Prof.Lenz comments on my paper

I am grateful for Prof.Lenz for so kindly reading my working paper on Renewable Energy programs and WTO law compatibility and offering a critique by email (both on substantive points and on avoidable typos!). It is both an honour and humbling.

He also commented on the paper in his blog Lenz Blog here:

"I am pleased that my blog made it into one of the footnotes. And I am also pleased to note that the book takes the view that feed-in tariffs are subsidies under WTO law. That’s because I am of the opposing view on that point, which makes it possible to discuss the issue. 

Srikar’s theory relies on one point I would call into question. In his opinion, delivering electricity services is a function normally performed by government. 

That’s just not true. Look at all the industrialized countries and show me one where the government provides electricity. 

It is true that some less developed countries may have not privatized this function. But that does not make it one “normally” provided by government. 

And it is true that this will lead to a different treatment of the issue, depending on which way electricity is organized somewhere. But that’s just the normal consequence of that different structure, which each country is basically free to choose. 

In contrast, I agree completely that local content requirements for generating equipment are a clear case of violating the national treatment requirement under Article 3 of GATT. 

And I also agree with the analysis that restricting the feed-in tariff to electricity generated nationally is at least very dubious under exactly the same standard, though just about everybody seems to do it that way. 

I think that is an important point when discussing international trade in electricity. If you discuss a Regional Comprehensive Economic Partnership Agreement for Asia, as will happen next year, it might be of interest to include language that requires everyone to extend their feed-in tariff programs to imported electricity. 

I think doing that would be very helpful when building the Asia Super Grid. In the absence of getting that done, one might consider to call for Japan paying a feed-in tariff specifically for energy generated in the Mongolian Gobi desert. I recall having done that recently. 

Of course, people could object that this would be violating the most-favored nation rule of the WTO, so one would need to ask if it may be justified under the Enabling Clause."

While I agree with Prof.Lenz that many industrialized countries do not have public sector electricity utilities, it is a reality in a large number of countries. I have often felt that multilateral trade rules do not presume the diminished role of the State. States, in varying degree, do play active roles in the economy. The argument that guaranteed tariffs are more "regulatory"in nature and not what governments "normally" do, will lead to a discriminatory situation where states play a more active role in the renewable energy sector. While the intent and impact of the guaranteed tariff in both cases would be the same, the country where the state is more involved will be adversely effected. As I have suggested in my paper:

"Merely because the measure is a “regulatory” measure as opposed to a direct transfer of funds, need not, ipso facto, exempt it from the characteristic of being a financial contribution. The intent of the measure is of primary importance. The provision of a guaranteed price support is to encourage the RE sector as compared to the non-RE sector. The nature of the market in many countries is such that the Government does not play an active role in the electricity market in terms of actually producing, transmitting and distributing electricity. Hence, the participation of private electricity utilities is a normal feature. If not for these private entities, the function of producing electricity and also providing price support directly to producers of RE would have vested with the government and would have normally been followed by governments. Thus, even though the price support mandate has the characteristic of a regulatory measure, it does delegate a function that is normally performed by government. In this sense, FiTs that involve private electricity entities paying guaranteed prices due to a government mandate can also be considered as financial contributions. Not doing so would lead to a discriminatory situation wherein countries in which governments play a more active role in FiTs (in terms of running electricity utilities and guaranteeing payments) would fall under this category of subsidies, while countries only “mandating” or “regulating” the payment, falling outside the radar of this provision. This would discriminate against developing and LDCs where the government tends to play a more active role in providing services. While this is not to comment on the more efficient or desirable way of providing the service (public or private), the interpretation of Article 1 of the ASCM should not lead to this discriminatory situation. Thus, it could be argued that FiTs, which provide a guaranteed tariff, do constitute a financial contribution and hence amount to a subsidy."

I may be totally wrong here. But I think there is a valid legal argument on both sides. It would probably be resolved when an FiT is challenged at the dispute settlement proceeding sometime soon!