FiT ruling, government purchase and some interesting findings

The much awaited Canada FiT Appellate Body report is out. For those interested in a  quick look at the findings, here it is. The detailed 145 page decision for those die hard WTO fans is here. The IELP blog bringing out the aspect of the domestic policy space available for countries to implement renewable energy schemes had this initial reaction.

The implications of the decision for FiT programs based on local content requirements worldwide is important. One would also wait and see how the province of Ontario and Canada would respond in terms of compliance.

My initial reading of the summary and quick read of the decision indicates:

1. The mandatory local content requirements violate Article III:4 GATT and Article 2.1 of TRIMS.

2. They are not saved by the government procurement exception in Article III:8 GATT exception since there is no governmental purchase of renewable energy equipment. perhaps the striking feature of this decision is the distinction made between the electricity produced and the renewable energy equipment. The link that the Panel had found was over ruled.

"5.79. We have found above that the conditions for derogation under Article III:8(a) must be understood in relation to the obligations stipulated in the other paragraphs of Article III. This means that the product of foreign origin allegedly being discriminated against must be in a competitive relationship with the product purchased. In the case before us, the product being procured is electricity, whereas the product discriminated against for reason of its origin is generation equipment. These two products are not in a competitive relationship. None of the participants has suggested otherwise, much less offered evidence to substantiate such proposition. Accordingly, the discrimination relating to generation equipment contained in the FIT Programme and Contracts is not covered by the derogation of Article III:8(a) of the GATT 1994.530 We therefore reverse the Panel's findings, in paragraphs 7.127, 7.128, and 7.152 of the Panel Reports, that the Minimum Required Domestic Content Levels of the FIT Programme and related FIT and microFIT Contracts are laws, regulations, or requirements governing the procurement by governmental agencies of electricity within the meaning of Article III:8(a) of the GATT 1994. Instead, we find that the Minimum Required Domestic Content Levels cannot be characterized as "laws, regulations or requirements governing the procurement by governmental agencies" of electricity within the meaning of Article III:8(a) of the GATT 1994."

3. The Appellate Body did not come to the conclusion that the measure was a prohibited subsidy under Article 3.1 (b) of the ASCM.

Hence, though the program mandating local content was found to be in violation of GATT provisions it was not held to be a prohibited subsidy under the ASCM.

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.

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.

 

Ontario feed-in tariff case countdown begins

WTO watchers are keenly awaiting the end of November decision of the Panel hearing the Ontario Feed-in tariff case against Canada (DS 412). The decision will be the first case at the WTO that lays down the jurisprudence relating to local content and applicability of WTO law (especially the nondiscrimination rule as well as subsidies) in the context of renewable energy programs. I have blogged about it recently here. With many countries implementing renewable energy  programs the decision will be awaited eagerly. The Panel decision is likely to be appealed against. It will also be judicially dissected and critically analyzed by the legal fraternity, especially at the IELP blog. The stakes are high for the renewable energy sector, which is one of the most subsidized sectors in both the developing and developed world.

Anticipating the decision in November reports are predicting the fall out of the case.The Globe and Mail had this piece outlining the possible impact of the Panel decision.

"A crucial ruling from the World Trade Organization, expected as early as this week, could force a dramatic rethink of Ontario’s green energy policies. 

The WTO will decide whether to side with complaints from Japan and the European Union that insist Ontario’s “local content” rules breach international trade law. Those rules force firms that sell premium-priced renewable energy to the province to buy a proportion of their equipment and services in Ontario. The policy, part of the province’s Green Energy Act passed in 2009, was designed to try to create a 21st-century manufacturing sector with an emphasis on renewable technology."

WIll the WTO decision force a rethink across the world about support for local content in renewable energy projects? Will mandating local content become taboo or will countries continue to implement local content programs? Will the issue of whether mandating or incentivizing local content being a prohibited subsidy (subsidy contingent on the use of local over imported goods) under Article 3 of the ASCM also be settled in the decision? Is this going to be a long drawn battle which will go upto the Appellate and compliance stage like the Airbus-Boeing Subsidies case that has engaged the dispute settlement mechanism for more than seven years now? 

Over to the Panel now for a decision.

Local content and the Chinese challenge - sustainable?

I had earlier blogged about the Chinese challenge to the EU renewable energy FiT programs, particularly of Italy and Greece. While one awaits the Canadian FiT case Panel decision, China's request for consultation in this case offers opportunities for the development of WTO jurisprudence in the are of renewable energy, local content and permissible domestic policy space.

