WORLD TRADE
ORGANIZATIONWT/CTE/W/200
18  September 2001
(01-4403)
Committee on Trade and Environment
ENVIRONMENTAL BENEFITS OF REMOVING TRADE RESTRICTIONS
AND DISTORTIONS:  THE ENERGY SECTOR
Item 6 of the work programme
Note by the Secretariat
1. This Note has been prepared in response to a request by the Committee on Trade and
Environment (CTE) for an update of the energy section of document WT/CTE/W/67 on The
Environmental Benefits of Removing Trade Restrictions and Distortions .  It surveys the most recent
literature on the subject, and is divided into the following sections: (1) overview of energy sector; (2)
trade aspects;1 and (3) the environmental benefits of removing trade restrictions and distortions.
I. OVERVIEW OF THE ENERGY SECTOR
A. PRIMARY SOURCES OF ENERGY AND RESERVES2
2. The main sources of primary energy are oil, coal and natural gas (which are together known
as "fossil fuels"), as well as nuclear energy and renewables (such as solar and hydroelectric power).
Electricity, while also a fuel, is itself generated using primary energy.
3. According to the projections of the Interna tional Energy Agency (IEA) for world primary
energy demand between 1997 and 2020, demand will rise at  an average rate of 2% per annum over the
projection period, and increase by a total 57% in 2020.3  Despite expected demand growth, the World
Energy Council (WEC) confirms that energy resources are plentiful and not expected to be a limiting
factor in global economic growth.4
4. Proven oil reserves are concentrated in the Middle East, which is home to 64% of world
reserves, followed by South America (8.3%), No rth America (8%), Africa (6.9%), Europe (6.6%),
Asia (5.9%), and Oceania (0.3%).  Coal, on the other hand, is much more concentrated, with 75% of
all proven reserves falling in only six countries.  However, these countries are widely spreadgeographically.  They are:  the United States (25%), Russia (16%), China (12%), Australia (9%),
India (8%) and Germany (7%).  Proven natural gas reserves exist in Europe (36.9%), the Middle East
(34.1%), Asia (10.9%), Africa (6.8%), North Am erica (6.2%), South America (4%), and Oceania
(1.1%).
                                                     
1 Energy services are not dealt with in this Note.  On where energy services stand vis-à-vis the WTO's
General Agreement on Trade in Services (GATS), see WTO document S/C/W/52 on Energy Services , dated
9 September 1998.
2 Proven reserves constitute only a small sub-set of potential reserves.
3 IEA.  World Energy Outlook 2000. Paris, 2000, p. 47. These projections are themselves based on (1)
economic growth, (2) populations growth, and (3) energy price forecasts.  Forecast is a global economic growth
rate of more than 3% per annum, a slowdown in the rate of population growth, and flatness of fossil fuel pricesthroughout the first decade of the projection period, with  oil and gas prices increasing after 2010 in response to
supply-side pressures.  The projections also take account of a range of major new policy initiatives adopted in
OECD countries, particularly under the Kyoto Protocol, enacted or announced up to mid-2000.  For furtherinformation on these forecasts, consult pages 33-41 of the Outlook.
4 WEC.  Energy for Tomorrow's World – Acting Now. London, 2000, p.1.WT/CTE/W/200
Page 2
5. With respect to nuclear energy, there are a total of 435 commercial nuclear units in operation
in 31 countries with an installed capacity of 352 gegawatt (GW) (or 11% of world power generating
capacity).   The United States has the largest share of global installed nuclear capacity (29% of world
total), followed by France (18%) and Japan (12%).  In Lithuania, 83% of all electricity is produced
from nuclear energy, and in France 77%.
6. Hydroelectric power is the most widely used source of renewable commercial energy
worldwide.  A total of 158 countries generate hydr oelectric power: 42 countries in Africa, followed by
38 in Europe, 31 in Asia, 18 in North and Central Am erica, 14 in South America, nine in Oceania and
six in the Middle East.   A total of 700 GW of hy dro capacity are said to exist worldwide (about half
of this capacity is in Europe and North America), and generate approximately 19% of the world's
commercial energy production. Approximately ten countries obtain all their commercial electricity
from hydro power, and include Norway, several African countries, Bhutan and Paraguay.5
B. TRENDS IN PRIMARY ENERGY DEMAND
7. According to the projections of the IEA, the main sources of primary energy in the year 2020
will be oil (40%), followed by natural gas (26%), coal (24%), nuclear power (5%) and renewables.
Relative to 1997, that will mean that oil will maintain its same 1997 share of the primary energy mix,
while the shares of gas and non-hydro renewables will rise. The sources of energy whose shares isexpected to decline are coal, nuclear and hydroelectric power.
8. Between 1997 and 2020, the IEA forecasts that demand for oil will grow at annual rate of
1.9%, allowing it to remain the dominant fuel in the primary energy mix (representing 40% of total
energy demand). In member countries of th e Organization for Economic Cooperation and
Development (OECD), the transportation sector will account for all oil-demand growth.  In othersectors, oil will lose market share to other fuels, in particular gas.  In non-OECD countries, while
growth in oil demand is due mainly to transporta tion, the household, industry, and power generation
sectors will contribute as well. China and India will account for one-third of all incremental oil
demand in non-OECD countries.
9. Natural gas  will  be the second fastest-growing energy source, after non-hydro renewables,
in the primary energy mix.  Gas demand will rise at 2.7% per annum between 1997 and 2020, and its
share of world primary energy demand will increase from 22 to 26% over that period.  Most of this
increase will come at the expense of nuclear energy and coal.  Technological advances in combined-
cycle gas turbines (CCGTs) will shift the economics of power generation in favour of gas. In fact,
demand for gas will grow primarily in order to meet the needs of power generation. Its relative
environmental cleanliness as a fuel will make it attractive.
10. Demand for coal will rise by only 1.7% per annum over the projection period, with its share
of the primary energy mix declining from 26% to 24% by 2020.  Most of the rise in demand in OECD
countries will come from power generation.  However, the switch from coal to gas in industrial
applications and heating will continue.  Contribu ting to two thirds of the increase in world coal
demand, are China and India, which have abundant coal reserves, and strong electricity demand-
growth.  In general, coal use will increasingly be confined to power generation, which will account for85% of the increase in coal demand between 1997 and 2020.  Industrial demand will increase only
slightly, being driven mainly by the iron and steel sectors in developing countries.  Demand for coal
in residential/commercial sectors will fall slightly.
11. Nuclear  power , whose share in total primary energy demand is around 7% in 1997, will peak
around 2010, but then decline.  Its share will fall to 5% in 2020.   It is only in a few countries thatdemand for nuclear power will increase, mostly in Asia.  In OECD countries the expected retirement
                                                     
5 WEC. Survey of Energy Resources 1998. London, 1998, chapters 1,2,5,6,7.WT/CTE/W/200
Page 3
of a number of reactors and the safety concerns associated with nuclear power (particularly after the
Chernobyl accident of 1986) will result in a decline.
12. Hydropower , whose share of the primary energy mix amounts to 3% in 1997, will decline to
2% by 2020. While it is the only renewable electricity source that has been exploited on a large-scale
until today, its share will decline because most of the best sites in OECD countries have already beenexploited and environmental/social concerns (such as the displacement of people for new dam
construction) will limit its expansion. In 1960, hydro accounted for 82% of electricity generation in
Italy, 51% in Japan, and 18% in the United States.  In 1997, these shares dropped to 16%, 9% and 8%
respectively.  Other renewables , such as geothermal, solar, wind, tidal, wave energy, combustible
renewables ("biomass"), and waste, are expected to be the fastest growing primary energy source,
with an annual growth rate averaging 2.8% ov er the projection period. Power generation in OECD
countries will account for most of the increase, particularly due to environmental concerns.
6  Figure 1
demonstrates these trends.
Figure 1:  World Primary Energy Demand by Fuel, 1971-2020
Source:  IEA (Mtoe stands for million tons of oil equivalent)
13. The power sector's share of primary energy demand will rise from 36% in 1997 to 38% in
2020, with world electricity generation increasing by an average of 2.7% per annum.  Coal will
maintain its dominant position as the world's largest single source of electricity generation.  While
coal's share will decline in the OECD area, it will rise in developing countries.  It accounts for three
quarters of total electricity generation in China and for approximately 70% in India. Natural gas-fired
power generation will grow to more than three and a half times its current level, with OECD countries
accounting for nearly half of the increase.  The share of oil in power generation will fall slightly,while that of nuclear power will drop dramatically.  World hydro-electricity and other renewable
sources of energy will continue to grow (see Figure 2).
14. The IEA projects that nearly 3000 GW of new gene rating capacity will be installed around the
world from now to 2020.  More than half of that capacity will be in developing countries, particularly
in Asia.
7 More competitive markets will govern the future development of the power-generation
                                                     
