Publications

Trade and Investment Rules for Energy

Executive Summary

As evidenced by the extraordinary March 2009 meeting of the G-20 in London, the world is facing an economic crisis of historic proportions, the solutions to which are both complex and long term. The consensus reached in London is that governments must not resort to protectionism nor retreat from efforts to maintain open markets in goods and services, and that the availability of capital is critical as part of the economic stimulus measures being implemented by governments.

Energy is an essential element in these efforts. Maintaining and enhancing the flow of energy in international markets is therefore critical. As the WEC Task Force states in this first report, barriers and impediments to energy goods, services and personnel, as well as to capital flows for energy investments, will inhibit rather than help global revitalization efforts currently underway.

Taking these factors into account, the Task Force has developed a series of recommendations on: (1) maintaining open markets for energy trade; (2) promoting energy-related investments; (3) aiding the movement and delivery of energy services;(4) promoting trade and investment in environmentally friendly energy goods and services; and (5) facilitating cross-border movement of energy services personnel. The central conclusion is that governments must maintain open energy markets, seek ways to expand international cooperation, and apply measures affecting energy trade, investments, and movement of persons that are fully consistent with the rules set out in the General Agreement on Tariffs and Trade (GATT) and other parts of the World Trade Organization Agreement.

As part of its analysis, the Task Force has carefully considered international efforts to deal with climate change and to reduce greenhouse gas emissions, with particular attention to the impending discussions of the Conference of Parties of the U.N. Framework Convention on Climate Change (UNFCCC) to be held in Copenhagen later in 2009. Without detracting from the importance of such efforts, the Task Force believes that environmental policy should not be applied contrary to rules established in the GATT and the WTO Agreement to the detriment of the energy sector.

Having analyzed these five priority areas, the Task Force presents its analyses and findings for each of the five subjects in the body of this report, together with the recommendations resulting from this review. These recommendations are set out below.

Maintaining open Markets - Border Measures and Energy Trade
Trade in energy, both primary forms and energy-related goods and services, is critical to global economic development and international energy security.
Trade-inhibiting border taxes and other border restrictions affecting energy would be counterproductive to economic development, and to efforts to stabilize the global financial system and restart and stimulate economic growth, all of which are matters of universal concern.

Governments should therefore adhere to the principle that any border measures affecting energy trade must comply with the open market objectives and legal obligations in the GATT and the WTO Agreement. To this end, all like forms of energy and energy products, whether imported or domestic, must be accorded equivalent treatment and equal competitive opportunities in the importing country in accordance with the requirements of the GATT and the WTO Agreement.

In pursuing greenhouse gas (GHG) reduction efforts, governments should not circumvent otherwise applicable GATT and WTO Agreement obligations respecting energy trade through improper or unwarranted recourse to the exceptions in GATT Article XX. Recourse to these exceptions should only be invoked where demonstrably justified and should not be discriminatory or disguised trade restrictions.

Governments should therefore fully respect all GATT and WTO Agreement rules and disciplines in pursuing measures to reduce GHG emissions, including efforts to implement the UNFCCC and the Kyoto Protocol in the post-2012 period. Governments should also agree that environmental concerns, including the implementation of GHG reduction measures, should be addressed through means other than the use of trade measures.

Governments should take steps to apply the foregoing recommendations, as appropriate, in future WTO negotiations and at the meeting of the UNFCCC Conference of Parties (COP) in Copenhagen in December 2009, and in future COP meetings.

Promoting Energy-related Investments
It is recognized that energy related investments entail long-term commitments of capital, with extensive up-front planning, including preparations for and participation in environmental assessments, infrastructure development, and a range of other matters preliminary to the actual energy investment.

Governments should commit to ensuring full protection for energy investors and investments in accordance with broadly recognized international standards for "direct" energy investments as well as "indirect" investments that, while not an integral part of the capital project, may be materially related to the core investment activity.

The pre-investment phase is an important first step in energy development. Recognizing that circumstances differ from project to project, governments should consider developing benchmarks to assist in identifying pre-investment activity that is a legitimate part of an energy investment and entitled to protection under accepted international standards.

Given the long-term nature of energy investments, governments should commit to fair and equitable treatment in accordance with international standards over the entire investment period, including, where appropriate, in the pre-investment phase. To this end, governments should ensure that all measures and polices governing energy are based on accepted international norms, including full disclosure, transparency, and non-arbitrary treatment.

