Global Platform on Climate Change • Volume 11 • Number 14 • 25th July 2011

Japan-Canada Climate-Related Case a First for WTO

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On Wednesday, 20 June, the WTO saw the start of the first climate change-related dispute in its history. After much expert discussion on the issue, the WTO might now be beholden to rule on the relationship between green energy support and national stimulus measures.

With the establishment of the panel to hear the case, the protracted disagreement between Japan and Canada over the Canadian province of Ontario’s renewable energy support programme took another turn. The two countries have been at odds over Ontario’s feed-in tariff (FIT) programme since last autumn.

The FIT mechanism guarantees renewable energy generators the purchase of their energy for a fixed price above market standards, along with grid access and long-term contracts. The programme aims at increasing the share of renewable energy in Ontario’s electricity mix by insulating green energy producers from risks, and facilitating investments that would otherwise be costly.

However, a local content provision in the programme that requires energy producers to source up to 60 percent of their inputs from Ontario is what caused Japan to bring the case to the WTO’s attention. The “made in Ontario” requirement, Tokyo claims, is in violation of the national treatment provisions of the General Agreement on Tariffs and Trade (GATT), and the Agreement on Trade-Related Investment Measures (TRIMS), and is a “prohibited subsidy” under the WTO’s Subsidies and Countervailing Measures (SCM) Agreement.

For the moment, the most interesting twist of the case could be the fact that Japan decided to bring the case, amongst others, under the SCM Agreement. This could illuminate the relationship between green energy support and the subsidies rules, which has remained largely unexplored until now.

“Subsidies rules might turn out to treat each national FIT programme differently - not only depending on its economic effect but more so depending on its design and the role of the government,” a new ICTSD study finds. “Governments will need to decide whether they find these options supportive of climate change mitigation efforts or whether a renegotiation would be beneficial.”

ICTSD, which authored the study, is also the publisher of Bridges Trade BioRes.

Last month, a similar conflict between China and the US came to a close before ever having reached the dispute panel stage. Beijing and Washington had argued over various support measures for wind turbine manufacturers in China.

On 7 June the US Trade Representative announced that China would be ending the funds and that it considered the matter settled. While Beijing’s decision to end the subsidies was communicated to Washington, it was not part of a formal agreement between the two parties nor was it directly related to the dispute. Chinese industries and officials insist that the subsidies were removed because they were no longer needed, not because they were in violation of international trade rules (see Bridges Trade BioRes, 13 June 2011).

Possible NAFTA parallel case?

Ontario’s FIT programme is also beginning to draw legal attention outside the global trade body. American renewable energy company Mesa Power Group, based in the US state of Texas and owned by billionaire T. Boone Pickens, announced on 14 July that it intends to file a complaint under the North American Free Trade Agreement (NAFTA).

The Mesa Power Group argues that the FIT violates NAFTA’s provisions on government procurement. Mesa has complained that Ontario made “last-minute” changes to the rules for awarding power purchase agreements under the FIT provisions of its Green Energy Act, which was passed in 2009. It argues that this has pushed Mesa out of the competition, with the process violating NAFTA public procurement rules that mandate non-discriminatory tendering procedures.

A similar argument had also been made with regard to WTO rules on government procurement. These, however, are less comprehensive than the NAFTA counterparts and currently do not apply to all sub-federal entities in Canada. In fact, the Ontario Power Authority - the body responsible for the implementation of the programme - happens to be outside the realm of WTO rules on government procurement, experts have reported.

On 3 June, the Ontario Power Authority changed its rules to allow projects in a neighbouring transmission region to connect to the Bruce transmission area in western Ontario. This meant that approximately only 62 percent of FIT contracts announced in the latest round of FIT awards on 4 July went to Bruce-based projects - but not those belonging to the Mesa Power Group. Mesa lost contracts for two wind energy projects.

Cole Robertson, a Mesa Power executive, argued that “this clear favouritism disadvantaged Mesa, as well as other wind developers, and clearly violates the spirit, goals, and objectives of the North American Free Trade Agreement,” according to Reuters.

Mesa is also challenging the local content requirements of FIT, as well as the “preferential treatment” given to certain investors, including, they argue, South Korea’s Samsung C&T Corporation. In January, Samsung committed to invest US$6.7 billion to build four wind and solar energy clusters in Ontario. This agreement is the largest deal under the province’s green power plan.

Mesa has stated that it expects to file a formal notice of arbitration with NAFTA after 3 October.

Ontario’s FIT programme has also faced substantial pushback from the province’s opposition Progressive Conservative Party, which has promised to eliminate the programme if they win the provincial election on 6 October. While the ruling Liberal party argues that the programme is a green job creator, critics charge that it is an expensive experiment that is increasing costs for consumers.

On 1 June, Japan issued its first request for a panel, which the Dispute Settlement Body deferred at their 17 June meeting at Canada’s request. WTO rules permit targeted countries to refuse the first request for a dispute panel; however, a second request must automatically be granted (see Bridges Trade BioRes 27 June 2011). The initial request for consultations between the two countries dates back to September 2010, with the US and EU joining the consultations shortly thereafter (see Bridges Trade BioRes, 24 September 2010).

Australia, Chinese Taipei, Norway, China, the EU, Korea, Honduras, and the US have all joined the case as third-parties.

ICTSD Reporting; “Pickens issues NAFTA challenge to Canada over wind rules,” RECHARGE NEWS, 18 July 2011; “Boone Pickens challenges Canada on green power law,” REUTERS, 14 July 2011.