WORLD TRADE
ORGANIZATIONWT/CTE/W/215
TN/TE/W/9
23 September 2002
(02-5081)
Committee on Trade and Environment
Committee on Trade and Environment Special SessionOriginal:  English
ENERGY TAXATION, SUBSIDIES AND INCENTIVES IN OECD COUNTRIES
AND THEIR ECONOMIC AND TRADE IMPLICATIONS
ON DEVELOPING COUNTRIES, IN PARTICULAR
DEVELOPING OIL PRODUCING
AND EXPORTING COUNTRIES
Submission by Saudi Arabia
TABLE OF CONTENTS
I. INTRO DUCTION ................................................................................................................. ...2
II. WTO AND THE E NVIRONMEN T........................................................................................2
A. THE WTO...................................................................................................................... .............2
B. TRADE AND ENVIRONMEN T IN THE WTO .......................................................................3
C. THE DOHA ROUND ............................................................................................................... ..3
III. OECD COUNTRIES' ENERGY POLICIES.........................................................................3
A. ENERGY – CARB ON TAXATI ON ..........................................................................................4
B. COAL SU BSIDIES ............................................................................................................... .....6
C. NUCLEAR SU BSIDIES ............................................................................................................ 6
D. RENEWABLE SU BSIDIES.......................................................................................................7
E. ENERGY EFFICIEN CY MEAS URES......................................................................................7
IV. ECONOMIC IMPLICATIONS ON  DEVELOPING COUNTRIES...................................8
A. IMPACTS ON DEVELOPING EN ERGY PRODUCING COUNTRI ES .................................9
B. IMPACATIONS ON WELFAR E.............................................................................................10
C. DISTRIBUTIONAL  IMPACTS...............................................................................................11
D. SPILLOVER EFFECTS ...........................................................................................................1 3
V. CONCLUSIONS AND RECOMMENDAT IONS................................................................15
A. MARKET IMPERFECTIONS A ND MARKET INST RUMENTS.........................................15WT/CTE/W/215
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I. INTRODUCTION
1. In the light of the responsibility of the Committees on Trade and Environment (CTE) and
Negotiating Group on Market Access, we present this initial contribution identifying the impact onenergy producing and exporting countries as well as recommendations.  The adoption of measures to
mitigate the impact and alleviate the trade implications on developing countries, particularly energy
producing and exporting among them, and improve their market access is at the heart of the Doha
Work Programme that will be negotiated by WTO member countries.  Given the nature of this issue,
we are submitting this paper to both Committees on Trade and Environment (in Special and Regular
sessions) and the Non-Agricultural Market Access Negotiating Group.
2. As both global trade and environmental policy become increasingly interrelated, under the
auspices of the World Trade Organization (WTO ), a Committee for Trade and Environment (CTE)
has been established to deal with potential areas of disparity between trade and environmental policy.
Following the Doha WTO round, a number of trade-related areas of relevance to both energy and the
environment have subsequently been highlighted for further discussion and negotiation.
3. There are several areas in which the WTO trade and environment agenda can interact with
energy exports and the interests of developing energy producing and exporting countries such as
Saudi Arabia.
4. There are a number of ways in which environmental mitigating actions of one country may
impact the economic interests of another country.  However, there are a number of areas in which
countries pursuing environmental objectives (such as climate change policy) may contravene  their
WTO obligations and seek to protect their domestic interests.  As these actions may have significant
implications for energy (and related) exports from developing countries.
5. This paper summarizes the current relationship between trade and environment.  In particular,
it examines the implications of the WTO trade and environment agenda for energy and oil and
contemplates how developed countries' energy and environmental policies could affect developingcountries by provisions relating to energy and environmental taxes, and domestic subsidies.  The
paper also covers the economic implications on developing countries, the spillover effects on
developing countries and proposes actions to be taken by developed countries to minimize the
impacts.
II. WTO AND THE ENVIRONMENT
A. THE WTO
6. The agreements govern trade in goods and services establishing legal responsibilities and
rights of WTO member states and imposing consequences on members who are found to have acted
in a manner inconsistent with WTO obligations.