China challenged the "Italian Legislative Decree of 3 March 2011, for the incentivizing of the production of electrical energy from photovoltaic solar installations, generally, and Article 25(10) thereof, specifically" and also "the 7 August 2012 version of the "Implementing Rules" pertaining to, inter alia, the administration of the Italian Feed-In Tariff, promulgated by the Italian Gestore Servizi Energetici (Regole Applicative per l’Iscrizione ai Registri e per l’Accesso alle Tariffe Incentivanti), generally, but including in particular Article 4.4 ("Premium for installations that use main components produced within EU/EEA States"), and all pertinent past and future versions thereof." On the Greek measures, China challenged the "Development of the Athens former international airport Hellinikon - Project HELIOS - Promotion of the use of energy from renewable sources as well as the "primary Greek legislation on renewable energy sources, i.e. Act No. 3468/2006 on "Electricity Production from Renewable Energy Sources." 

The main legal basis for China's request for consultation is found in the following arguments:

"China considers that the above-mentioned measures are inconsistent, both as such and as applied, with, among others, the following obligations under the following provisions:

• Article III:1 of the GATT 1994, because the measures are laws, regulations and requirements affecting the internal sale of products in such a way that they afford protection to domestic production;

• Article III:4 of the GATT 1994, because certain measures accord less favorable treatment to imported equipment for renewable energy generation facilities over like products produced in the EU and the European Economic Area ("EEA");

• Article III:5 of the GATT 1994 because the measures constitute quantitative regulations relating to the use of products in amounts or proportions which requires, directly or indirectly, that a specified amount or proportion of any product which is the subject of the regulation must be supplied from domestic sources; 

• Article I of the GATT 1994, because certain domestic content restrictions impede other WTO Members, including China, from enjoying the full benefit of the measures while other WTO Members do not face similar restrictions. These include but are not limited to certain WTO Members which are Members of the European Economic Area (EEA) but not the EU;

• Articles 3.1(b) and 3.2 of the SCM Agreement, because the measures include subsidies within the meaning of Article 1.1 of the SCM Agreement that are prohibited as they are provided contingent upon the use of domestic over imported goods;

• Articles 2.1 and 2.2 of the TRIMs Agreement, in conjunction with paragraph 1(a) of the Agreement's Illustrative List, because the measures are trade-related investment measures inconsistent with Article III:4 of the GATT 1994 which condition the receipt of the full advantage of the measure on the use of domestic goods."

While the GATT challenge may be more easily sustainable if local goods are favored over imported goods, the finding of a prohibited subsidy under the ASCM may be a little more arduous because of the definitional requirements of what constitutes a subsidy including financial contribution, benefit and specificity. This opens up another debate about the applicability of Article XX GATT which provides for general exceptions to the GATT provisions on the grounds, inter alia, of the environment.

One would have to way and watch the journey of the Canadian FiT case and the arguments in the China challenge. The rulings will have immense implications for renewable energy programs around the world that are dependent on local content requirements.

Local content, renewable energy and the WTO

The FiT ruling in the WTO case (DS 412) of Canada's (more specifically Ontario's) renewable energy program is eagerly awaited. I had blogged about a preliminary report of the WTO Panel here. It will surely be appealed against. What implication does the prohibition of "local content" requirements in renewable energy programs have on programs around the world?

A well written piece on the history and implications of a WTO ruling is found here.

Many questions:

1. What is the implication for countries following "local content' requirements in their FiT or renewable energy programs? Will domestic policy require a thorough revamp?

2. Is there a difference between "mandating" local content and "incentivizing" local content? Is the latter more acceptable?

3. Would the applicability of Article XX GATT general exceptions (protecting the environment) not be available in the case of local content rules?

4. Will we see a splurge of trade disputes wherein renewable energy programs across the world based on local content requirements will be challenged at the dispute settlement mechanism? Will countries take this path or will a negotiated settlement for a renewed multilateral agreement on renewable energy be worked out?

Will keenly await the Panel ruling and the reactions to it.

Renewable energy, WTO and local content - China takes on the EU

In signs of increased disputes in the renewable energy sector at the WTO, China filed a complaint against the EU and certain EU member states against certain Feed in Tariff programs that it alleged violated the GATT, ASCM and TRIMs. The WTO reported the filing of the complaint here. Though details of the complaint and the grounds of challenge are not yet clear, it seems that "local content" requirements are the main ground for he challenge.It was reported here.The NYT reported it here. Surprisingly, China has not filed a case against the U.S. with regard to which China connected a detailed investigation into State specific renewable energy programs recently. Many countries provide preferential tariff on generation of renewable energy and also mandate the use of locally produced products for this generation. Some countries provide an incentive on the tariff (additional tariff) on the condition that local products are used. 

EU and Japan have already challenged Canada's (Ontario's, more specifically) Feed-in tariff program as being violate of GATT law since it treats imported products less favourably than local products. The decision of the WTO Panel in this case is awaited in November. I had blogged about the dispute recently here.

With a number of countries implementing renewable energy programs of varying degrees and varieties, with and without local content requirements, the disputes at the WTO will offer some interesting insights on where the lines are to be drawn in balancing environment protection and trade.

Ontario Feed in Tariff - Not a prohibited subsidy but violative of GATT provisions?

