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Climate change and trade: challenges and lingering questions on the relationship between renewable energy subsidies and WTO disciplines

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Abstract

The worsening of global warming has prompted an ever-increasing number of States to enact climate change mitigation policies. These often include renewable energy subsidies and local content requirements. Yet, these policies do not always sit comfortably with WTO disciplines. This paper investigates how the WTO case law and legal scholarship have dealt with this issue. Bearing this in mind, it seeks to contribute to this debate by putting forward a solution to reconcile renewable energy subsidies and WTO obligations.

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Notes

  1. R. Howse, “The World Trade Organization 20 years on: Global governance by judiciary” (2016) 27 European Journal of International Law 9, p. 21. Cf B. Hoekman, “The world trade order: global governance by the judiciary” (2017) 27 European Journal of International Law 1083, 1084–1085.

  2. R. Howse, “The World Trade Organization 20 years on: Global governance by judiciary”, cit., 36–38.

  3. Ibid.

  4. M. Wu, J. Salzman, “The next generation of trade and environment conflicts: The rise of green industrial policy” (2014) 108 Northwestern University Law Review 403, 408.

  5. Ibid., 416. See also T. Meyer, “Energy Subsidies and the World Trade Organization” in 17(22) ASIL Insights 10 September 2013: http://www.asil.org/insights/volume/17/issue/22/energy-subsidies-and-world-trade-organization (accessed 22 October 2016).

  6. Appellate Body, Canada—Certain Measures Affecting the Renewable Energy Generation Sector—Canada-Measures Relating to the Feed-In Tariff Program, WT/DS412/AB/R, WT/DS426/AB/R, 6 May 2013; Appellate Body, India—Certain Measures Relating to Solar Cells and Solar Modules, WT/DS456/1, 16 September 2016.

  7. International Energy Agency, “CO2 Emissions from Fuel Combustion-Highlights”, OECD, 2016, 8.

  8. These include the joint implementation mechanism, the emissions trading scheme and the clean development mechanism. See S. Oberthür, H. E. Ott, The Kyoto Protocol: International Climate Policy for the 21st Century (Springer, 2013), pp. 151–171.

  9. Article 2 (1), Paris Agreement, United Nations, FCCC/CP/2015/L.9, 12 December 2015 (hereinafter referred to as “Paris Agreement”).

  10. Article 2 (2) Paris Agreement.

  11. See e.g. Government of Chile, “Intended Nationally Determined Contribution of Chile towards the Climate Agreement of Paris 2015”, Santiago, September 2015, 17.

  12. S. Charnovitz, C. Fischer, “Canada-Renewable Energies: Implications for WTO law on Green and Not-So-Green subsidies”, Resources for the future-Discussion Paper, 2014, 10–13.

  13. Ibid.; S. Ölz, R. Sims, N. Kirchner, “Contribution of Renewables to Energy Security”, IEA Information Paper, 2007, 32.

  14. Ibid., 35.

  15. Ibid., 16.

  16. S. Müller, A. Brown, S. Ölz, “Renewable energy—Policy Considerations for Deploying Renewables”, IEA Information Paper, 2011, 14–15.

  17. F. Beck, E. Martinot, “Renewable Energy Policies and Barriers”, in Encyclopaedia of Energy (Elsevier, 2004), 366.

  18. Ibid., 367.

  19. Ibid.

  20. Ibid.

  21. M. Plante, “The long-run macroeconomic impacts of fuel subsidies” (2014) 107 Journal of Development Economics 129, 139–140.

  22. J. Rentschler, M. Bazilian, “Reforming fossil fuel subsidies: drivers, barriers and the state of progress” (2016) 16 Climate Policy 2, 3. In this respect, it has been observed that repealing such subsidies would result in a significant reduction of GHGs emissions. L. Merrill, A. M. Bassi, R. Bridle, L. T. Christensen “Tackling fossil fuel subsidies and climate change: Levelling the energy playing field”, Nordic Council of Ministers, Copenhagen, 2015, p. 11.

  23. F. Beck, E. Martinot, “Renewable Energy Policies and Barriers”, cit., p. 369.

  24. T. Couture, Y. Gagnon, “An analysis of feed-in tariff remuneration models: Implications for renewable energy investment” (2010) 38 Energy Policy 955, 955.

