Canada's renewable energy program challenged

The disputes in the renewable energy sector are knocking on WTO's doorstep. Reuters reported that EU has decided to seek establishment of a Dispute panel at the WTO against Canada with respect to the Feed-in Tariff program (FIT program) of the Canadian province of Ontario.

"The European Union has escalated a trade dispute over Canadian provincial rules for solar and wind energy subsidies by asking the World Trade Organization to set up a panel to rule on the case, the WTO said on Wednesday.

The EU's decision to resort to legal measures against Canada, after the failure of direct talks to settle the dispute, will come as little surprise because Japan has already trodden the same path in an identical case. 

The EU and Japan say the Canadian province of Ontario is illegally restricting trade by giving an subsidy to local producers of renewable energy equipment and services. 

The scheme guarantees above-market energy prices for renewable power that uses a certain amount of Canadian-made equipment or services, a provision that the complainants say is against the WTO's rules."

 The FIT Program of the Ontario Power Authority essentially encourages power generation projects using renewable sources of energy by providing a guaranteed pricing structure for renewable energy production. As part of this program, to avail its benefits power generation products have to source a certain percentage of their products that are produced domestically in Ontario. 

The domestic content requirement is as follows:

"The FIT contract requires wind projects greater than 10 kilowatts (kW) and all solar PV projects to include a minimum amount of goods and services that come from Ontario. You will be required to develop a plan that demonstrates how you intend to meet these domestic content requirements.

The minimum required amount of Ontario-based content will increase over time and is determined by the milestone date for commercial operation of your project, not the date that your project reaches commercial operation. The minimum requirements are set out below.

Wind projects over 10 kW 

Minimum domestic content level	Milestone date for commercial operation
25 percent	before January 1, 2012
50 percent	on or after January 1, 2012

 Solar PV projects over 10 kW and less than or equal to 10,000 kW 

Minimum domestic content level	Milestone date for commercial operation
50 percent	before January 1, 2011
60 percent	on or after January 1, 2011

This has been challenged by the EU in the WTO on the ground that Canada is violating its WTO obligations as reported here. The EU had earlier sought for consultations in the matter in the WTO. Failure at the consultations led the the demand for setting up of a dispute panel. The main assertions of the EU were:

" The European Union claimed that the measures are inconsistent with Canada's obligations under Article III:4 and III:5 of the GATT 1994 because they appear to be laws, regulations or requirements affecting the internal sale, offering for sale, purchase, transportation, distribution, or use of equipment for renewable energy generation facilities that accord less favourable treatment to imported equipment than that accorded to like products originating in Ontario; that the measures could be internal quantitative regulations relating to the mixture, processing or use of a specified amount or proportion of equipment for renewable energy generation facilities which require that equipment for renewable energy generation facilities be supplied from Ontario sources; and that the measures appear to require the mixture, processing or use of equipment for renewable energy generation facilities supplied from Ontario in specified amounts or proportions, being applied so as to afford protection to Ontario production of such equipment, contrary to the principles of Article III:1 of the GATT 1994.

The European Union also claimed that the measures appear to be inconsistent with Article 2.1 of the TRIMs Agreement because they appear to be trade-related investment measures that are inconsistent with the provisions of Article III of the GATT 1994.

Finally, the European Union alleged that it appears that a subsidy is granted under the measures because there would be a financial contribution or a form of income or price support, and a benefit is thereby conferred.  It is also claimed that the subsidy would be a prohibited subsidy under Articles 3.1(b) and 3.2 of the SCM Agreement because it appears to be provided “contingent … upon the use of domestic over imported goods”, namely contingent upon the use of equipment for renewable energy generation facilities produced in Ontario over such equipment imported from countries such as the European Union."

The three broad issues relating to mandating of domestic content requirement in the FIT program that the EU contentions raise are:
1. It is violative of the national treatment principle which is one of the underlying principles of the WTO. In other words, there are laws/regulations that accord a less favourable treatment to imported goods as compared to locally produced renewable energy products.
2. It violates the national treatment principle in the TRIMS Agreement.
3. The program offers  a "prohibited subsidy" since a subsidy (price support) would be provided to power generation projects contingent upon the use of domestically produced equipment which is not permitted by the Subsidies and Countervailing measures Agreement.


