THE FEED-IN TARIFF CONTROVERSY:
RENEWABLE ENERGY CHALLENGES IN WTO LAW
ANDREW JERJIAN
I. INTRODUCTION
The future policy landscape for the promotion of renewable energy (RE) has the potential
to be shaped by the legal treatment of feed-in tariff (FIT) programmes under the
international trading system. A FIT is an instrument for promoting investment in RE and
typically sets a fixed price for purchases of RE power, providing electricity producers
with a premium above the market price for electricity—per kilowatt-hour (kWh)—fed
into the grid. 1 FIT programmes have been implemented in about fifty jurisdictions
worldwide, at either a national or sub-national level.2 The catalyst for the international
proliferation of the FIT model is, in part, the desire to emulate the success of other
jurisdictions—especially Germany—in achieving more decentralized, carbon-neutral
domestic energy production.3
Despite the growing prevalence of FIT programmes, the global RE landscape has
more recently been called into question. This issue emanates from WTO actions launched
by Japan and the EU against Canada in relation to Ontario’s FIT programme. While the
case specifically concerns the legitimacy of domestic content requirements for eligibility
in Ontario’s FIT programme, the proceedings also pose more systemic concerns with
respect to FITs—as a “subsidy” at risk of being challenged and lacking clear status as a
matter of WTO law.
The recent WTO disputes concerning Ontario’s FIT programme will have a
detrimental impact on the RE sector, possibly spurring fragmentation of RE policy in the
coming years. Not only are the potential ramifications of the panel decisions inimical to
the future cohesion of the global RE sector, but they will also serve as a litmus test for the
WTO regime’s sustainable development credentials. With systemic issues at stake, the
WTO can help Canada and others by providing more transparent and progressive rules on
subsidies, while remaining vigilant and alert to the danger of protectionism under the
guise of such subsidies.
This paper will first explore the origins and operation of the FIT instrument in
Germany and Ontario. In doing so, the stage will be set for the examination of the WTO
definition of subsidy and requirements for liability—focusing initially on “actionable”
subsidies in the Agreement on Subsidies and Countervailing Measures (ASCM).
Furthermore, the FIT programmes of Ontario and Germany will be analysed under the
ASCM. This will then be complemented by an examination of “prohibited” subsidies
under WTO law and the current controversy on domestic content requirements.
Ultimately, the WTO must be more accepting of RE public support mechanisms and
should provide greater flexibility to the extent required by the needs of nations in pursuit
of sustainable development objectives.
1
Mendonça et al, Powering the Green Economy: The Feed-in Tariff Handbook (Earthscan 2010)
xxi.
2
Renewable Energy Policy Network
<http://www.ren21.net/RenewablesPolicy/OverviewonPolicyInstruments/RegulatoryPolicies/Fee
dinTariff/tabid/5628/Default.aspx> accessed 8 September 2012.
3
Grinlinton and Paddock, ‘The Role of Feed-in Tariffs in Supporting the Expansion of Solar
Energy Production’ (2009) 41 U Toledo LRev 942, 945.
2
II. BACKGROUND TO FEED-IN TARIFFS
This Chapter will examine the origins of FIT programmes and their development within
Germany and Ontario.
AN OVERVIEW: HISTORY & ORIGINS
Germany was the first European nation to pioneer a feed-in law incentive scheme for the
development of RE production.4 Although the energy industry was hostile to the notion
of new decentralized competition, political support led to the introduction of the
Electricity Feed-in Law 1990 (Stromeinspeisungsgesetz, StrEG). The StrEG required
utilities to provide renewable energy generators grid access and purchase the energy
produced. Remuneration for the energy was correlated to average price of electricity per
kWh sold to final consumers; for wind and solar power, the rate was fixed to 90% of this
end-user price.5 One of the declared purposes of the law was to “level the playing field”
for renewable energy.6
Germany’s Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, EEG)
was adopted to improve upon the former StrEG and foster greater expansion of RE
production within Germany’s energy portfolio. Some of the more crucial elements of the
EEG include the decoupling of rates from electricity prices, fixed rate guarantees for
twenty-year terms, and the establishment of tariff differentiation according to the source,
size and location of renewable energy plants.7 More recently, the Act’s innovations were
taken further under a 2012 amendment. Among other developments, the revised
legislation refined the purpose of the EEG by enumerating previously enshrined
objectives in more exacting terms. The Act’s purpose expressly incorporates goals such
as the development of new RE technologies and reduction of energy costs, as well as a
35% renewables target for the domestic energy supply—to be achieved by 2020. 8
Germany’s FIT programme does not rely upon a State actor for the provision and
management of FIT payments. It imposes a purchase obligation on private distribution
and transmission system operators—collectively involved in the transmission of electric
power from the point of generation to consumption—to purchase and share the costs of
paying the EEG-imposed tariff to RE producers.
Inspired by Germany’s successful promotion of RE using the FIT model,9 Ontario
sought to adopt its own “European-style” FIT instrument.10 This was achieved through
4
Mendonça, Feed-In Tariffs: Accelerating the Deployment of Renewable Energy (World Future
Council 2007) 27.
5
Jacobbson and Lauber, ‘Germany: From a Modest Feed-in Law to a Framework for Transition’
in Lauber (ed), Switching to Renewable Power: A Framework for the 21st Century (Earthscan
2005) 122, 134.
6
ibid.
7
Laird and Stefes, ‘The Diverging Paths of German and United States Policies for Renewable
Energy: Sources of Difference’ (2009) 37 Energy Policy 2619, 2624.
8
EEG 2012, §1.
9
Ontario Legislative Assembly Debates (Hansard), 39th Parl, 1st Sess, 23 February 2009, 4937,
4952.
10
Rothman and Dalton, ‘Ontario’s Feed-in Tariff: Can a European-style renewable model work
in the Americas?’ (October 2009) Public Utilities Fortnightly 22, 22; Interview with George
Smitherman, former Duty Premier and Minister of Energy of Ontario (Toronto, 2 January 2012).
