Canada: WTO Appellate Body Rules Against Canada In Renewable Energy Case

Last Updated: May 14 2013
Article by Claudia Feldkamp, Peter E. Kirby and Clifford Sosnow

On May 6, 2013, the World Trade Organization's (WTO) Appellate Body issued its decision affirming an earlier panel ruling that Canada had violated its national treatment obligations by offering green energy incentives that included domestic content requirements in Ontario that favoured local suppliers. The decision comes at a time when Ontario's green energy policies have come under increased public scrutiny and criticism within the province. With energy policy possibly becoming a central issue in an Ontario election that can come at any time, the Appellate Body decision is likely an unwelcome development for the Liberal government. This bulletin provides an overview of the decision, and offers some preliminary commentary on its implications for renewable energy law and policy in Ontario and Canada.

The Disputed Measures - Ontario's FIT Program

In May 2009, pursuant to the Green Energy and Green Economy Act of 2009 (the "Act"), Ontario introduced a provincial feed-in tariff program (FIT program) to promote power generation through renewable energy sources. The FIT program grants developers of wind and solar energy premium, fixed-rate prices for power delivered into Ontario's electricity grid provided that certain minimum domestic content requirements are met. Under the rules of the FIT program, a certain percentage of the equipment used in wind farm projects and by solar panel installers in Ontario must be sourced locally.

The Dispute - Japan and EU file complaints with the WTO

In 2001, after consultations at the WTO failed to produce a mutually acceptable solution, Japan1 and the European Union2 (EU) each filed complaints with the WTO arguing that the domestic content levels prescribed under the FIT program are inconsistent with the national treatment rules under the General Agreement on Tariffs and Trade (GATT) and the Trade-Related Investment Measures (TRIMS). Those national treatment rules prohibit members from discriminating against foreign goods in favour of local goods and suppliers. Japan and the EU also claimed that the FIT program constituted prohibited subsidies under the Agreement on Subsidies and Countervailing Measures Agreement (SCM Agreement). Canada argued that the incentives that wind and solar producers receive for delivering energy into the grid were exempt from GATT national treatment rules as government procurement. 

The dispute settlement panels established by the WTO agreed with Japan and Europe respectively that Canada had discriminated against foreign manufacturers in its application of the Act and the FIT program in contravention of GATT and TRIMS. The panels, however, rejected the argument that the domestic content rules constituted an illegal subsidy. Since Ontario's procurement of electricity under the FIT program was undertaken "with a view to commercial resale", the panels also ruled that Canada had not established that it was entitled to rely on an exemption from GATT national treatment rules.

The Appellate Body rejected Canada's argument to exempt the FIT program from GATT national treatment rules but on different grounds. The exemption only applies where the product procured by the government, in this case, electricity, is the same product being discriminated against. Canada cannot claim an exemption to cover the discriminatory treatment for the electricity generation equipment when the product being procured is electricity. 

When considering the panel decision on the application of the SCM Agreement, the Appellate Body found that the panel erred in its analysis of whether a "benefit" had been conferred under the FIT program. Whether a "benefit" has been conferred is determined by assessing whether the recipient has received a "financial contribution" on terms more favourable than those available to the recipient in the market. Whether a financial contribution confers a benefit to the recipient cannot be determined in absolute terms, but requires a comparison with a benchmark, which, in the case of subsidies, derives from the market. The Appellate Body found that there was insufficient evidence on the appropriate benchmark to be used to complete the analysis as to whether the FIT constitutes an illegal subsidy.

What happens next?

This is the first time that a WTO ruling involving Canada concerns measures exclusively under provincial jurisdiction. Only Canada is a party to the WTO agreement, but Ontario has sole legislative authority over the measures in question. As such, the federal government cannot compel Ontario to change its policy. In the wake of the Appellate Body ruling, Ontario Energy Minister Bob Chiarelli confirmed the importance of Ontario's green energy policies and indicated that the provincial government is "reviewing the ruling in consultation with the federal government" and will consider its next steps in light of this review. 

Once the Appellate Body Report has been adopted, Canada will be given a reasonable period of time to comply (if impractical to comply immediately). If Ontario does not take the necessary steps to comply with the ruling, the WTO or one of the complaining parties may request that Canada engage in negotiations to reach an agreement on mutually acceptable compensation. In the absence of agreement, the complainants may seek authority from the WTO to retaliate by imposing sanctions against Canada's exports. This international legal process could still take years to play out, with uncertain outcomes and implications for all parties looming for the duration.

The Appellate Body ruling—the first to consider a FIT program—calls into question similar domestic content rules that have been implemented by a number of other countries to encourage the development of a renewable energy sector. Earlier this year, the United States challenged India's local content requirements for its national solar program at the WTO. Similarly, China is challenging domestic content requirements in the renewable energy sector in both Italy and Greece.

The decision also comes at a time when Ontario's green energy policies have come under increased criticism within the province. The Liberals have a minority government and the opposition parties holding the balance of power have called into question the Liberal party's energy policies. The Progressive Conservatives have pledged to repeal the Act and cancel the FIT Program altogether. With energy policy potentially forming the central issue in an Ontario election that can come at anytime, the Appellate Body decision is an unwelcome development for the Liberal government.

Businesses in the renewable energy sector in Ontario face an increasingly uncertain regulatory and pricing environment and with the advent of this decision, this is all the more so. The legal machinations at the WTO will only increase uncertainty in an already volatile political and regulatory environment for renewable energy in Ontario.

Read the full text of the decision.

Footnotes

1 Canada — Certain Measures Affecting the Renewable Energy Generation Sector, case number DS412.

2 Canada — Measures Relating to the Feed-in Tariff Program, case number DS426.

www.fasken.com

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