Salt Lake City, UT -- In a move that will likely set a worldwide precedent barring governments from imposing local content requirements to their feed-in tariff programs, a forthcoming World Trade Organization report indicates that it will side with the European Union and Japan against the Canadian province of Ontario. Although the official report is not expected to be released until November, a leaked preliminary dispute settlement floated by the International Centre for Trade and Sustainable Development (ICTSD) signals the WTO's acceptance of two separately filed claims of protectionism against Ontario. Both Japan and the EU have claimed Ontario's feed-in tariff (FIT) program discriminates against foreign green energy manufacturers and unduly pressures local companies to purchase hardware from local suppliers.
The Case Against Ontario
In September of 2010, Japan filed an official dispute with the WTO claiming that certain provisions in Ontario’s FIT program directly violate Canada’s obligations under the General Agreement on Tariffs and Trade (GATT) 1994 — in specific, Articles III:4, III:5 and XXIII:1. These articles essentially bar governments from doing what Ontario stands accused of doing: requiring power generating companies that are participating in the FIT program to source a certain percentage of their equipment in Ontario. The local content requirement in Ontario is 25 percent for wind projects and 60 percent for solar. Japan further claimed that Ontario’s actions were out of compliance with Article 2.1 of the TRIMS Agreement and asked the WTO to view Ontario’s FIT program as an illegal subsidy.
Following Japan’s lead and echoing the same concerns, the EU’s official dispute was filed in August of 2011. Eventually, both complaints were merged by the WTO. Recently, it was leaked that the WTO had reached a preliminary decision on the matter — one that the government of Ontario, which defends its actions by saying the requirements were put in place to encourage local clean energy production, will likely appeal.
The Rising Tide of Complications
What appears on the surface to be a cut and dried case of unfair discrimination against foreign manufacturers is actually far from it. The implications of the WTO’s impending official decision, which isn’t likely to stray from the preliminary dispute settlement report, may have consequences that reach far beyond any direct impacts to Ontario’s renewable energy efforts and could result in a glut of litigation against other governments with similar local content requirements written into their FIT schemes.
“They don’t call them trade wars for nothing,” says Clint Wilder, senior editor with Clean Edge, Inc. and co-author of Clean Tech Nation: How the US Can Lead in the New Global Economy. “It’s a real dilemma. It’s very discouraging to see these kind of trade wars breaking out over renewable energy. The industries of clean tech are becoming the critical industries for global economic competitiveness in the 21st century. The downside is, when industries achieve that status you’re going to get these disputes.”
Pointing to a recent dispute between the U.S. and China over the dumping of solar exports that resulted in the U.S. Commerce Department levying stiff tariffs against Chinese imports, Wilder says, “We’ve certainly seen it before, with the U.S. taking action against China. But what’s interesting to me is that the Ontario market is hardly the only one — and far from the largest one — to have domestic content rules.”
Similar local content rules are in place in many countries, including Brazil’s wind and solar industries and in India, where crystalline photovoltaic projects are required to use products manufactured in-country. In Saudi Arabia, the recently announced K.A.CARE program, which plans to add 55,000 megawatts of renewable energy capacity over the course of the next 20 years, plans to opt in favor of awarding “extra bid points” for developers who utilize local content — however once the second round of procurements are launched, the plan is to make the use of local content mandatory.
“The more these local content requirements are embedded into these procurement programs for renewable energy – the more mandatory or the more eliminatory these requirements become – the more likely it is that such requirements are going to be subject to enhanced scrutiny," says Marc Norman, lawyer for Chadbourne & Parke LLP and director of the Emirates Solar Industry Association (ESIA). "You need to look at the procurement regime of a given WTO member state and assess whether the policy is merely incentivizing as to the use of local content, as Saudi Arabia plans in its first procurement rounds, or effectively disbarring bidders that fail to meet its local content requirements. There’s a distinction to be drawn.”
Meanwhile in various geographical pockets across the globe, WTO member states are watching the unfolding situation closely and prepping their arguments. Norman believes it will likely evolve into a delicate international issue, and that the stakes are high.
“In the eye of the Ontario saga, the Indonesian government, for instance, has already publically announced that it would vigorously defend its regulations requiring oil and gas companies to use locally made products and services," says Norman. "Various interest and pressure groups have also started rustling their feathers.”
The Impacts to Worldwide Renewable Energy Efforts
In the Ontario case, what lies at the heart of this complex matter has nothing to do with the viability of renewable energy or the concept of FIT programs, and everything to do with the local content requirements written into those FIT programs — and whether or not governments are imposing the equivalent of “no play” rules for energy creators who don’t exclusively use local content.
“I think it’s important to note that this is not a ruling against developing renewable energy,” Wilder says. “No one is saying that feed in tariffs are bad, or that that trying to boost the production of renewable energy is a bad thing. This has to do with one particular aspect of the policy in Ontario.”
Norman agrees: “This isn’t limited to renewable energy. This isn’t limited by any means to feed-in tariffs. Local content is nothing particularly exotic; we see it quite often."
Lessons Learned: What Governments Can Do
John Smirnow, VP of Trade and Competitiveness with the Solar Energy Industries Association (SEIA), says the WTO’s preliminary findings set “an important precedent” and suggests they’ll serve as “signpost for other countries to look for alternatives to local content requirements.” Smirnow adds, “There are a lot of things that governments can do to help their industries grow, such as tax incentives. But what they shouldn’t be doing is relying on local content restrictions that are pretty clear violations of WTO agreements.”
Smirnow also indicates that the long process of filing such complaints through the WTO – which he says make take as many as three years before seeing actual resolution – could result in governments taking proactive instead of reactive measures when it comes to issues of renewable energy and trade.
“I think there’s an opportunity here for governments to get together and develop a list of best practices,” Smirnow says. “We can’t just leave it to litigation alone. I think there’s a real need here, and an opportunity for governments to get together.”
Smirnow envisions the possible drafting of a document along the lines of 10 Things You Can Do to Support Your Green Industry That Are WTO Consistent. “It would be proactive,” Smirnow says, “and positive.”
Lead image: Gavel via Shutterstock