3
the Green Energy and Green Economy Act 2009 (GEGEA), which enacted the Green
Energy Act. Ontario’s FIT programme is divided into two streams: the FIT and the
microFIT.11 The FIT is applicable to projects generating more than 10 kW, while the
microFIT targets individuals interested in more small-scale projects not exceeding the
aforesaid threshold. The Preamble of the Green Energy Act enunciates that the legislation
strives to secure “cleaner sources of energy” as well as the promotion of both RE projects
and a “green economy”. According to the Minister of Energy at the time of the proposed
legislation, the policies embedded within the legislation are intended to make Ontario one
of the “greenest energy supply mixes in the world.”12 The FIT programme also aims to
create a new “green industry” by requiring solar and wind facilities to meet domestic
content requirements—currently, 60% and 50% for solar and wind respectively.13 These
objectives illustrate the dual environmental and economic policy impetus underlying
Ontario’s FIT programme.
Ontario’s FIT programme is managed and implemented by the Ontario Power
Authority (OPA).14 Under GEGEA, the OPA is required to comply with the Minister of
Energy’s directions in relation to activities such as the procurement of electricity supply
and development of a FIT programme. Although the Electricity Act 1998 describes the
OPA as not being a Crown Corporation, the Ministry of Energy has delegated to the OPA
the responsibility for setting the FIT and administering FIT contracts.15 With respect to
financing, FITs are partially funded by the Global Adjustment Mechanism (GAM). GAM
appears as a charge on consumer bills and funds the shortfall between the market price
and the guaranteed FIT—which, like in Germany, is provided for a twenty-year period.16
Yatchew and Bazilauskas, ‘Ontario Feed-in-Tariff Programs’ (2011) 39 Energy Policy 3885,
3888.
12
George Smitherman, Ontario Legislative Assembly Debates (Hansard), 39th Parl, 1st Sess, 23
February 2009, 4937, 4952.
13
FIT Rules, s 6.4(a)
<http://fit.powerauthority.on.ca/sites/default/files/FIT%20Rules%20Version%201%205%201_Pr
ogram%20Review_0.pdf> accessed 15 September 2012.
14
OPA, ‘FIT Program Overview’ (2010) 2.
15
EA 1998, s 25.1-25.3.
16
AG, ‘Annual Report of the Auditor General of Ontario’ (2011) 93; OPA, ‘FIT Program
Overview’ (2010) 30.
11
4
III. SUBSIDIES: WTO LAW FRAMEWORK
The development of FIT programmes worldwide has introduced new challenges for the
existing framework established by the WTO’s law of subsidies. In this Chapter, the
WTO’s perspective on the matter of subsidies will be examined. An overview will be
provided in Chapter IV of the case against Canada (concerning the Ontario scheme), and
reforms which the WTO may adopt—clarifying the matter of subsidies in the RE sector
for the future.
A. THE WTO’S APPROACH TO SUBSIDIES
(1) DEFINING SUBSIDIES UNDER THE ASCM
After failing to resolve the dispute with Canada during consultations, Japan and the EU
(the “Members”) each sought to establish a panel pursuant to Article 6.1 of the WTO’s
Dispute Settlement Understanding.17 The Members specifically argue that Ontario’s FIT
is a “prohibited” subsidy under the ASCM (WTO Agreement on Subsidies and
Countervailing Measures) because it is contingent on the use of domestic content. More
specifically, Ontario’s FIT Rules and FIT Contract both establish that all solar and wind
project capacities over 10kW must meet a minimum required domestic content level.
Prior to determining whether Ontario’s FIT violates the WTO law of subsidies, it
is vital to underscore a distinction that is drawn between “prohibited” and “actionable”
subsidies under the ASCM. Article 3 ASCM makes clear that subsidies linked to export
performance or the use of local content are categorically prohibited. By contrast, nonprohibited subsidies require proof of adverse effects (Article 5) and specificity (Article
2), thereby being only potentially “actionable”. With respect to prohibited subsidies,
Article 3.1(b) prohibits “subsidies contingent, whether solely or as one of several other
conditions, upon the use of domestic over imported goods.” In order to conclude that a
measure is “actionable” or “prohibited”, one must analyse whether Ontario’s FIT can be
classified as a subsidy under the ASCM.
(a) The First Prong: Financial Contribution or “Price Support”
Under Article 1 ASCM, the definition of a subsidy effectively rests on two prongs: (1)
the existence of a “financial contribution” or income or price support; and (2) conferral of
a benefit upon the recipient. The concept of financial contribution—albeit acting as an
initial control-valve to ASCM disciplines—has been interpreted quite flexibly. In
Canada–Measures Affecting the Export of Civilian Aircraft (Canada–Aircraft), the
Appellate Body held that the question of whether Article 1 requires a “cost to
government” is relevant to the interpretation of “financial contribution”, not as to whether
a benefit has been conferred—as suggested by Canada. In concluding that a financial
burden for the State is unnecessary, it noted that:
Canada’s interpretation of ‘benefit’ would exclude from the scope of that term
those situations where a ‘benefit’ is conferred by a private body under the direction
of government. These situations cannot be excluded from the definition of ‘benefit’
Japan: Canada–Certain Measures Affecting the Renewable Energy Generation Sector,
WT/DS412/5 (7 June 2011); EU: Canada–Measures Relating to the Feed-in Tariff Program,
WT/DS426/5 (10 January 2012).
