Bridges Weekly Trade News DigestVolume 16Number 44 • 19th December 2012

WTO Panel Rules in Favour of EU, Japan in Canada Renewable Energy Dispute

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A WTO panel has sided with the EU and Japan in their challenge of renewable energy support provided by the Canadian province of Ontario, the global trade arbiter announced earlier today. Brussels and Tokyo had argued that the feed-in-tariff (FIT) system - put in place in 2009 - violates WTO rules because it requires participating electricity generators to source up to 60 percent of their equipment in Ontario.

The case (DS412 and DS426) has been widely portrayed as an environmental dispute, dealing with the extent to which government authorities can favour domestic producers and suppliers in promoting green energy. At panel hearings earlier this year, however, the arguments from the parties principally focused on the investment aspects of the FIT provisions.

The report now confirms the view that the scheme’s “local content requirement” violates the WTO’s non-discrimination principle enshrined in the General Agreement on Tariffs and Trade (GATT) and the WTO Agreement on Trade-Related Investment Measures (TRIMS). The panellists further demand that Canada brings its measures into conformity. Unless appealed, this would in effect mean that the FIT programme itself may stay in place in its current form, but that the local content requirement must be withdrawn.

Ontario officials have argued that the scheme’s design is meant to encourage clean energy production, specifically by providing incentives to energy producers to use electricity from renewable sources. Provisions of the programme, however, also require that to be eligible for such incentives, renewable energy projects include a minimum quota of goods and services deriving from Ontario - in the case of wind, 25 percent, and for solar projects, 60 percent.

Such a “discriminatory measure,” said Japan in its statement before the panel in March this year, “is designed to promote the production of renewable energy generation equipment in Ontario rather than to promote the generation of renewable energy.” (See Bridges Weekly, 28 March 2012)

No subsidy as EU and Japan fail to show benefit

Assertions by Brussels and Tokyo that the programme also amounted to illegal subsidies - dependent on the use of locally produced equipment - on the other hand, have been rejected. The three-member panel found that the scheme payments constituted a financial contribution in the form of governmental purchase (the first criterion of a subsidy), but that Japan and the EU had failed to show that the payments also conferred a benefit (the second criterion of a subsidy). The critical point, in this context, was to determine the appropriate benchmark of comparison for ‘benefit’.

“The outcome [of the approach suggested by the EU and Japan] would fail to reflect the reality of modern electricity systems, which by their very nature need to draw electricity from a range of diverse generation technologies that play different roles and have different costs of production and environmental impacts,” the panellists criticise in the ruling, showing a sensibility towards balancing the different governmental needs associated with electricity generation.

While this finding only remotely changes the overall outcome of the dispute, it may have major ramifications for other ongoing cases. In particular, earlier this winter China had requested consultations with the EU over FIT programmes in Italy and Greece, advancing similar subsidy claims as those brought forward by Japan and the EU in the present proceedings. (DS452)

Government procurement yes, but for commercial resale

Canada, on behalf of Ontario, had countered Japan’s and the EU’s claims by portraying the measure as government procurement necessary to facilitate a move toward green energy production.

As such, the programme would be shielded from both GATT national treatment requirements and the TRIMS Agreement provisions being cited in the case, provided that the procurement does not occur with the view of commercial resale. Government procurement is also exempt from the WTO subsidies agreement, provided that it is not conferring a benefit.

In the report, however, the panellists come to the conclusion that the programme constitutes government procurement with a view of commercial resale as it results in a profit for the state of Ontario.

“In 2010, Hydro One [a government-owned holding agency that sells the electricity to consumers] paid CAD 28 million dividends to its shareholder, the Province of Ontario,” the panellists note. “Therefore, although the Ontario Power Authority does not profit from the resale of electricity through Hydro One [...], it is evident that the Government of Ontario and Ontario’s municipal governments will profit from these operations.”

Next steps

Both parties will have sixty days to appeal the panel’s decision.

ICTSD reporting.

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