  25. Ibid., 956–961.

  26. Market-independent FITs may provide for (1) a fixed price, (2) a price partially adjusted to inflation, (3) a gradually decreasing price (front-end loaded model) (4) a price comprised between the spot market price and the required FIT price (a spot market gap model).

  27. This kind of FITs may provide, amongst others, for a fixed or variable premiums.

  28. REN21, “Renewables 2016-Global Status Report”, REN21 Secretariat, Paris, 2017, 20.

  29. Ibid., 63.

  30. Ibid., 63–77.

  31. Frankfurt School-UNEP Centre/BNEF, “Global Trends in Renewable Energy Investment”, Frankfurt, 2016, 21.

  32. Ibid., 25.

  33. T. Randall, “Wind and solar are crushing fossil fuels”, Bloomberg, 6 April 2016.

  34. UNCTAD, “Local content requirements and the green economy”, United Nations, New York-Geneva, 2014, p. 3. LCRs may also (1) provide for tax or tariff rebates conditioned upon local requirements, (2) design import licensing procedures to promote local products, (3) impose the obligation to store and analyse data locally. See G. C. Hufbauer, J. Schott, C. Cimino, M. Vieiro, E. Wada, “Local Content Requirements: Report on a Global Problem”, Peterson Institute for International Economics, 2013, 11.

  35. UNCTAD, “Local content requirements and the green economy”, cit., 3.

  36. Ibid.

  37. Ibid., p. 5.

  38. Ibid., p. 6.

  39. G. C. Hufbauer, J. Schott, C. Cimino, M. Vieiro, E. Wada, “Local Content Requirements: Report on a Global Problem”, cit., 13.

  40. Ibid.

  41. OECD, Overcoming Barriers to International Investment in Clean Energy, Green Finance and Investment, OECD Publishing, Paris, 2015, 50.

  42. A. F. Lowenfeld, International Economic Law, 2nd edn, (Oxford University Press, 2008), iv. In a similar vein see ex multis, M. Matsushita, T. J. Schoenbaum and P. C. Mavroidis, The World Trade Organization. Law, Practice, and Policy, 2nd edn, (Oxford University Press, 2006), 332–34; M. Trebilcock, R. Howse and Antonia Eliason, The Regulation of International Trade, (Routledge, 2013), 389–392.

  43. See, ex multis, G. N. Horlick, “How Subsidies Rules Have Been Shaped”, in L. Rubini and J. Hawkins (eds.), What Shapes the Law? Reflections on the History, Law, Politics and Economics of International and European Subsidies Disciplines (European University Institute, 2016), 65–7.

  44. See M. Trebilcock, Advanced Introduction to International Trade Law (Edward Elgar, 2011), 86; Matsushita, Schoenbaum and Mavroidis, op. cit., 334; G. N. Horlick and P. Clark, “The 1994 WTO Subsidies Agreement”, in World Competition, 1994, 41–44.

  45. See Trebilcock, Howse and Eliason, cit., 389–92. See also L. Rubini, The Definition of Subsidy and State Aid, (Oxford University Press, 2009), 56–67.

  46. See further G. C. Hufbauer and J. Shelton-Erb, Subsidies in International Trade (MIT Press: 1984) 19–21.

  47. See G. M. Grossman, E. Helpman, Special Interest Politics, (MIT Press, 2001), 15. D. Rodrik, “Industrial Policy for the Twenty-First Century”, November 2004, CEPR Discussion Paper No. 4767.

  48. J. N. Bhagwati and V. K. Ramaswami, “Domestic Distortions, Tariffs and the Theory of Optimum Subsidy”, in 71:1 Journal of Political Economy, 1963, 44–50.

  49. W. F. Schwartz and E.W Jr. Harper, “The Regulation of Subsidies Affecting International Trade”, in 7 Michingan Law Review, 1972, 833.

  50. L. Rubini, The Definition of Subsidy and State Aid: WTO and EC Law in Comparative Perspective (Oxford University Press, 2009) 54.

  51. A. Biondi and P. Eeckout, “State Aid and Obstacles to Trade”, in A. Biondi, P. Eeckhout, J. Flynn (eds.) The Law of State Aid in the European Union (Oxford University Press, 2004), 108.