17
5
in Article 1.1(b), given that they are specifically included in the definition of
‘financial contribution’ in Article 1.1(a)(iv).18
The relevance of this decision vis-à-vis government expenditure is therefore linked to an
important distinction under Article 1.1—namely, that financial contributions may be
either direct or indirect.19
(i) Direct Financial Contribution
Direct financial contributions are those that are provided by the government or a public
body. Article 1.1(a)(1) exhaustively enumerates four forms of financial contribution, with
paragraphs (i)-(iii) being direct in nature. In the context of FIT programmes, paragraph
(iii) is especially relevant, as it concerns the “purchase of goods” by a government or
public body. Given that electrical energy may be defined as a good under WTO law,20 the
more critical question centres on the interpretation of “public body”. Until recently,
Korea–Measures Affecting Trade in Commercial Vessels (Korea–Commercial Vessels)21
was authority for the view that an entity is a public body where it is controlled by the
government. In this matter, the panel’s affirmative finding of a public body was
supported “primarily” on the basis that the entity was 100% owned by the Korean
government (or other public bodies).22 This conception of a public body as hinging on the
concept of control was hewn in the recent case of United States–Definitive Anti-Dumping
and Countervailing Duties on Certain Products from China (US–AD/CVD),23 where the
Appellate Body decided that evidence of a “controlling interest”24 is itself not sufficient
to establish that an entity is a public body. It elaborated that the ability to perform the
functions of entrusting or directing private bodies are “core commonalities” between
government and public body. In this respect, while any single characteristic—like a
controlling financial stake—is not decisive, “meaningful [government] control over an
entity and its conduct may serve … as evidence that the relevant entity possesses
governmental authority and exercises such authority in the performance of governmental
functions”25 [emphasis added]. The Appellate Body also asserted that the classification of
an entity’s functions as governmental under the “legal order” of the relevant Member
may be a “relevant”—yet not a definitive—consideration in the determination of public
body.
(ii) Indirect Financial Contribution
By contrast, indirect financial contributions are those that originate from or are
channelled through private bodies to a beneficiary. Such forms of contribution are
addressed specifically under Article 1.1(a)(1)(iv) and entail different imputability criteria
18
Canada-Aircraft, WT/DS70/AB/R (1990), para 160.
Matsushita et al, The World Trade Organization: Law, Practice, and Policy (OUP 2006) 343.
20
Cottier et al, ‘Energy in WTO Law and Policy’ in Cottier and Delimatsis (eds), The Prospects
of International Trade Regulation (CUP 2011) 215.
21
Korea–Commercial Vessels, WT/DS273/R (2005).
22
ibid, para 7.50.
23
US–AD/CVD, WT/DS379/AB/R (2011); Wilke, ‘Feed-in Tariffs for Renewable Energy and
WTO Subsidy Rules: An Initial Legal Review’ ICTSD (2011) 21.
24
US-AD/CVD, para 320.
25
ibid, paras 318-9.
19
6
compared to direct financial contributions. 26 Paragraph (iv) provides that government
payments to a “funding mechanism” are defined as financial contributions. Alternatively,
indirect financial contributions also exist where: (1) the government or public body
“entrusts or directs” a private body; (2) to carry out a “function(s) illustrated in (i)-(iii)”;
(3) which would “normally be vested in the government”; and (4) the “practice, in no real
sense, differs from “practices normally followed by governments”. Where a private body
is used as a “proxy”27 by the “government” to carry out the functions listed in paragraphs
(i)-(iii), paragraph (iv) is applicable even absent any cost to government.
The “real gateway”28 to regulation under Article 1.1(a)(1)(iv) is that the type of
function undertaken by the private entity must represent a “function” or “practice”
normally vested in government—with respect to both the relevant WTO Member and as a
normative matter. These provisos impose a heightened evidential and analytical burden,
and are “one of the most controversial aspects of WTO subsidy law.” 29 As a starting
point, consideration must be given to the legal order of the specific Member in order to
determine whether the relevant function “would ordinarily be considered part of [its]
governmental practice”. 30 However, in United States–Measures Treating Export
Restraints as Subsidies (US–Export Restraints), the panel held that the ‘normal practice
by governments’ criterion is a reference to the delegation to private bodies of the
functions of taxation and expenditure “and not a reference to government market
interventions in the general sense, or the effects thereof.” 31 The panel in Korea–
Commercial Vessels more recently reaffirmed this position.32
Nevertheless, the unduly narrow conclusions of these panels are antithetical to the
Appellate Body’s interpretation of paragraph (iv) in Canada–Aircraft. Rubini has
correctly argued that where “normal government practice” is equated to the power of
taxation and expenditure, it would “by necessity imply that financial contribution always
requires a cost to government which was rejected by the Appellate Body itself.”33
(iii) “Price Support”
At this juncture, it is appropriate to mention the alternative to financial contribution that
is expressed in Article 1.1(a)(2), which permits a subsidy to be found where there is
income or price support “in the sense of Article XVI of GATT”. The reference to Article
XVI means that the measure must operate to increase exports or decrease imports of the
relevant (or competing) product. Although this provision has not yet been extensively
addressed, the Appellate Body in United States–Final Countervailing Duty
Determination with respect to Softwood Lumber from Canada (US–Softwood Lumber)
26
Matsushita et al (n 19) 343.
US-DRAMS, WT/DS296/AB/R (2005), para 108.
28
Rubini, ‘The Subsidization of Renewable Energy in the WTO: Issues and Perspectives’ (2011)
NCCR Trade Working Paper, 21 <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1904267>
accessed 1 October 2011.
29
Wilke (n 23) 15.
30
US-AD/CVD, para. 297.
31
US-Export Restraints, WT/DS194/R (2001), para 8.72; Wilke (n 23) 16.
32
Korea-Commercial Vessels, para 7.30.
33
Rubini (n 28) 22.
27
7
affirmed that government subsidisation measures are “broadened still further” 34 by the
concept of income or price support. Furthermore, although a 1960 GATT Panel35 held—
in relation to price support schemes—that Article XVI requires a “loss to government”,
this interpretation appears “outdated”36 in light of the conclusion in Canada–Aircraft that
a cost to government is not implicit in the general concept of a subsidy.