6 IEA.  World Energy Outlook 2000. Paris, 2000, p. 48-9.
7 Ibid, p. 24.WT/CTE/W/200
Page 4
sector. In the OECD and some developing countries, electricity markets are undergoing rapid reform.
This is likely to promote economic efficiency and ensure that prices reflect the costs of supply.
Figure 2:  World Electricity Generation, 1971-2020
Source:  IEA (TWh stands for terawatt-hour)
15. Most of the projected increase in world primary energy demand will come from developing
countries.  They will account for 68% of the increase between 1997 and 2020, while OECD countries
will account for only 23%.  The share of OECD countries will therefore fall from 54 to 44% by 2020,
while that of developing countries will rise from 34 to 45% (see Figure 3).  The rise in developing
country demand can be explained by a number of factors, such as rapid economic growth and
industrial expansion, and population growth and urbanization.8
Figure 3:  World Primary Energy Demand by Region, 1997 and 2000
Source:  IEA (Mtoe stands for million tons of oil equivalent)
16. The Commission on Sustainable Development (CSD ) cautions that the increase in primary
energy will not result in more equitable access to energy between industrialized and developingcountries. It indicates that in Africa, per capita energy use barely increased in the 1990s and remains
at less than 10% of average per capita use in North America.  In the majority of Asian countries, the
                                                     
8 Ibid, p. 51.WT/CTE/W/200
Page 5
same is true.  It adds that Latin America saw little improvement in access to energy, while China and
Western Asia made above average progress in providing access to modern energy services.9
C. TRENDS IN FINAL ENERGY DEMAND
17. In terms of "final" energy demand (which is demand for primary energy in addition to
electricity and heat),  in 1997 oil was the dominant source, followed by gas,  electricity , coal, heat and
renewables.  According to IEA projections for 2020, while the share of oil and natural gas will remain
the same, gas will be overtaken by electricity (whose share is expected to rise from 17% to 20%).  The
shares of coal and heat will decline, while renewables will increasingly be used.
18. Electricity will grow faster than any other fuel (at 2.8% per annum).  It will rise in both
OECD and non-OECD countries (see Figure 4).  In OECD countries, which currently use 63% of the
world's electricity, projected demand will grow about half as fast as it did in the 1971-97 period,
mainly due to the saturation of end-use markets.  Electricity demand will grow much faster indeveloping countries than in the OECD area. 
10  With respect to access to electricity, the CSD states
that regional energy use is extremely inequitable when viewed in terms of per capita electricity use.
It points out that there is a difference of two orders of magnitude between least developed countries
(83 kilowatt hours per capita) and the OECD average (8,053 kilowatt hours per capita).11
Figure 4:  Fuel Shares in World To tal Final Consumption, 1997 and 2000
Source:  IEA (Mtoe stands for million tons of oil equivalent)
D. TRENDS IN THE END -USE OF ENERGY
19. The IEA classifies the uses to which energy is put into four different categories: (1) electrical
services (total consumption of electricity by the final consumer, excluding heating services); (2)
mobility (non-electricity fuels used in all forms of transport); (3) stationary services (mainly fossil
                                                     
9 CSD, acting as the preparatory committee for the World Summit on Sustainable Development
(E/CN.17/2001/PC/20).  "Energy and Transport; Report of the Secretary-General."  Organizational Session,30 April – 2 May 2001, p.2.
10 IEA.  World Energy Outlook 2000. Paris, 2000, p. 62.
11 CSD, acting as the preparatory committee for the World Summit on Sustainable Development
(E/CN.17/2001/PC/20).  "Energy and Transport; Report of the Secretary-General."  Organizational Session,30 April – 2 May 2001, p.2.WT/CTE/W/200
Page 6
fuels consumed for heating in homes, commercial establishments and industrial processes); and (4)
fuels used in power generation.  In general, energy use for all four purposes rises, with power
generation being the main use in 2020, followed by fo ssil fuel use in stationary services, mobility and
the consumption of electrical services.12
20. Most of the expected incremental demand for oi l for the next two decades will come from the
transport sector.  As previously stated, in both  OECD and non-OECD countries, transportation will
account for most of the demand for oil.13  According to the United Nations Environment Program
(UNEP), the single most important change with resp ect to transport in the 20 th century has been the
dramatic rise in personal mobility in developed countries, brought on by cheap oil, affordable motor
cars, and lifestyles dependent on commuting, shopping out-of-town, dispersed families and leisure
activities.  Since World War II, the number of cars on the road has risen from 40 to approximately
680 million.  If current rates continue, there will be more than one billion vehicles on the road by2025.  Air transport is also rising rapidly.
14
E. ENERGY INTENSITY AND EFFICIENCY
21. Two useful concepts in energy policy are those of energy intensity and energy efficiency.
Energy efficiency is a technical concept which refers to the ratio between energy output (such as light,
heat and mobility) and input (fuels).  Energy intensity is a statistical concept defined as energyconsumption per unit of output.  Energy intensity depends on a number of factors, which include:
stage of economic development, energy efficiency , energy prices, climate, geography, culture and
lifestyles.
15  According to the IEA, world energy intensit y is expected to decline by 1.1% per annum,
between 1997 and 2020.  There are, however, substa ntial differences between regions.  In OECD
countries, intensity falls more slowly compared with past trends, whereas in non-OECD countriesintensity improvements will accelerate relative to past trends.
16 The OECD explains that the energy
intensity of its economy has been declining since the oil price rises of 1973/74 and 1979.  Although
the rate of decrease of energy intensity slowed after 1985, when oil prices went down to their pre-
shock levels, energy use did not rise very sharply since certain energy efficiency improvements had
been "locked-in."17
II. TRADE ASPECTS
A. TRENDS IN ENERGY TRADE
22. As fossil fuels dominate world energy supply and final consumption, they represent the vast
majority of internationally traded energy (see Annex I for Net Energy Imports by Country).  Oil is the
most heavily traded of the three fossil fuels.  Crude oil represents three-fourths of internationally
traded energy, while petroleum products represent four-fifths of international trade in energy
products.  Whereas coal releases the highest amount of environmentally harmful emissions per unit ofheat, oil is responsible for the highest amount of CO2 emissions woldwide due to its dominant share
in consumption.
                                                     
12 IEA.  World Energy Outlook 2000. Paris, 2000,  p. 54-55.  For more information on this concept also
see IEA's World Energy Outlook of 1998.
13 Ibid. p. 72.
14 UNEP.  Global Environment Outlook 2000. London, 1999, p. 13.
15 According to the IEA:  "A more energy-intensive country is not necessarily less energy-efficient.
The United States and Japan, for instance, have comp arable technological knowledge and technical energy
efficiency.  Due to differences in energy prices, climate, geography and lifestyles, however, the energy intensity
(energy consumption per unit of output) of Japan is roughly half of that of the US."
16 IEA.  World Energy Outlook 2000. Paris, 2000, p. 56-7.
17 OECD.  OECD Environmental Outlook. Paris, 2001, p.149.WT/CTE/W/200
Page 7
23. The IEA projects a substantial increase in energy trade over the next 20 years.  The expansion
will encompass all fossil fuels and electricity, but to different degrees.  A particularly sharp increase
will take place in trade in oil and gas.  The cost  and facility with which energy is transported are
important determinants of international trade. Gas and electricity, which are largely grid-bound, will
require enormous infrastructure outlays before trade can take place.  However, the liberalization ofenergy markets, which will allow consumers to shop for the cheapest source of electricity, is likely to
stimulate both demand and cross-border trade.
18
24. The OECD states that whereas energy self-sufficiency reached a peak of 78% in the 1980s, it
has been gradually declining ever since.  Today, the energy self-sufficiency of different fuels varies
substantially.  While OECD countries are self-sufficient in the use of nuclear and renewable energy,
and import only 3% of all the coal they use, over 15% of gas and 50% of oil used are imported from
non-OECD countries.19
25. According to the IEA, net inter-regional oil trade is projected to increase from its current level
of 28 million barrels per day (mb/day) in 1997 to over 60 mb/day by 2020.  Due to declining oil
production in OECD countries, OECD import depe ndence is likely to jump from around 58% in 1996
to 70% in 2020.  Outside the OECD, Asia will become increasingly dependent on imports.  While
China only became a net importer of oil in 1993, it is projected to import more than three-quarters ofits needs by 2020.  All other regions will remain net exporters.  Demand growth is likely to boost the
market power of the Organization of the Petroleum Exporting Countries (OPEC), particularly that of
its Middle East members.  Their production will mount from 26 to 41% over the projection period.
Table 1 demonstrates the oil import dependence of OECD and certain no n-OECD countries and
regions.
Table 1:  Oil Import Dependence (per cent)
1997 2010 2020
OECD 54.3 63.3 70.0
North America 44.6 52.4 58.0
Europe 52.5 67.2 79.0
Pacific 88.8 91.5 92.4
China 22.3 61.0 76.9
India 57.4 85.2 91.6
Rest of South Asia 87.2 95.1 96.1
East Asia 53.7 70.5 80.7
Source:  IEA
26. IEA holds that because of how costly the transportation of gas is, a truly global market for it
cannot be said to have emerged.  It is mostly transported in pipelines or in the form of liquified natural
gas (LNG).  LNG transportation is only economic, however, over long distances because of the high
costs of liquefaction and regasification, and of carriers.  International trade is likely to increasingly
rely on pipelines (especially where they can pass over land), which is the most economic way to
transport large volumes of gas.  Although the world gas resource base is immense and reserves areabundant, gas is not always located near centers of demand, and long-distance transportation will
therefore have to take place.
                                                     