Similarly, Japan has also challenged the FIT program as violative of Canada's commitments which is before the Dispute panel of the WTO, in which the EU is a Third Party. Both these cases will be keenly watched since it will have a bearing on other potential disputes that concern the Chinese, American and Indian renewable energy sectors.

Shining Bright? Not the solar industry

The issue of "protectionism" in manufacturing of renewable energy products, especially solar panels has become a contentious issue of late. Countries, including U.S., China and India) have accused each other of protecting domestic industry over foreign products thus bringing the dispute to the WTO. It has also been recently reported here, here and here.

Down to Earth carried an extensive piece on protectionism in the solar panel industry.

"The world is witnessing an increase in trade disputes in the renewable energy sector. Countries are trying to strengthen their renewable energy base by preferring indigenous products over imports. This is an obvious dampener for countries with good renewable energy equipment manufacturing capabilities and advanced technology. They argue that such policy measures hinder free trade. Their complaints at the World Trade Organization (WTO) are piling up. India is the latest to be in the spotlight."

The United States has alleged illegal dumping by China on solar panel imports into the U.S. This prompted similar steps from China against U.S, imports as reported here.

"Cheap solar panel imports from China have substantially hurt US manufacturers, the US International Trade Commission (ITC) preliminarily found on 2 December. Following this early assessment, six ITC members unanimously decided to continue investigating the alleged subsidisation and dumping of imports of crystalline silicon photovoltaic (CSPV) cells and modules from China. 

The assessment and vote follows the ITC’s decision on 9 November to react to a petition to curb unfair imports submitted by SolarWorld Industries America Inc. and the Coalition for American Solar Manufacturing (CASM).

Washington’s decision to continue proceedings comes only days after Beijing confirmed that it was conducting its own investigation on Washington’s renewable energy support. Beijing’s probe will cover wind energy, solar, and hydro technology products. The investigation is expected to end by 25 May 2012."

The U.S. has alleged that Chinese manufacturers receive huge subsidies from the State which helps them to sell their products cheaply and thus affect domestic producers in the U.S. The Chinese Commerce Ministry reacted with caution,

"China-based PV (photovoltaic) industries express their strong opposition to the petition for the investigations ... and that any trade restrictive measures that may be imposed will unavoidably cause serious impairment to the sustainable development of the green industries as well as consumers' interests in both China and the U.S."

The Chinese Development Bank has reportedly extended more than $34 billion in credit lines to Chinese solar companies. It has also been interestingly argued that subsidies to the renewable energy industry is practiced around the world by many countries and China is no exception.

Gulzar has recently contextualised the solar energy subsidy debate int he context of the Jawaharlal Nehru National Solar Mission (JNNSM) in India. The U.S has alleged that India's mandating of domestically produced solar products is violative of its WTO obligations. The JNNSM has a domestic component feature.

" Domestic content -
One of the important objectives of the National Solar Mission is to promote domestic manufacturing. In view of this, the developers are expected to procure their project components from domestic manufacturers, as far as possible. However, in the case of Solar PV Projects to be selected in first batch during FY 2010-11, it will be mandatory for Projects based on crystalline silicon technology to use the modules manufactured in India. For Solar PV Projects to be selected in second batch during FY 2011-12, it will be mandatory for all the Projects to use cells and modules manufactured in India" 

It is clear that the solar industry around the world is heavily subsidised by the State through various means. This has resulted in the products being available at an economical price. The issues in the context of the WTO are the following: Whether the subsidies offered by various countries to their domestic manufacturers is violative of WTO obligations? Related to this issue is the question of anti-dumping and countervailing measures that can be imposed to protect local industry against cheap subsidised imports. Most of the cases referred to above refer to the anti-dumping measures against cheap imports.Anti-dumping measures can be imposed after a thorough investigation and a finding that the cheap imports have caused injury local domestic industry.

There are different dimensions to the dispute:

1. Anti-dumping measures can be undertaken, irrespective of whether subsidies are being given by the country, wherein the WTO agreement allows governments to act against dumping where there is genuine (“material”) injury to the competing domestic industry. In order to do that the government has to be able to show that dumping is taking place, calculate the extent of dumping (how much lower the export price is compared to the exporter’s home market price), and show that the dumping is causing injury or threatening to do so.If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be “dumping” the product. Hence in the case of solar panels a member country can allege that China is "dumping" their products in their market which has caused an injury to their local industry. This is covered by the Agreement on Anti-dumping in the WTO Agreements.

