Barriers to trade and investment in energy goods and services, long neglected, start being addressed by trade negotiators in the World Trade Organisation and outside of it. The process of integrating the energy dimension to trade policy is however still in its infancy. A recent World Energy Council report aims to offer trade officials a policy agenda. By Iana Dreyer.
This article appeared first on World Energy Focus’ April 2016 edition.
Energy has long been largely neglected in conventional trade policy in the World Trade Organization (WTO) as well as in bilateral free trade pacts. “Often energy trade tends to fall off the table in the pursuit of broader principles”, says Lawrence Herman, of the consultancy Herman & Associates in Canada, who was involved in the World Energy Council report.
There are various reasons for this. Major oil and gas exporting countries like Iran, Iraq, Azerbaijan and Algeria are not in the WTO. Russia only joined in 2012. At the same time, major importers of oil, gas, coal or uranium have not imposed tariffs on these products, because they are dependent on them.
The energy world is changing, though. The last two decades have brought a tremendous bout of globalisation, with cross-border investment in the energy sector rising significantly. Renewed resource nationalism during the last decade has highlighted the need for predictable rules and open markets. A new renewable energy industry has emerged whose market rules remain in flux after long having been bolstered by government subsidies. Rules are often tweaked in such a way as to favour incumbent firms or certain less efficient domestic producers, leading de facto to protectionism and higher costs.
Window of opportunity
Trade initiatives such as the Transpacific Partnership (TPP), the Transatlantic Trade and Investment Partnership (TTIP) under discussion between the European Union and the United States, or the Environmental Goods Agreement (EGA) negotiations underway at the WTO are currently offering a window of opportunity to address government policies that hamper investments and trade flows in the energy sector.
An upcoming new report from the World Energy Council (“Non-tariff measures to trade of energy goods and services”) offers trade officials recommendations on how to improve trading of energy goods and services. This is important, according to the Council, because the elimination of trade barriers helps secure “easier access to energy for developing and emerging economies”, reduces “the cost of technology and energy itself, therefore enhancing energy security” and “enables the transition to a low carbon energy system”.
The World Energy Council report lists twelve key issues it wants to see tackled, including local content requirements, regulatory standards and technical regulations, government procurement rules and investment restrictions.
Some of these topics are starting to be addressed within the WTO. Local content requirements, i.e. obligations set by governments on foreign investors to source inputs (labour, services, or products) locally regardless of quality or cost, are an example. In 2012, the WTO’s dispute settlement body outlawed Canadian local content requirements for investors in renewable energy. In March 2016, it did the same for similar requirements imposed by the Indian government on US investors in the solar power sector.
Small part of the story
Yet WTO rules are limited in scope. They don’t (or only partially) cover issues such as investment protection, barriers to exports of raw materials, public procurement rules, and competition in the services sector. New trade initiatives are starting to tackle such energy-specific issues. One important initiative, the Environmental Goods Agreement (EGA), which involves 17 WTO members including the EU, the US, and China, has been ongoing since mid 2013. EGA covers goods such as energy efficiency appliances (thermostats, energy-saving light bulbs, etc.) and renewable energies. Suppliers are hoping that import tariffs on such goods will disappear.
However, tariffs on physical products are only a small part of the trade story. A big gain for the energy sector would be freeing up services. These involve for example the act of installing and operating a plant, maintenance, repairs, sales, or distribution. These activities, which often require a government licence, tend to remain very closed to international operators. They frequently depend on public bidding systems that are closed to private and foreign operators and whose bidding processes can be non-transparent.
The EGA talks do not cover services. Negotiators within the EGA are now aiming to establish a ‘working programme’ on barriers to trade in goods of a technical nature – ‘non tariff measures’, or ‘NTMs’, in the trade policy jargon. This would still not cover services, but it would expand the scope of the EGA. “We understand the limits in [the EGA] negotiations”, notes Lawrence Herman.. “We are encouraged that governments agreed to look at a non-tariff measures working group. The World Energy Council report is an effort to give them an agenda.”
Outside the WTO, the US-driven Transpacific Partnership (TPP), a trade pact among twelve Asia-Pacific countries signed in October 2015, now awaiting ratification, has been an opportunity for a country like Mexico, which started opening up its oil and electricity sectors to private players in 2013, to ‘lock in’ the new rules and avoid any future backtracking.
“For the energy sector the most important part of TPP is the investment chapter”, Edgar Uddelohde, a veteran trade professional in Mexico, who was involved in the preparations of the World Energy Council report, explains. “It protects foreign investment and helps to consolidate the energy reforms of Mexico.”
The EU has developed a specific energy and raw materials agenda in its recent bilateral free trade agreements (FTAs). Its latest FTA signed with Vietnam in December 2015, for example, allows EU energy players to bid with the local electricity monopoly. A special annex on renewable energies obliges Vietnam to adopt international technical standards, to recognise EU standards, and aims to avoid duplicative testing. The agreement also bans export restrictions and export taxes.
Brussels has also set itself the goal to develop a dedicated ‘energy chapter’ in the TTIP agreement. The EU wants to enshrine the principle of free exports and imports, and to tackle various energy market rules. It wants to offer an example for the world in what it considers to be the right, free market rules for energy governance. One aim is to lock in the US’s recent lifting of its crude oil ban and to secure imports of LNG from the US to reduce Europe’s dependency on Russian gas.
Washington, however, is not very keen on including a dedicated energy chapter in the TTIP. But according to the negotiators, energy rules are being discussed and negotiated in TTIP and could end up in the final text under one form or another.
If and when TTIP negotiations are concluded, and if they include energy rules, they would certainly bolster global governance of energy trade. But one outcome of TTIP is uncertain: its investment protection chapter. While public attention is on the EU’s idea of an international investment court to settle investor disputes with host states, businesses worry whether the EU itself provides sufficient protection for energy investors. The jury is still out on that one.