(b) The Second Prong: “Benefit”
The second element necessary to the determination of a subsidy is the conferral of
“benefit”. This criterion focuses exclusively on the advantage to the recipient and is
legally distinct from the question of financial contribution (or income or price support).37
In conducting the benefit analysis, the panel in European Communities–Countervailing
Measures on Dynamic Random Access Memory Chips from Korea (EC–DRAMS) agreed
with the Appellate Body in Canada–Aircraft, which stated that the finding of a “benefit”
implies that the recipient is “better off” than it would have been absent the contribution.38
As a corollary, it found that the “appropriate basis” for determining the existence of a
benefit is the marketplace. 39 This so-called “private investor-test” 40 shares symmetry
with—and is indeed inspired by—Article 14 ASCM. With respect to financial
contributions under Article 1.1(a)(iii), Article 14(d) establishes that the benchmark in
determining the calculation of the benefit is the “adequacy of the remuneration … in
relation to prevailing market conditions”. This benchmark has been held by the Appellate
Body to be the “relevant context for the interpretation of ‘benefit’ in Article 1.1(b)”.41
However, in the context of energy, Howse has argued that a “meaningful” market
benchmark remains elusive given that it has been historically distorted by government
intervention in favour of fossil fuels.42 This complements Sykes’s argument that subsidies
may actually offset the effects of government intervention by serving as a “corrective”
measure.43 This is a question for reform, as the market price is the relevant benchmark
due to the fact that Article 14(d) refers expressly to “prevailing” rather than free market
conditions.
34
US-Softwood Lumber, WT/DS257/AB/R (2004), para 52.
Review pursuant to Article XVI:5, L/1160 (1960), para 11; Rubini, ‘The Definition of Subsidy
and State Aid: WTO and EC Law in Comparative Perspective’ (OUP 2009) 123.
36
Bigdeli, ‘Incentive Schemes to Promote Renewables and the WTO Law of Subsidies’ in Cottier
et al (eds), International Trade Regulation and the Mitigation of Climate Change (CUP 2009)
171.
37
Canada-Aircraft, para 157.
38
EC-DRAMS, WT/DS299/R (2005), para 7.176.
39
ibid.
40
Matsushita et al (n 19) 347.
41
Canada-Aircraft, para 155.
42
Howse, ‘Post-Hearing Submission to the International Trade Commission: World Trade Law
and Renewable Energy: The Case of Non-Tariff Measures’ REIL (2005) 20.
43
Howse, ‘Climate Mitigation Subsidies and the WTO Legal Framework: A Policy Analysis’
IISD (2010) 6.
35
8
(2) ANALYSING FIT PROGRAMMES UNDER THE WTO SUBSIDIES REGIME
(a) An Assessment under the ASCM
FIT programmes may constitute a financial contribution where they involve the purchase
of goods (i.e. electricity) by a government (or public body) under Article 1.1(a)(1)(iii), or
by private body under paragraph (iv). For Ontario, the OPA is a State enterprise
accountable to the provincial government and responsible for the FIT programme’s
implementation, with the authority to enter into FIT contracts with private parties. In light
of the Appellate Body decision in US–AD/CVD, the OPA may be deemed to possess
“governmental authority”; this is because of its authority to administer the FIT
programme and to impose charges on consumers in order to fund its operation. The OPA
is also subject to “meaningful” governmental control, as it receives ministerial instruction
vesting it with the authority to perform its functions. Although Canada will attempt to
assert that the OPA is not a public body, the ruling in US–AD/CVD provides much scope
for the conclusion that the entities concerned are exercising governmental authority. 44
Even if the OPA were defined as a private body, it is arguable that the OPA’s GAM may
qualify as an indirect “funding mechanism” under Article 1.1(a)(1)(iv), thereby
establishing a subsidy through their implication in the administration of public funds.45
In Germany, there is no State enterprise analogous to that of the OPA. The
obligation to operate the FIT programme is imposed directly upon the distribution and
transmission system operators—which are private bodies. The EEG statutorily “directs”
such private parties to purchase electricity sourced by RE technologies. This delegation
or instruction to purchase goods—as expressed in Article 1.1(a)(1)(iii)—would satisfy
the imputability standards within paragraph Article 1.1 (a)(1)(iv). As supported by the
Appellate Body decision in US–Softwood Lumber, the absence of a cost to the German
government does not affect the existence of a financial contribution. Furthermore, it may
found that purchasing goods is a function that is normally vested in the German
government and is a practice generally “followed by governments”.
What is “normal” is an empirical question. However, the concept is sufficiently
flexible to give “precedence to decisions informed by broader policy—we could say
teleological—considerations.”46 The ‘normal function or practice’ provisos within Article
1.1(a)(iv) would likely receive a wide interpretation in order to guard against the
calculated circumventions of the financial contribution criterion. By way of example, the
international prevalence of FIT programmes and the practice of State procurement of
electricity may permit one to infer that the purchase of goods may be one of the
“functions of [governmental] entities within WTO Members generally”. 47 This functional
approach to interpretation (and deduction) vis-à-vis determining practices “normally
followed by governments” would allow a decision on this question to be more accessible,
while nevertheless anchoring inferences in empirical observations. It would also permit a
compromise to be achieved between paragraph (iv)’s two principal functions—namely,
limiting forms of government action regulated by the ASCM and acting as an “anticircumvention”48 mechanism.
44
US-AD/CVD, para 318.
Wilke (n 23) 14.
46
Rubini (n 28) 21.
47
US-AD/CVD, para 297; Rubini, ‘The Subsidization of Renewable Energy’ (n 28) 23.
48
Rubini, The Definition of Subsidy and State Aid (n 35) 114.
45
9
Alternatively, FITs may constitute a form of “price support” under Article
1.1(a)(2). 49 This is premised on the fact that FIT programmes maintain the price of
electricity generated by RE producers at a desired level in order to offset the high cost of
RE technologies and to incentivise production. Howse has argued that FITs “ought not to
be considered price support”, as it would be intrusive to the regulatory State to interfere
with price regulation, which may serve public policy goals. Howse’s view seems
incongruous with the “broad and unqualified” 50 nature of the provision—referring to
“any form” of price support—and the fact that this would also provide too easy and broad
a method of circumventing its rules. Furthermore, because FIT programmes reduce the
need for energy imports and render higher export levels possible, 51 Article XVI GATT is
also satisfied insofar as it must be read cumulatively with Article 1.1(a)(2).
