Despite its frequent use, the term ‘subsidy’ is ‘notoriously difficult’ to define. Existing definitions range from as narrow as a direct budgetary payment by a government to a producer or consumer to as broad as any government interventions that affect prices or costs (UNEP 2008). Since an enumeration of these definitions serves little purpose, this chapter will focus on the only legally binding international definition of subsidies, which is contained in the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures (SCM Agreement).

For the purpose of the SCM Agreement, a subsidy is deemed to exist if:

  • (i) ‘there is a financial contribution by a government or any public body within the territory of a Member or any form of income or price support in the sense of Article XVI of the GATT [General Agreement on Tariffs and Trade]’, and
  • (ii) ‘a benefit is thereby conferred’ (WTO 1995: Art. 1.1). A financial contribution, as spelt out in Article 1.1(a) (1) of the SCM Agreement, may take the form of: (a) a direct transfer of funds (e.g., grants, loans, and equity infusion) or potential direct transfer of funds or liabilities (e.g., loan guarantees); (b) government revenue that is otherwise due is foregone or not collected (e.g., tax credits and other fiscal incentives); (c) provision of goods or services other than general infrastructure or government purchase of goods; or (d) government payments to a funding mechanism or government entrustment or direction to a private body to carry out one of the type of functions illustrated in (a)-(c) and which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments. These four broad categories offinancial contributions capture more than what is normally perceived as a subsidy, but, as noted by the Appellate Body in US-Softwood Lumber, the inclusion of an exhaustive list of financial contributions is in itself an indication that not all government measures capable of conferring benefits would necessarily constitute a subsidy within the meaning of the SCM Agreement (WTO 2004). Some of the most notable exclusions are of particular importance in the context of energy subsidies. For example, regulatory measures, including border measures such as tariffs and export restraints, are excluded from the subsidy definition of the SCM Agreement, although they may eventually confer the same benefit as the above-mentioned financial contributions.[1] Also excluded are implicit subsidies that arise from government inaction (or inadequate action), such as the non-internalization of negative externalities or the adoption of lax environmental regulations (Bigdeli 2008). A failure to internalize negative externalities through taxes or other mechanisms is likely to confer the same benefit as any other financial contribution on those who create the externalities. Indeed, it is precisely for this reason that the International Monetary Fund (IMF) incorporates negative externalities associated with the use of fossil fuels into its global FFS estimates.

  • [1] For example, a restriction on coal exports, either in the form of quotas or a total ban, mayincrease the quantity of coal in the domestic market and hence provide an advantage forconsumers in terms of lower prices in the same way a government provision of coal (belowmarket price) does. For more details, see Rubini (2009).
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