Governments should also recognize that GATT type standards of non-discrimination, both national treatment and Most Favoured Nation (MFN) treatment, are vital components of stable and reliable energy investment regimes. In applying these obligations, special care should be taken to ensure that the "like circumstances" requirement does not open avenues of discriminatory treatment to foreign-based energy investors and investments.

Governments, in consultation with the energy industry, should also consider ways to make international dispute settlement mechanisms more flexible, less costly, more efficient, and more effective to the benefit of both host States and the energy industry at large.

Recognizing that States have sovereign rights to regulate their own economies, and taking into account the legitimate need for GHG emission reduction policies, governments should work with WEC to establish guidelines for distinguishing measures that cross the line from legitimate regulation to "creeping" or de facto expropriation.

As the global community grapples with climate change, including the post-2012 regime under the UNFCCC and the Kyoto Protocol, governments should ensure that carbon emission reduction measures do not discriminate against foreign energy investments. In this respect, national GHG reduction measures should not be applied in a differential or discriminatory manner to foreign energy investments or investors, and national treatment requirements should be fully respected.

Aiding the Movement and Delivery of Energy Services
Whether or not the Doha Round is reactivated, governments should accord special consideration to improved terms for the delivery of energy services as an integral component of international economic development, particularly for emerging economies and for developing countries in general.

Taking the foregoing into account, governments should commit to current levels of market access and agree to a standstill on new trade restricting measures in energy related sectors and subsectors where WTO members have not made specific commitments under the General Agreement on Trade in Services (GATS).

In negotiating bilateral or regional free trade agreements, governments should consider including these same levels of market access and standstill commitments covering energy services.

Implementation of the UNFCCC and any other regime governing carbon emission reductions in the post-2012 era should ensure that energy services are accorded non-discriminatory market access and other treatment in accordance with the principles of non-discrimination and national treatment under the GATT and the WTO Agreement.

The global energy industry, under the leadership of WEC, should develop an agreed energy services list, taking into account the plurilateral requests made in the Doha Round. As part of this exercise, the efficacy of these requests in removing and eliminating the most serious trade barriers and market impediments faced by the energy sector should be assessed.

The energy industry, under WEC's guidance, should also examine where domestic laws, regulations, and policies (such as competition laws) restrict modes of supply and impede delivery of trans-boundary energy services. This could include an assessment of competition policies and practices that inhibit the growth of open service markets.

Finally, governments should recognize that the foregoing requires balancing of State sovereignty over natural resources and the exclusive rights of governments to legislate in the public interest with the need for clear, fair, and transparent treatment of all energy service providers in accordance with the rule of law.

Promoting Trade in environmental Goods and Services
Governments should support efforts to reach consensus on rules for improving market access for Environmental Goods and Services (EGS), whether inside or outside the WTO framework. To this end, governments should, as a priority, work toward agreement based on proposals tabled in the Doha Round for reducing market barriers for these goods and services.

In light of these proposals and to maintain momentum in the WTO negotiations, WEC should promote the inclusion of energy goods and services on an agreed services classification list as part of renewed efforts to achieve either multilateral or plurilateral agreement on EGS.

Efforts to reach agreement on this list should be initiated as soon as possible, irrespective of whether the Doha Round is reactivated. Without prejudice to the final form of such agreement, it could then be adopted either within or outside revived Doha Round negotiations, as appropriate.

Facilitating Cross-border Movement of Energy Services Personnel
Pending a resumption of WTO negotiations, governments should endorse the objective of facilitating trans-boundary movement of Energy Services Personnel (ESP). These efforts should balance the twofold need to respect reasonable and acceptable national security requirements along with speeding the approval of cross border movement of ESP.

To further these objectives, governments should expand linkages between and among regions and States through arrangements, understandings, and protocols governing conditions of entry. Developing these linkages should take into account current regional initiatives as useful models in the energy sector for facilitating cross-border movement of personnel.

Means to minimize differences among national and regional approaches should be pursued through the development of jointly agreed security protocols, understandings, and arrangements for background checks, screening, documentation, and other State security matters.

As a further step, ways to link with other national and regional programs and initiatives to enlarge the network of ESP entry arrangements should be explored. All of the above should be geared to the special needs of the energy sector. 

Following is the Task Force's full report on each of the five subjects. It contains a background section and an analysis of the subject matter in each area, leading to the set of recommendations outlined above. In offering these recommendations, the Task Force hopes that industry and government can work together to implement these ideas, with the ultimate objective of ensuring that the global economy once again flourishes and that energy trade, in all its manifestations, continues to play its central part.