7. Basic obligations include the duty to refrain from imposing quantitative restrictions on trade
or raising tariffs beyond bound levels.  Basic rights include the principle of non-discrimination, which
is incorporated in the national treatment and most-favoured nation status.WT/CTE/W/215
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B. TRADE AND ENVIRONMENT IN THE WTO
8. In this context, it should be noted that the development and policing of trade-related
environmental policies is not part of the WTO's remit.  Such a task falls under the jurisdiction of othermultilateral frameworks, such as the United Nations Framework Convention on Climate Change
(UNFCCC).  The WTO's involvement is limited to the settlement of disputes between contracting and
non-contracting parties to multilateral environmental agreements (MEAs).
C. THE DOHA ROUND
9. The WTO agreement reached in Doha in November 2001 at the 4 th Ministerial Meeting
reaffirmed a commitment to the protection of the environment (provided measures taken do not
restrict trade or discriminate between countries) and stressed the need for trade and environmentalpolicies to be mutually supportive.  In the context of trade and environment, discussions at Doha
centred on number of issues including:
• Market access: The CTE was advised to consider the effects of environmental measures on
market access, in relation to developing countries, and consider the benefits of removing traderestrictions.  The outcome of these discussions will have some bearing on the interests of
developing countries including energy-exporting developing countries.
III. OECD COUNTRIES' ENERGY POLICIES
10. OECD countries rely on a mixture of policy instruments in particular connection to reduction
of CO 2 emissions that will have trade implication on developing oil-producing countries.  The
following schematic summarizes the major policies:
11. This section outlines the use of energy - carbon taxes and subsidies policies, and discusses the
potential interaction (or conflict) between these domestic environmental policies and WTO rules.  The
UNFCCC is considered as the most relevant MEA to this paper and reference is made to direct trade-
related impacts upon developing energy producers and exporters such as Saudi Arabia where
necessary.carbon/energy taxes
subsidised renewable energy
subsidised nuclear energy
internal GHG trading schemesClimate Change 
Mitigation
demand & supply-side energy 
efficiency measurescarbon/energy taxes
subsidised renewable energy
subsidised nuclear energy
internal GHG trading schemesClimate Change 
Mitigation
demand & supply-side energy 
efficiency measuresWT/CTE/W/215
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A. ENERGY – CARBON TAXATION
12. With carbon taxes, governments are able to tax goods in commerce based on how much those
goods contribute to greenhouse gas emissions.  The main thrust of this policy for OECD governments
is to limit emissions at the same time creating additional and guaranteed government revenues.However, the introduction of such taxes has raised concerns over associated trade effects on
developing countries.
13. At present, OECD countries apply different rates of tax on fossil fuels, with oil being heavily
discriminated against compared to other fuels.  The following schematic represents the different rates
of taxation that are applied across fossil fuels:
/g118Taxes are generally biased against petroleum products.
/g118Taxes on coal and gas products are negligible in comparison .
/g118Coal products are often subsidised.
Coal
0% (other EU)
48% (Finland)Oil Products
39% (US) to
85% (UK)Coal Subsidies
US$ 9 billion
(EU 1999)Natural Gas
4.8% (UK) to
29% (Finland)/g118Taxes are generally biased against petroleum products.
/g118Taxes on coal and gas products are negligible in comparison .
/g118Coal products are often subsidised.
Coal
0% (other EU)
48% (Finland)Oil Products
39% (US) to
85% (UK)Coal Subsidies
US$ 9 billion
(EU 1999)Natural Gas
4.8% (UK) to
29% (Finland)
14. The following graphs illustrate the high level of consumption taxes in the end-user prices for
gasoline and automotive diesel within the EU.  EU  taxes on gasoline range from 66% of the end-use
price to 81%, whilst EU taxes on automotive diesel range from 62% of the end-use price to 82%.