18 IEA.  World Energy Outlook 2000. Paris, 2000, p. 50.
19 OECD.  OECD Environmental Outlook. Paris, 2001, p.149.WT/CTE/W/200
Page 8
27. Trade in gas will expand rapidly, mostly in Europe and the Asia-Pacific region.  In Europe,
rising demand is likely to lead to further increases in gas imports and intra-European cross-border
trade. European demand will be driven by the increased use of CCGTs, new technologies,
liberalization in the gas and power markets, and environmental pressure.  Russia, which provides
more than one third of total world gas exports, will remain Europe's primary supplier.  China, Japan,Korea, and possibly India, are likely to become major importers of gas.  In North America, a rapid
rise in imports is not foreseen.  Cross-border trade in Latin America, on the other hand, is likely to
increase significantly.  Table 2 demonstrates the gas import dependence of OECD and non-OECD
countries.
Table 2:  Gas Import Dependence (per cent)
1997 2020
OECD 15 32
North America 0 6
Europe 31 62
Pacific 59 38
Non-OECD -16 -25
Transition Economies -17 -36
Asia -18 10
Latin America 6 4
Africa & Middle East -28 -74
Source:  IEA (negative figures indicate net exports)
28. Today, most coal production is for local use and coal trade accounts for only 13% of total
world demand. According to the IEA, world trade in coal is unlikely to expand much, mainly because
overall demand for coal will rise relatively slowly.  There is some chance, however, that trade patterns
may change.  Projected imports by the Asia-Pacific region will continue to grow, with Japan
remaining the world's largest importer.  Imports of most European countries will decline due to agreater efficiency in the use of coal (particularly in steel production), and environmental concerns.
There is a possibility however, that imports will displace subsidized domestic coal in Germany and
Spain.
20
29. Cross-border and inter-regional electricity  trade in Europe is likely to increase substantially
over the IEA projection period, although from a relatively low base.  Helped by the relatively short
distances between countries, liberalization of the European electricity market, and European Union
(EU)-led initiatives to promote the integration of grids, electricity trade is likely to expand.  It willprobably do so in most other regions as well, particularly Latin America, but will remain small
relative to total production.
21
B. TRADE RESTRICTIONS AND DISTORTIONS
1. Introduction
30. Historically, governments have intervened in the energy sector through a variety of direct and
indirect financial and administrative instruments.  Regulations, taxes, charges, budgetary transfers,
tariffs and quotas have all formed part of the instruments used. Generally, intervention has been
                                                     
20 One of the main questions, however, in the coal subsidy reform debate is whether the closing down
of German coal mines will lead to an increase in tota l coal consumption or a decline.  While imports will
increase, will they displace all domestic production is the question.
21 IEA.  World Energy Outlook 2000. Paris, 2000, p. 50-1 and 71-108.WT/CTE/W/200
Page 9
justified on the basis of the following policy goals: (1) achievement of energy security through
maintenance of certain levels of domestic energy production and diversification of sources,
(2) maintenance of certain levels of employment, furtherance of regional development, and
guaranteeing minimum access to energy by different income groups (i.e. social concerns),
(3) avoidance of the inefficiencies associated with leaving the so-called "natural monopolies" of
energy production and distribution to unregulated ownership by private entities,22 (4) generation of
revenue,23 and (5) environmental protection, which is a more recent concern.24
31. According to the United Nations Conference on Trade and Development (UNCTAD),
governments have generally subordinated trade policy in this sector to energy security concerns.25
Tariffs and other instruments of trade policy have  been primarily geared towards energy security.
UNCTAD states that: "Energy-importing and energy -exporting countries have both found reasons in
the past to isolate this sector from the normal set of [trade] rules, and to retain the sovereign ability to
impose special restrictions for political, strategic or diplomatic reasons. It may even be deceptive to
define security considerations as an influence on trade calculations, when one could easily suggest the
reverse order." 26  While there are numerous trade restrictions and distortions in the energy sector, it is
energy subsidies (defined in some studies to include differential energy taxation and several other
forms of governmental intervention) that are focu sed on in the literature on environmentally harmful
trade measures.
2. Subsidies27 and Other Governmental Intervention
32. Subsidies are defined differently in different studies, and numerous methodologies for their
measurement exist (such as producer/consumer subsidy equivalents (PSE/CSE) and "price gap"
methodologies).   The narrowest, and perhaps mo st common, definition of a subsidy used in the
literature is a "direct payment by a government to a producer or consumer."  Broader definitions have
been employed, however, by certain regional and international organizations (see Annex II).  The
IEA, for instance, uses the following definition:  "An energy subsidy is any government action that
concerns primarily the energy sector and that lowers the cost of energy production, raises the price
received by energy producers or lowers the price paid by energy consumers."  Its definition is broadenough to capture measures that range from grants and credit instruments for energy production and
consumption as well as public funding for research and development (R&D), to differential taxation
to encourage or discourage the production and use of certain fuels.
28   UNEP/IEA state that since
governmental intervention in many different sectors (such as in transportation) can have a subsidizing
effect on energy, it is particularly important to use a broad definition of a subsidy.29
                                                     
22 As the production and network-based distribution of electricity and gas involve large fixed costs and
the expectation of increasing returns to scale, some argue that these are natural monopolies that require
government intervention.
23 It has been argued that because consumers change their behaviour only little in response to changes
in energy prices, taxing energy to raise revenue generates relatively fewer distortions than taxing goods withhigher demand elasticities.
24 IEA.  World Energy Outlook.  Looking at Energy Subsidies:  Getting the Prices Right. Paris, 1999,
p.43-44.
25 Although some argue that the objectives of greater  energy "security" is often used as a smokescreen
to conceal the real motive of protecting in efficient or infant domestic industries.
26 UNCTAD.  Trade Agreements, Petroleum and Energy Policies. Geneva, 2000, p. 105.
27 For environmental, including energy-related, subsidies notified to the WTO in the year 2000 see
pages 28-49 of documen t WT/CTE/W/195 entitled Environmental Database for 2000 .
28 IEA.  World Energy Outlook.  Looking at Energy Subsidies:  Getting the Prices Right. Paris, 1999,
p.43 and 47.
29 UNEP/IEA.  "Energy Subsidy Reform and Sustainable Development: Challenges for Policy
Makers."  Synthesis Report.  Submission to the 9th Session of the United Nations Commission on Sustainable
Development, April 2001, p. 5.WT/CTE/W/200
Page 10
33. While subsidies in the energy sector have been employed by both OECD and non-OECD
countries, UNEP/IEA explain that they have been used for completely different purposes.  In OECD
countries, producer subsidies are the most widely used and are designed to encourage energy
production, and protect domestic industries and empl oyment (they tend to hold energy prices above
world level).  It was following the oil crises of  1973/74 and of 1979/80 that much support was given
to the energy sector, in particular to alternatives to oil, as a means of reducing demand for oil imports.
Support was mainly given to coal and nuclear power with the objective of achieving greater energy
self-sufficiency and keeping indigenous sources of energy alive.30 In non-OECD countries and
transition economies, consumer subsidies prevail, and are intended to facilitate the access of
consumers and the poor to energy (they tend to hold energy prices below world level).31
34. Estimates of the scale of subsidies provided to the energy sector at the global level vary.  In
fact, only a few studies have been conducted on this due to serious data deficiencies.  One of the mostwidely quoted estimates (although fairly dated) comes from the pioneer work of Larhsen and Shah in
1992. It put global fossil fuel consumption subsidies at US$230 billion per year.  The former
Soviet Union accounted for two thirds of the total (around US$153 billion), while non-OECD
countries for most of the rest (around US$76 billion).
32   This indicates that consumption subsidies in
OECD countries are relatively small.  A recent study conducted by IEA confirms that pervasive
underpricing of energy resources occurs in eight of  the largest energy consuming countries outside the
OECD: China, India, Indonesia, Iran, Kazakhstan, Russia, South Africa and Venezuela.  End-use
prices in these countries are, on average, approximately 20% below their opportunity-cost and market-
based reference levels, despite the substantial progress that has been made in energy sector reform.33
OECD energy production subsidies are estimated to be around US$82 billion per annum.34
35. In an OECD study on the world's 27 largest fossil fuel producing and consuming nations, an
attempt at quantifying the distortions created by governmental intervention in the energy sector is
made.  Evidence of widespread price distortion is found, totalling nearly US$60 billion per year.  The
study finds that while large energy exporters tend to subsidize domestic fuel consumption, large
energy importers tend to keep domestic fuel prices artificially high.  Moreover, trade distortionsassociated with coal and natural gas are found to ex ceed those related to oil, and coal to receive
substantial subsidies.
35
OECD Countries
36. According to the IEA, most OECD countries have reduced or eliminated direct energy
subsidies and lifted price controls over the past two decades in an attempt to move towards more
market-oriented policies. Remaining subsidies are mainly geared towards the protection of domestic
industries and employment.   This is particularly the case with subsidies for coal mining in Germany,Japan and Spain; for peat in Finland and Ireland, and biofuels in France.  Some subsidies are also used
to encourage environmentally friendly sources of energy and technologies.
36
                                                     