2. Another aspect of the dispute is the issue of facilitating local, domestic industry by offering subsidies as well as mandating local content requirements in projects. The Agreement on Subsidies and Countervailing measures  essentially outlines what are "prohibited subsidies" and what are "actionable subsidies" under the WTO.

Article 3 of this Agreement states

 "3.1        Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited:

(a)        subsidies contingent, in law or in fact(4), whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I(5);

(b)        subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.

3.2        A Member shall neither grant nor maintain subsidies referred to in paragraph 1."

Hence, where a subsidy is given to a project on the condition that domestic goods should be used over imported goods it is a prohibited subsidy. This is a prohibited subsidy. Does the JNNSM support fall under this category?


3. "Specific" subsidies are also "actionable" under the Agreement. As per Article 5 , action can be initiated against specific subsidies if it can be proven that they caused, inter alia, injury to the domestic industry. Though the Chinese subsidies may not fall under prohibited subsidies, can a case be made out that they are actionable subsidies since it caused injury to the domestic U.S.industry? This would require marshalling of evidence to that effect.


4. Does the requirement of domestic content violate the "national treatment" principle enshrined in the GATT Agreement?


While Japan and EU have initiated WTO Dispute Settlement procedures against Canada in regard to solar energy products, it is surprising that China has not been under the scanner here. It is clear that one would have to strategically and creatively craft one's renewable energy policy keeping in mind its implications on the various obligations under the WTO. This would require not only an understanding of how the renewable energy sector is across the world but also a thorough knowledge of the interpretation of the WTO Agreements.

Outdated trade rules for 21st century trade?

Richard Baldwin in his paper "21st Century Regionalism: Filling the gap between 21st century trade and 20th century trade rules" has brought out in great detail the new dimension of 21st century international trade fuelled by the "trade-investment-services" nexus. Explaining the concept of the internationalisation of the supply chain in 21st century international trade, he gives insights into how regionalism is having an impact on the world trading system. 

I am not discussing the paper as such in this blog. An interesting insight the paper dwells on is the relationship between the Dispute Settlement Mechanism of the WTO and the "negotiating" role of the multilateral body. It states,

"Third, the WTO’s adjudication function is still working well, but any dispute settlement system must walk on two legs. The judges can connect the dots for particular cases, but the basic rules must be updated occasionally to match evolving realities. For example, the Appellate Body finds itself ruling on issues like “zeroing” where the negotiated consensus is disputed. If the basic rules applied by the Appellate Body are not updated, there is a serious danger that the judges will overreach themselves, basing decisions on previous decisions that were based on previous decisions. Similar challenges may arise when members ask the Appellate Body to rule on 21st century climate subsidies and taxes based on rules negotiated in the 1940s and last updated in 1994. The larger members may be tempted to take matters into their own hands, applying sanctions based on unilateral law, not multilateral law."

The dichotomy of a well functioning Dispute Settlement Mechanism vis a vis the failed negotiations is brought out here. The DSM is seen as one of the strongest points working in favour of the WTO. It establishes the "neutrality", "independence" and "rule-based" approach of the WTO as against the "politically" charged negotiations context. While the former adudicating the rights and obligations of member countries in the context of WTO obligations rather well (much to the chagrin of "domestic" voices),  the latter has seen a setback in Doha. However, the ability for the DSM to work in a vacuum is debatable. Both the political and judicial mandates of the WTO must equally deliver for the multilateral institution to be relevant in an increasingly complex trading world.

WTO control over domestic policy?

The interplay of WTO and its impact on domestic law making and policy space has been a subject matter of debate ever since the institution has been created. What are the limits of domestic laws vis vis international treaty obligations? Does the WTO impinge on domestic sovereignty?

(Deb Lindsey/FOR THE WASHINGTON POST)

An interesting piece in the Washington Post attributes two decisions (Tuna  and COOL decisions) of the WTO to have impinged on U.S domestic policy. Both pertained to labelling requirements under U.S domestic law. Both the decisions of the WTO were against the United States.

