The Fuel Dynamics: Understanding the Implications of Non-Specific Fuel Subsidies Under the Fisheries Subsidies Agreement

Bourne out of the Sustainable Development Goal 14.6, the Agreement on Fisheries Subsidies (AFS) aims to curb the depletion of marine fish stocks via the prohibition of harmful fisheries subsidies, especially fuel subsidies for fishing vessels. AFS has inherited its structure and concepts from its predecessor, the Agreement on Subsidies and Countervailing Measures (ASCM). This includes the concept of specificity, which determines whether a subsidy is categorized as prohibited, actionable, or non-actionable. Non-specific subsidies are, generally, non-actionable, whereas specific subsidies are either prohibited or actionable. Under ASCM, however, certain subsidies are considered so trade-distortive that, regardless of specificity, they are automatically deemed to be specific and are consequently prohibited. A similar scenario occurs under AFS, where fuel subsidies cause the greatest damage to fish stocks. Fuel subsidies can be either specific or non-specific. Unlike ASCM, however, AFS does not have provisions that would allow fuel subsidies to automatically be deemed as specific due to their harmful nature. This loophole allows the world’s major subsidizers to continue providing non-specific fuel subsidies without any repercussions. This paper argues that following ASCM’s example, AFS should include the framework that automatically deems all fuel subsidies to be specific and thereby leads to their prohibition. Part I of the paper explains the rationale for carving AFS out of ASCM and elevating it to an independent agreement as well as the contrasting objectives of both agreements. Part II explores the definition of subsidies and how the concept of specificity is relevant in this regard. Part III examines the role of subsidies, particularly non-specific fuel subsidies, in the declining fish stocks. Part IV shows how the exclusion of non-specific fuel subsidies gives industrialized nations a monetary advantage as opposed to less industrialized nations. Part V examines possible solutions to include non-specific fuel subsidies within the AFS.

1. Agreement on Fisheries Subsidies (AFS)

1.1. The Evolution of the AFS

The AFS’ main objective is to curb harmful subsidies to the fisheries sector. Each year, governments worldwide shelve out around $22 billion to fund unsustainable fishing, causing around 35% of the world’s fish stocks to be overfished.[1] In fact, if current trends continue, it is predicted that the world’s commercial fish stocks will be entirely depleted by 2050.[2]

The impetus of the World Trade Organisation (hereinafter “WTO”) to tackle fisheries subsidies can be dated as far back as 2001 as a part of the Doha Development Agenda.[3] At the Hong Kong Ministerial meeting in 2005, members agreed that a new discipline should be formed which oversaw the prohibition of fisheries subsidies that resulted in the overexploitation of fish stocks.[4] But it wasn’t until the adoption of Sustainable Development Goal 14.6 in 2015, which aimed to “prohibit certain forms of fisheries subsidies which contribute to overcapacity and overfishing” that the negotiations gained true momentum. Three forms of fisheries subsidies were brought under the scope of the AFS, namely, i) Subsidies for illegal and unregulated fishing (IUU), ii) Subsidies to fishing in overfished stocks (OF), and iii) Subsidies contributing to overcapacity which, in turn, cause overfishing.

All efforts culminated at the 12th Ministerial Conference where Phase One of the AFS (“Phase One”) was finalized. Phase One, which deals with the IUU and overfished stocks disciplines, was adopted on 17 June 2022.[5] Following this, negotiations to finalize Phase Two of the AFS (“Phase 2”), which would tackle overfishing and overcapacity (OCOF), continued from 2022 to 2024. Various draft texts on the OCOF disciplines were prepared and debated with hopes of finalizing Phase Two by the 13th Ministerial Conference. However, the recently concluded 13th Ministerial Conference could not bring about the same results as members were unable to reach consensus on OCOF.[6]

1.2 ASCM and AFS: Contrasting Objectives

The AFS did not start out as a standalone agreement. In fact, it has humble beginnings as an annex of the ASCM. It stands to reason therefore that the ASCM works as a blueprint in terms of rules, definitions and concepts for the AFS. However, despite their similarities, the core objectives of both agreements are starkly different.

