Local content was always there, my friend

For those who are following the domestic content requirements in renewable energy debate (I have blogged about it here, here and here), especially in the context of the Ontario Feed- in tariff case, a recent study highlights the universal use of domestic content requirements or local content requirements by countries in renewable energy programs around the world.

The study titled "Local Content Requirements and the Renewable Energy Industry - a Good Match? " by ICTSD is found here.

The paper concluded:

"Finally, as already emphasized at the beginning of this paper, further research is required to support a meaningful debate on this pressing issue. As indicated, to date there has been relatively little empirical analysis of the potential of LCRs being used in conjuncture with the creation of globally competitive innovators. This is especially the case for LCRs in RE policy. Econometric modelling of LCRs for RE growth is particularly needed. It is certain that many countries use LCRs in RE policies and that these schemes are often contradictory to WTO law. However, it is in the interest of neither the trade community, nor the green tech community, to have the necessary debate before the WTO Dispute Settlement System. Instead, there should be informed debate about what is effective, and what is agreed as appropriate, in the support of critically necessary green technology development."

A classic case of trade versus the environment? Or is there a need for a re-look at the trade rules itself? Or are they both compatible?

In another context, an interesting piece of the clash of policy goals of free trade, protection of the environment and geo-politics with respect to the dispute of Chinese solar panels imports into Europe.

All in all, trade and environment have a lot to sort out here.

A Canadian viewpoint on domestic content

A viewpoint from Canada on the Ontario FiT ruling and the role local content rules should play in domestic policy making is found here. The Council for Canadians have been at the forefront of defending Ontario's local content requirements for renewable energy. One may not agree with the view, but one would have to contend with it in the context of globalization and its impact on local economies.

"“Without local content requirements for solar and wind power, the Green Energy Act is almost worthless to Ontario,” we said in November, when news leaked of the WTO decision. “Our provinces and local governments should have the right to ask for some local content in big projects like energy, transit and construction. These kinds of policies are used the world over to create vibrant local businesses. The alternative way of attracting investment is to cut wages and taxes, which is just a race to the bottom. We need more options if we are going to make our economies more sustainable.”

Local content, non-discrimination, development of local industry and capability, cheaper goods to the market - all contested arguments in the ongoing debate. One interesting aspect in this piece is that how a position/stand of a producer/manufacturer could change when one benefits from local content to losing markets from it.

EU and Japan also appeal - Ontario case becomes more interesting

I have blogged about the Canadian FiT case at the WTO case here, here and here. News of Canada appealing the matter was reported here. It was not surprising since Canada had lost the case and was contesting the finding of the panel report that it had violated the provisions of the TRIMS and GATT.

Reports of the EU and Japan cross-appealing caught my attention. This would presumably be mainly on the interpretation of the provisions of the ASCM, especially the definition of a subsidy and benefit.

It is clear that the Appellate Body would decide the legal contours of this dispute, especially the compatibility of local content requirements with WTO law in the context of governments guaranteeing a minimum feed in tariff. With a number of countries across the world, both developing and developed, having massive renewable energy support programs (many of them with local content requirements), the AB ruling all be keenly awaited. One hopes that going by timeframe of the Antigua and Airbus-Boeing cases at the WTO dispute settlement, the wait for a closure is not too long!

Analysis of the Canadian FiT case: Part III

The Canadian FiT case is the first instance wherein renewable energy FiTs have been challenged at the WTO dispute settlement mechanism. It raises important issues of domestic content provisions in renewable energy programs as well as the existence of a subsidy that can be challenged under WTO law.

This post explores the issue of a subsidy under the ASCM and how the Panel has interpreted the provisions of the ASCM to come to finding that while it does constitute a "financial contribution" no "benefit" however exists in this case.The analysis of the existence of a benefit involved a detailed understanding of the peculiar nature and status of the electricity market in Canada. Was the understanding of the existence of a benefit highly influenced by the nature of the good ie. electricity?

"7.320 We have carefully reviewed the parties' legal and factual arguments in the light of the legal standard for determining the existence of benefit that has to date been applied in WTO dispute settlement. In the particular circumstances of these disputes, we have concluded that determining whether the challenged measures confer a benefit on the basis of a benchmark derived from a competitive wholesale electricity market, would mean that the FIT and microFIT Contracts could be legally characterized as subsidies by means of a comparison with a market standard that has not been demonstrated to actually exist nor one that could be reasonably achieved in Ontario - a market standard that the complainants have not contested will only rarely, if at all, attract sufficient investment in generation capacity to secure a reliable system of electricity supply even outside of Ontario624. In our view, such an outcome would fail to reflect the reality of modern electricity ystems, 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. As we have emphasized on a number of occasions, it is only in exceptional circumstances that the generation capacity needed from all such technologies will be attracted into a wholesale market operating under the conditions of effective competition. Thus, the competitive wholesale electricity market that is at the centre of the complainants' main submissions cannot be the appropriate focus of the benefit analysis in these disputes. Furthermore, for the reasons we have outlined above, the alternatives to the wholesale electricity market that have been presented to us also cannot stand as appropriate benchmarks against which to measure whether the challenged measures confer a benefit. There is therefore no basis to uphold the complainants' benefit arguments."