30 Support to the nuclear energy has also been given for various other reasons.  For example, it was
seen as cleaner than alternatives, at least in terms of noxious air pollutants, and it often formed part of a broader
strategy to develop domestic capabilities in various other nuclear technologies (e.g. weapons).
31 Ibid;  and OECD. Reforming Energy and Transport Subsidies.  Paris, 1997, p. 25.
32 Ibid (UNEP/IEA), p. 7.
33 IEA.  World Energy Outlook.  Looking at Energy Subsidies:  Getting the Prices Right. Paris, 1999,
p.9.
34 UNEP.  Global Environment Outlook 2000. London, 1999, p. 208.
35 OECD Council at Ministerial Level (C/MIN(99)14).  "Report on Trade and Environment."  May
1999, p.12.
36 IEA.  World Energy Outlook.  Looking at Energy Subsidies:  Getting the Prices Right. Paris, 1999,
p.46-7.WT/CTE/W/200
Page 11
37. In the OECD area, subsidies take the form of:  (1) grants and credit instruments, such as soft
loans and interest-rate subsidies, applied as government transfers to producers or consumers of
energy, as well as grants for energy services or appliances to encourage energy efficient technologies;
(2) regulations requiring or encouraging consumers to purchase a given fuel from a particular source,
usually domestic, sometimes at a regulated price (e.g. Denmark requires utilities to buy minimumamounts of straw or wood in power stations);  (3) differential taxation to encourage or discourage the
production and use of certain fuels (increasingly energy taxes are being restructured to penalize the
most carbon-intensive fuels); (4) public funding for R&D.  Generally, R&D is directed towards the
sources of energy produced in the country, or towards more environmentally friendly technology; and
(5) price controls to promote supply and consumption of particular energy sources (although few
OECD countries use the latter however for social, economic or environmental objectives, preferring
other instruments instead).
37  Implicit support to energy producers in the OECD is also given in terms
of government-brokered agreements with electricity generators to use specific domestic fuels.  These
have generally favoured coal, creating a disincentive to use other fuels.38
38. According to the United States Department of Energy (DOE),  federal energy subsidies take
three principal forms:  (1) direct payments to producers or consumers, (2) tax expenditures, which are
provisions in the US tax code that reduce the tax li ability of firms or individuals who take specified
actions that affect energy production, consumption or conservation in ways that are deemed to be in
the public interest, and (3) research and development expenditures.  Federal subsidies for primary
energy were estimated to be at US$4 billion in 1999, down by $1 billion from 1992.  Of the primary
sources of energy, natural gas benefitted the most, followed by oil and coal.  Federal R&D
appropriations related to energy totalled US$1.6 billion in 1999, down from $2 billion in 1992, mainlydue to declines in spending on coal and nuclear power research (although they continue to be the
largest recipients of funds).
39
39. The OECD states that support to energy probabl y constitutes the second most significant area
of support in OECD countries after agriculture, although available indicators show declines in its
overall level.40 Direct support measures to different fu el types and R&D support have been biased
towards coal and nuclear power.  It has been estimated that support to nuclear and fossil fuel power
constituted a total of 75% of direct support to energy in the EU over the period 1990-95, while
support to conservation, renewables and electricity accounted for the remaining 25%.41 
40. Coal subsidies have been particularly well studied because of their environmental impact. In
1999 Member countries of the IEA42 produced 1,121 millions tons of coal equivalent (tce) of hard
coal.  Of this 59 million tce,  or 5.3%, receive d state aid as measured by the PSE.  Subsidized
production took place in France, Germany, Japan, Spain and Turkey (see Table 3 below).43
                                                     
37 Ibid.
38 OECD.  Improving the Environment through Reducing Subsidies.  Part II, Analysis and Overview of
Studies.  Paris, 1998, p. 23.
39 United States DOE, Energy Information Administration . "Federal Financial Interventions and
Subsidies in Energy Markets 1999:  Primary Energy."  Washington D.C., September 1999, p. vii-x.
40 OECD.  Improving the Environment through Reducing Subsidies.  Part I, Summary and Policy
Conclusions.  Paris, 1998, p.11.
41 OECD.  Improving the Environment through Reducing Subsidies.  Part II, Analysis and Overview of
Studies.  Paris, 1998, p. 21.
42  These include:  Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece,
Hungary, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway,  Portugal, Spain, Sweden,Switzerland, Turkey, the United Kingdom, and the United States.
43 IEA.  Energy Policies of IEA Countries, 2000 Review.  Paris, 2000, p.55.WT/CTE/W/200
Page 12
Table 3:  Subsidized Hard Coal Production in the IEA, 1999
Million "tce" Percentage
of Total
France 4.1 0.4
Germany 40.1 3.6
Japan 3.0 0.3
Spain 10.3 1.0
Turkey 1.5 0.1
Total 59.0 5.3
Source:  IEA
41. However, the amount of IEA hard coal production receiving government financial assistance
has declined over the past decade (see Figure 5).  Subsidized production in IEA countries fell by 66%
from 1991 to 1999 largely because of programmed decreases in domestic coal production, and thecomplete elimination of subsidies in the United Kingdom, Belgium and Portugal.  Germany now
accounts for two-thirds of subsidized production and for 75% of PSE assistance, while Spain accounts
for 17% of subsidized production and 11% of PSE.
44
Figure 5:  Assisted Hard Coal Pr oduction in IEA Countries, 1991-99
Source: IEA
42. While Germany is expected to reduce subsidized output and PSEs by one-third by 2005,
Spain to reduce production by 20% by 2005, France to close its coal industry by 2005, and Japan to
eliminate coal subsidies by 2006, the IEA argues that the total elimination of coal production
subsidies is not foreseeable in the near future due to the new mechanisms that have been developed to
                                                     
44 Ibid, p. 56-7.WT/CTE/W/200
Page 13
support the coal industry.45  For instance, both Spain and France have transposed certain provisions of
the EU Electricity Directive into their national electricity legislation, which permits EU member states
to give priority of up to 15% of primary energy used in electricity production to indigenous fuels.   As
a balancing force, however, a number of factors are expected to push countries towards the
elimination of subsidies.  These include electricity  market liberalization which is already under way,
and the expiry of the European Coal and Steel Community Treaty (ECSC) in 2002.46  The IEA argues
that the latter may lead EU members to reconsider the case for continued coal subsidies.47
43. Looking at R&D expenditures in IEA member countries, it is clear that they have undergone
significant changes in recent years.  The total expenditures of IEA countries on energy R&D fell from
US$9billion in 1990 to US$7.1 billion in 1998.  The decline has mainly been caused by reduced
spending on nuclear research, and on technologies related to fossil fuel extraction and transformation.
Nuclear technologies still remain, however, the core of public R&D spending in IEA countries.   Withrespect to fossil fuel R&D, research expenditures on oil and gas did not suffer a visible reduction,
whilst the brunt of the reduction has fallen on coal.
48  The share of renewable energy in R&D budgets
grew.  Between 1990 and 1998, two countries (Japan and the United States) have accounted for more
than 65% of total energy R&D expenditures in IEA countries.49
44. The OECD points out that the unequal incidence of fossil fuel taxes has also acted as a
subsidy on some fuels.  In most countries, these taxes fall most heavily on the cleanest fuels and least
heavily on coal, acting as a subsidy to coal.  This is due to the fact that taxation had been imposed to
raise revenue rather than to internalize negative environmental costs.50  In its study of the world's 27
largest fossil fuel producing and consuming nations  (which includes 17 OECD countries), the OECD
finds that tax rates vary (sometimes significantly) across fuels. With the exception of Denmark, itfinds that rates on coal are actually lower than those on gas and oil.  Aside from Germany, it finds that
rates on oil are generally higher than those on gas.
45. Another study on energy taxes finds oil to be the most heavily taxed source of energy in the
OECD.  Oil taxes accounted for 45% of the total value of oil sold in 1999.  Taxes on natural gas are
rising, although gas continues to be taxed much less heavily than oil.  Coal taxes are either absent ornegligible.   The study demonstrates that energy taxes in Europe are significantly higher than in other
parts of the OECD, and the gap in levels of ta xation between northern European and other OECD
countries to have widened in the 1990s.
51
Non-OECD Countries
46. In several non-OECD countries, the energy sector is still dominated by monopoly, state-
owned, enterprises which implement government policie s.  The structure of these enterprises and their
                                                     
45 See the article recently published in the Financial Times (Thursday 26 July 2001) entitled "Germany
may pay billions in subsidies under EU coal plan," which indicates that coal subsidy reform may slow down.
46 ECSC is the first treaty organization of what b ecame the European Union, and was established by
the Treaty of Paris in 1952.  In the ECSC, member states pledge to pool their coal and steel resources by
providing a unified market for their coal and steel products, lifting restrictions on imports and exports, and
creating a unified common market.
47 IEA.  Energy Policies of IEA Countries, 2000 Review.  Paris, 2000, p.58-9.
48 While reduced research coal reflects the decline in coal use in IEA countries,  coal use for electricity
generation in developing countries is expected to in crease.  Research on coal combustion (high efficiency
technologies for power generation) and conversion remain important, therefore, particularly in light oftechnology transfer to developing countries.
49 IEA.  Energy Policies of IEA Countries, 2000 Review.  Paris, 2000, p.73-79.
50 Ibid, p. 20-1.
51 ECON Center for Economic Analysis .  "Energy Taxes, Trends and Structure in OECD Countries."
Oslo, 2000, p. 3.WT/CTE/W/200
Page 14
relationship to the state often masks the different types of governmental interventions made, rendering
them difficult to identify and measure.52
47. In the IEA study on the eight largest energy consuming countries outside the OECD, it was
previously stated that end-user prices were found to be approximately 20% below their market-based
reference levels.  Price distortion is found to be greatest in Iran, followed by Venezuela, Russia,Indonesia, Kazakhstan, India, China and South Africa, although it differs by fuel (see Table 4).  Coal,
which is the most carbon intensive fossil fuel, is found to be heavily subsidized in China and India.
China, which the world's leading producer of coal, and which derives 60% of its total primary energy
supply from this fossil fuel, distorts the price of coking coal by 73%.  In India, where most fuels are
sold at administered prices, the price of coking coal is distorted by some 42%.
53
Table 4:   Estimated Energy Subsidy Rates as a Percentage of Reference Price (weighted
average)
China Russian
Fed.India Indonesia Iran South
AfricaVenezuela Kazakh-
stan
Gasoline 0 9.3 0 0 59.4 0 26.6 0
Auto
Diesel 0 0 0 40.2 93.9 0 35.9 0
Liquified
petroleumgas (LPG) 0 0 31.6 0 89.7 0 26.1 0
Kerosene 0 0 52.6 55.2 89.5 2.0 4.9 0
Light
Fuel Oil 0 1.5 0 45.5 82.3 0 19.3 0
Heavy
Fuel Oil 0 0 0 7.8 88.1 0 39.4 0
Electricity 38.2 42 24.2 0 48.1 20.3 63.0 56.6
Natural
Gas 18.7 46.1 22.5 28.4 77.8 0 85.6 55.7
SteamCoal 8.3 0 13.1 0 0 8.1 91.9 20.7
CokingCoal 73.1 0 42.3 0.35 0 0 -- 2.7
Total 10.9 32.5 14.2 27.5 80.4 6.4 57.6 18.2
 Source:  IEA
48. The IEA explains that artificially low energy prices caused by heavy subsidies are not
meeting their stated objective of helping the poor.  They are at the root of the poor financial
performance of many state-owned energy companies in developing and transition economies.  This
point has also been made by the World Bank.  While Indonesia has for many years had a policy of
subsidizing kerosene to encourage its use by the poor for cooking, and its policy has accomplished its
                                                     