The ASCM was adopted for the dual purposes of monitoring subsidies provided by WTO members within their country and the countervailing measures used to balance any injury caused to a Member by subsidized imports. The main aim of the ASCM is to prevent trade distortion and, in the event that trade distortion does occur, to provide adequate remedies caused by such distortion.[7]

Unlike other WTO agreements, the roots of the AFS can be traced back to environmental sustainability. Its main objective is to sustainably harvest marine resources and conserve the common environment by curbing subsidies towards the three harmful forms of fishing. Therefore, even though both agreements deal with subsidies, the end goal of each is markedly different. It is for this reason that the AFS was carved out of the annex of the ASCM and developed into a full-fledged agreement of its own. WTO members reasoned that an independent agreement dealing with fisheries subsidies would signify the importance that the WTO placed on the disciplining of such subsidies.[8] Additionally, although fisheries subsidies would have an impact on international trade, such impact would not come under the purview of the AFS.[9]

2. Subsidies and Specificity

2.1 Subsidies Defined

According to Article 1 of the ASCM a subsidy is financial assistance provided by the government.[10] The assistance can be either in a direct manner such as through the transfer of funds or an indirect manner where the government foregoes the revenue due to it e.g. non-collection of tax. Another characteristic of a subsidy is that it must confer a benefit upon the recipient. Finally, the subsidy must not be ‘specific’ in nature in accordance with Article 2 of the ASCM.

2.2 Subsidies and Specificity

The goal of the ASCM and ultimately WTO is free and fair trade. To this end, the ASCM ensures that a subsidy should not be limited to a particular category of recipients.[11] If a subsidy is restricted to a certain of recipients, it would give them an unfair advantage and create economic distortions. To combat this problem, Article 2, ASCM introduces the concept of ‘specificity’, which provides the parameters for determining whether a legal instrument or a government has placed any restrictions on the eligibility for a subsidy.[12] In other words, specificity helps differentiate between distortive and non-distortive subsidies. Specificity can be of four types:[13]

i) Enterprise-specificity: A subsidy is restricted to a particular company or companies.

ii) Industry-specificity: A subsidy is restricted to a particular sector or sectors e.g. agriculture or fisheries.

iii) Regional specificity: A subsidy is restricted to producers in specified parts of its territory for subsidization.

iv) Prohibited subsidies. A government targets export goods or goods using domestic inputs for subsidization.

Only specific subsidies come under the purview of the ASCM.[14] Specific subsidies boost the enterprises in a particular industry, thereby giving them a competitive edge over the enterprises of another country. The ASCM therefore curbs such subsidies by categorising them as prohibited subsidies or actionable subsidies. A specific subsidy can be of two kinds, namely, 1) prohibited or 2) actionable. Prohibited subsidies cannot be provided by any Member or otherwise can be subject to a challenge before WTO. On the other hand, a Member getting prejudiced because of an actionable subsidy can take action in the nature of imposition of countervailing duties against the Member providing such subsidy.

On the other end of the spectrum, non-specific subsidies are those where the benefit is conferred upon enterprises across a variety of industries. This ensures that while different industries are getting support from the government to boost economic progress, such support is not helping any particular industry have a competitive edge over the same industry in another country. According to Article 8(2)(b), non-specific subsidies are non-actionable, meaning that they cannot be challenged or counteracted upon by another Member.[15]

However, an exception is made under Article 2.3 which states, “Any subsidy falling under the provisions of Article 3 shall be deemed to be specific.” Article 3 deals with two types of subsidies, namely:

1) subsidies contingent upon export i.e. the subsidy is only granted if the enterprise, industry, or region exports the goods or services produced; and

2) Subsidies contingent upon use of domestic over imported goods i.e. the subsidy is only granted if the enterprise, industry, or region uses local goods[16]

The contingency present in the design of both forms of subsidies inherently makes them extremely trade distortive to the extent that they are automatically deemed to be specific.[17]

3. Subsidies Specificity and the AFS

3.1 How do Subsidies Impact Fish Health?

The aim of subsidies is to provide support to a sector of the economy. In the context of the fisheries sector, subsidies are provided in various forms e.g. income support to fishermen, subsidies for marine capture, storage, marine research etc.

