Balancing Export Pricing Commitments in FTAs: Towards Affordable, Secure, and Clean Energy

The world is still ways off to ensuring access to affordable, secure, and clean energy for all. In 2021, 675 million people still lacked access to electricity and around 2.3 billion people still relied on inefficient and polluting cooking systems. Central to ameliorating this are increased electrification and the deployment of renewable energy systems. To strengthen these, it is important to reduce hurdles in their global value chains (GVCs). In recent years, though, the opposite has happened. The minerals, metals, and products necessary to build renewable energy systems face an increasing number of export restrictions. This has been fueling fears of further disruptive policies down the road. Such fears—of dependency and exposure to trade ruptures—help explain, at least in part, the often costly attempts by countries to attract investments in these value chains.

Among the policies to address these concerns are commitments in free trade agreements (FTAs) to lower or remove existing export restrictions and to restrain their use in the future. Such commitments can help reduce uncertainty for importers, create a more reliable investment environment in exporting countries, and thus contribute to the essential expansion of GVCs in the sector. However, commitments on export restrictions reduce the policy space available to countries. They may, for example, give away a potential tool for industrial policy; depending on their tax system, they may limit their tax base; and depending on the exceptions to the commitments, they may restrict the countries’ ability to respond to unforeseen circumstances.

To support overall development, it is critical to strike the right balance on these commitments, including those related to the goods that underpin the GVCs for an affordable, secure, and clean energy future.

The Case for International Cooperation

The world is shifting towards renewable energy. While five years ago, global energy investment was split evenly between clean and fossil fuels at USD 1.1 trillion each, for 2023 the IEA expects USD 1 trillion to be invested into fossil fuel supply and more than USD 1.7 trillion into clean energy.

Yet this is not enough to ensure that everyone has access to energy and to achieve net zero emissions by 2050. Investment into clean energy is heavily concentrated in three economic areas: China, the EU, and the USA. And while growth has been strong also for developing countries, as per the most recent Sustainable Development Goals Report, the least developed countries are falling behind. At the current pace, nearly 1.9 billion people in the world will still be using unsafe and inefficient cooking systems by 2030 and 660 million people will remain without electricity.

There are many constraints to increasing renewables, from difficulties in deployment to limits in the production of the minerals, metals, and other inputs necessary to build renewable systems. Difficulties in accelerating deployment are faced not only but especially by poorer countries, e.g., because the cost of renewables is heavily frontloaded, and costs of capital differ starkly across countries. Increasing production of renewable energy systems, on the other hand, is hindered by too little investment in exploration, mining, processing, and manufacturing. In the face of a rapidly rising demand for renewables, it is essential to expand supply along the GVCs for the energy future to meet demand in the medium and long term and to keep the cost of renewables low compared to fossil fuels.

Increasing production may also bring about a double boon: the production of renewable energy equipment seems to benefit from large and sustained economies of scale. More investment early on may thus lead to bigger overall price reductions. In other words, the better countries cooperate, the faster the build-out of the GVCs for the energy future and the more affordable overall energy access.

A Stumbling Block to Address: Export Restrictions

One area in need of strengthened international cooperation is averting export restrictions. Between 2009 and 2020, as per a recent OECD report, the number of export restrictions on raw materials critical for the green transition increased more than fivefold. Over the last few years, about 10% of the global value of exports in raw materials for the energy future has been impacted by at least one export restriction measure. The most used form of such restrictions were export taxes (36%), followed by licensing requirements (24%). In 2021, the average non-zero export tax on industrial raw materials stood at 12.3% (and 9.4% if timber is excluded). That year, the maximum export tax applied to a critical raw material amounted to 40%.

The GATT generally prohibits export bans or export quotas (with exceptions) but does not prohibit various other forms of export restrictions, among them export taxes and licensing requirements. Countries have further limited export restrictions through FTAs. In the World Bank’s Deep Trade Agreements Database the data on export restrictions identifies provisions on export taxes in 190 out of 237 agreements. Some of these agreements make use of negative or positive lists; some only ban new export taxes between the partners; some limit the rates to existing levels, demand that they be lowered, or that they be phased out over a specified time frame.