EU Taxes on Unleaded Gasoline:   March 2001
-2004006008001,0001,2001,400
UK
Neth
Finland
Denmark
Germany
France
Sweden
Italy
Belgium
Austria
Ireland
Spain
Lux
Portugal
GreeceTax
Pre-Tax PriceEuros per 1,000 litres EU Taxes on Unleaded Gasoline:   March 2001
-2004006008001,0001,2001,400
UK
Neth
Finland
Denmark
Germany
France
Sweden
Italy
Belgium
Austria
Ireland
Spain
Lux
Portugal
GreeceTax
Pre-Tax PriceEuros per 1,000 litresWT/CTE/W/215
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EU Taxes on Diesel:    March 2001
-2004006008001,0001,2001,400
UK
Italy
Germany
Denmark
Sweden
France
Ireland
Neth
Finland
Belgium
Austria
Spain
Greece
Portugal
LuxTax
Pre-Tax PriceEuros per 1,000 litres EU Taxes on Diesel:    March 2001
-2004006008001,0001,2001,400
UK
Italy
Germany
Denmark
Sweden
France
Ireland
Neth
Finland
Belgium
Austria
Spain
Greece
Portugal
LuxTax
Pre-Tax PriceEuros per 1,000 litres
15. Furthermore, the following table indicates the different fossil fuel consumption tax
percentages between the EU, USA and Japan.  Th e range of taxes runs between 4.8% up to 82%.
Fossil Fuel Consumption Taxes
Percentage of End-Use Prices
EU USA JAPAN
Gasoline 66% - 81% 30.6% 55.8%
Diesel 62% - 82% 42.3% 42.7%
HFO 0% - 31.2% 0% 4.8%
Nat. Gas 0% 0% 4.8%
16. In addition to the use of consumption taxes, several EU members are currently employing
carbon and energy taxes to lower their carbon emissions (for example, the UK climate levy).
Although most of these taxes have the stated aim of reducing CO2 emissions, they are generally
biased against already highly taxed petroleum produc ts.  The only immediate impact of this approach
has been to increase government revenues.  It has not, as was intended, led to a decrease in overall
emissions.
17. A better approach would be to reset overall tax levels based on carbon content rather than
utilising additional or supplemental carbon taxes.  Such approach might offer exporting countries an
opportunity to increase their share of the rents from oil consumption while keeping the final consumer
price unchanged.  For most countries that apply such taxes, they provide a substantial share of the
general revenue.
18. Most Annex B Parties also provide some form of incentive - either as investment credits or
tax offset - for petroleum exploration and development.  Removal of these policies would drive upWT/CTE/W/215
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costs of producing oil in OECD countries, leaving a higher share of the demand to be supplied from
lower cost fossil fuel exporters such Saudi Arabia.
B. COAL SUBSIDIES
19. Another major existing market distortion with in OECD countries energy markets is the
continued subsidisation and tax-exemption of domestic coal.  A paper prepared by the Annex I
Experts Group in 1996 concluded that the removal of subsidies in coal and electricity could both
substantially reduce CO 2 emissions - and stimulate economies with revenues that had previously been
tied up in subsidies.
20. According to the IEA's 1998 publication Coal Information, approximately 5.5 % of the coal
produced by IEA member countries received state ai d, primarily in Japan, Germany, Turkey, Spain
and France.  Of these, only France is committed to end all subsidised production.  Given that theprimary use of coal is in power generation, removal of such subsidies would promote the use of other
fuels (most likely natural gas), reducing the impacts on hydrocarbon-exporting countries such as
Saudi Arabia.   The table below indicates the total coal subsidies in different OECD countries
whereby Germany ranks the highest and Japan the lowest.