Not all subsidies, however, have the same impact on the environment. There are three types of fisheries subsidies based on their environmental impact, namely:[18]

a) Beneficial: Subsidies focused on conservation and monitoring measures which aid the growth of fish stocks. These include subsidies for fisheries management measures, marine research and development, or marine protected areas.

b) Capacity-enhancing: Subsidies that encourage overexploitation of stocks such as subsidies for boat construction, fish port construction, or fuel subsidies, amongst others.

c) Ambiguous subsidies: Subsidies whose impacts cannot be determined and could be either harmful or beneficial. These can include fisher assistance programs, vessel buyback programs or rural fishers’ community development programs.

Capacity-enhancing subsidies are considered the most harmful because they reduce the cost of fisheries operations. This allows fishermen to capture more fish at lesser cost, thereby artificially boosting profits. This increased profitability, however, incentivizes fishermen to continue their fishing activity to the point of overexploitation of fish stocks.[19] In recent decades, global fishing activity has increased to a pace that fish stocks are no longer able to replenish the stock at the same rate as they are being fished, leading to a general decline in the fish population at an alarming rate.[20] As stated earlier, if fishing efforts continue at the current rate, the global fish population in the oceans would be completely depleted by 2050.

3.2 Fuel Subsidies Within the AFS Framework

Within the category of capacity-enhancing subsidies, fuel subsidies to the fisheries sector have the most negative impact on fish stock health. Such subsidies simultaneously work to reduce fishing costs and increase profits while also promoting fishing intensity and expansion of ocean areas covered by fishing vessels.[21] It is estimated that around 22% of global fisheries subsidies are channelled towards fuel subsidies, making it the largest subsidy type in fisheries.[22]

Fuel subsidies additionally enable distant water fishing i.e. fishing by a country beyond its exclusive economic zone. This type of fishing is considered particularly harmful because it enables vessels to stay at sea for longer periods, catch more fish and travel much farther than they could if it were not for subsidies.[23]

The latest draft of the AFS for Pillar on Overfishing and Overcapacity (“Draft Text”) has dealt with fuel subsidies through Article A.1, which provides a list of harmful subsidies that are prohibited under the agreement. This includes “subsidies to the purchase/costs of fuel, ice, or bait”.[24] This means that no WTO member can provide specific subsidies for fuel purchases.

3.3 The Non-Specific Fuel Subsidies Loophole

As mentioned earlier, the AFS has inherited its basic structure and concepts from its parent-agreement, the ASCM. This includes the concept of specificity. Article 1, AFS states, “This Agreement applies to subsidies, within the meaning of Article 1.1 of the Agreement on Subsidies and Countervailing Measures (SCM Agreement) that are specific within the meaning of Article 2 of that Agreement, to marine wild capture fishing and fishing related activities at sea.”.[25] This means that only those subsidies that are specific in nature come under the purview of the AFS. This means that Article A.1 of the Draft Text only prohibits specific subsidies to the purchase or costs of fuel.

In the context of free trade, non-specific fuel subsidies do not have any harmful effects i.e. if every sector in a country, including the fisheries sector, is equally eligible for fuel subsidies, there is no distortion of trade. For this reason, non-specific fuel subsidies are not prohibited under the ASCM. In the context of sustainability of marine resources, however, the effects of non-specific fuel subsidies are very different. For example, a WTO member can provide a non-specific fuel subsidy to its entire transport sector, which would make road transport, aviation and the fisheries sector equally eligible for the subsidy. When this subsidy does filter down to the fisheries sector, the capacity-enhancing nature of the fuel subsidy would kick in and still cause damage to the environment. In other words, fish stocks are equally harmed by fuel subsidies whether they are specific or not.

