Biofuels: International Trade and WTO Paradigm

Participant’s Presentation CDS-UNCTAD Training Programme

on "Contemporary Issues in International Trade: Theory and Empirics" CDS, Trivandrum, Kerala, INDIA 10-30 October, 2008.

Biofuels: International Trade and WTO Paradigm • Biofuels act as partial substitutes for fossil fuel

and have economic and environmental angle. • The paper raises various important issues in respect to the Biofuels, particularly from Indian perspective, such as its usage, emerging markets, international agreements, trade and foreign exchange and the global policy environment & WTO issues. • The limited and exhaustible oil resource and burgeoning oil import bills of many countries presents a case to search for alternatives. [Critical Review of the Paper “Biofuels and WTO: An Emerging Context” (2006), by R.S. Deshpande; Asian Biotechnology and Development Review, Vol. 8 (2), pp. 77-96]

Rationale for Biofuels • Biofuels (ethanol and biodiesel) are renewable fuels which are less damaging to the environment. • Strong employment and income generating effect. • The plants (Jatropha curcas, Simerouba glauca and Pongamia pinnata are well suited to the Indian climatic condition) are soil enriching and help in soil-degradation. • Answers global concern about the green house and climate change effects.

Rationale for Biofuels… • Reduces dependence on huge oil imports and saves foreign exchange. • Biofuels provide energy security in rural areas. They can be grown on cultivable wastelands, on degraded forest areas, as plantations on the side of railway tracks, roads and bunds of irrigation canals.

India’s Fuel share • More than 90 % based on fossil fuels (51% Coal,

34 % Petroleum and 7% Natural Gas). • Hydro- 6%, Nuclear- 2%; while wind/solar/ biomass share a miniscule share. • Oil accounts for about one-third of India’s total energy consumption. (Net import of oil in India was 78 million tonnes at the cost of Rs. 760 billion for 2003-04) • India’s energy demand expected to grow at more than 5 % per annum corresponding to the existing rate of growth.

International Agreements • The paper mentions two international agreements, namely, Cartagena Protocol on Biosafety (BSP) and the Kyoto Protocol, besides of course WTO specifically. • It argues that BSP will not be having any direct consequences for the biofuel sector. However, part of the Agreement that concerns on environmental quality may have a clear bearing. Producers will have to find the market and sustain them, whereas the net importer may have to accept the quality and demand generated elsewhere. • Kyoto Protocol have a clear bearing on biofuels sector and will boost demand for these fuels in

Global Policy Environment In the global policy environment, biofuels are pertinent from three distinct perspectives-

• In the context of environmental agreements, due to its dependence on biomass, less emissions and the impact on the forest use. • Emission standards-A report of the India’s Planning Commission (2003) clearly states that emission standards are globally accepted, which may boost the use of biofuels. • Since biofuels will largely substitute the fossil fuels, the trade angle (support to the industry and tariffs) becomes important.

Developed vs. Developing countries • Experience of many countries including Brazil

show that biofuels could be produced at a low cost and cost of production decreases over the years. Therefore, developing countries could take advantage of biofuels by producing for the purpose of trade. • Notwithstanding all the advantages, biofuels are likely to face significant trade barriers from developed countries, on three counts• 1. Developed countries are almost fully dependent on indigenous producers, and therefore, may support the sector with domestic subsidies.

Developed vs. Developing countries… • 2. They could bring forth some restrictive

regulations often based on quality and technology aspects of production (non-tariff considerations). • 3. The technology, as well as, investment would favour fossil fuels, as the use of fossil fuels would remain significant. That would provoke the oil exporting nations to argue on tariffs. • Biofuels have a high priority issue in US, EU and in a number of countries around the world, due to concerns about oil dependence, reduction in NO2, S, and CO2 emissions or restrictions on other octane enhancement additives and oxygenation.

WTO: Trade & Policy Issues • Biofuels are a tradable commodity with significant

economic and environmental implications. It gets included in the environmental goods and services sector. • Under the Kyoto Protocol, developed countries (Annex 1) must reduce their emission levels at 5% from the 1990 levels during 2008-2012. Importing biofuels from other, mainly developing countries, could help them reach their targets. • The paper highlights the need to ensure that trade liberalization efforts and policies in implementing the Kyoto Protocol become truly and mutually supportive.

WTO: Trade & Policy Issues… The biofuels sector interfaces with the WTO regime in five important ways-

• 1. It involves de minimus Market Access featuring from the viewpoint of the oil exporting countries. • 2. Domestic support angle- The possibility that trade in fuels may get restricted due to the possible generous support mechanisms to the biofuels sector. The aggrieved countries may consider these as trade distorting support mechanisms and therefore, these subsidies have to be classified from the viewpoint of the environmental sustainability argument. • 3. From the SPS Agreement viewpoint, acceptable standards of these biofuels have to be fixed before it gets into the trade discipline.

WTO: Trade & Policy Issues… • 4. From the point of view of IPR regime under

WTO. Here the product patent has to be viewed before embarking on large scale production of the product, if the production process as well as the product is going to be standardized. • 5. The environmental angle and carbon trading arguments- Kyoto Protocol contains binding targets for reduction of emissions that each developed country has to abide. It has institutional mechanisms, viz. CDM, Joint Implementation and Emission Trading to promote activities for mitigating harmful effects of climate change. These are likely to interface with the WTO

Doha Declaration Doha Declaration pays attention to the issue though indirectly by stating that-

“With a view to enhancing the mutual supportiveness of trade and environment, we agree to negotiations, without prejudging the outcome, on: (i) the relationship between existing WTO rules and specific trade obligations set out in MEAs. The negotiations shall be limited in scope to the applicability of such existing WTO rules as among parties to the MEA in question. The negotiations shall not prejudice the WTO rights of any member that is not a party to the MEA in question;

Doha Declaration… (ii)procedures for regular infromation exchange between MEA Secretariats and the relevant WTO Committees, and the criteria for the granting of observer status (iii)the reduction or, as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services.

Concluding Remarks • Overall the paper serves a good reference in

understanding the broad trade related aspects of biofuels, more specifically from the WTO point of view with a focus on India. However, the paper doesn’t provide a deep analysis of the issues involved and offers a limited light on the subject. It fails to take into account of the other major social and environmental features of the debate on biofuels, such as , the issue of land availability (choice between food crops and biofuels), environmental sustainability and food security aspects and the developmental challenges before the international community, viz. UN MDGs etc.

Thank You Amit Singh Consultant, ICRIER New Delhi