It is not straightforward, though, to align such commitments with development goals. In some cases, export taxes play an important role for fiscal capacity and removing them may cause critical revenue losses, in others they may be considered important industrial policy tools, and in others yet they can be important short-term measures to address shocks. A study published by the European Parliament therefore calls on the EU not to seek commitments on export restrictions beyond the GATT rules in its FTAs with small developing countries, particularly with least developed countries, while continuing to strengthen them in FTAs with middle-income countries and those with higher income levels.

At the same time, it is also not straightforward—if a country decides to use export taxes—to align them with development goals. As a standalone policy, it is very likely to backfire and hurt the targeted industry. In cases where export taxes were part of a larger well-designed policy package, though, they may have supported the build-up of downstream industry. Among the examples are the development of the Malaysian palm oil industry; Indonesia’s downstreaming efforts in various materials such as copper, manganese, titan dioxide, or bauxite; or China’s policy measures to spur development across a broader range of products. Among the general lessons learned from these cases are that export taxes seem to have been more successful in supporting industrial development when they were adjusted to existing downstream capacity; when the necessary workforce was trained, infrastructure and energy access for firms provided; and when governments encouraged foreign and local investment and supported so-called strategic coupling with global lead firms in the relevant GVCs. For all of these, it is essential for governments to rigorously evaluate their chosen policies and to let those go that are deemed to be ineffective.

The EU-India FTA Negotiations and Commitments on Export Pricing

A case in point where these issues are on the agenda are the current negotiations of an FTA between the EU and India.
The report on the round of negotiations in June 2023 states that the two sides have now agreed that there should be a dedicated chapter on “Energy and Raw Materials” (ERM). This makes clear that both India and the EU see value in stricter rules applying to the commodities that are to be included in this chapter. The EU’s published proposal for such a chapter includes the following article (X.5) on “Export Pricing”:

“A Party shall not adopt, impose or maintain any measure that provides for or results, directly or indirectly, in a lower price of energy goods or raw materials that are destined for sale to industrial consumers in its domestic market below the price of those goods when they are destined for export to the other Party”.

This proposed rule for to-be-specified industrial materials would go beyond the EU’s proposal in the first chapter on Trade in Goods that bans any duties, taxes, or other charges on goods destined for export. The formulation in the Trade in Goods chapter seems to still allow for policies that affect the price of goods indirectly (and possibly also the reductions of VAT-rebates for exported products). The above proposal in the ERM chapter would go farther and also ban such policies.
As both rules can be assumed to be acceptable to the EU (since it proposed them), the question is whether these are rules that India should subscribe to, or what changes it may want to demand. Indeed, according to the World Development Indicators (series: “Taxes on Exports”), the EU has not been using export taxes at all in the past decades, and for the years 2009-2021 the OECD database on “Export restrictions on Industrial Raw Materials” contains no records of any EU export restrictions (including VAT-rebate withdrawals).

India has been using export restrictions in various ways. Cases in point are the export tax on fossil fuels and other export duties on energy goods or raw materials, e.g. on bauxite, on which India currently levies a 15% export duty, ilmenite with an export duty of 10% (unprocessed) and 2.5% (upgraded), ferrous waste and scrap (15%). These and any other export taxes on goods destined to the EU covered by the proposed chapters would be prohibited vis-à-vis the EU if, possible exceptions notwithstanding, the commitments proposed by the EU were accepted by India. This could thus limit policy space for India that it has been using. At the same time, some commitments may increase sourcing from the EU for covered products.

In terms of fiscal revenue, export taxes have contributed little to the budget of the Indian government. For the years 2016-2020, the World Development Indicators show that export taxes contributed to the budget of the Indian government to the tune of about USD 16 million per year (0.01% of total tax revenue). During 2007/08, export taxes accounted for around USD 350 million (between 0.2-0.3% of total tax revenue). And for the fiscal year 2022-2023, the Indian Ministry of Finance’s revised budget foresees around USD 300 million in revenue from export taxes. In other words, the fiscal component varies but on a low level.

Balancing the Interests

From the EU’s perspective, India’s productive capacities in the mineral and metal sectors could support the EU’s attempts at diversifying its imports of critical materials. In fact, all the above-mentioned export taxes affect commodities that were discussed for inclusion in the EU’s Critical Raw Materials List. Of them, aluminium (contained in bauxite) and titanium (contained in ilmenite) did end up on that list. The EU generally only imports small shares of these from India, and India produces a small but relevant part of global supply in them. By strengthening production of these commodities in India and increasing trade between the EU and India, the EU and the world could diversify sourcing of these commodities.