Under the Draft Text, non-specific fuel subsidies are dealt with in Article C.3, which states, “Notwithstanding Article 1 of the AFS, and to the extent possible, each Member shall notify the Committee in writing on an annual basis of its fuel subsidies granted or maintained to fishing or fishing related activities that are not specific within the meaning of Article 2 of the SCM Agreement.” Under this provision, a WTO member should declare any non-specific fuel subsidies it provides to its fisheries sector. However, the wording “to the extent possible” renders this provision toothless because even if a member does not notify non-specific fuel subsidies, it would not have to face any repercussions for the same.

The ultimate consequence of the non-specific fuel subsidy loophole is that a member can continue providing fuel subsidies to its fisheries sector and consequently damage the marine environment, and the AFS would be unable to prevent it.

4. Economic Factor of Non-Specific Fuel Subsidies

4.1 Industrialized Nations at an Advantage

The threat of non-specific fuel subsidies has not gone by unnoticed by WTO members. However, it has mostly been developing countries, which have demanded for the inclusion of such subsidies under the scope of the AFS.[26] Industrialized nations have largely stayed silent on the matter or have spoken out against it.[27] This is because industrialized nations have an economic advantage when it comes to non-specific subsidies as compared to emerging economies.

Given that emerging economies have limited monetary resources, they tend to provide subsidies solely to that industry that needs a particular subsidy – in this case, the fisheries industry.[28] Such subsidies, however, are caught in the net of the specificity because the subsidy design places a restriction on the eligibility and consequently, these are prohibited. In contrast, industrialized nations, which have vast financial resources, can provide subsidies on any type of fuel purchase – from household consumption to airplane fuel. However, among these various types of purchases, fuel purchase for fishing vessels would also receive a subsidy. In this scenario, since the subsidy is not aimed at any particular industry, it would not come under the purview of the AFS. In this manner, industrialized nations would be able to circumvent Article A.1 of the Draft Text and still channel subsidies towards their fisheries sector.

4.2 Case Study: European Union’s Detaxation Scheme

The EU’s Energy Tax Directive (ETD) provides fuel subsidy in the form of revenue foregone. Article 14(1) states that EU Member States will exempt tax collection on:

i) Energy products used to produce electricity

ii) Energy products used to fuel all aviation, except for private leisure aircraft

iii) Energy products used to fuel for vessels, except for private leisure crafts[29]

In this case, the ETD will be considered a non-specific subsidy because it provides energy subsidies to three different industries. However, EU members are still able to funnel fuel subsidies to their respective fishing vessels.

According to ETD, the tax rate for the fisheries sector was as low as €0.036 per litre (around 20 times less than average tax rates for road transport of €0.67 per litre).[30] Based on these figures, it is estimated that through 201-2020, the EU large-scale fishing fleet benefited from a tax exemption of around €0.8 billion. In 2018, EU’s fishing fleet reported an operating profit of €804 million.[31] However, it is estimated that if the artificial boost of fuel tax exemption is eliminated, the operating profit would be around € -332 million. Based on the framework of the AFS, this tax exemption would not come under its purview due to the non-specific nature of Article 14, ETD.

In contrast, India’s fuel subsidy, which is reserved specifically for the fisheries sector, would come under the AFS’ scope. For example, the 2019 fuel subsidy provided by the government of Andhra Pradesh, titled, “Exemption of Sales Tax on purchase of High-Speed Diesel (HSD)” is for the stated purpose of “To protect & secure the livelihood of traditional and poor fishing communities.”[32] The subsidy amounted to Rs. 572.80 million ($). Financial Assistance: The ceiling limit of subsidy on purchase of HSD oil is 3000 litres per boat per month in case of mechanized boats and 300 litres per boat per month in case of motorised boat. The subsidy is capped at Rs. 6.03 per litre. The total fuel subsidy amount of India for the period 2018-2019 was Rs 712 crore (around $101 million).[33]

5. The Way Forward

5.1 Proposed Solutions

There have been varied approaches to address the issues of non-specific fuel subsidies. India, for instance, has argued that fuel subsidies should be included within the scope of the AFS regardless of specificity. It tabled the proposal of an additional article in the Phase One text, which stated that the agreement would include non-specific fuel subsidies.[34]