The piece highlights the tension between domestic food safety norms and international trade obligations. The WTO decision has been viewed as an illegitimate "control" over what is essentially domestic policy space of deciding the rules of the game. However, this is what the member countries have essentially agreed to - that the WTO would be an "international", "neutral" arbiter of disputes related to trade between countries. To what extent that arbitrage impinges domestic policy space depends on facts of each case. Instead of questioning the WTO as an institution that can "control" domestic policy it would be more fruitful to use the various Agreements of the WTO to address domestic concerns and "protect" (not to be confused with "protectionism") one's national interest within permissible international obligations. Achieving this balance is tougher than alleging loss of domestic sovereignty!

EU ETS in aviation - Trade war or damp squib?

I had earlier blogged about the EU ETS ruling of the European Court of Justice. Whether the contours of the dispute would take the contending parties to the doorsteps of another international body, the WTO's Dispute Settlement Body, is debatable.

Reports in the new year indicate that different parties are taking divergent viewpoints. The NYT reported that the European Commission was serious in imposing the EU ETS Scheme,

"The European Commission said on Thursday that airlines that did not follow a new European law requiring them to account for their emissions of greenhouse gases could face being banned from European airports.

The warning was the latest stage in an escalating war of words between the European Union and countries like China, which have expressed fierce opposition to a law that represents the European Union’s boldest move to date to protect the climate.The initiative went into effect at the start of the year and involves folding aviation into the European Union’s six-year-old Emissions Trading System, in which polluters can buy and sell a limited quantity of permits, each representing a ton of carbon dioxide."

Some Airlines seem to have fallen in line and are in a mood to comply with the "environmental friendly" order. This report indicated that US Airways and United-Continental were complying with the provisions of the scheme, albeit by passing the burden onto the customer.

"United-Continental and US Airways have joined Delta in adding a $3 surcharge to one-way tickets to Europe, days after the European Union started requiring airlines to pay for carbon emissions.

Spokesmen for all three airlines would not discuss the reasons for the surcharges.

But industry analysts call the surcharge a clear sign that consumers could bear the brunt of a European law that the U.S. airline industry has estimated would cost it $3.1 billion from now through 2020.

The new surcharge also happens as consumers are already paying surcharges for higher fuel costs on international flights.

“This is a new fee, so it’s going to go straight to the bottom line, and that means consumers will be paying,” says Charles Leocha, director of the Consumer Travel Alliance. “This is one more fee on top of all the other ones, so it adds up.”

One Airline Association appears to be sticking to a confrontationist stand. China Air Transport Association. As reported here,

"China, of course, will not cooperate with the European Union on the ETS (emissions trading scheme)," said Chai Haibo, deputy secretary-general of the China Air Transport Association, which represents the country's airlines.

"The CATA, on behalf of Chinese airlines, is strongly against the EU's improper practice of unilaterally forcing international airlines into its ETS," Chai said from Beijing, where the group is based."

Whether this would result in an all out trade war having ramification across sectors is too early to judge. A negotiated settlement could also be on the cards. Further, passing on the burden to the paying customer is always an option. 

A recent interesting report by an aviation industry intelligence association (OAG) is found here. It essentially forecasts two fall outs of the ETS regime on the airline industry:

"In consequence, the EU ETS will create two possible scenarios. The first one will generate higher air fares due to the carbon tax at an additional average cost of approximately 3% per passenger. The second scenario will  see airlines  use non-EU points  as intermediate stops to avoid the additional costs. The impact of introducing this new carbon tax will be visible not only in carriers’ capacity and frequency, but also in European airports and airports outside the area affected by carbon regulation."

The report concludes,

" In the longer term, an aircraft operator's ability to pass on the additional carbon cost will  be a key differentiator and will vary from operator to operator although it is likely that such costs will be passed on to the passenger. The degree to which an individual airline is able to pass on this cost will be influenced by the efficiency of its route network, market pricing and price elasticity of the route. Those airlines with a higher proportion of premium revenues may find it easier to pass on carbon costs to passengers, as these costs will be a proportionately lower percentage of the ticket price than for  lower priced economy passengers. Low-cost and short-haul airlines that have lower premium revenues, and particularly those with older aircraft fleets,  will be more affected by ETS scheme across their business.

The decision made by the EU to include aviation in the EU ETS has already proven to be controversial. A group of US airlines  are  pursuing a case on this issue at the European Court of Justice.  26 countries, including China, Russia, India, and the United States, publicly voiced their opposition to the initiative. Adding to confusion on the issue, the US House of Representatives on 24th October  2011  passed a bill  prohibiting US airlines to participate in the controversial EU scheme. 