For India, the important question is how to best weigh the possible upsides and downsides of retaining its current policy space on creating a differential in domestic and export prices. On the one hand, commitments to lower or remove existing export restrictions and to restrain their use moving forward can help reduce uncertainty over India’s future policy and taxation levels. This may support larger demand from the EU, and possibly also larger investments into the development of India’s extractive and processing sectors. On the other hand, the current export taxes may help ensure that the EU’s demand does not simply increase at the raw material stage but supports sourcing and investment into the production of goods further downstream. And for energy goods that can be used both by industry and consumers directly (such as gasoline and electricity, and very likely increasingly also hydrogen and/or other energy goods) commitments on export taxes could limit India’s ability to address, for example, price shocks that affect its economy and population and where redistribution between sectors may be addressed via export taxes.

Towards A Cooperative Approach

While negotiations are, at least in part, about finding compromises, from the Indian perspective, a blanket ban on policies that create a price difference between domestic and exported goods in these sectors, may go too far. Instead, India may want to retain some ability to tax exports, while still decreasing uncertainty for trade partners in the EU. There appear to be several ways that this could be achieved. In some cases, it may suffice to not include certain energy goods or raw materials in the ERM chapter and thus let the laxer stipulations in the Trade in Goods chapter apply. If there are negative or positive lists used in either of the chapters, commitments on specific commodities could take the form of upper limits for export taxes, e.g., at the highest current rate, possible reductions over a given time span, or commitments not to raise current export tax levels in the future for exports to the EU.

Some export taxes may also be relevant for India vis-à-vis recent developments in EU policy. Retaining the ability to offer goods at lower prices domestically compared to their export price may be among the tools to address possible EU subsidies in downstream processing, such as those proposed in the Net Zero Industry Act. It could also be relevant for India to retain the right to tax the carbon-content of exports, for example to address the EU’s Carbon Border Adjustment Mechanism and, in doing so, retain fiscal revenue.For goods that can directly be used by consumers, it may make sense to commit less to address, e.g., issues related to consumer prices. Some of these concerns may also be addressed in the chapter on exceptions, e.g., by incorporating stronger exceptions for such goods. And specifically in the case of fossil fuels, leaving commitments untouched—or commit less—may be interesting to both the EU and India. While the EU may have a shorter-term interest in increasing access to fossil fuels from anywhere but Russia, limiting commitments on these fuels could reduce the relative attractiveness of fossil fuels and strengthen the relative attractiveness of the sectors that are relevant for the GVCs for the energy future.

Evaluating Policies to Align with Development Goals

Further commitments could be crucial to align export pricing policies, if chosen, with industrial development and the green transition, namely consultations ahead of their implementation and the periodical review of their effects. Examples for these could come from other EU trade agreements, such as the ones signed with Côte d’Ivoire, Cameroon, or Kazakhstan. The first stipulates a general standstill on export duties and on charges with equivalent effect (Article 16) but includes the option for Côte d’Ivoire to raise existing ones or to implement new ones on a limited number of traditional goods after consultation with the EU, e.g., for the protection of infant industries or the environment. It furthermore includes a review of these provisions. The agreement with Cameroon is substantively similar but with the option to introduce export duties, again after consultation with the EU (Article 15), on a limited number of additional goods in the case of serious public finance issues or the need for greater environmental protection. While the agreement with Kazakhstan contains only the GATT ban on quantitative export restrictions, its ERM chapter further stipulates that if prices are regulated, they should provide for reasonable profits and where there is a difference between domestic and export prices, the exporting party shall—upon request—provide information on such difference (see Article 139).

Instead of a blanket ban, as proposed by the EU in its negotiations with India, scheduling commitments on export taxes—via negative or positive lists and including a robust cycle of consultation and review of chosen policies—may be the more balanced option. This way, the trading partners may enhance the reliability of trade in the GVCs for the energy future, retain space for industrial policies, and channel investment into those sectors that lie at the heart of ensuring access to affordable, secure, and clean energy for all.