The Panel majority declined to accept that there was a benefit conferred on the Fit renewable energy producers though a financial contribution did exist. the Panel, however, did not go into the analysis of whether it amounted to a price or income support ( for another day in the Appellate Body?) since benefit was not conclusively established.

I was curious about the minority opinion in the case of existence of a benefit:

"9.2 I respectfully disagree with these findings and the alternative benefit test. The wholesale electricity market that currently exists in Ontario is recognizable as a market for the buying and selling of electricity. It is undeniable that the supply of electricity, its price and competition between electricity generators – in particular, market entry – are very heavily regulated and conditioned in the market by the Government of Ontario. The wholesale electricity market that currently exists in Ontario is therefore not the kind of market where price is determined by the unconstrained forces of supply and demand. The regulatory impacts on the market are not simply in the nature of framework regulation, within which those forces may operate. The Government of Ontario (through Hydro One) and the municipal governments (through Local Distribution Companies) account for almost all purchases of electricity made at the wholesale level. The same product, which in this case is electricity, is purchased by these entities at different prices depending upon its method of generation or particular status in the Government of Ontario's electricity supply policy, including under the FIT Programme. In these circumstances the complainants have expressed their concern that an advantage is being given to the market participants that are receiving the highest prices for the electricity they produce, namely generators using solar PV and windpower technologies operating under the FIT Programme. The Panel's task is to test that concern according to the disciplines of the SCM Agreement. 

9.3 The relevant question that a Panel in a case such as this must address is whether a benefit is conferred on the recipient of the financial contribution. The wholesale electricity market in Ontario does not allow for the discovery of a single market-clearing price established through the unconstrained forces of supply and demand. In that market the Government of Ontario and the municipal governments are the chief buyers of the goods concerned. In these circumstances the Panel must consider whether there is some appropriate frame of reference for determining if a benefit is conferred in the provision of that financial contribution. In my view, the competitive wholesale market for electricity that could exist in Ontario is the appropriate focus of the benefit analysis. Furthermore, I am of the view that facilitating the entry of certain technologies into the market that does exist – such as it is – by way of a financial contribution can itself be considered to confer a benefit. In the light of these considerations, it follows from the arguments and evidence presented by the complainants, as well as Canada's own statements, that the challenged measures confer a benefit, within the meaning of Article 1.1(b) of the SCM Agreement."
 

The conclusion of the minority view summarizes the contention that a benefit is conferred by an FiT that guarantees a minimum tariff for renewable energy sources in order to encourage renewable energy production as well as address the high capital costs involved:

"9.23 Thus, by contracting to purchase electricity produced from solar PV and windpower technologies under the FIT Programme at a price intended to provide for a reasonable return on the investment associated with a "typical" project, the Government of Ontario ensures that qualifying generators are remunerated at a level that allows them to recoup the entirety of their "very high" capital costs. As the complainants argue and Canada accepts, such levels of remuneration would never be achieved through the unconstrained forces of supply and demand in a competitive wholesale electricity market in Ontario. Nor could they be achieved within the constrained forces of supply and demand which actually do operate within the wholesale electricity market in Ontario, without an intervention which remunerates the facilities which generate power from solar PV and windpower technologies at a higher rate than is paid in respect of electricity generated by the other technologies663. It follows that by bringing these high cost and less efficient electricity producers into the wholesale electricity market, when they would otherwise not be present, the Government of Ontario's purchases of electricity from solar PV and windpower generators under the FIT Programme clearly confer a benefit upon the relevant FIT generators, within the meaning of Article 1.1(b) of the SCM Agreement."

As Simon Lester commented in IELP: 

"Basically, buying energy from wind and solar producers at prices they could not have otherwise obtained in the market confers a benefit. End of story."

Perhaps the Appellate Body would clarify in this case? 2013 would perhaps engage us with the intersection of renewable energy programs, international trade law and some interesting disputes!

Analysis of the Canadian FiT case: Interpretation of Article III:8(a) GATT - Part II

Can the Ontario Feed-in tariff measure be justified under Article III:8(a) GATT? In other words, can a violation of the national treatment principle enshrined in Article III:4 GATT and Article 2.1 TRIMS be justified on the ground that the exception of Article III:8(a) GATT is applicable?