The inclusion of aviation into the EU ETS, in long term, will have not only a direct impact on ticket prices to/from and within Europe but also on regional aviation demand. It is forecasted that air fares will  increase  approximately  about 3% due to carriers’ additional carbon tax that may lead to demand suppression on certain markets."

Trade, environment and markets are in interesting confluence here.

China's market!

Two interesting stories about China's market!


Bloomberg Businessweek carried this

" VW’s Bentley Sells More Cars in China Than U.K. for First Time

Volkswagen AG’s super-luxury Bentley brand sold more cars in China than Britain for the first time in its 92-year history and said it’s seeking to capitalize on wealthy customers reopening their wallets this year.

Bentley sold 37 percent more cars in 2011 as demand for the Crewe, England-based manufacturer’s models doubled in China, helping make the brand profitable for the first time since 2008. The maker of the Continental luxury coupe said it expects “robust” growth in sales and higher profit this year as consumers end the spending restraint brought on by the 2008 recession."

Another story on Rolls Royce sales is here.

"China Buys more Lamborghinis and Rolls-Royces than U.S. in 2011

In 2011, China led the way for expensive, exclusive and luxurious cars, buying more Lamborghini’sand Rolls-Royces than anybody else in the world.

The avenues in China are increasingly lined with luxurious car dealerships – Lamborghini, Ferrari, Bugatti and Rolls-Royce. Perhaps indicative of China’s luxury market appeal, Rolls-Royce recently introduced a $1.6 million “Year of the Dragon” model, decked out with hand-embroidered versions of mythical animals on leather headrests."

It is apparent that not only does China's exports create flutters around the world, it is also the largest market for many products produced in the developed world. Can't ignore China in multilateral trade negotiations, can we?

Will the Dispute Settlement Mechanism salvage the WTO?

A brilliant blog piece on the Dispute Settlement Mechanism is found in the tradeandenvironmentnexus blog. It states,


"Generally, the sentiment seems to be that even a failed Doha Round would not in a direct or immediate manner lessen the credibility or the functioning of the DSM. Both the stability of the body of case law as well as WTO Members recognition of its utility seem rather strongly indicative of no such negative effects ensuing, at least not in any immediate fashion. However, the effect on the DSM from a failed Doha Round is not something so simple as to be a non-issue. The important point, which may sound like heresy to the purist lawyer, is that the DSM should not be considered as functioning in a vacuum, complete unto itself. Though it seems evident that few Members have serious quarrels with the mechanism as such, this would only be reassuring it from potential political fallout if the mechanism could be considered as being isolated from the political part of the WTO"

Referring to the reality that the DSM does not function in a political vacuum, the piece states,

"Here we enter the realm of power and politics but, again, if one accepts that ultimately the DSM does not function in a vacuum, such a discussion is unavoidable. There may be an element of power shifting between WTO members that has evolved over time, influencing the actions of the Appellate Body. Most seem to agree that there indeed seems to be a greater degree of activism by the Appellate Body in recent times as compared to its earliest decisions. The reason for this is subject to debate, but it is perhaps not implausible that the power dynamic of the WTO was heavily skewed toward a few major players during the early years, as opposed to the more dispersed power landscape we see today. A more activist approach taken in recent times may thus not be the manifestation of increased confidence or security in the body of legal decisions, but rather (or also) be simply a reflection that whatever the Appellate Body decides in recent times will lead to one of many major players being upset. Faced with such a modern bind, it may actually afford the Appellate Body more freedom to focus on reaching the right decision than what they might have dared during the early days. The flipside is that focusing on the ‘right’ decision also often is one and the same with increasing the degree of activism when the dispersed power landscape effectively blocks political progression."

The “legal” nature of the DSM is highlighted as against the “political economy” of the multilateral trade negotiations. While one would like to believe that a strengthened DSM is a positive for a “rule-based” multilateral trading system with “legality” overpowering “political might”, one needs to be cautious about ignoring the political economy of trade as manifested in trade negotiations. The DSM has been recognised as one of the halmarks of the WTO and as an independent arbiter of rights and obligations of WTO members irrespective of political power or trading might. How effective it will remain in the context of failed political negotiations would be an interesting study in times to come.