There is a strong case that FIT programmes constitute a financial contribution
and/or price support. Ontario’s FIT programme involves a contractual purchase and
therefore a direct financial contribution under Article 1.1(a)(1)(iii), whereas Germany’s
be could be analysed as an indirect financial contribution under paragraph (iv). By
contrast, Germany longstanding FIT programme would constitute a financial contribution
under Article 1.1(a)(1)(iv). Nevertheless, even absent a “financial contribution”, Article
1.1(a)(2) reference to “price support” provides an alternative route to defining FITs as
subsidies.
Furthermore, FIT programmes by definition confer a benefit on the recipient. This
is because FITs are designed to provide RE producers with above-the-market-price
remuneration. As per EC–DRAMS, a differential between the payment and market price
is direct evidence that a benefit has been conferred. This conclusion is further buttressed
by Article 14(d)’s reference to “prevailing market conditions” in determining the
existence of a benefit.
With the above considerations in mind, it is “reasonable to conclude that feed-in
tariffs … should, and could, amount to subsidies under WTO law.” 52 This is more
broadly supported by Cottier et al.—Cottier himself being the Chairman of the WTO
panel in the pending cases against Canada—who state that “much of the support provided
to the RE sector takes the forms which fit the definition of a subsidy according to Article
1 of the ASCM.”53
(b) (In)applicability of GATT Article XX
It is pertinent briefly to highlight the unresolved debate on the applicability of Article XX
GATT to other WTO Agreements. In relation to the ASCM, this question is important
because it concerns the extent to which RE subsidies otherwise in violation of the ASCM
could be held WTO-compatible. The exceptions within Article XX(b) and (g) have been
held to encompass measures aimed at protecting the environment.54 The former applies to
49
Bigdeli (n 36) 171-2.
Rubini, The Subsidization of Renewable Energy’ (n 28) 23.
51
Case C-279/98 PreussenElektra [2001] ECR I-2099, para 70.
52
Rubini, ‘The Subsidization of Renewable Energy’ (n 28) 23.
53
Cottier et al (n 20) 226.
54
US-Gasoline, WT/DS2/AB/R (1996) and Brazil-Tyres, WT/DS332/AB/R (2007); Condon,
‘Climate Change and Unresolved Issues in WTO Law’ (2009) 12 JIEL 895, 911-3.
50
10
measures “necessary to protect human, animal or plant life or health”, whereas the latter
concerns those “relating to the conservation of exhaustible natural resources”.
The availability of Article XX GATT as a defence to ASCM violations remains
an open question, as WTO dispute settlement has not directly addressed the issue. In this
respect, Howse follows the view that the “lack of textual support … makes it unlikely
that the Appellate Body would accept an Article XX defence to a claim” under the
ASCM.55 Notwithstanding the above debate, as the issue of environmental subsidies is
being addressed in the Doha Round, the Appellate Body is likely to be reluctant to
compromise negotiations through a “heroic approach to interpretation”56 to fill the textual
void in the ASCM.
(3) REQUIREMENTS FOR “ACTIONABLE” SUBSIDIES
By virtue of the prevalence of FIT programmes as a RE policy mechanism, it is
instrumental to examine whether FITs—as separate from domestic content
requirements—might be “actionable” under subsidy disciplines. Once a subsidy is found
to exist, actionability rests on proof of specificity (Article 2) and adverse effects (Article
5). Evidence of specificity requires that the subsidy be specific to certain enterprises or
industries. Such evidence need not be adduced in relation to “prohibited” subsidies
because such subsidies are deemed to be specific under Article 2.3 ASCM. Article 2.1
ASCM covers both de jure and de facto specificity, and stipulates that specificity is
absent where subsidies are generally available on the basis of neutral, objective criteria.
In this respect, FITs are not “sufficiently broadly available throughout an economy as not
to benefit a particular limited group of producers of certain products”.57
The second element hinges on the presence of “adverse effects”. This reflects the
principle that only subsidies causing actual trade effects should be subject to the WTO’s
multilateral disciplines. Under Article 5 ASCM, causation must be established between
the subsidy and one of three possible “adverse effects”: (a) injury to domestic industry;
(b) nullification and impairment of benefits accruing under the WTO Agreements; and (c)
serious prejudice to a Member’s interests. Serious prejudice is arguably “somewhat easier
to prove”58 than Article 5(a) and (b) ASCM. Article 6 ASCM permits this finding on the
basis that the effect of the subsidy is to displace or impede the imports of a “like product”
into the subsidizing State. For the purposes of the ASCM, the panel in Indonesia– Certain
Measures Affecting the Automobile Industry (Indonesia–Autos) addressed the concept of
“like products” by stating that physical characteristics are important in assessing which
products closely resemble the product under consideration—while also noting the
relevance of non-physical characteristics such as “consumer perception”.59
If all energy or even a “class” thereof—such as RE—is treated as a “like
product”, it may indeed be claimed that FITs produce adverse effects. One possible future
claim may be that foreign-produced non-renewable energy or inputs have been
Howse, ‘Climate Mitigation Subsidies’ (n 43), 17.
Condon (n 54) 903.
57
US-Cotton WT/DS267/R (2004), para 7.1142; Rubini, ‘The Subsidization of Renewable
Energy’ (n 28) 27.
58
Green, ‘Trade Rules and Climate Change Subsidies’ (2006) 5 World Trade Review 377, 402.
59
Howse, ‘Climate Mitigation Subsidies’ (n 43) 14; Indonesia-Autos WT/DS54/R (1998), paras
14.173-6.