Coal Subsidies
US $ Million
Production Other Total
Germany 5,579 467 6,046
Spain 798 413 1,211
France 100 671 771
UK 0 581 581
Japan 528 0 528
Total 7,005 2,132 9,137
C. NUCLEAR SUBSIDIES
21. Significant subsidies for OECD nuclear power stations also remain (although are generally
being phased out), despite the significant environmental and political problems associated with their
operational safety and decommissioning.  The figure below shows that number of OECD countrieshigh implicit subsides.WT/CTE/W/215
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IMPLICIT SUBSIDY FOR NUCLEAR 
0200040006000800010000
JapanUSA
Canada
EU
BeneluxFinland
France
Germany
Spain
Sweden
UK
Rest of World$ M illion Per Year
D. RENEWABLE SUBSIDIES
22. The increased use of renewable energy has become a major aspect of most OECD countries
as a climate change strategy.  The EU and its member States are at the forefront of proposing policies
and measures aimed at securing an increased place for renewable power production within liberalizing
energy markets.  For example, as part of its Climate Change Strategy the UK has set itself a goal of
increasing renewable energy as a share of total energy consumption from around 2% to 10% by theyear 2010.  EU policies and measures aimed at pr omoting and developing renewable forms of energy
include:
• Increased financial support for renewable projects
• Increased technological research and demonstration schemes
• National commitments to increasing renewable energy production
• Legislation to ensure a foothold for renewable energy in a liberalizing energy market
(preferential grid access, guaranteed shares of supply etc.)
23. As technology improves, wind, solar, hydro and ge othermal energy is predicted to rise as a
share of global energy use.  The IEA forecasts renewables share will reach 3% of total primary energy
use by 2020 (World Energy Outlook 2000).  However, financial supports are given at the expense of
other energy forms and are discriminatory in nature.
E. ENERGY EFFICIENCY MEASURES
24. Actions to increase energy efficiency have long been seen as perhaps the most obvious
approach to reducing greenhouse gas emissions.  Therefore, improvements in energy efficiency from
power plant performance levels to household appliances have been a key focus in climate policy
discussions.
25. OECD countries have adopted different approaches to the pursuit of energy efficiency
policies and measures.  The EU already has in place a number of existing policies, which address
energy efficiency both at the EU and member-State level.  These include:WT/CTE/W/215
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• Regulation of industrial emission levels
• Taxation measures to encourage greater energy efficiency
• Energy efficiency and fuel standards for various vehicles and products
• Fuel-switching to gas and power plant improvements
• Financial support for efficiency improvements and R&D activities
26. Despite the EU adopting a wide-ranging and fairly  strict regulatory approach to encouraging
energy efficiency along with employing an extensive range of national carbon and energy taxes,sustained lobbying from industrial groups has resulted in a gradual shift towards more flexible policy
forms.
27. The US approach to energy efficiency policies and measures is generally less regulatory, with
a preference for voluntary, least-cost options.  The US  is continuing to invest in greater efficiency in
power generation, and is seeking continued voluntar y agreements with various energy-using groups.
28. A major issue is that many of the policies and measures suggested by the EU such as energy
taxes and the use of optimal technology are aimed at reducing domestic energy use, rather than
encouraging potential investors to invest in le ss-costly energy efficient projects in developing
countries.  This will have a significant effect on developing oil-producing countries and will reduce
the opportunities for technology transfer and private investment in both oil producing and developing
countries will be less than otherwise.
IV. ECONOMIC IMPLICATIONS ON DEVELOPING COUNTRIES
29. This section will highlight the assessment of the effects of environmental policies, in
particular Climate Change, and measures upon oil exporting and developing countries in light of the
WTO trade dimension.
30. Policy areas for existing and proposed policies and measures to mitigate for example, climate
change, are given under Article 2 of the Kyoto Protocol to the United Nations Framework Conventionon Climate Change (UNFCCC).
31. The section identifies two main areas of concern for developing oil-producing and exporting
common to developing countries as well.  These are:
• Reduction of global demand for developing energy producers; and
• adverse effects upon the economic development of developing countries.
32. The analysis finds that the following strate gies are in the long-term interests of all:
• Removal of existing energy market distortions such as coal subsidisation and existing OECD
taxation structures which discriminate against developing energy producers;
• encouragement of technology transfer, investment and research, especially in technologies that
promise to improve the efficiency and emissions performance of oil products.