Article III:8(a) GATT states:

"8.       (a)      The provisions of this Article shall not apply to laws, regulations or requirements governing the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or with a view to use in the production of goods for commercial sale."

The Ontario Power Authority purchases electricity from the renewable energy generation producers who are eligible for the guaranteed tariff which is conditioned on the purchase of domestic renewable energy generation products. Thus, there are two products in question: "electricity" produced and "renew be energy generation equipment". The panel dismissed the distinction of the two in the context of interpretation of Article III:8(a) GATT thus:

" 7.127 As already mentioned, the "Minimum Required Domestic Content Level" is a necessary prerequisite for the alleged procurement by the Government of Ontario to take place, and to this extent, we are of the view that such requirements "govern" the alleged procurement. Furthermore, we observe that the electricity allegedly procured by the Government of Ontario under the FIT Programme is produced using the renewable energy generation equipment that is the subject of the "Minimum Required Domestic Content Level". Thus, to the extent that the "Minimum Required Domestic Content Level" relates to the very same equipment that is needed and used to produce the electricity that is allegedly procured, there is very clearly a close relationship between the products that are affected by the relevant "laws, regulations or requirements" (renewable energy generation equipment) and the product that is allegedly procured (electricity)."

Regarding the interpretation of "commercial resale" in Article III:8(a) GATT requiring a profit element, the Panel held:

"7.151 Having found that Hydro One and the LDCs sell electricity in competition with private-sector licensed retailers and that the Government of Ontario and the municipal governments profit from the resale of electricity purchased under the FIT Programme to consumers, it is clear to us, for purposes of these disputes, that the nature of the resale of electricity purchased under the FIT Programme is "commercial". In coming to this conclusion, we emphasize that this does not mean we agree with Canada's understanding that a "commercial resale" will always necessarily involve profit, as there may well be situations where a resale of a product purchased by a governmental agency may not involve a profit but still may be "commercial" for the purpose of Article III:8(a) of the GATT 1994. Indeed, it is a fact that loss-making sales can be, and often are, a part of ordinary commercial activity. However, in the present factual situation, we have concluded that it is sufficient, for the purpose of finding that the Government of Ontario purchases electricity under the FIT Programme "with a view to commercial resale", that the Government of Ontario and the municipal governments not only profit from the resale of electricity that is purchased under the FIT Programme, but also that electricity resales are made in competition with licensed electricity retailers. In the light of the foregoing considerations, we find that the Government of Ontario's procurement of electricity under the FIT Programme is undertaken "with a view to commercial resale".

Thus, the Panel held that the Ontario measure did not fall into the ambit of Article III:8(a) GATT and hence was violative of Article III:4 GATT. It also held the measure incompatible with Article 2.1 TRIMS.

"7.152 We have concluded above that: (i) the Government of Ontario's purchases of electricity under the FIT Programme constitute "procurement", within the meaning of that term in Article III:8(a); (ii) the "Minimum Required Domestic Content Level" prescribed under the FIT Programme, and effected through the FIT and microFIT Contracts, is one of the "requirements governing" the Government of Ontario's "procurement" of electricity; and (iii)the Government of Ontario's "procurement" of electricity under the FIT Programme is undertaken "with a view to commercial resale". In the light of this latter conclusion, we find that the measures at issue are not covered by the terms of Article III:8(a), and that consequently, Canada cannot rely on Article III:8(a) of the GATT 1994 to exclude the application of Article III:4 of the GATT 1994 to the "Minimum Required Domestic Content Level" that the complainants challenge."     

I found this observation of the Panel interesting in the context of availability of domestic policy space in international economic law and policy:

"7.153 In coming to this conclusion, we express no opinion about the legitimacy of the Government of Ontario's objective of promoting the use of renewable energy in the production of electricity through the FIT Programme. Our conclusion that the Government of Ontario purchases electricity under the FIT Programme "with a view to commercial resale", within the meaning of Article III:8(a), must be understood only as a judgement about the extent to which Canada is entitled to rely upon Article III:8(a) of the GATT 1994 to maintain a measure that is alleged to discriminate against imported products under the terms of Article III:4."

In other words, the broad objective of promoting renewable energy though support programs is not being questioned but the discrimination to imported electricity generation equipment. The latter is not protectionism but the latter is. While renewable energy programs around the world are put through this rubric it would be interesting to see the results. Some would be blatant violations while others would be walking the tight rope. The interesting part (worrying for some) is that al this would be decide in the international arena if a country chooses to. Hence, defending one's national programs in the context of international trade rules becomes evidently critical.The debate would become even more engaging when we analyze the interpretation of the ASCM and whether the measure is a subsidy incompatible with WTO law.

That is for Part III of this series.