Ontario’s green energy policies violate WTO rules, found a three-person panel just in time for the holidays.

Last week, the WTO released a panel report by Thomas Cottier (Swiss), Alexander Erwin (South African) and Daniel Moulis (Australian) that held the Canadian federal government responsible for the attempts of a single Canadian province to jump-start a clean energy transition. The decision cuts to the heart of federalism and of environmental governance in the 21st century – neither of which the WTO is proving itself very capable of accommodating.

The trade challenge was brought by the EU and Japan, with a nod of support from the Obama administration. Because only federal governments are represented at the WTO, the progressive government of Ontario had to have its policy defended by the anti-environmental Harper administration.

The basic thrust of Ontario’s policy is two-fold.

First, entities that generate electricity from renewable sources are paid a guaranteed price per kilowatt-hour in long-term contracts. Second, for the larger wind and solar power generators to participate in the program, they must use 25 to 60 percent locally produced generation equipment (depending on the scale and type of project, see paras. 7.64-7.68, 7.158). Fully implemented after the world economic crisis, the Ontario government describes the four goals of this so-called “FIT Programme” are to:

(i) “increase capacity of renewable energy supply to ensure adequate generation and reduce emissions”; (ii) “introduce a simpler method to procure and develop generating capacity from renewable sources of energy”; (iii) “enable new green industries through new investment and job creation”; and (iv) “provide incentives for investment in renewable energy technologies”… (para. 7.65)

The pairing of these two approaches – renewable incentives, plus incentives to produce locally – are deeply intertwined and have been replicated in various national and regional contexts. The latter job-creation scheme is often seen as the political price for the former (which may destroy jobs in traditional energy sectors in the short term), and is sometimes seen as an environmental benefit in and of itself, to the extent it leads to more localized manufacturing and less carbon-intensive long-distance shipping. In any case, a number of foreign  companies – including Siemens – had boosted their green investments in Ontario in order to take advantage of the program. (para. 7.110)

So, first, the good news. On the broader charge of whether paying a higher price for renewables was in and of itself a violation of the WTO’s subsidy rules (i.e. a transfer of funds or a benefit to the generators), a majority of the three-person panel found that it wasn’t. Over the course of their deliberation on this topic (paras. 7.194-7.249 and 7.270-7.327), you find some of the most sophisticated argumentation I have seen yet from a WTO panel on the nature of how markets and governments interact in the real world. In particular, the majority noted that truly free markets in electricity, for instance, would be an utter failure:

The evidence before us indicates that competitive wholesale electricity markets, although a theoretical possibility, will only rarely operate in a way that remunerates the mix of generators needed to secure a reliable electricity system with enough revenue to cover their all-in costs, let alone a system that pursues human health and environmental objectives through the inclusion of facilities using solar PV and wind technologies into the supply-mix. (7.309)

As a consequence, it makes no sense to talk about whether Ontario’s policy diverged from an idealized market price: there’s no free market in electricity. Without a free market reference price, there can be no talk of a “benefit” to renewable generators in the WTO legal sense.

Unfortunately, the whole panel did not agree. One of the three panelists (they do not reveal their names, so we don’t know who is who) said that the WTO should be examining the free market that could exist in Ontario as a basis for the subsidy comparison, and that trying to jumpstart new technologies should be seen as a potentially WTO-problematic subsidy per se (para. 9.3). Moreover, he pointed to a more free market electricity experiment in Alberta (the stronghold of Harper’s conservatives in Canada) as a benchmark against which the Ontario prices could be compared. (para. 9.14)

(This comparison underlines the difficulty that the WTO has with federal systems. When a local measure is challenged, it is presumed for international legal purposes to be an act of the federal government. This tends to neglect the actual division of decisionmaking powers. But, for the purposes of establishing benchmarks of the most free market prices in a country, litigants and panelists at the WTO can sample from any of a country’s provinces to find the least regulated. This recognizes the differentiated bases for decisionmaking in a federal system, but in a perverse way of “racing to the bottom.” A consistent federalism-oblivious approach would not “pierce the veil” of the nation-state; a consistent federalism-sensitive approach might not allow a local policy to be challenged in the first place, or require that the local level of government mount the defense.)

But I digress. Of course, the ostensible reason that Europe and and Japan challenged the Ontario program in the first place was not that it was a subsidy to renewables (at least I hope not), but a subsidy to renewables contingent on local manufacturing of the inputs. (The majority of the panel didn’t always seem to appreciate the distinction in their subsidy analysis, a matter which might be discussed if the panel report is appealed.) This didn’t matter too much, however, since all three panelists ruled that the local content requirements constituted prohibited trade-related investment measures under the WTO’s TRIMs agreement.

Here again is where federalism is poorly accommodated at the WTO system. While the Harper administration did push back on many of Europe and Japan’s points, they did not even bother to debate the TRIMS-compatibility of Ontario’s local content requirements, see para. 7.107 and footnote. As a consequence, when the Harper team’s relatively flimsy argument that the local content requirement should fall into a procurement-related carve-out in WTO law failed, they weren’t left with much to argue about.

Given that there was a dissent, and the split decision, and that this whole dispute was so controversial, I expect the parties to appeal. It’s entirely possible that the Appellate Body could rule wholly in Europe/Japan’s favor and against the whole renewables scheme, or that Canada could somehow prevail. I think the latter is doubtful, however, since Canada did not make any arguments on many of the key points, and will not be able to raise wholly new arguments at the appeal stage.

(Finally, while here isn’t the place to go into depth on it, there was an interesting contrast between the comments offered by Brazil as a third party (who argued that the role of the government in a country can be determined by social values (para. 7.93)), and the Obama administration (which argued that government performs a narrow role (para. 7.105)). Also, some nice dissecting of what the meaning of “government” and “market” are at paras. 7.233, 7.273)

The full title of the WTO report is “Canada — Certain Measures Affecting the Renewable Energy Generation Sector,” and can be found here.

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