33. It is in the interest of both energy exporting and energy importing countries to pursue
environmental policies, which minimise the adverse effects on producing countries' economies, andseek the least-cost flexible solutions.WT/CTE/W/215
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A. IMPACTS ON DEVELOPING ENERGY PRODUCING COUNTRIES
34. Fossil fuels represent the major share of exports for developing oil producing countries’
main source of revenue .  For example, in 1998, Saudi Arabia's energy exports were estimated to be
worth approximately $US 30 billion, whilst non-energy products amounted to less than $US 3 billion
(Statistical Review of Energy , 1999).  Saudi Arabia's energy exports accounted for almost 40% of
their GDP, compared to figures of  less than 5% for most OECD energy-exporters such as Australia
and Canada.
35. The main areas of impact of developing energy - oil producers are:
• Adverse tax policies leading to reduced demand for oil, and lower revenues;
• reduced global growth in industry and GDP;
• loss of trade by oil producers to other fuels; and
• replacement of fossil fuels by renewable and nuclear energy sources.
36. The degree to which developing countries affect depends on the exact package of measures
adopted by each OECD country and the extent to which these countries rely on imports of oil.
37. In this context, developing oil-producing countries suffer GDP losses of between 3%
and 5.1% by 2010 (relative to 1990 levels): will significantly impact national development and social
welfare aims.
38. This will be the cause since the dependence of these countries are higher that others in
relation to the percentage of exports of GDP.  The following figures highlight such dependency
compared it to some developed countries.
OECDMalaysiaGabonIranLibyaQatarNigeriaAngolaVenezuelaSaudi ArabiaOmanKuwait
-6- 5- 4- 3 -2 -10
GDP reduction (%)GDP reduction under developed countries 10% CO2
reduction case:
OECDMalaysiaGabonIranLibyaQatarNigeriaAngolaVenezuelaSaudi ArabiaOmanKuwait
-6- 5- 4- 3 -2 -10
GDP reduction (%)GDP reduction under developed countries 10% CO2
reduction case:WT/CTE/W/215
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Energy Export Dependen ce & National Wealth
0 1 02 03 04 05 0AustraliaCanadaMexicoNorwayIranNigeriaQatarUAESaudi ArabiaOmanAngolaKuwait
per cap GDP ($1000)
exports % of GDP
0 1 02 03 04 05 0AustraliaCanadaMexicoNorwayIranNigeriaQatarUAESaudi ArabiaOmanAngolaKuwait
per cap GDP ($1000)
exports % of GDP
B. IMPACATIONS ON WELFARE
39. The rationale for carbon taxation is provided by the theoretical assumption that a
cost-effective outcome in aggregate economic terms can be obtained if all countries equalize theirmarginal cost of emission reduction.
40. However, numerous studies on carbon taxation have shown that it can have significant
macroeconomic effects and produce substantial welfare losses in practice.
41. The GREEN  model, for example, considers the implications of imposing carbon taxes at
rates of $300/t and $700/t (achieving, respectively, 1% and 2% per year global CO 2 emission
reductions relative to a rising baseline).  The model assumes global action, based on an equal global
carbon tax introduced in all countries.  The results are expressed in terms of welfare loss effectscompared to a BAU scenario in which economic gr owth slows from 2.5% in 1990 in OECD countries
to 1% in 2100 (and from 4% to 3% in developing countries).  The Figure below depicts the global
welfare losses sustained in each of the two tax sc enarios.  By the year 2010, they are shown to be
0.5% and 2.5% in the $300/t and $700/t tax case respectively (compared to the BAU base scenario).WT/CTE/W/215
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GREEN Model: global welfare loss
-4-3-2-10
2000 2005 2010 2030 2050welfare loss (%)$300/t
$700/t
-4-3-2-10
2000 2005 2010 2030 2050welfare loss (%)$300/t
$700/t
-4-3-2-10
2000 2005 2010 2030 2050welfare loss (%)$300/t
$700/t
-4-3-2-10
2000 2005 2010 2030 2050welfare loss (%)$300/t
$700/t$700/t
42. The OPEC  World Economic Model, specifically developed to examine the impacts of CO2
abatement policies upon oil markets and OPEC members,  provides insight into differences between a
BAU reference case and various control scenarios.  One scenario models the implications of the typeof carbon taxes proposed in the early 1990s, such as the EU's $10/bbl and the US Btu tax.  According
to the model, such taxes give rise to a 3% drop in average GDP growth for the world as a whole
between 2000 and 2010 compared to the BAU case (from 2.98%/yr to 2.89%/yr).