Breaking news of an interim WTO panel ruling on the Ontario Feed in Tariff case is coming in. The Globe and Mail reported it here. The EU and Japan had challenged the FiT program for renewable energy of Ontario which mandated use of locally manufactured Ontario products on the grounds that it violated the "local content" rules of the ASCM, TRIMS and GATT. I had earlier blogged about it here, here and here.

The WTO website has no official confirmation of the interim decision (the website is normally uptodate on decisions and happenings in the WTO). ICTSD has a detailed note on the interim decision:

"According to a confidential interim WTO dispute settlement report, a three-member panel has sided with the EU and Japan in their challenge of renewable energy support provided by the Canadian province of Ontario, sources told BioRes this week. The two countries 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. 

According to a confidential interim WTO dispute settlement report, a three-member panel has sided with the EU and Japan in their challenge of renewable energy support provided by the Canadian province of Ontario, sources told BioRes this week. The two countries 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 .However, based on what is currently known about the confidential document, assertions by Brussels and Tokyo that the programme also amounted to illegal subsidies - dependent on use of locally produced equipment - have been rejected. At the time BioRes went to press, the ruling was not available."

If I understand this right, the panel has decided that the local content requirements are violative of WTO obligations of non-discrimination under GATT and TRIMS. However, they do not constitute a "prohibited subsidy" under Article 3 (1) (b) of the ASCM. Does this imply that an FiT as implemented in Ontario is not a subsidy as defined by the ASCM and hence does not amount to a "prohibited" subsidy? Or does it not have the characteristics of a prohibited subsidy as defined under Article 3 of the ASCM? The other major implication of this distinction of not amounting to a prohibited subsidy is the applicability of the general exception of Article XX of GATT. If it was declared a prohibited subsidy it would have been more difficult for Canada to justify its measure under Article XX of the GATT. This distinction has a major implication for renewable energy programs, especially FiTs, worldwide.

WIll eagerly await the November panel ruling.

Nigeria, local content and WTO law - Issues of compatibility

Local content requirements are pretty much taboo under WTO law.It signifies "protection" to local goods over imported goods and is thus a violation of the national Treatment principle enshrined under the GATT, TRIMS and GATS. Countries violate this provision rarely, and when they do are immediately taken to the DSM by an aggrieved members.

It is in this context that I found the Nigerian Oil and Gas Content Development Act 2010 rather interesting. It explicitly supports the growth of the local industry in the oil and gas sectors in Nigeria. Section 12 of the Act states:

"Subject to section 7 of this Act, the Nigerian Content Plan submitted to the Board by an operator shall contain a detailed plan, satisfactory to the Board, setting out how the operators and their contractors will give first consideration to Nigerian good and services, including specific examples showing how first consideration is considered and assessed by the operator in its evaluation of bids for goods and services required for the project."

This provision, and many other provisions of the above Act seem to run contrary to the National Treatment principle which mandates that imported goods not be treated less favorably as compared to local made goods.This policy was supported by the local oil industry here.A succinct analysis of the Act by Humphrey Onyeukwu is found here.

However, the issue of the compatibility of the Nigerian law with WTO law has been raised here and here. However, no WTO member has challenged this legislation yet at the DSM of the WTO. Is this a matter of time?

Several questions come to my mind:

1. Is the local content requirements in violation of Nigeria's WTO obligations? if so why has there been no substantial challenge to this legislation? Are global business interests and international involvement in the Oil and Gas sector still nascent to necessitate this challenge? Is it a matter of time (when Nigeria's oil and gas industry has international participation) that a WTO challenge will become inevitable?

2. The Nigerian local content policy is restricted now to the Oil and Gas sector. Would the reaction of WTO embers be different if it extended to the economy as a whole rather than these sectors? Would that have prompted a WTO challenge?

3. Nigeria has employed this policy to ostensibly boost it's local economy, jobs and industry. It is part of its industrial policy. This is a clear instance where domestic policy pace, in terms of an industrial policy favouring local content, is in conflict with WTO rules.

4. Would it be justifiable for an LDC or a developing economy to adopt such policies as an aggressive industrial policy? Is it not a fact that the WTO law gives no leeway in matters of local content. As Ayodele Oni concludes in his piece questioning the Act:

"Although further research may suggest an arguable leeway, Nigeria appears to be, prima facie, in breach of its obligations under the WTO particularly as regards the National Treatment Principle. 

It should, however, be noted that a foreign company carrying on business in Nigeria, which feels strongly about these issues would need to take actions under the auspices of its country of origin. 

Where this is done, a Dispute Settlement Body (DSB) may request Nigeria to bring into conformity measures which are inconsistent with its obligations under the WTO. China for example, brought its trade measures into conformity with the DSB’s recommendations and rulings, within 8 months, further to a WTO decision in 2008."

5. Does Nigeria, and other developing countries, have a defense for this legislation? A WTO dispute, will perhaps, have some of these answers.