55
56
11
prejudiced by a heightened demand for RE.60 Alternatively, within the global RE sector,
an adverse effect may arise where a FIT programme incorporates a purchase obligation
favouring domestic RE production at the expense of imports, or because tariff
differentiation renders particular RE sources and technologies more financially attractive
than others.61 Furthermore, although proving causation in the context of a highly distorted
global energy market would be difficult, decisions “tend to actually focus on correlation
more than causation”—thereby lowering the evidential standards for actionability. 62
Causation may nonetheless be more easily established within regional energy markets—
like North America, where the market is “close to non-distorted”.63
Howse, ‘Post-Hearing Submission’ (n 42) 23.
Bigdeli (n 36) 183-5; Bigdeli, ‘Resurrecting the Dead? The Expired Non-Actionable Subsidies
and the Lingering Question of “Green Space”’ (2012) 8 MILJ 2, 29.
62
Green (n 58) 402.
63
Wilke (n 23) 18.
60
61
12
IV. FIT PROGRAMMES: CURRENT CONTROVERSY & FUTURE SUBSIDIES REFORM
This Chapter will analyse the legitimacy of FIT programmes with respect to domestic
content requirements—being a form of “subsidy” in themselves—from a WTO
perspective.
A. ANALYSING DOMESTIC CONTENT ISSUE: WTO REQUIREMENTS FOR “PROHIBITED”
SUBSIDIES
In order to be classified as a “prohibited” subsidy, Article 3 ASCM requires—rather
succinctly—that the subsidy be contingent on export performance or the use of domestic
over imported goods. Where access to a subsidy is conditioned upon achieving a certain
level of exports or the obligation to provide location-specific economic support, such
subsidies are presumed to be inherently trade-distortive and therefore harmful to the
international trading system.
With respect to whether Ontario’s FIT programme constitutes a “prohibited”
subsidy, eligibility for the programme incorporates domestic content requirements. As
per the original direction by George Smitherman—as Minister of Energy—to the OPA,
the domestic content requirements were set exclusively for wind and solar facilities.64
This was 25% for wind projects with a milestone date of commercial operation prior to 1
January 2012, thereafter increasing to 50%. In relation to solar projects, content levels
were initially set at 40% and 50% for those under the microFIT and FIT programmes,
respectively, but have been set uniformly at 60% since 1 January 2011. 65 Therefore, to
the extent required by the relevant threshold, a minimum level of inputs—goods and
services—for constructing RE generation facilities must be manufactured or provided in
Ontario. 66 The OPA has facilitated this compliance calculation by producing various
tables—specific to project capacity and the technology deployed—listing designated
activities with corresponding qualifying percentages. On this basis, Ontario’s FIT is a
prohibited subsidy under Article 3 of the ACSM because access to the FIT is expressly
contingent on the use of a certain level of inputs sourced within Ontario.
From an institutional perspective, the WTO would consider domestic content
requirements as being detrimental to international and domestic trade flows. This is
rooted in the fact that the designated activity percentages set by the OPA in 2009 are not
subject to periodic review. Such percentages were set in a manner that reflected—at the
time—the average total cost of the particular products or services in relation to the overall
project.67 Where discrepancies exist between the set percentage and the current real costs,
this would cause those constructing RE facilities to purchase within Ontario those
products reflecting the lowest possible cost and providing the highest optimal percentage
toward the domestic content threshold. This prejudices certain types of Ontario
manufacturers because circumstances dictate that RE producers purchase such products
in-province. Similarly, this impairment of economic freedom operates to the detriment of
foreign manufacturers, as those products purchased within Ontario will not be purchased
64
Direction from George Smitherman to Colin Anderson (24 September 2009) 2-3.
FIT Rules, s 6.4(a).
66
FIT Rules, Exhibit D—Domestic Content.
67
Interview with Amir Shalaby, Vice President of Power System Planning at OPA (Toronto, 11
January 2012).
65
13
abroad. Although Germany’s system has no such feature, FIT programmes in countries
such as Italy and India have domestic content provisions which also engender concerns.68
B. REFORMING WTO LAW ON SUBSIDIES
The creation of a more receptive WTO framework for RE subsidies can be viewed in the
context of four possible strategies for moving forward. These encompass either utilising
or expanding existing Agreements, or the creation of new substantive and procedural
frameworks.
(1) UTILISING OR MODIFYING EXISTING AGREEMENTS
(a) An Interpretive Approach to Increasing RE Policy Scope
One method of expanding RE policy space within the WTO subsidies disciplines is to
limit the scope of its application.69 In the EU’s landmark PreussenElektra case70—which
analysed whether Germany’s FIT programme under the StrEG constituted State aid—the
European Court of Justice [now the Court of Justice of the European Union (CJEU)]
endorsed AG Jacobs’s view that it is “preferable that legislation regulating the
relationship between private actors is as a matter of principle excluded from the scope of
State aid rules.”71 As a means of accommodating RE policy measures, the WTO panels
and the Appellate Body could exclude “regulatory measures” from the ambit of Article
1.1(a)(1)(iv) ASCM. In parallel with the approach taken by the CJEU and European
Commission, measures could be deemed regulatory in nature—and therefore not
providing a “financial contribution”—where obligations are imposed solely between
private undertakings, which are not designated or controlled by the State. The scope of
the term “price support” could similarly operate so as to not be “intrusive into the
operation of the democratic regulatory state.” 72 In this respect, WTO panels could
exclude from its purview any support deployed for the purpose of correcting existing
market failures. One example of this is the energy market, which is distorted in favour of
conventional energy sources and thereby prevents alternatives sources from competing
effectively in the absence of government support. This approach should equally apply to
the interpretation of “benefit”, while also excluding from its remit any policy aimed at
compensating only for extra costs incurred and a reasonable profit margin. In doing so,
panels and the Appellate Body would be aligning the WTO approach with that of the EU.
The proposed approach, albeit providing more RE policy space, would still render
“actionable” any subsidies which confer advantages for the mere purpose of advancing
domestic protectionism. Nevertheless, despite providing a way forward, the interpretive
strategy encounters the issue of altering the direction of existing case law. If it is indeed
preferable to continue to develop the subsidies disciplines in a rules-based context, it is of
Green World Investor, ‘Solar Energy Protectionism – Italy Joins India, Canada in formulating
Domestic Content Requirements’ <http://www.greenworldinvestor.com/2011/05/10/solar-energyprotectionism-italy-joins-indiacanada-in-formulating-domestic-content-requirements/> accessed
28 September 2012.
69
Bigdeli, ‘Resurrecting the Dead?’ (n 61) 24.
