1. WTO Disciplines and Biofuels: Opportunities and Constraints in the Creation of a Global Marketplace Presented at: World Bank – Rural Day 9 November, 2006 By: Charlotte Hebebrand International Food & Agricultural Trade Policy Council (IPC) www.agritrade.org

2. Main Drivers for Biofuel Production Some are predicated on domestic production and use: Desire for greater energy independence Additional market for agricultural commodities Potential contributor to rural development

3. Main Drivers for Biofuel Production But others are not: Search for more environmentally-friendly transportation fuel Desire for cost-effective biofuels

4. Trade in Biofuels May Increase Given mandates… US Mandate: 4b gallons in 2006; 7.5b in 2012 EU target: 5.75% of transportation fuel by 2010 JA contemplating 10% blending mandate …and logic of demand and supply OECD countries with limited land availability, possibly higher production costs

5. Developing Countries Perceive Opportunities Comparative advantage – more land; better climate; more suitable crops; lower labor costs Interest in domestic production and use to reduce expenditure on imported oil and to promote rural development Endless demand by rich countries offers potential export opportunities

6. But Should Proceed with Caution Price of fossil fuel Weigh against other opportunities Unable to subsidize to the same extent as OECD countries Potential trade may be stifled by overly exclusive focus on domestic production in OECD countries Sustainability concerns and criteria may limit trade

7. Need to Clarify How WTO Rules Apply Focus on trade can highlight comparative advantage Focus on trade can lead to use of biofuels produced from feedstocks which are most effective at reducing GHGs and are most cost effective Transparent trade regime can attract stable financing and capital investment Address increased production of by-products Clarify subsidy issues

8. Key WTO Issues I.Classification – agricultural, industrial or environmental goods? II. Subsidies/Incentives III. Domestic regulations and standards

9. I.Classification WTO rules provide structures and rules for negotiated tariff reduction – countries “bind” tariffs Most WTO members use WCO’s Harmonized Commodity Description and Coding System (HS) Biofuels are produced from agricultural products; replace industrial products; used to achieve environmental benefits

10. I. Classification HS headings determine whether product is agricultural or industrial product WTO Agreement on Agriculture Annex 1: HS Chapters 1-24 (and some others) Ethanol in Chapter 22 = agricultural product; no differentiation based on end use Biodiesel in Chapter 38 = industrial product

11. I. Classification Negotiation on Environmental Goods & Services Could Biofuels be considered environmental goods and thus be subject to faster liberalization? Difficulty defining parameter of what may be included Unresolved whether agricultural goods can be included or NAMA only

12. I. Classification Policy Responses: Amend HS to introduce distinctive headings for biofuels – allows better tracking of trade; liberalization Amend Annex I of AoA Liberalize multilaterally, unilaterally, preferential arrangements

13. II. Subsidies Importance of Classification – SCM / AoA Expiration of the Peace Clause Subsidies and Countervailing Measures Agreement (SCM) Prohibits export subsidies and subsidies contingent upon use of domestic products over imports

14. II. Subsidies – SCM: Actionability Financial contribution by government: includes range of measures besides direct cash payments Benefit received by recipient which confers competitive advantage on recipient (in market shaped by government interventions, “market benchmark” not easy to determine) Subsidy must be specific Upstream and downstream subsidies

15. II. Subsidies – SCM: Actionability Adverse Effects Injury to domestic producers of like product in competition with imported subsidized product Nullification and impairment Serious prejudice – displace imports of like products; displace exports to third market; price suppression Increase in world market share

16. II: Subsidies -AoA URAA – amber, blue and green boxes Capped amber box, unlimited green box Biofuels support programs (support to industry and/or to agricultural products??)

17. II. Subsides – AoA – Green Box Green box criteria I.Fundamental requirements: program publicly funded; no transfers from consumers; no provision of price support to producers II.Must meet specific criteria (Annex 2 URAA) – R&D; general services (no direct payments to producers/processors); decoupled income support; payments in exchange for removing land from agricultural production; environmental subsidies

18. II. Subsides – AoA – Green Box Environmental subsidies limited to those that are intended to compensate producer for costs of complying with governmental environmental programs Issue of set-aside land – farmers receive payments for removing land from marketable agricultural production – is biomass an agricultural good? Increased production of by-products (glycerine, DDGs)

19. III. Regulations & Standards Principle of non-discrimination Most Favored Nation National Treatment “like” products – physical characteristics, end uses, consumer habits Production-process distinction WTO approach to domestic regulations

20. III. Regulations & Standards TBT Agreement – applies to mandatory technical measures that specify characteristics of products and their related processes and production methods Urges members to use international standards Regulations not more trade restrictive than necessary

21. Conclusion: Uncertain classification Wide range of government measures – tax incentives, high tariffs, subsidies Web of separate technical and environmental standards Potential for trade given increased demand, but need to clarify rules