This proposal, however, has met with opposition by other members on the ground that it contravenes the founding principles laid down in the ASCM.[35]

There have been other calls from environmental and climate change avenues in general to invoke Article 2(1)(c) of the ASCM to invoke de facto specificity because fuel subsidies largely tend to benefit energy-intensive industries.[36] This approach too is an obstacle-ridden one as determining de facto specificity is a complex process.[37]

5.2 Creating a New Carveout

The specificity loophole has left Members at a stalemate. However, it should be noted that even within the context of free trade, the ASCM itself has an exception to specificity. As previously mentioned, Article 2.3, ASCM held that any export-contingent subsidy or subsidy requiring use of domestic content are automatically deemed to be specific because, regardless of specificity, they are extremely trade distortive. In this way, the ASCM maintains its end goal of free trade.

The AFS, therefore, needs to align itself to the structure of the ASCM in the same manner. Fuel subsidies are to the AFS what export-contingent and DRC subsidies are to the ASCM. Therefore, a similar carveout must be incorporated into the AFS, which deems fuel subsidies to be specific regardless of the subsidy program’s design. Thereby, the AFS will be able to maintain the framework it has inherited from the ASCM, while still ensuring that the most harmful form of subsidies will not fly under its radar.

6. Conclusion

The AFS is unlike any other WTO agreement in that it deals with environmental spillovers of international trade. It is not a stretch to assume, therefore, that it will go down as a precedent for other environmental multilateral and bilateral agreements that will come up as countries begin to recognize the importance of climate change and sustainable trade. It is of the utmost importance therefore that the loophole of non-specific fuel subsidies is addressed in this landmark agreement, not only for the conservation of the marine environment but for all future agreements as well.

[1] Fisheries Subsidies Agreement: What’s the Big Deal? PEW (May 10, 2023), https://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2023/05/fisheries-subsidies-agreement-whats-the-big-deal.

[2] Worm, B. et al., Impacts of Biodiversity Loss on Ocean Ecosystem Services, SCIENCE (Nov. 3, 2006) https://www.science.org/doi/abs/10.1126/science.1132294.

[3] Western Central Atlantic Fishery Commission, World Trade Organization (WTO) Agreement on Fisheries Subsidies (Sept. 8, 2023) https://www.fao.org/3/cc7197en/cc7197en.pdf.

[4] Harper, S., et al. Fuelling The Fisheries Subsidy Debate: Agreements, Loopholes And Implications, 113 Fisheries Research 143, 144 (2012).

[5] WTO, Agreement on Fisheries Subsidies, https://www.wto.org/english/tratop_e/rulesneg_e/fish_e/fish_e.htm

(last visited Mar. 10, 2024).

[6] Thibault Denamiel et al., Insight into the 13th WTO Ministerial Conference CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES (Mar. 8, 2024) https://www.csis.org/analysis/insight-13th-wto-ministerial-conference.

[7] Provisions On The Scope For The Comprehensive Agreement On Fisheries Subsidies And Subsidies Contributing To Overcapacity And Overfishing (OCOF), (Sept. 19, 2023), https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S001.aspx.

[8] Id.

[9] Id.

[10] UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT, https://unctad.org/system/files/official-document/edmmisc232add15_en.pdf (last visited on Mar. 14, 2024).

[11] Elizabeth Van Heuvelen, Subsidy Wars, INTERNATIONAL MONETARY FUND (June 2023), https://www.imf.org/en/Publications/fandd/issues/2023/06/B2B-subsidy-wars-elizabeth-van-heuvelen.

[12] Supra note 11.

[13] Agreement on Subsidies and Countervailing Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 14. [Not reproduced in I.L.M.].

[14] Supra note 10.

[15] Supra note 14.

[16] Supra note 14.

[17] Dan Wouters and Dominic Coppens, LAW AND ECONOMICS OF CONTINGENT PROTECTION IN INTERNATIONAL TRADE 48 Cambridge University Press 2010.