70
Case C-279/98 PreussenElektra [2001] ECR I-2099.
71
PreussenElektra, Opinion of AG Jacobs, para 157.
72
Howse, ‘Climate Mitigation Subsidies’ (n 43) 13.
68
14
paramount importance that “sector-specific rules [be devised] for measures for which
exemption … seems to be warranted.”73
(b) Expanding “Green-Light” Subsidies & GATT’s “General Exceptions”
Another avenue of support for the RE sector within the WTO is to re-open and expand
so-called “green-light” subsidies. This refers to a list of “non-actionable subsidies” under
Article 8 ASCM, which expired five years post-Uruguay Round. 74 While ASCM
justifications—including a limited form of environmental subsidy—have now expired, no
notifications of a non-actionable subsidy were ever made under Article 8.3 during its
operative period. 75 In light of the fact that exception under Article 8.2(c) ASCM is
limited to promoting the adaptation of existing facilities to new environmental
requirements, the “benefits may have seemed … to [have been] outweigh[ed] by the costs
of pre-notification procedures.”76 One way to provide greater scope for exemption in the
future is to adopt a rules-based approach to “green-light” subsidies within the ASCM.
This is to say that exemptions would be provided on the basis of various criteria such as
the type of aid–e.g. investment aid for the construction of new facilities, or operating aid
to assist in lowering production costs—and maximum aid intensities.
Alongside “green-light” subsidies for RE investment and production, it is also
critical to accompany such enhanced policy space with rules on abuse prevention and
proportionality.77 In this respect, Article 8.2(c) ASCM attempts to address such concerns
through its strict eligibility criteria—restricting assistance to a one-off payment for
“existing facilities” and excluding operating aid. Although Article 8.2(c) ASCM imposes
strict eligibility requirements, this is a rather “blunt [and equivocal] approach” to
achieving abuse prevention and proportionality—as it is achieved at the expense of
creating a versatile framework for RE policy.78 The ASCM should therefore be clearer
and more flexible in addressing such concerns. This may be achieved by providing
detailed rules for a range of aid intensities and the calculation of eligible costs, while also
requiring that all subsidies aim to contribute to enhancing sustainability objectives. To
the extent that WTO Members desire the creation of greater flexibility and certainty in
the RE policy-making arena, it will be equally critical that the WTO develops a
framework which ensures proportionality between policy and objective. The impetus to
create such a framework is likely only to materialise if the current ASCM disciplines are
considered a “serious threat” to Members’ domestic RE (and related environmental)
policy space.79
If Article XX GATT is indeed applicable to the ASCM, new “general exceptions”
may be introduced to justify what may otherwise be objectionable RE subsidies. In
addition to a general environmental exception, a specific RE exception could be included
in order to ensure that sufficient coverage is provided for policies going beyond climate
change mitigation—such as the increasing security of energy supply and availability of
Bigdeli, ‘Resurrecting the Dead?’ (n 61) 25.
Article 31 ASCM; Wilke (n 23) 21.
75
Bigdeli, ‘Resurrecting the Dead?’ (n 61) 8-9.
76
ibid 11.
77
ibid 27.
78
ibid 20.
79
Bigdeli, ‘Resurrecting the Dead?’ (n 61) 27.
73
74
15
affordable energy. In Europe, the European Commission has itself explicitly referred to
these goals under its Environmental Aid Guidelines, as they are “not just guidelines on
aid for environmental protection, but also guidelines on energy aid.”80 With regard to the
proposed GATT exceptions, abuse prevention would be dealt with under the ‘chapeau’ of
Article XX, which prohibits arbitrary or unjustifiable discrimination and disguised
restrictions on international trade. Furthermore, with respect to proportionality, it must be
ensured that—like Article XX(b) on measures “necessary to protect human, animal or
plant life or health”—the proposed exceptions are subject to the Appellate Body’s
“necessity” or least restrictive means test in order for the relevant measure to be justified
under Article XX. 81 Article XX would therefore provide governments with scope to
deploy RE subsidies while also ensuring the WTO can scrutinise actions for arbitrariness
or discrimination.82 In this respect, it will “allow some basis for action and for policing
protectionism.”83
(2) NEW SUBSTANTIVE AND PROCEDURAL FRAMEWORKS
(a) A WTO Agreement on (Renewable) Energy
As a means of addressing current energy issues, there have been several proponents of an
holistic WTO Agreement on Energy.84 This proposal is premised on the notion that, when
the GATT rules were originally negotiated, issues relating to the sustainability of energy
sources and the liberalisation of energy trade were not at the forefront of geopolitical
discourse. On this basis, it is considered important now that the WTO “deal with energy
as a distinct sector”. 85 This would be necessary to create disciplines to address the
growing energy trade and the particular challenges it faces in relation to increasing
demand and sustainable development. In terms of RE subsidies, Cottier et al. suggest that
an Agreement on Energy would accommodate such subsidies, while also ensuring that
perverse effects are avoided and harmful energy subsidies are addressed.86
The WTO could take this proposal further by creating an Agreement on RE. It is
arguable that this would be more politically feasible than an Agreement on Energy, as it
would deal with a discrete aspect of the energy sector. In this respect, it would be less
difficult for WTO Members to find common ground in relation to RE—as a sub-sector—
than in relation to the energy field as a whole. This Agreement could potentially lay the
foundation for a future Agreement on Energy. However, it has been submitted that
energy “does not lend itself to such sectoral negotiations” based on its form and is in need
of an “integrated approach” subjecting all forms of energy to the same rules.87 Although
this may be the ultimate destination, to the extent that an Agreement on Energy is
politically unviable as a first step, an Agreement on RE would still represent a
80
Community Guidelines on State Aid for Environmental Protection (Environmental Aid
Guidelines) (OJ C82/1, 1.4.2008), s 1; Heidenhain, European State Aid Law (Beck 2010) 270.