52 ECON Center for Economic Analysis.   "Energy Taxes; Trends and Structure in OECD and Selected
Non-OECD Countries."  Oslo, 1996, p. 33-48.
53 IEA.  World Energy Outlook.  Looking at Energy Subsidies:  Getting the Prices Right. Paris, 1999,
p.104-5and 136-39.WT/CTE/W/200
Page 15
stated objective, the World Bank argues that many free-riders from the upper and middle classes take
advantage of the subsidy as well.54
49. In the OECD study on the world's 27 largest energy consuming and producing countries,
three developing countries (Brazil, Saudi Arabia and Ukraine) are studied in addition to those looked
at by the IEA.55  The study concludes that large energy producers such as Saudi Arabia, Iran, Russia,
Venezuela and Mexico tend to provide substantial energy subsidies to their domestic consumers and,
of the countries studied, have some of the largest price gaps (i.e. maintain prices below world level).
In addition, it argues that while large energy subsidies are administered in Eastern Europe, these tend
to be understated since in countries such as Russia and Ukraine there is widespread non-payment of
energy bills. The IEA adds that non-payment and theft in Russia, Ukraine and India can affect up to
two-thirds of distributed electricity, to the point of actually bankrupting energy companies.56
50. With respect to energy taxes, a study conducted on 14 non-OECD countries finds that taxes in
these countries tend to follow the same pattern as in  the OECD (i.e. are heaviest on the cleanest fuels),
although are generally lower.57  Another study on Brazil, China, India, Indonesia, and Russia finds
that the power and industrial sectors pay relatively little tax, that value-added taxes in these two
sectors are refundable (except in China), and that taxes on gasoline and diesel are significant, and are
major contributors to governmental revenue.58
C. O NGOING ENERGY SECTOR REFORM
51. According to the IEA, the energy sector is u ndergoing market-oriented reform in both OECD
and non-OECD countries. In OECD countries, there is a clear trend towards a new organization of the
electricity industry to allow for greater competition between generators (i.e. to move away from
vertically integrated utilities), and to allow consumers to choose their own suppliers.  Virtually allOECD countries have opened up their electricity markets for big industrial users and, in a number of
countries, for households and small companies as well.  By 2007, the IEA forecasts that roughly
500 million consumers (and all large industrial users) in the OECD will be entitled to choose their
electricity supplier.  Several OECD countries have also taken steps towards liberalizing their natural
gas markets, at least for large industrial users (e.g . power generators).  With respect to coal, while
subsidy reform is underway, the IEA does not expect  total subsidy elimination in the near future.
59
52. In response to the 1992 United Nations Framework Convention on Climate Change
(UNFCCC), a number of policies have been set by OECD countries to bring their emissions of
greenhouse gases (GHG) to their 1990 levels.  Fiscal policies include the removal of subsidies and the
imposition of  energy taxes.  While subsidy reform  to mitigate the effects of climate change is
underway in a number of OECD countries, 15 IEA countries have reported tax policy changes to deal
with the phenomenon.  A third of these changes rela te to the transportation sector, and the other two-
thirds have to do with power generation and broad-based energy or carbon taxation.  A number of
regulatory instruments are also being used.60
53. In non-OECD countries, energy sector reform is also proceeding along the following lines:
(1) de-monopolisation of state-owned energy utilities, (2) deregulation (removal of subsidies and price
                                                     
54 World Bank.  Energy Services for the Poor.  Energy and Development Report 2000.  Washington
D.C., 2000, p. 62.
55 With the exception of Kazakhstan.
56 IEA.  Energy Policies of IEA Countries, 2000 Review.  Paris, 2000, p.83.
57 ECON Center for Economic Analysis.   "Energy Taxes; Trends and Structure in OECD and Selected
Non-OECD Countries."  Oslo, 1996, p. 33-48.
58 ECON Center for Economic Analysis.  "Carbon Based Energy Taxes in Developing Countries."
Oslo, 2001, p. 9.
59 IEA.  Energy Policies of IEA Countries, 2000 Review.  Paris, 2000, p.45-59.
60 Ibid, p. 59-67.WT/CTE/W/200
Page 16
controls, as well as the lowering or removal of trade and investment barriers), and (3) privatization.
Price decontrol, the IEA states, is the thorniest reform issue in non-OECD countries, mainly because
of the social hardships that may result from the li fting of subsidies.   In some non-OECD countries,
particularly in Asia and Latin America, there also  signs of a shift from the use of coal to oil and
natural gas.61
54. According to the IEA, in the former Soviet Un ion and Central/Eastern Europe painful efforts
are under way to replace centrally planned economic systems with market-based economies.
However, Russia's long-term energy strategy does call for a doubling of coal output by 2010 and for
38 new nuclear power reactors to be built by 2020.   The IEA sums up the state of energy sector
reform in various non-OECD countries in the fo llowing terms: "China has made considerable
progress in energy price reforms, but many deep-seated  structural problems remain, notably in China's
huge coal mining industry.  India has started liberalizing its energy sector, but has made little progressin removing price controls and reducing subsidies.  Brazil and South Africa have all made impressive
strides in cutting fossil-fuel consumption subsidies, although significant production subsidies remain.
Argentina and Chile are, in many respects, at the forefront of non-IEA countries in energy-sector
liberalization and structural reform.   By contrast Indonesia has made little headway in reducing its
enormous oil-sector subsidies."
62    Moreover, in some countries coal is an expanding sector, such as
in Indonesia and Colombia, and new nuclear power generation capacity is being commissioned.  New
nuclear power plants are also nearing completion in India, Brazil, Korea and Slovakia.63
55. In both OECD and non-OECD countries regulatory instruments are increasingly being used to
promote energy efficiency.   They include:  (1) "labels", which are markings that show a product's
energy use or efficiency according to a common measure, (2) "standards", which are mandatoryprograms that stipulate minimum efficiency levels acceptable for products sold in a particular country
or region, and (3) "targets", which are voluntary arrangements in which governments or utilities
persuade, but do not require, manufacturers to lower their energy use or raise the energy efficiency of
their products (IEA definitions).  Regulatory instruments have so far targeted home appliances, office
and lighting equipment, electric motors, and home entertainment electronics. In June 2000, energyefficiency labels existed in 37 countries, and standards in 34 (see Annex III).
64  Under the Agreement
on Technical Barriers to Trade (TBT) a large number of energy efficiency measures have also been
notified.65
III. ENVIRONMENTAL BENEFI TS OF REMOVING TRADE RESTRICTIONS AND
DISTORTIONS
A. E NERGY AND THE ENVIRONMENT
56. Energy production and consumption may have harmful environmental effects at the local,
regional and global levels.   These effects differ by energy type and include:  air pollution, GHG
emission, the generation of radioactive waste, la nd and water pollution, noise and visual pollution,
and ecosystem alteration and degradation.  All of these effects can have consequences for human
health.  In reviewing the impact of different fossil  fuels on the environment it is important to consider
their entire "fuel cycle", in other words their effects throughout the different stages ofmining/extraction, production, transportation, distri bution, combustion, and disposal. In general, the
impact of energy on the environment depends on: (1) the total amount of energy consumed, (2) the
                                                     
