Green energy guilty verdict expected in World Trade Organization

“These are the first international trade disputes which create the potential for conflict between a nation’s commitments under the WTO and its obligations under the Framework Convention on Climate Change and the Kyoto Protocol. It raises fundamental questions about whether the goals of trade liberalization can be reconciled with ecological imperatives to reduce greenhouse gas emissions, and if not, which are to prevail.”

— Joint friend of the court legal brief from the Council of Canadians and others in WTO case on Ontario feed-in tariff

On Monday, 1 October 2012, we were dismayed to hear that climate policy is being made by an international trade tribunal.  A story from the BNA WTO Reporter came across our desk claiming that the World Trade Organization is poised to rule in a lawsuit brought by Japan and the European Union, arguing that the Canadian province of Ontario’s “feed-in tariff” program, which   increases green energy’s share of Ontario’s electricity market and builds  local green energy infrastructure, violates international trade law. This case is an acid test for whether, under WTO law, governments may use some preferences for local producers of goods and services in order to convert from a carbon economy to a green economy.

Apparently, the Canadians were unable to mount a totally successful defense based on exceptions in WTO law, which are intended to protect government procurement and environmental policies to a degree. We will not know the full implications of the Ontario feed-in tariff case for future WTO challenges to similar green economy programs until the final tribunal opinion is published in November and perhaps not until final review by the WTO Appellate Body. There are, however, good reasons to be apprehensive.   The November opinion could establish a legal template that substantially chills such government incentives for renewable energy and a green economy.

Stepping back from the policies and legal questions that are immediately at issue in the Ontario feed-in tariff case, the most unsettling thing is that the lawsuit is not isolated — it is part of a trend. In the past year, we have witnessed an alarming rise of international trade disputes that are posing significant risks to global efforts to curb climate change. An international trade war over solar products is currently reaching a boiling point. Likewise, in another example, officials in California are bracing for a potential NAFTA suit by Canadian tar sands producers, who are arguing that the state’s Low Carbon Fuel Standard unfairly discriminates against “like” products. Trade tribunals that focus on theoretical free market efficiency are becoming the de facto authoritative forums for resolving international disputes over climate policy.

The Ontario feed-in tariff program

The Ontario program is intended to promote growth in clean and renewable energy sources by encouraging energy conservation, investing in renewable energy production and creating green jobs. Essentially, the Ontario feed-in tariff guarantees electricity purchase prices, grid access, and long term contracts to renewable energy producers. Feed-in tariff programs that provide financial incentives for green energy production have been implemented successfully in Germany and other national and local jurisdictions.

The Ontario feed-in tariff program includes a provision that requires developers to have a certain percentage of their project costs come from Ontario goods and labor. This “made-in-Ontario” provision mandates that most renewable energy suppliers use a minimum level of equipment produced in Ontario in order to qualify for price guarantees and grid access. For example, wind projects require a minimum of 25 percent local content and solar projects require a minimum 60 percent. This is the element of the Ontario program that most concerned Japan and the E.U. — and ultimately the WTO tribunal.

The rationale behind the Ontario program is two-fold: incentivizing clean energy generation .and local job creation. Ontario hoped to create 50,000 jobs by 2012 and eliminate its coal-fired power stations by 2014. As a means of phasing out dirty energy production, Ontario hopes that the program will reduce its carbon footprint by 75 percent, explicitly justifying the program as means of meeting Kyoto Protocol obligations. (The Kyoto Protocol is an international environmental treaty with the aim of reducing signatories’ greenhouse gas emissions to benchmark 1990 levels.)

Response to the program in Canada has been generally positive. Almost immediately, investment boomed in Ontario’s renewable energy sector. By December 2009, Ontario had received over 1,000 applications from developers. In March 2010, provincial officials announced initiation of over 500 mid-scale projects with a total generating capacity of 112 mega watts. In April, the Ontario Power Authority began awarding contracts to large scale projects, totaling almost 2,500 mega watts of green energy. Of note is Samsung C&T’s 7 billion dollar investment to build 2,500 mega watts of wind and solar generating capacity. Altogether the Ontario program created 13,000 jobs by the end of 2010.

In addition, the program has been championed by many in the environmental and renewable energy communities. Al Gore commented that Ontario’s “green energy program is widely recognized now as the single best green energy legislation on the North American continent.” Michael Eckhart, President of the American Council on Renewable Energy said that “Ontario’s Green Energy Act and supporting initiatives are the most comprehensive renewable energy policy … anywhere in the world. Most importantly, it builds on worldwide experience to date on ‘what works’”

Status of the WTO suit

Japan and the European Union sued Canada in the WTO, alleging that the provisions in Ontario’s program favoring local firms providing renewable energy products violated WTO rules of non-discrimination, subsidies and foreign investor rights. Among other legal arguments, the Canadian government and Canadian civil society organizations claimed that the program fit under exceptions to the relevant WTO law for government procurement and for protection of the environment.

Now it is reported that the WTO tribunal in the case has issued a confidential interim ruling for review by the parties holding that the Ontario feed in tariff program violates WTO rules on non-discrimination and foreign investor rights, but not the rules on subsidies. Canada, Japan, and the E.U. can now file comments on the interim ruling, but it would be very unusual for the tribunal to reverse its decision; however, it may fine tune the decision based on the parties’ comments.