43. Despite differences in model assumptions and parameters, an analysis of the modelling results
offers some powerful indications of the impact of carbon taxation.  The models essentially agree thatin the short to medium-term; the introduction of carbon taxes will have economic implications and
leading to global welfare losses and reduced GDP growth.  This will result in negative trade to
developing countries due to lower growth.
C. DISTRIBUTIONAL IMPACTS
44. Any tax that is set at a level sufficient to generate sizeable revenue, as in the EU, or alter
economic behaviour is likely to have impacts on the economic viability of certain activities, which are
often concentrated in particular regions or countries.
45. A carbon tax could have the following distributional effects:
• A tax on CO 2 emissions will reduce demand for fossil fuels.  This will tend to reduce both the
overall volume of exports from energy producers and, by reducing pressure on reserves, the
price that can be commanded on the world markets.  For countries that have large fossil fuelreserves and are dependent on fossil fuel exports, this will lead to declining fossil fuel rents
with resulting implications for their national economies.
• If domestic action taken in response to a carbon tax is sufficient to significantly depress overall
economic consumption, this may lead to a decline in levels of imports.  This is likely to bevery country-specific and will particularly affect those developing countries whose economies
are based upon a small range of exported commodities.WT/CTE/W/215
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• Even with equal marginal costs of abatement, total costs of reducing emissions would differ
from country to country.  A large burden would fall on OECD countries and economies in
transition in the early years, shifting to developing nations in later years.
46. To quantify some of the effects that a carbon tax might have on the distribution of wealth
across nations, we must turn to the results of economic modelling.
47. The GREEN  model shows a marked difference between economic impacts on the world as a
whole and energy-exporting developing country regions.  Both tax rates modelled ($300/t and $700/t;)
lead to substantial losses for the latter, amountin g to 4.2% and 12.5% from the BAU base scenario by
the year 2010, depending on the severity of the tax (see Figure below).  This compares with welfare
losses of 0.5% and 2.5% for the world as a whole.
GREEN: welfare loss in energy-producing developing countries
-20-15-10-50
2000 2005 2010 2030 2050welfare loss (%)$300/t
$700/t
-20-15-10-50
2000 2005 2010 2030 2050welfare loss (%)$300/t
$700/t
-20-15-10-50
2000 2005 2010 2030 2050welfare loss (%)$300/t
$700/t
-20-15-10-50
2000 2005 2010 2030 2050welfare loss (%)$300/t
$700/t$700/t
48. The IEA World Outlook Model was developed as a tool for examining energy market trends
and modelling a large number of separate geographic regions.  It simulates the effects of two different
levels of carbon tax ($100/t and $300/t) applied to fossil fuels in proportion to their carbon content,but in addition to all existing taxes and duties.  The underlying BAU energy scenario projects a world
energy demand increase of 48% from 1990 to 2010.  The projected demand reductions for the main
fossil fuels are shown in Figure below.  This gr aph makes evident the powerful theoretical impact of
such taxes on fossil fuel consumption, and by association, on those economies that are dependent on
their export.WT/CTE/W/215
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IEA Model: tax-induced demand reductions for the year 2010
-40-30-20-100% demand change$100/t
$300/t
coal oil gas-40-30-20-100% demand change$100/t
$300/t
coal oil gas-40-30-20-100% demand change$100/t
$300/t
coal oil gas-40-30-20-100% demand change$100/t
$300/t
coal oil gas$300/t
coal oil gas
D. SPILLOVER EFFECTS
49. Damages to developing countries could be significantly reduced if developed countries phase
out and eliminate existing energy and fuel taxes and subsidies.  Spillover effects on developing
countries would be reduced, and impacts on developing oil-exporting countries would be cut at leastin half.
