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Green energy on trial at World Trade Organization

Posted Jul. 24, 2012 / Posted by: Bill Waren

“There is little doubt that current WTO negotiations do not fully address the real problems confronting the world and the trading system itself. The threat of global climate change and the catastrophic consequences for the natural environment—and for the world's poorest citizens—ought to focus the minds of our leaders.”

C. Fred Bergsten, Peterson Institute for International Economics, and Lori Wallach, Public Citizen, Washington Post, Op-ed, November 13, 2009  

 

In response to the climate crisis, and especially the Fukushima nuclear energy disaster, on July 1 Japan implemented an ambitious program to mandate the purchase of power from solar, wind, and other renewable energy sources.  Under Japan’s “feed-in tariff” law, utility companies are required to buy electricity from solar, wind and other renewable sources at a fixed price over a set period of time.  Eligible renewable energy producers in Japan are paid a premium, allowing them to thrive with increased market certainty and stability.   

The Japanese government intends to fix the price high enough and purchase period long enough to create strong financial incentives for new investment in each category of renewable energy.  The government of Japan is also providing financial support to expand and strengthen the grid to facilitate transmission of power from remote areas suitable for wind or solar facilities to urban population centers.  The point of the Japanese FIT program is to rapidly grow the renewable industry in order to reduce costs and environmental harm in the future, thereby providing an alternative to nuclear and fossil fuel energy.

The irony is that the government of Japan, while supporting feed-in tariff subsidies for renewable energy at home, is suing Canada in the World Trade Organization on the grounds that Ontario’s feed-in tariff for renewable energy and its associated domestic content provisions violate international trade law.   

The Ontario feed-in tariff program for renewable energy

Ontario’s FIT program aims to increase the share of renewable energy in the province’s electricity market.  The program was developed and implemented in 2009 by the Ontario Power Authority. The OPA sets prices and administers contracts, in which premiums are based on supplier contracts between the OPA and electricity providers. The Ontario Global Adjustment Mechanism then offsets the difference between the electricity market price and the guaranteed FIT premium.

The FIT program also includes a provision that requires developers to have a certain percentage of their project costs come from Ontario goods and labor. This “made-in-Ontario” provision mandates that most renewable energy suppliers use a minimum level of equipment produced in Ontario in order to qualify for price guarantees and grid access. For example, wind projects require a minimum of 25% and solar projects require a minimum 60% local content.

Ontario sees the FIT program as a win-win, increasing renewable energy while creating jobs in the process.  Ontario hopes to create 50,000 jobs by the end of this year and eliminate its coal-fired power stations by 2014. At the same time, Ontario expects that the program will reduce its carbon footprint by 75%, explicitly justifying the program as a means of meeting Kyoto Protocol obligations. The Kyoto Protocol is an international environmental treaty with the aim of reducing and controlling signatories’ greenhouse gas emissions to benchmark 1990 levels.  In addition, eliminating coal power would have significant health benefits in Ontario, as an independent study found that coal-fired generation costs $4.4 billion annually when health and environmental costs are considered.

Among other legal arguments, Japan and the E.U. claim that because the “made in Ontario” requirement is mandatory, the FIT program is contingent on the use of domestic over imported goods and is prohibited by the WTO agreement on subsidies.

With respect to this challenge to the domestic content provision of the Ontario FIT program, Stuart Trew of the Council of Canadians observes that: “… the EU and Japan are trying to create a dichotomy between environmental protection and economic development which is at odds with the definition of sustainable development under the Framework Convention on Climate Change and the Kyoto Protocol, which all three parties have agreed to.”  Article 3 of the Framework Convention provides that “measures to protect the climate system…should be integrated with national development programs…”

According to a “friend of the court” legal brief filed by the Council of Canadians and others, “In accordance with its obligations under the Convention and Protocol, Ontario is not only seeking to increase the consumption of renewable energy but to facilitate the development of renewable energy infrastructure in Ontario.  By so doing, it proposes to reduce the costs of renewable power and create the industrial, commercial, and services infrastructure that will allow the province to more readily take the next steps to further reduce greenhouse gas emissions.”

Supporters of the Japan and E.U. complaint in the WTO would disagree, but the Council of Canadians makes a strong policy argument.

Other green energy disputes could end up in the WTO

Friends of the Earth  fears  that drawn-out litigation before WTO and other international trade tribunals   on  feed-in tariffs and other green energy programs  could slow the deployment of alternatives to nuclear, coal, oil and other dirty energy sources  that pose a clear and present  risk to the planet.

 The WTO litigation on Ontario’s feed-in tariff may not be an isolated case in the future. For example:

On July 20, the Chinese ministry of Commerce announced that it will open a domestic trade investigation into U.S. subsidies for polysilicon imports used to make solar energy products, presumably in retaliation for U.S. import duties (tariffs) on Chinese solar panels.