Both parties to the dispute have a right to appeal the tribunal decision on a point of law, which is then reviewed by a permanent WTO Appellate Body.

Legal findings of the tribunal

The long-term impact of the WTO tribunal decision will depend on the reasoning of the tribunal in its final opinion or the opinion of the WTO Appellate Body if it comes to that. Again, we have not seen the text of the confidential interim ruling, but we do know the results– unless the usually reliable source of the BNA WTO Reporter is  off base.

Daniel Pruzin and Peter Menyasz report for BNA that in its confidential interim ruling, the WTO tribunal found that the Ontario feed-in tariff program violated Article III 4 of the General Agreement on Tariffs and Trade (covering trade in goods or products) and Article 2.1 of the WTO Agreement on Trade Related Investment Measures. The press story did not report that the tribunal found a violation of the WTO agreement on Subsidies and Countervailing Measures. We can hope that the tribunal read the SCM agreement narrowly in a way that would discourage future suits. Or, it might be that the tribunal simply found no reason to address that issue after finding GATT and TRIMS violations.

Article III 4 of the GATT provides that imported products must be “accorded treatment no less favorable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.”  Essentially, it is a non-discrimination obligation for trade in goods. The WTO tribunal apparently found that the local content requirement of the Ontario feed-in tariff program is covered by the GATT because it affects goods and products and that preferential treatment of Ontario suppliers is discriminatory.

Similarly, according to the press report, the WTO tribunal found that Ontario’s feed-in tariff program violates Article 2.1 of the agreement on Trade Related Investment Measures, which forbids the application of any trade related investment measure by a government that is inconsistent with Articles III or XI of the GATT. The tribunal presumably agreed with the EU argument that the Ontario program is an “investment measure” because it encourages the development of a local manufacturing capability and is “trade-related” because it directly affects imports.

Two affirmative defenses apparently might have negated the GATT Article III and TRIMS violations. First, the tribunal might have found that the Ontario program is a species of government procurement outside the scope of the WTO agreements, which would have been a defense. Second, the tribunal could have found that the GATT Article XX exception for certain environmental measures was a defense. We will have to read the November opinion to determine why neither was effective.

The apparent failure of Article XX as a defense defense could be a major concern. It was assumed by some that it was likely to become the “legal battleground of this policy debate.”  That said, Article XX is fairly restrictive. Measures cannot stand if they are applied in an arbitrary or unjustifiably discriminatory manner, or in some cases, if they are unnecessary to protect human, animal, or plant life or health.

Climate implications

As noted in an earlier blog on this case — with respect to this challenge to the domestic content provision of the Ontario program, Stuart Trew of the Council of Canadians observed that “the EU and Japan are trying to create a dichotomy between environmental protection and economic development which is at odds with the definition of sustainable development under the Framework Convention on Climate Change and the Kyoto Protocol, which all three parties have agreed to.” Article 3 of the Framework Convention provides that “measures to protect the climate system…should be integrated with national development programs…”

According to a “friend of the court” or “amicus” legal brief filed by the Council of Canadians and others, “In accordance with its obligations under the Convention and Protocol, Ontario is not only seeking to increase the consumption of renewable energy but to facilitate the development of renewable energy infrastructure in Ontario. By so doing, it proposes to reduce the costs of renewable power and create the industrial, commercial, and services infrastructure that will allow the province to more readily take the next steps to further reduce greenhouse gas emissions.”

Amicus supporters also argued that in the case of a possible conflict between international trade and climate change, the international law of treaty interpretation would warrant a resolution in favor of climate responsibility. The priority is the reduction of greenhouse gas emissions, as “Canada, the EU and Japan have each declared that the pursuit of ecological security in the face of potentially catastrophic climate change is the paramount obligation.”

For the Kyoto and Convention arguments, it seems as though the issue might come down to treaty interpretation and the necessity of the domestic content requirement within the Ontario program. While necessity does not seem to be a dispositive issue within the international environmental treaty framework, it may well have swayed this WTO tribunal as a matter of trade law given the results of the case. We will have to read the final opinion when it is released in November to be sure.

More generally, it is reasonable to ask whether there is an irreconcilable conflict between WTO law and a sustainable future.

The big picture

Regardless of the way the Ontario feed-in tariff case turns out, the threat of international trade law challenges to green energy policy, more broadly, will not go away. Other cases abound.

As noted above a trade war on solar energy policy is well under way.  The United States has imposed a 31 percent tariff on solar panels imported from China, alleging violation of U.S. law on unfair subsidies and “dumping” of excess inventory on the U.S. market. China has retaliated by threatening to impose tariffs on poly-silicon imported from the U.S. used to make solar energy products, and by bringing a World Trade Organization complaint against U.S. imposition of countervailing duties on a number of Chinese products including solar panels.

Now, the German government is also seeking European Union “anti-dumping” sanctions against Asian solar manufacturers. To top it off, in September 2012, Indian companies requested that their government begin investigating Malaysian, Chinese and U.S. companies for allegedly “dumping” below-cost solar cells and components. All of this promises to make solar energy more expensive, at a time when solar energy was becoming more cost competitive with coal and other dirty energy sources that contribute significantly to global warming.

Again, we must ask the question: why is climate policy being made in the WTO and similar arenas based on trade law, not climate science and the real-world necessities of building a green economy?