50. There are four important changes in the terms of  trade that account for these spillover effects:
• Imports from developed countries will rise in price due to higher energy costs;
• energy exports will fall in price because of decreasing demand;
• exports of less energy-intensive goods to developed countries will fall in price because of a
drop in demand for all imports by developed countries; and
• exports of energy-intensive goods from all countries will rise in price.
51. These changes in terms of trade lead to wealth transfers among countries, the largest of which
are from developing oil-exporting countries to all others.  Developed countries benefit from the lower
price of oil on world markets, and also receive higher prices for their exports to developing countries.
On balance, terms of trade effects are:
• Very harmful for developing oil producers;
• mostly harmful for poorer developing countries, whose lower oil import costs are offset by
much higher prices for imports from developed and other developing countries and lower
prices for exports; and
• beneficial for larger, developing oil-importing countries with infrastructure to expand
production of energy-intensive goods for exports or domestic consumption;
• largely beneficial for developed countries energy importers, who benefit from lower prices for
oil imports, higher prices from exports to developing countries, and lower prices from energy-
intensive imports from developing countries, but suffer from higher prices for energy-intensive
imports from developed countries.WT/CTE/W/215
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52. Developing oil-exporting countries are disproportionately affected by actions of developed
countries to limit their carbon emissions.  The mechanism by which these impacts occurs is as
follows:
• Oil demand from developed countries will fall due to limits on carbon emissions and
(effectively) a higher tax on oil use.
• world oil prices will fall due to lower demand.
• oil production and exports will be reduced in response to lower prices.
• export earnings of developing oil-exporting countries will fall due to lower export volumes
and prices.
53. Other trade spillovers will also harm developing oil-producing countries.  A general reduction
in levels of economic activity in developed countries, compared to baseline levels, will reduce
demand for other exports.  Oil-exporting countries will also face higher costs for imports fromdeveloped countries, especially energy-intensive imports.  Specialized oil-exporting countries, such as
Saudi Arabia, that are more heavily dependent on oil export revenues will be harmed the most through
changes in oil prices.
54. Figure below illustrates how wealth is transferred among regions through changes in oil
prices.
Magnitude of wealth transfer depends on how Kyoto Protocol is implemented. Developed
countriesDeveloping
Oil-exporters
countriesIndustrialized
developing
countriesLeast Developed
countries
Magnitude of wealth transfer depends on how Kyoto Protocol is implemented. Developed
countriesDeveloped
countriesDeveloping
Oil-exporters
countriesDeveloping
Oil-exporters
countriesIndustrialized
developing
countriesIndustrialized
developing
countriesLeast Developed
countriesLeast Developed
countries
Wealth Transfer
55. Terms of trade changes produce these spillover effects.  Terms of trade move against
developing oil producers and other poorer developing countries as oil prices fall and import prices rise
(see Figure below).  Developing oil-producing countries experience erosion in terms of trade as pricesreceived for exports fall and prices paid for most imports rise.  Other poorer developing countries
must pay more to developed countries for imports and earn less for their exports of goods and
services.WT/CTE/W/215
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Terms of Trade Move against Most Developing Countries
(Price of exports relative to price of imports)
-3-2.5-2-1.5-1-0.500.511.5OPEC ROW Chn+Ind Asia US EU Japan% Change from BaselineLimited
Trading -
no CDM
LimitedTrading &
CDM
-3-2.5-2-1.5-1-0.500.511.5OPEC ROW Chn+Ind Asia US EU Japan% Change from BaselineLimited
Trading -
no CDM
LimitedTrading &
CDM
V. CONCLUSIONS AND RECOMMENDATIONS
56. There are several areas in which the WTO trade and environment agenda can interact with
energy exports and the interests of developing energy producing and exporting countries such as
Saudi Arabia.  As both global trade and environmental policy become increasingly interrelated, under
the auspices of the World Trade Organization (WTO) whereby the adoption of measures to mitigatethe impact and alleviate the trade implications on developing countries, particularly energy producing
and exporting among them, and improve their market access is of importance.