61 IEA.  Energy Policies of IEA Countries, 2000 Review.  Paris, 2000, p. 79-86.
62 IEA.  World Energy Outlook.  Looking at Energy Subsidies:  Getting the Prices Right. Paris, 1999,
p.16-17.
63 IEA.  Energy Policies of IEA Countries, 2000 Review.  Paris, 2000, p. 79-86.
64 IEA.  Energy Labels and Standards.  Paris, 2000, p. 10-11 and 15-16.
65 See pages 17-24 of document WT/CTE/W/195 entitled Environmental Database for 2000  for TBT
energy-related measures of the year 2000 (for example, notifications number G/TBT/Notif.00/368 andG/TBT/Notif.00/444).WT/CTE/W/200
Page 17
specific mix fuels used (since different environmental problems are linked to different fuels and to
their cycles), (3) the efficiency at which primary energy is converted into useful energy, and (4) the
technologies in use (e.g. car fuel efficiency).
57. Coal mining can have negative environmental consequences, such the loss of forests and
agricultural land, and the potential pollution of surface and groundwater. Coal, which is also the mostcarbon intensive fossil fuel and an emitter of sulphur dioxide (SO
2), can result in local air pollution,
acid rain and climate change which have regional and global impacts.
58. Environmental problems, such as natural habitat destruction, can result from oil and natural
gas exploration and drilling. Leakages and spills during the transportation of oil and natural gas can
also have negative environmental consequences.  Several water bodies have been polluted as a result
of oil spills, and marine life degraded.  Leakages in natural gas pipelines can result in the dangerous
releases of gas into the atmosphere.  Natural gas, which is primarily composed of methane, is a muchmore potent GHG than carbon dioxide (CO
2). Moreover, as harnessing gas and transporting it to
distant markets requires significant infrastructure, natural gas flaring and venting takes place in
significant amounts in many parts of the developing world to allow for oil exploitation.  This wastes a
valuable natural resource and contributes to climate change.  While coal is the most carbon intensive
fossil fuel, oil is responsible for most CO 2 emissions worldwide due its dominant share in world
consumption.
59. Nuclear energy production raises the risks of nuclear accidents and the need to dispose of
radioactive waste.  The expansion of nuclear energy also raises risks of the proliferation of nuclear
weapons. Renewable sources of energy also have environmental and social impacts.  Hydropower
may degrade ecosystems by altering the natural state of river basins, with effects on flora and fauna,as well as result in the displacement of people for dam construction  Other renewable energy systems,
such as wind, can have visual as well as noise impacts.
66
60. At the global level, climate change has been identified as one of the most pressing
environmental concerns.  International cooperation to deal with the phenomenon is embodied in the
1992 UNFCCC. The Kyoto Protocol of 1997 incorporates legally binding commitments for theimplementation of the UNFCCC.  The objective of the Framework Convention is to stabilize GHG
concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference
with the climate system.
67  According to the IEA, OECD countri es were responsible for 51% of global
CO 2 emissions in 1997, while developing countries for 38% and transition economies for 11%.  By
2020, developing countries will account for 50%,  OECD countries for 40% and transition economies
for 10%.  Per capita emissions in developed countries, however, will continue to be much higher than
in the developing world.  Power generation and transportation are the two main sources CO 2
emissions worldwide (see Annexes IV and V).68
B. P OSSIBLE RESULTS OF TRADE POLICY REFORM
61. Much of the literature argues that subsidy re form and the restructuring of energy taxes are
necessary for environmental improvement.  Key to sustainable development is to ensure that price andincentive structures reflect the true costs and benefits of production and consumption. By distorting
prices, subsidies encourage the inefficient use of energy resources, and discourage energy
                                                     
66 World Bank.  Fuel for Thought; An Environmental Strategy for the Energy Sector.  Washington
D.C., 2000, p.27-30; and OECD.  OECD Environmental Outlook. Paris, 2001, p.145; and OECD. Reforming
Energy and Transport Subsidies.  Paris, 1997, p. 30.
67 For signatories of the UNFCCC and its Kyoto Protocol see pages 38-40 of document
CTE/WT/W/160/Rev.1 entitled "Matrix on Trade Measures Pu rsuant to Selected MEAs."   As of 20 July 2001,
84 parties have signed and 37 have ratified or acceeded to the Kyoto Protocol.
68 IEA.  World Energy Outlook 2000. Paris, 2000, p. 65.WT/CTE/W/200
Page 18
conservation and the expanded use of renewable sources of energy.  Moreover, some encourage
obsolete and environmentally inefficient technologi es to remain in operation.  Subsidy reform is
therefore required. While some argue that certain kinds of energy taxes offset the environmentally
damaging effects of subsidies when they fall on the very same fuels, much has been written in the
literature on the fact that their imposition is no alternative to subsidy reform.69  This is the case as
taxes generally do not fall on the same part of the production/consumption chain as subsidies and do
not affect, therefore, the same decisions.
62. In addition to subsidy reform, environmental policy is required to bring the private benefits
associated with energy production and consumption in line with its social costs. Various
environmental policies are used to internalize negative externalities linked to energy production and
consumption, and include command and control measures (such as the setting of emissions standards)
as well as economic instruments (such as taxes, charges, tradeable pollution permits, and propertyrights).
The environmental effects of removing trade restrictions and distortions of the type identified in
section II will depend on:  (1) how the removal of restrictions and distortions will affect energy prices,
(2) how energy consumption will respond to change in prices (in terms of total consumption and the
mix of fuels used), and (3) how the focus of R&D will shift in response to these developments.  Withrespect to the latter, numerous new technologies, which are under development today, can
significantly transform the relationship between energy production and use and its environmental
effects.  According to the OECD,  in addition to electricity systems based on renewable energy, such
technologies include the use of cellulose ethanol in motor vehicles, and the development and use of
hybrid vehicles, hydrogen fuel cells and CO
2 capture technologies.70
63. However, WT/CTE/W/67 had already cautioned that "While it is usually assumed that the
removal of energy subsidies would result in decreased energy consumption and an improved
environmental situation, to reduce subsidization may not substantially reduce energy consumption
because:  (a) as energy is an input to virtually a ll forms of economic activity, subsidy removal is likely
to have general equilibrium effects, making predic tions about the impact of reforms on the environment
difficult to make; and (b) where inter-fuel substitu tion is possible, reduced subsidies may affect the
composition rather than the quantity of fuel used (environmental damage would in this case depend on
the composition of the fuels that continue to be used)."71  Simplistic conclusions about "win-win"
situations for trade and the environment must therefore be avoided since one set of problems
associated with a particular fuel mix may simp ly be substituted for another following trade
liberalization. It must also be remembered that while trade policy reform can contribute to
environmental improvement, it is not a substitute for environmental policies, which will always beneeded.
64. It is important to note that subsidy reform does not necessarily mean subsidy removal, since
there are environmentally harmful as well as environmentally beneficial subsidies.  Environmentally
sound ones capture positive environmental externalities.  UNEP explains that fossil fuel subsidies do
not always lead to adverse environmental effects.  "For example, encouraging the use of oil products
can reduce deforestation in developing countries as poor rural and peri-urban households switch from
firewood.  This is a major reason for the maintenance of subsidies to kerosene and LPG [liquified
petroleum gas] in many countries.  Public funding of fossil-fuel R&D activities could actually yield
positive environmental effects to the extent that it results in development and deployment of more
efficient, cleaner burning technologies.  Also, subsidies to indigenous fuel production do notsystematically lead to higher consumption if thei r removal simply results in increased imports on a
                                                     
69 See for instance:  OECD (COM/TD/ENV(2000)38/Final).  "Environmental Effects of Liberalizing
Fossil Fuels Trade:  Results from the OECD Green Model."  Paris, 2001, p. 27.
70 OECD.  Environmental Outlook. Paris, 2001, p.145.
71 See page 24 of WT/CTE/W/67.WT/CTE/W/200
Page 19
one-for-one basis.  Subsidies to support renewables, nuclear power and energy-efficient technologies
may help noxious greenhouse gas emissions depending on how the subsidies are structured and on
market conditions."72
65. In examining the environmental benefits of removing trade and restrictions and distortions,
much emphasis has been placed in the literature on CO 2 emissions reductions due to the importance of
climate change.   The results of various simulations on trade policy reform and its effects on CO 2
emissions are shown below.  However, it must be  remembered that climate change is not the only
environmental consequence of energy use, and that some of the local and regional problems that
production and consumption may cause can have just as serious a health and an environmental impact
as global ones.
1. Energy Subsidy Removal in Eight Developing Countries73
66. A recent IEA study attempts to determine the effects of the removal of all subsidies for
energy end-use on CO 2 emissions in eight of the largest energy consuming developing countries (see
Table 4).  Most of the subsidies in these countries are geared towards consumption. The study
demonstrates that, following subsidy removal, energy consumption drops by approximately 13% and
CO 2 falls by around 16%, and reaches the conclusion that a close relationship holds between
measured subsidy rates and the potential for energy savings and GHG emissions reduction. CO 2
emissions fall, in part, due to the removal of heavy subsidies on coal.  Table 5 below contains these
results.
67. The study also finds that because subsidies distort prices and encourage economically
inefficient decisions to be made, economic efficiency gains in all eight countries are made through
removal.  Moreover, as the removal of what are essentially consumption subsidies leads to reducedoverall energy consumption, energy import demand declines in those countries which were previously
energy importers, and this increases the availability of energy exports.  The result is an improvement
in world energy security. The study does not provide clear indication, however, of what the final fuel
mix in the eight countries under study becomes following subsidy removal.
                                                     
