WTO Appellate Body finds Ontario’s renewable energy program violates international trade rules

On May 6, 2013, the Appellate Body of the World Trade Organization (WTO)’s dispute settlement system held that Ontario’s feed-in tariff (FIT) program to support renewable energy development was inconsistent with Canada’s international trade obligations.  The decision confirmed the conclusion reached by the dispute settlement panel which first ruled on the case in December 2012, although the Appellate Body disagreed with that Panel’s analysis and reasoning on some points of law.

The first complaint against Ontario’s scheme was made by Japan in September 2010, and a second complaint was made by the European Union (EU) in August 2011.  Both Japan and the EU alleged that the FIT program discriminated against foreign suppliers of renewable energy technologies, as participation in the scheme required electricity generators to  source a certain amount of their components from Ontario.  For wind projects, the local content requirement was 25%, while for solar projects it was 60%. As neither complaint was able to be resolved through consultations between the parties, the two cases were submitted for joint adjudication by a Panel.  The Panel held that the local content requirement of the FIT scheme accorded preferential treatment to products made in Ontario, in violation of the national treatment obligation set out in Article 2.1 of the Trade-Related Investment Measures (TRIMs) Agreement and Article III of the General Agreement on Tariffs and Trade (GATT).  These conclusions were confirmed on appeal.

In addition to claims under the TRIMs Agreement and the GATT, Japan and the EU had argued that the FIT scheme constituted a prohibited subsidy in violation of the Agreement on Subsidies and Countervailing Measures (SCM Agreement).  The Appellate Body found that the Panel’s analysis of that agreement was flawed, because it held that the relevant “market” was a single market for electricity in Ontario regardless of the source of the energy.  The Appellate Body’s view was that the relevant market was “shaped by the government’s definition of an energy-supply mix,” and the appropriate benchmark for comparison should have been “competitive prices for wind power and solar [photovoltaic] generation.”  The Appellate Body drew a distinction between markets which only exist because of government intervention, such as measures to create a certain mix of energy supplies, and government interventions that may distort competition in existing markets.  However, the Appellate Body reached no conclusion on whether Ontario’s scheme was consistent with the SCM Agreement, as it had inadequate evidence before it to make the necessary factual determinations.

While the Appellate Body therefore did not determine if Ontario’s program was an impermissible subsidy, its discussion of the interpretation of the SCM Agreement may be important for pending cases concerning government support for renewable energy projects.  In February 2013, the US made a complaint against Indian government support of the Jawaharlal Nehru National Solar Mission, alleging that its domestic content requirements violate the SCM Agreement (in addition to the GATT and TRIMs Agreements).  If consultations between the parties fail to resolve that dispute, then it may be heard by a dispute settlement panel.  Although it has not yet made a formal complaint, in April 2013 India raised concerns about US support of renewable energy producers.  In particular, it has questioned whether schemes adopted by Connecticut, Delaware, Massachusetts and Minnesota are consistent with the SCM Agreement and the TRIMs Agreement.

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