The United States in May of this year applied preliminary import duties on Chinese solar products, alleging unfair subsidies and “dumping” of excess inventory on the U.S. market.   This follows a U.S. International Trade Commission action based on a complaint by German and U.S. based solar cell manufacturer, SolarWorld.

Reportedly, the German government is also backing efforts by SolarWorld and other German solar manufacturers to seek European “anti-dumping” sanctions against Asian solar manufacturers.  Germany and Italy are two of the world’s largest solar energy producers, but E.U. austerity measures could result in a drop off in domestic subsidies that, if combined with import duties on Chinese solar cells, could significantly impact the cost of solar energy production in the future.

All of this could lead to WTO litigation on solar energy, unless the parties are able to resolve their differences through nation-to-nation negotiations. 

According to Kelly Sims Gallagher and Kevin P. Gallagher, economists associated with Tufts and Boston University respectively, The Obama Administration’s preliminary decision to impose a 31 per cent tariff on solar panels imported from China is short sighted. The move could cause a trade war, hurt the US economy, jeopardize US security interests, and put the world further off course in terms of meeting its global climate change goals.  The decision opens the US up to a trade war in renewable energy, of all things. The US currently has a trade surplus with China in solar energy because of large US exports of polysilicon to China. Not surprisingly, Li Junfeng, a senior Chinese government official, has already proposed imposing retaliatory tariffs on US polysilicon—and a trade war might not stop there.”

Supporters of the SolarWorld complaints in the United States and Europe would disagree, but the Gallaghers make a powerful argument.

The WTO is the wrong forum for making energy and climate policy

In future blog posts and other more technical issue papers, we will sort out the details and complexities of the WTO case regarding the Ontario FIT program.  And, we will look at other trade and climate policy cases, including the SolarWorld litigation.  Clearly, one of the dilemmas that needs to be addressed is how, when, and by whom decisions are made about the trade off between nurturing a domestic green energy industry in the interest of sustainable development over the long run as Ontario is attempting to do, and the immediate need to drive down the cost of renewable energy by liberalizing international markets in environmental goods like solar panels.

To foreshadow that discussion, here are a few considerations about the appropriate forum for evaluating such trade offs.

The primary concern is that climate policy is being made in the WTO and similar forums based on trade law and policy, with a strong “free market” bias, rather than climate science and policy, which generally points to the need for government intervention.     

Market liberalization promoted by the WTO, in the form of fewer government regulations and interventions, may be of benefit in reducing the cost of certain environmental goods and services on the world market over the shorter term, but that same policy of market liberalization applied in a different context could reduce the cost of products like coal or services like oil drilling that threaten the planet and human survival.    

To further complicate matters, an international tribunal interpretation of a WTO agreement could make for a “good result” in terms of climate policy in one case, but that interpretation could be persuasive with a future tribunal in another case in a way that produces a “bad result.”  The results could, therefore, be random in terms of sound policy for addressing global warming.  For example, if a WTO tribunal decided that government subsidies encouraging oil drilling violates international trade law, the reasoning in that decision could be persuasive in a subsequent case with the result that subsidies for wind energy are also found to be in violation of the WTO subsidies agreement.

In the broadest terms, the mission of the WTO is to reduce tariffs and especially so-called “non-tariff barriers” to international commerce, such as government regulations, subsidies, and taxes.   The WTO system is inherently suspicious of government action.  But government action is exactly what is needed to address the climate crisis. In particular, government action is needed to internalize climate costs with measures such as carbon taxes and compensate for the failure of markets to reflect climate costs through measures such as renewable energy subsidies.

In the context of the WTO litigation regarding the Ontario FIT program,   Aaron Cosbey at the International Institute of Sustainable Development sums up the primary policy concern:  “The current [WTO] rules with respect to these sorts of green subsidies are clear. Many of the types of support used to foster renewable energy would probably be found to be WTO-illegal. There are particularly strong grounds to question those that are conditional on domestic content or export performance… [T]here is an urgent need to revisit the existing rules. But the WTO’s dispute settlement regime can only function on the basis of the rules as they are; it is not a negotiating forum. It is absolutely the wrong place to address issues of law where there is no international consensus on what the law should say.”

A related point is made in an opinion piece in Politico by Adam Browning and Jigar Shah in the context of the domestic SolarWorld case: “If there has been wrongdoing afoot, it should be addressed, but ultimately the U.S. needs an energy policy that is more supportive of solar and renewables.  U.S. energy policy prioritizes fossil fuels, while countries like China and Germany provide real support to solar.  As long as that is the case, the U.S. will lag behind.  Trade complaints will not solve our problems; in fact in the long run they may undercut clean energy and low carbon policies globally.”

The WTO and similar trade forums are the wrong places to make energy and climate policy.

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