72 UNEP/IEA.  "Energy Subsidy Reform and Sustainable Development:  Challenges for Policy
Makers."  Synthesis Report.  Submission to the 9th Session of the United Nations Commission on Sustainable
Development, April 2001, p. 10.
73 IEA.  World Energy Outlook.  Looking at Energy Subsidies:  Getting the Prices Right. Paris, 1999,
p.62-9.WT/CTE/W/200
Page 20
Table 5:  The Results of Subsidy Removal – IEA Simulation
Average
Subsidisation
(Per cent of
reference price)Annual
Economic
Efficiency Gains
(Per cent of
GDP)Reduction in
Energy
Consumption
(Per cent)Reduction in
CO 2 Emissions
(Per cent)
China 10.89 0.37  9.41 13.44
Russia 32.52 1.54 18.03 17.10
India 14.17 0.34  7.18 14.15
Indonesia 27.51 0.24  7.09 10.97
Iran 80.42 2.22 47.54 49.45
South Africa  6.41 0.10  6.35  8.11
Venezuela 57.57 1.17 24.94 26.07
Kazakhstan 18.23 0.98 19.22 22.76
Total Sample 21.12 0.73 12.80 15.96
Source: IEA
2. Removal of Energy Price-Distorti ons in OECD and Non-OECD Countries74
68. In a model run on a large number of OECD and non-OECD countries, the GHG emissions
effect of liberalizing trade in fossil fuels is studied.  The model removes fossil fuel price distortions,and measures the effect on CO
2 emissions.75  Three scenarios are looked at: an "OECD only
liberalizes", a "non-OECD only liberalizes" and an "all countries liberalize" scenarios.
69. The model shows that for some countries, although not all, liberalization of fossil fuels
reduces GHG emissions.  For other countries, in particular Japan, the simulations show adverse
effects on emissions which offset emission reduct ions elsewhere in the OECD.  The "OECD-only
liberalizes" scenario tends to increase fossil fuel demand (and hence imports), as the above world
market prices that currently prevail in Japan and Europe fall.  However, CO 2 emissions remain
basically stable (-0.0% in 2005 or +0.1% in 2010).  Since price distortions in non-OECD countries
keep energy prices artificially low, the "non-OECD only liberalizes" scenario results in higher energy
prices, leading to decreased consumption and emissions.  In the "all countries liberalize" scenario,
CO 2 emissions drop the same amount in 2005 (-3.9%), or slightly less in 2010 (a -6.2%, rather than a -
6.3%, drop relative to the "business as usual" scen ario), than they would have had the OECD not
liberalized.
70. Trade patterns change as result of energy policy reform.  As prices drop in the OECD, there is
a rise in consumption, which also translates into a rise in imports.  In non-OECD countries the
opposite takes place. As consumption subsidies are removed, consumption as well as import demand
decline.  Exports, on the other hand, rise in most of the big exporting countries when trade isliberalized. Overall fossil fuel trade increases by 4.4% in 2010. 
71. On the import side, the European Union begins to import more coal (to replace German and
Spanish coal once support is removed), substantial declines in fuel imports are experienced in
Eastern Europe, the former Soviet Union, India and China as domestic prices are reformed, and a
sharp increase of oil imports takes place in Japan and Brazil (as more competitive suppliers replacedomestic ones).  On the export side, energy exporting countries (such as the former Soviet Union)
begin to export energy that was previously consumed domestically because of support.
                                                     
74 OECD (COM/TD/ENV(2000)38/Final).  "Environmental Effects of Liberalizing Fossil Fuels Trade:
Results from the OECD Green Model."  Paris, 2001, p. 16-26.
75 The simulations focus on distortions in fossil fuel prices for the industry and power generation
sectors, but do not look at subsidies to commercial, agricultural or retail users.WT/CTE/W/200
Page 21
72. With respect to interfuel substitution in trade, the results of the model are mixed.  With
respect to coal for instance, while there is reduced demand for coal imports in some regions, there is
increased demand in others (because weakening demand in some parts of the world makes coal
affordable in others). The model also concludes that because of the inefficiencies that price distortions
create, improvement in welfare take place upon their correction (for the results of the model, seeTable 6). What the model does not indicate is whether a change takes place in world total fossil fuel
consumption following liberalization and what the exact mix of fossil fuels used in different parts of
the world becomes.  Moreover, it does not consider non-fossil fuel sources of energy.
Table 6:  Results of OECD Simulation (Changes relative to a "Business as Usual" scenario)
OECD only liberalise Non-OECD only
liberaliseAll countries
liberalise
CO 2 Emissions
2005 -0.0% -3.9% -3.9%
2010 +0.1% -6.3% -6.2%
Larger Impacts OOE-5%, JPN+10% CHN-15%, EET-15%,
FSU-13%, DAE-10%,
EEX-10%, IND-8%,
BRA+11%CHN-15%, EET-15%,
FSU-13%, DAE-10%,
EEX-9%, IND-8%,
BRA+10%, JPN+10%
Welfare Effects
2005 +0.0% +0.0% +0.0%
2010 +0.1% +0.0% +0.1%
Larger Impacts EEX+0.8% FSU-0.7%, EEX-0.5%,
EET+0.7%,
ROW+0.8%ROW+0.8%,
EET+0.9%
Imports
2005 +4.8% -1.9% +2.8%
2010 +7.2% -2.6% +4.4%
Larger Impacts EEC+18%, JPN+19% ROW-20%, EET-14%,
EEX-13%, FSU-11%,
BRA+29%ROW-21%, EET-14,
EEX-10%, FSU-9%,
BRA+28%, JPN+18%,
EEC+17%
Exports
2005 +4.8% -1.9% +2.8%
2010 +7.2% -2.6% +4.4%
Larger Impacts* EET+15%, USA+16%,
OOE+17%,CHN+17%,DAE+24%CHN-11%, DAE-11%,
EET-12%,USA+11%,
OOE+12%, DAE+14%
Key:  + or – sign after regional abbreviations denotes significantly higher or lower values within the particular region as
compared to the global totals.  Percentages shown in the "Larger Impacts" section represent values in 2010.Abbreviations:   EEC (European Union 15);  JPN (Japan);  OOE (other  OECD);  USA (United States):  BRA (Brazil);
CHN (China);  DAE (Dynamic Asian Countries);  EET (Easte rn Europe);  EEX (Oil Exporting Countries);  FSU (Former
Soviet Union);  IND (India);  ROW (Rest of World).
Source:  OECD SecretariatWT/CTE/W/200
Page 22
3. Fossil Fuel Subsidy Removal and Tax Use in OECD Countries76
73. In a different simulation, fossil fuel subsidies in OECD countries are removed and an
ad valorem  tax on fuel use is imposed.  The ad valorem  tax increases by 2 percentage points
per annum for coal, 1.6 percentage points for crude oil and 1.2 percentage points for natural gas,
reaching a total tax levy of 50%, 40% and 30% of pre-tax prices by the year 2020.  The increase intaxes is linked to the carbon content of the different fuels.
77   This results in a decline in global coal,
oil and natural gas consumption, and the environmental effects of the subsidy removal and imposition
of a tax are significant.  The policy reform leads to a 25% reduction in both SO 2 and CO 2 emissions,
leading to an improvement in local air quality and a reduction in the effect of global warming.  Gross
domestic product (GDP) in OECD countries declines by an insignificant 0.1% (possibly due to thecontraction of OECD energy production). These results are contained in Table 7 below.
Table 7:  Effects of Subsidy Removal and Energy Tax Use in OECD Countries  (% change from
a reference scenario in 2020)
Effect on demand in OECD countries for:
Coal Oil GasGDP SO x emissions CO 2 emissions
-32% -18% -17% -0.11% -25% -25%
Source:  OECD
4. The Simulations Compared
74. The different simulations considered in this Note demonstrate that there can be environmental
benefits (in terms of climate change mitigation) to the removal of trade restrictions and distortions in
the energy sector.   In all models CO 2 emissions drop.  While the OECD model shows that when the
OECD liberalizes on its own, CO 2 emissions in the long-run rise, the last simulation demonstrates that
accompanying environmental policies (i.e. taxes linked to the carbon content of specific fuels) havean important role to play.  The imposition of thes e taxes in the last simulation, shows that they have
the potential to bring down overall levels of energy consumption and, therefore, emissions as well.
There is a broad array of instruments that countries may use to internalize negative environmental
externalities, many of which are already in use.  These will always prove indispensable in giving
value to environmental resources.
                                                     
