the government in reversed auctions. Academic literature does exist, but mostly focuses on the WTO boundaries for domestic climate law in a broad sense. That literature is rather worrying. Because it takes a broad perspective and deals with all potential instruments that may infringe upon a wide range of WTO instruments, it looks as if the WTO is a huge stumbling block for domestic policies.^[1]

In my view, it is more worthwhile to focus on the two most likely instruments. As stated above, policies aimed at stimulating climate smart agriculture are likely to be some sort of government subsidy of a system of offsets from agriculture that are allowed in the carbon market. These instruments primarily have to be assessed against the requirements of two WTO instruments: the Agreement on Agriculture (AoA) and the Agreement on Subsidies and Countervailing Measures (SCM).

Domestic policies aimed at stimulating the adoption of climate smart agricultural practices and technologies are environmental protection programmes that, in principle, are allowed under the so-called ‘Green Box’ of the AoA, provided the support is only given in the start-up phase and is terminated after the benefits from the conversion to climate smart practices, be it from improved productivity, the generation of energy or from the sale of carbon credits on the private carbon market, greatly surpass the costs involved. Incentives that have a positive impact on production, such as for soil carbon projects, and that are not allowed under the AoA’s Green Box, are actionable under the SCM Agreement. It is hard to say in general whether payments to farmers, be it through a subsidy or through the carbon market, are not actionable because they do not cause adverse effects on competing producers in other countries. This very much depends on the individual case.

Several carbon farming methodologies definitely have production-enhancing co-benefits and would, therefore be actionable under the SCM Agreement. Soil sequestration projects, for example, are known to have a tremendous positive impact on the production of crops. Financing such projects could, therefore, be seen as granting an actionable subsidy, as long as they are not covered by the AoA. This means that it is up to the injured WTO member state to prove these subsidies caused serious prejudice to its interests, i.e., that because of the subsidy, it suffers from displaced imports into the market of the subsidizing country, displaced exports to third countries, significant price suppression, or an increase in the world market share by the subsidizing country.  Should a country succeed and subsequent consultations not lead to an agreement, the injured state can take countermeasures.

The accused state could argue that the subsidies are non-actionable because these are meant to promote adaptation of existing facilities to new environmental requirements imposed by law and/or regulations, as allowed under the SCM Agreement.  It is, however, unlikely that all of the six conditions for this exception clause to apply are met as current schemes are voluntary, the subsidies are not one-time but re-occur every time new abatement has been achieved, and the payments are not limited to 20 per cent of the cost of adaptation.  The condition that financial assistance should be directly linked to and proportionate to a firm’s pollution reduction,  is only met in case of emissions abatement projects, such as methane capture. Sequestration projects are not covered as these do not reduce the firm’s own emissions. Whether the condition that the financial assistance needs to be available to all firms which can adopt the new equipment and/or production processes is met, depends on the design of the regulatory scheme. The Australian scheme, for example, under which only farmers with winning bids in a reversed auction receive government funds, seems incompatible with the latter condition.

The other WTO instruments are only relevant to a very limited extend. The GATT and TBT Agreement, generally, are not applicable in the case of the two instruments that are most likely to be used to stimulate climate smart agriculture. The GATS requires a policy to enable foreign service providers to be active under a carbon pricing mechanism aimed at offsets from agriculture. The TRIP Agreement requires states to protect the invention of climate smart technologies to be protected under patent law. Should policies be aimed at a rapid adoption of patented climate smart technologies, then states can opt for excluding a climate smart technology from patentability based on grounds of avoiding serious prejudice to the environment.

To further facilitate the adoption and implementation of policies promoting climate smart agriculture, the international community should take action in the area of international trade law. Unfortunately, climate change is not addressed in a comprehensive manner in the ongoing negotiations on liberalizing environmental goods and services, on the relationship between the WTO and the UNFCCC and the Paris Agreement, and on agriculture, nor in the regular meetings of the Committee on Trade and the Environment and the TBT Committee.  It is clear that policies aimed at stimulating climate smart agriculture cannot be neatly assessed under one of the current WTO Agreements, but instead are situated in between and across the various agreements, depending on the specific type of measure and the specific activity that is incentivized. It seems that it is difficult to give due consideration to climate smart agriculture in all of the ongoing negotiations and discussions within the WTO framework, although several realistic options to at least create more room do exist. The most realistic and feasible options in my view are including climate smart agriculture technologies in the yet to be concluded WTO Agreement on Environmental Goods and Services and to recognize carbon sequestration as an agricultural product under the AoA so that it becomes possible to support farmers’ sequestration measures under the Green Box.

[1] For example, David Blandford and Tim Josling, Greenhouse Gas Reduction Policies and Agriculture: Implications for Production Incentives and International Trade Disciplines (Geneva: International Centre for Trade and Sustainable Development, 2009); David Blandford, “Climate Change Policies for Agriculture and WTO Agreements”, in Joseph A. McMahon, Melaku Geboye Desta (eds.), Research Handbook on the WTO Agriculture Agreement. New and Emerging Issues on International Agricultural Trade Law (Cheltenham: Edward Elgar, 2012), pp. 223 et sqq.; David Blandford, International Trade Disciplines and Policy Measures to Address Climate Change Mitigation and Adaptation in Agriculture, E15 Expert Group on Agriculture, Trade and Food Security Challenges Think Piece (Geneva: ICTSD/WEF, 2013); Andrew Green, “Climate Change, Regulatory Policy and the WTO. How Constraining are Trade rules?”, 8:1 Journal of International Economic Law (2005), pp. 143 et sqq.; Christian Hberli, WTO Rules Can Prevent Climate Change Mitigation for Agriculture, Working Paper No. 2016/06 (London: Society of International Economic Law, 2016); Deok-Young Park (ed.), Legal Issues on Climate Change and International Trade Law (Cham: Springer International, 2016); Richard G. Tarasofsky, “Heating Up International Trade Law: Challenges and Opportunities Posed by Efforts to Combat Climate Change”, 2:1 Carbon and Climate Law Review (2008), pp. 7 et sqq.

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This project has received funding from the European Union’s Horizon 2020 research and innovation programme under the Marie Sklodowska-Curie grant agreement No 655565.