81
Green (n 58) 408.
82
Green (n 58) 409.
83
ibid.
84
Cottier et al (n 20).
85
ibid 212.
86
ibid 226-227.
87
ibid 221.
16
constructive development. This may then provide a future basis for transitioning towards
a comprehensive sectoral agreement on energy.
(b) Reshaping Notification Procedures and the Role of the Subsidies Committee
Any RE-specific exemptions within the ASCM, GATT or indeed an Agreement on RE
should also be coupled with new notification procedures and a revised role for the
Subsidies and Countervailing Measures Committee (the “Subsidies Committee”). An
improved notification system is necessary in order to provide RE policy scope and ensure
that certain RE support measures are more susceptible to scrutiny for protectionism and
proportionality. For WTO purposes, a dual system could be established whereby
subsidies are either subject to ‘basic notification’ or ‘enhanced notification’. The type of
notification could be dictated by the nature of the aid—for instance, investment or
operating aid—as well as specific criteria relating to the permissible aid intensities, which
could correspond to exemption requirements set within the ASCM, GATT or Agreement
on RE in the future. Detailed notification could apply to more generous aid intensities
and operating aid—which is more conducive to trade distortion88—and would require
that notification of the aid to the Subsidies Committee be accompanied by a report
explaining how the WTO Member has satisfied a proportionality assessment. In light of
criticisms that the “weighing and balancing” under Article XX GATT may lean too
favourably towards exemption,89 a more exacting test should be adopted. This would not
only ensure that the measure was the least trade-restrictive possible, but it would also
assess—similar to the EU’s Environmental Aid Guidelines90—if an overall net positive
effect results from the measure. In essence, it would test whether any trade distortions are
limited to the extent that they are outweighed by the aid measure’s positive effects on
sustainable development.
In addition to providing greater transparency through an improved notification
procedure, the Subsidies Committee should also be required to approve—or provide
conditional exemption to—subsidies proposed via enhanced notifications. This would
arguably be a more flexible approach when compared to requiring authorisation by a
subsidy management body in respect of subsidies generally.91 In the context of the WTO,
the latter might be considered unduly intrusive into the sovereignty of nations and is
undesirable insofar as it would involve the micromanagement of all government support
programmes. 92 Furthermore, the Subsidies Committee could be mandated to provide
“soft” guidance, so as to provide direction—albeit not legally binding—regarding the
interpretation of the relevant “balancing test” for enhanced notifications.
88
Heidenhain (n 80) 271.
Bigdeli, ‘Resurrecting the Dead?’ (n 61) 32-33.
90
Environmental Aid Guidelines, para 16.
91
cf Peat, ‘The Wrong Rules for the Right Energy: The WTO SCM Agreement and Subsidies for
Renewable Energy’ (2012), HEI Research Paper, 21
<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1998240> accessed September 2 2012.
92
Howse, ‘Climate Mitigation Subsidies’ (n 43) 21.
89
17
V. CONCLUSION
The RE sector is crucial to addressing concerns over climate change and the security of
energy supply. It is therefore of quintessential importance that RE promotion policies
receive the support that they require from the international trading system. In this respect,
FIT programmes have become the most important instrument for levelling the playing
field between RE and carbon-based energy sources. However, FIT programmes are
increasingly vulnerable to future challenge in the WTO and are therefore at risk of
becoming subject to considerable limitations.93 The recent WTO disputes over Ontario’s
FIT programme may well be detrimental in establishing whether such programmes will
become increasingly susceptible to legal action in the future. The proceedings initiated by
Japan and the EU against Canada go beyond the legal status of Ontario’s domestic
content requirement in the context of its FIT programme. They also engage the wider
issue of whether FITs themselves constitute an actionable subsidy under WTO law. In
this respect, the WTO must be receptive to the need to create a more accommodating
legal framework for the deployment of RE subsidies, while also safeguarding against
exempting concurrent protectionism.
In order to determine the outcome of the controversy over Ontario’s domestic
content requirement, the WTO panels must first determine whether the FIT programme is
a subsidy under the ASCM. This paper demonstrates that FIT programmes generally take
forms which satisfy the definition of subsidy under Article 1 ASCM—either constituting
a “financial contribution” or “price support”. The “benefit” is especially clear, insofar as
the case law and ASCM define it as the conferral of an advantage not otherwise available
in the marketplace. Not only is Ontario’s FIT programme classifiable as a subsidy, but
Germany’s—albeit structured differently—may also be defined as such.
To the extent that FIT programmes are classifiable as subsidies, domestic policy
autonomy may be at stake as RE support policies become exposed to the risk of WTO
actionability. In order to render subsidies actionable, it is necessary to prove “specificity”
and “adverse effects”. In light of the real prospect of WTO actionability in the future, the
necessary political impetus must be garnered in order to address the unstable RE policy
space provided under the existing WTO subsidies regime. The WTO has the potential to
move forward in a manner that is more accommodating to RE promotion policies. This
may be accomplished through interpretive strategy, the expansion of “green-light”
subsidies and/or Article XX GATT exemptions, or the creation of an Agreement on RE—
with the possibility of a more comprehensive sectoral agreement on energy. Irrespective
of the approach adopted, it is crucial that an increase in RE policy space be accompanied
by rules on abuse prevention and proportionality.94 This, in part, may be furthered by the
creation of new notification procedures and a more active role for the Subsidies
Committee. Ultimately, the WTO’s response to resolving the unsatisfactory policy scope
for subsidies in the RE arena will be a litmus test of its ability to create an integrated
trading system in a manner consistent with sustainable development objectives.
93
94
Bidgeli, ‘Incentive Schemes’ (n 36) 88.
Bigdeli, ‘Resurrecting the Dead?’ (n 61) 27.
18