[18] Anna Schuhbauer, et al. A Bottom-Up Re-Estimation Of Global Fisheries Subsidies 7 MAR SCI 2020 https://www.frontiersin.org/articles/10.3389/fmars.2020.539214/full.

[19] Rashid Sumaila, et al. Updated Estimates And Analysis Of Global Fisheries Subsidies 109 MAR POL 2019 https://www.sciencedirect.com/science/article/pii/S0308597X19303677.

[20] Id

[21] Chuyi Shen & Tinggui Chen, Impact Of Fuel Subsidies On Bottom Trawl Fishery Operation In China 138 MAR POL 2022 https://www.sciencedirect.com/science/article/abs/pii/S0308597X22000240.

[22] Supra note 21.

[23] Most Long-Distance Fishing in Foreign Waters Dominated by Only a Few Governments PEW (May 27, 2022) https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2022/05/most-long-distance-fishing-in-foreign-waters-dominated-by-only-a-few-governments.

[24] Agreement on Fisheries Subsidies, June 17, 2022, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/MIN22/33.pdf&Open=True.

[25] Id.

[26] Peter Lunenborg, Analysis Of The Overcapacity And Overfishing Pillar Of The WTO Fisheries Subsidies Negotiations (November 2020) SOUTH CENTRE https://www.southcentre.int/research-paper-122-november-2020/.

[27] Frederik Scholaert, WTO Agreement On Fisheries Subsidies EUROPEAN PARLIAMENT RESEARCH SERVICE (Nov. 2022) https://www.europarl.europa.eu/RegData/etudes/BRIE/2021/698842/EPRS_BRI(2021)698842_EN.pdf.

[28] Radika Kumar et al, Effect of Fisheries Subsidies Negotiations on Fish Production and Interest Rate, 13 J. Risk Financial Manag. 297, (2020) https://www.mdpi.com/1911-8074/13/12/297.

[29] Restructuring The Community Framework For The Taxation Of Energy Products And Electricity, Council Directive 2003/96/EC, 2003 https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32003L0096#d1e844-51-1.

[30] Laura Elsler & Maartje Oostdijk, Better Use of Public Money: The End of Fuel Subsidies For The EU Fishing Industry OUR FISH (Apr. 12, 2023)

https://our.fish/wp-content/uploads/2023/04/SFFS-FINAL-REPORT_V5.pdf.

[31] Natacha Carvalho & Jordi Guillen, Economic Impact of Eliminating the Fuel Tax Exemption in the EU Fishing Fleet. Sustainability 13 Sustainability 21027, (2021).

[32] New And Full Notification Pursuant To Article XVI:1 Of The GATT 1994 And Article 25 Of The Agreement On Subsidies And Countervailing Measures (G/SCM/N/343/IND, G/SCM/N/315/IND/Suppl.2, G/SCM/N/284/IND/Suppl.4), WTO (Jul. 19, 2019), https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/G/SCM/N343INDS1.pdf&Open=True.

[33] Id.

[34] India Reiterates That Responsible And Sustainable Fisheries Is A Practice Ingrained In Ethos And Practices Of India’s Large And Varied Fishing Community PRESS BUREAU INDIA (Feb. 27, 2024 8:06 PM), https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2009551.

[35] Bernard Hoekman, et al, Managing Externalities in the WTO: The Agreement on Fisheries Subsidies (2022), EUROPEAN UNIVERSITY INSTITUTE ROBERT SCHUMAN CENTRE FOR ADVANCED STUDIES. https://cadmus.eui.eu/bitstream/handle/1814/75082/RSC_2022_76.pdf?sequence=1&isAllowed=y.

[36] Henok Birhanu Asmelash, Falling Oil Prices And Sustainable Energy Transition- Towards A Multilateral Agreement On Fossil-Fuel Subsidies UNITED NATIONS UNIVERSITY WIDER (Mar. 2016) https://www.wider.unu.edu/publication/falling-oil-prices-and-sustainable-energy-transition.

[37] Id.