57. There are a number of ways in which environmental mitigating actions of one country may
impact the economic interests of another country.  However, there are a number of areas in which
countries pursuing environmental objectives (such as climate change policy) may contravene theirWTO obligations and seek to protect their domestic interests.  As these actions may have significant
implications for energy (and related) exports from developing countries.
A. MARKET IMPERFECTIONS AND MARKET INSTRUMENTS
58. The reduction of market imperfections and distortions with regard to global and domestic
energy markets would generally benefit developing countries, in particular oil producing.  At present,the use of energy taxes within OECD countries discriminates unfairly against oil and petroleum
products.  A reform of these taxation policies should be considered based on carbon content would be
less damaging to the developing oil producing and exporting economies.  The extensive subsidization
policies concerning both coal and nuclear energy should also be discouraged, as these protectionist
approaches are inefficient, environmentally unsound.  Also the financial support and incentives ofother energy forms needs to be removed.  Therefore, the main areas of market distortion in global and
domestic energy markets are through the use of subsidies and the structure of existing and planned
OECD country energy taxes, subsides and incentives need to be addressed.WT/CTE/W/215
TN/TE/W/9
Page 16
59. Policies and measures that aim to reduce energy market imperfections and distortions are
important for developing oil producing countries and their fuel exports.  A more cost-effective and
environmentally effective taxation regime would reflect carbon content.  At present, however, oil
taxation is excessively high in many OECD countries whilst coal, a more polluting fuel, is oftensubsidised.  This imbalance could be rectified by reforming taxation in OECD countries.
60. Having explored the economic implications and design problems, as well as some of the main
international policy dilemmas associated with energy/carbon taxation, the main arguments against the
introduction of such a tax can be summarised.
Developed countries t axation measures should become 
more 
carbon responsive
and thus m ore reflective of their influence.
Reorganisation of fuel taxes to 
reflect carbon contentRemoval of coal subsidiesDeveloped countries t axation measures should become 
more 
carbon responsive
and thus m ore reflective of their influence.
Reorganisation of fuel taxes to 
reflect carbon contentRemoval of coal subsidies
• Economic impacts .  The introduction of carbon tax could depress the world economy further
with important spillover consequences for de veloping countries (particularly those highly
reliant on fossil fuel exports).  Model results indicate that negative macroeconomic effects
such as reduced GDP growth and welfare losses could result and retard the development of
developing country economies.  Reduced growth in highly taxed regions may reduce demand
for imports from developing regions, whilst reduced demand for fossil fuels and resulting
falling prices could most harm developing en ergy-exporting countries.  Such outcomes would
clearly be counterproductive to development policy.
• Equity and distributional issues .  Carbon tax, clearly distribution issues constitute a major
problem.  Increasing taxation would particularly affect the fossil fuel sector (and at the
international level, countries such as Saudi Arabia states whose national incomes rely upon
fossil fuel exports), as well as energy intensive industries.  In terms of effects on different
income groups, a carbon tax without any compensating measures could be significantlyregressive, with differences across countries coming from, among other factors, the reliance on
personal vehicles, and the total mix in household energy consumption.  A tax with severe
distributional effects would contradict the policy aim of assisting development and sustainable
growth in developing countries.
• International trade issues .  Competitiveness concerns arising from differential tax, subsidy,
and incentive levels could result in the imposition of trade barriers and prove regressive in
terms of promoting the role of developing countries in global trade patterns.
61. Therefore, we request that this issue is to be included under the negotiations process as
outlined in the introduction section.
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