76 OECD.  Environmental Outlook. Paris, 2001, p.154.
77 However, this is not intended to simulate a "carbon tax".WT/CTE/W/200
Page 23
ANNEX I - NET ENERGY IMPORTS BY COUNTRY
(in thousands of metric tons of oil equivalent)
Country Net energy imports*
% of commercial
energy useCountry Net energy imports*
% of commercial
energy use
1980 1997 1980 1997
Albania -12 13 Ethiopia 5 5
Algeria -440 -374 Finland 73 54
Angola -149 -505 France 75 48
Argentina 7 -30 Gabon -532 -1,110
Armenia -18 70 Gambia, The " "
Australia -22 -96 Georgia 66 70
Austria 67 71 Germany 48 60
Azerbaijan 1 -17 Ghana 19 15
Bangladesh 11 10 Greece 72 62
Belarus -8 87 Guatemala 33 21
Belgium 83 77 Guinea " "
Benin 11 13 Guinea-Bissau " "
Bolivia -85 -40 Haiti 11 27
Honduras 30 37 Bosnia and
Herzegovina " 64 Hungary 49 50
Botswana " " India 8 12
Brazil 43 30 Indonesia -116 -60
Bulgaria 73 52 Iran, Islamic Rep. -116 -108
Burkina Faso " " Iraq -1,306 -129
Burundi " " Ireland 78 77
Cambodia " " Israel 98 97
Cameroon -58 -95 Italy 86 82
Canada -7 -52 Jamaica 91 85
Japan 88 79 Central African
Republic " " Jordan 100 96
Chad " " Kazakhstan 0 -69
Chile 41 65 Kenya 19 18
China -2 1 Korea, Dem. Rep. " "
Korea, Rep. 77 86 Hong Kong, China
99 100 Kuwait -884 -618
Colombia 5 -122 Kyrgyz Republic -28 50
Lao PDR " " Congo,
Dem. Rep. 0 1 Latvia 54 63
Congo, Rep. -370 -990 Lebanon 93 96
Costa Rica 50 57 Lesotho " "
Côte d'Ivoire 34 12 Libya -1,248 -423
Croatia " 48 Lithuania 95 55
Cuba 73 49 Macedonia, FYR " "
Czech Republic 9 22 Madagascar " "
Denmark 95 4 Malawi " "
Malaysia -50 -53 Dominican
Republic 62 74 Mali " "
Ecuador -126 -168 Mauritania " "
Egypt, Arab Rep. -114 -47 Mauritius " "
El Salvador 25 35 Mexico -51 -58
Eritrea " " Moldova " 98
Estonia -11 32 Mongolia " "WT/CTE/W/200
Page 24
Country Net energy imports*
% of commercial
energy useCountry Net energy imports*
% of commercial
energy use
1980 1997 1980 1997
Morocco 82 88 Turkey 45 61
Mozambique 8 9 Turkmenistan -1 -54
Myanmar -1 6 Uganda " "
Namibia " " Ukraine -12 46
Nepal 3 8 United
Netherlands -11 13 Arab Emirates -995 -397
New Zealand 41 15 United Kingdom 2 -18
Nicaragua 42 41 United States 14 22
Niger " " Uruguay 71 62
Nigeria -181 -115 Uzbekistan 4 -15
Norway -196 -778 Venezuela, RB -277 -255
Oman -1,415 -662 Vietnam 7 -11
Pakistan 18 26 West Bank
Panama 72 65 and Gaza " "
Papua Yemen, Rep. 96 -469
New Guinea " " Yugoslavia, FR
Paraguay 23 -66 (Serb./Mont.) " "
Peru -25 19 Zambia 8 7
Philippines 50 57 Zimbabwe 12 18
Poland 2 4
Portugal 86 89
Puerto Rico " "
Romania 19 30
Russian
Federation 2 -57
Rwanda " "
Saudi Arabia -1,408 -395
Senegal 46 40
Sierra Leone " "
Singapore " 100
Slovak Republic 84 73
Slovenia 62 55
South Africa -12 -33
Spain 77 71
Sri Lanka 29 39
Sudan 16 14
Sweden 61 36
Switzerland 66 58
Syrian
Arab Republic -78 -124
Tajikistan -20 -63
Tanzania 8 5
Thailand 51 42
Togo " "
Trinidad
and Tobago -239 -66
Tunisia -79 2
* Net energy imports are calculated as energy use less production, both measured in oil equivalents.  Negative
value indicates that a country is a net exporter.  All forms of commercial energy are included in this table.Source: World Bank.  World Development Indicators 2000.  Washington D.C., 2000, p. 138-140.WT/CTE/W/200
Page 25
ANNEX II
Policies that can be interpreted as "supports" or "subsidies"
I.  DIRECT PAYMENTS THAT SUPPORT 
CURRENT PRODUCTIONIV.  POLICIES THAT CREATE
 TRANSFERS THROUGH MARKET 
 PRICES
Trade policies
• Import and export taxes and subsidies• Deficiency payments (grants to cover losses)
and operating subsidies to producers
• Consumer subsidies provided via retailers
• Price premiums • Non-tariff trade barriers, e.g. import and
export quotas;  procurement preference
II.  TAX POLICIES
Domestic energy and related policies
• Preferential treatment under the general
tax code • Procurement preference
• Exemption from excise tax • Managed non-commercial contracts
• Tax credits • Energy planning
• Preferential treatment in local rates • Price regulation (ceilings, floors, rate-basing)
and franchise fees • Protection for monopolies
III.  POLICIES THAT REDUCE THE 
COSTS OF INPUTS AND 
COMPLEMENTS
• Budgetary subsidies to inputs and
complements
• Price controls for inputs and complements
• Land expropriation for roads, plant sites
Investment subsidies
• Equity participation
• Loans at preferential rates
• Loan guarantees
• Habitual debt forgiveness
• Infrastructure financing
• R & D funding
• Liability guarantees (sometimes combined
with rate-of-return controls)
Source:  OECD.  Reforming Energy and Transport Subsidies.  Paris, 1997, p.18.WT/CTE/W/200
Page 26
ANNEX III
USE OF LABELS, STANDARDS AND TARGETS FOR MAJOR HOME APPLIANCES
(as of June 2000)
Number of Countries
& EUCountries & EU
Labels Standards
or TargetsI = mandatory label; s = mandatory standard;
t = target; vl = voluntary label;  vs = voluntary
standard
Refrigerators and
Freezers
IEA 8 + EU 6 + EU Australia (I,s);  Canada (I,s);  European Union
(l,s);  Hungary (l,s)  Japan (vl,s); New Zealand
(vl);   Norway (l);  Switzerland (l,t);  United States
(l,vl,s)
Non IEA 15 10 Brazil (l,vs);  Bulgaria (l,s);  China (s);  Chinese
Taipei  (vl,s);  Hong Kong China (vl);  India (l,vs);Indonesia (vl);  Iran (l,s); Korea (l,s);  Lithuania (l);Mexico (l,vl,s);  Philippines (l); Poland (l,s);Romania (l);  Russia (s);  Singapore (vl);
Thailand (vl)
Clothes Washers
IEA 7 + EU 4 Australia (l);  Canada (l,s);  European Union
(l,vs);  Hungary (l);  New Zealand (vl);  Norway (l);Switzerland (l,t);  United States (l,vl,s)
Non-IEA 8 2 Bulgaria (l);  China  (s);  Chinese Taipei (vl);
Hong Kong China (vl);  Lithuania (l);  Mexico (l,s);Poland (l);  Romania (I);  Singapore (vl)
Clothes Dryers
IEA 6 + EU 3 Australia (l);  Canada (l,s),  European Union (l);
Hungary (l);  New Zealand (vl);  Norway (l);Switzerland (l,t);  United States (s)
Non-IEA 4 - Bulgaria (l);  Lithuania (l);  Poland (l);  Romania (l)
Dishwashers
IEA 7 + EU 3 Australia (l);  Canada (l,s);  European Union (l);
Hungary (l);  New Zealand (vl); Norway (l);Switzerland (l,t);  United States (l,vl,s)
Non-IEA 4 1 Bulgaria (l);  Lithuania (l);  Poland (l);  Romania
(l);  Russia (s)WT/CTE/W/200
Page 27
Room Air
Conditioners
IEA 5 3 Australia (l);  Canada (l,s);  Japan (vl,t,s);  New
Zealand (vl);  United States (l,vl,s);
Non-IEA 8 8 Brazil (l);  China (s);  Chinese Taipei (vl,s);  Hong
Kong China (vl);  India (vs);  Korea (l,s);  Mexico(l,vl,s);  Philippines (l,s);  Russia (s);  Singapore(vl,s);  Thailand (vl)
Electric Water
Heaters
IEA 2 3 Australia (s);  Canada (s);  New Zealand (vl);
United States (l,s)
Non-IEA - 3 Chinese Taipei (s);  Mexico (s);  Russia (s)
Lighting Equipment
IEA 5 + EU 3 Canada (s);  European Union (l);  Hungary (l);
Japan (l,s);  Norway (l);  Switzerland (l);  UnitedStates (l,s)
Non-IEA 11 5 Bulgaria (l);  Chinese Taipei (vl,s);  Hong Kong
China (vl);  Korea (l,s);  Lithuania (l);  Malaysia(s);  Mexico (vl,s);  Philippines (l,s);  Poland (l);Romania (l);  Singapore (vl);  Thailand (vl)
Source:  IEA. Energy Standards and Labels.  Paris, 2000, p. 15-6.WT/CTE/W/200
Page 28
ANNEX IV
Global CO 2 Emissions by Region and by Sector
(Million tons of CO 2)
Emissions World* OECD Transition
EconomiesDeveloping
Countries
1990 20 878 10 640 4 066 6 171
1997 22 561 11 467 2 566 8 528
2010 29 575 13 289 3 091 13 195
2020 36 102 14 298 3 814 17 990
Increase 1990
-20101997
-20201990
-20101997
-20201990
-20101997
-20201990
-20101997
-2020
Power
Generation4 012 5 816 1 202 1 369 -200 446 3 009 4 001
Industry 892 1 698 -157 -91 -244 193 1 294 1 597
Transport 2 469 3 577 1 215 1 285 -164 254 1 418 2 038
Other 1 324 2 450 388 268 -367 354 1 303 1 826
Total 8 697 13 541 2 648 2 831 -976 1 247 7 024 9 462
*Excluding international marine bunkers
Source:  IEA.  World Energy Outlook 2000.  Paris, 2000, p. 66.WT/CTE/W/200
Page 29
ANNEX V
World Energy-Related CO 2 Emissions
          Source:  IEA.  World Energy Subsidies.  Looking at Energy Prices: Getting the Prices Right.
          Paris, 1999, p. 38.
__________