  52. See, among others, Andrea Biondi, “The Rationale of State Aid Control: A Return to Orthodoxy”, in CYELS, 2011, 35 Tim Maxian Ruche, Claire Micheau, Henri Piffaut and Koen Van de Casteele, “State Aid”, in Jonathan Faull and Ali Nikpay (eds.), The EU Law of Competition, (Oxford University Press, 2014), 1927; Michael Blauberger “Of Goods and Bad Subsidies: European State Aid Control through Hard and Soft Law” (2009) 32 West European Politics, 719.

  53. See Matsushita, Schoenbaum and Mavroidis, The World Trade Organization, cit., 333 and Gene Grossman and Petros Mavroidis, "Here Today? Gone Tomorrow?" in H. Horn and P. C. Mavroidis (eds), The WTO Case Law of 2001 (Cambridge University Press, 2003), 170, 180–6.

  54. Agreement on Subsidies and Countervailing Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex lA, 1869 UNTS 14 [hereinafter SCM Agreement].

  55. SCM Agreement, Article 8. See Trebilcock, Howse and Eliason, The Regulation of International Trade, cit., 389–392, Rubini, The Definition of Subsidy and State Aid, cit., 57.

  56. Matsushita, Schoenbaum and Mavroidis, The World Trade Organization, cit., 334.

  57. Although the SCM Agreement contains detailed substantive and procedural rules, it has been criticized for failing to distinguish “socially constructive” subsidies from “protectionist” or otherwise “objectionable” subsidies. See, ex multis, Sykes, cit., 473.

  58. What is particularly striking is that fossil still remains immune from complaints based on WTO rules. For a comprehensive analysis of the reasons that can justify this tendency, see H. Birhanu Asmelash, “Energy Subsidies and WTO Dispute Settlement: Why Only Renewable Energy Subsidies Are Challenged” (2015) Journal of International Economic Law 261, 279–284.

  59. European Union and certain Member States—Certain Measures Affecting the Renewable Energy Generation Sector, G/L/1008; G/SCM/D95/1; G/TRIMS/D/34; WT/DS452/1.

  60. Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC, OJ L 140, 5.6.2009, pp. 16–62.

  61. European Commission, “EU initiates anti-dumping investigation on solar panel imports from China”, 6 Settembre 2012, Press release.

  62. United States—Certain Measures Relating to the Renewable Energy Sector, WT/DS510/1, G/L/1149 G/TRIMS/D/42, G/SCM/D111/1.

  63. China—Measures concerning wind power equipment, WT/DS419/1 G/L/950 G/SCM/D86/1.

  64. Interestingly, it was a trade union (United Steelworkers) that lobbied the Obama administration to request consultation with China.

  65. X. Han, “China’s first 10 years in WTO Dispute Settlement” (2011) 12 Journal of World Investment and Trade 49, 59.

  66. Canada—Certain Measures Affecting the Renewable Energy Generation Sector, WT/DS412/1 G/L/926 G/TRIMS/D/27 G/SCM/D84/1.

  67. India—Certain Measures Relating to Solar Cells and Solar Modules, WT/DS456/1, G/L/1023 G/TRIMS/D/35, G/SCM/D96/1.

  68. J. Ferriss, “Fueled by Free Trade: WTO Trade Agreements Ensuring the Proliferation of Solar Technology” (2015) 39 William & Mary Environmental Law and Policy Review 789, 798–799.

  69. The rules on subsidies also apply to private bodies which were delegated by the State to engage in one of these conducts.

  70. Appellate Body, Canada—Certain Measures Affecting the Renewable Energy Generation Sector, WT/DS412/AB/R, WT/DS426/AB/R, 6 May 2013.

  71. Ibid., para 5.128.

  72. Appellate Body, Canada—Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, 20 August 1999.

  73. Ibid., para 5.163.

  74. Ibid., para 5.170. In support of this statement, the AB cited its decision in the EC and certain member States—Large Civil Aircraft case. See Appellate Body, European Communities and Certain Member States—Measures Affecting Trade in Large Civil Aircraft, WT/DS316/AB/R, adopted 1 June 2011.

  75. Appellate Body, Canada—Certain Measures Affecting the Renewable Energy Generation Sector, cit., para 5.174.

  76. Ibid., para 5.175.

  77. Ibid., para 5.178.

  78. Ibid., para 5.190.

  79. Ibid., para 5.219.

  80. Ibid., para 5.220.

  81. Article III: 4 GATT reads as follows: “The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product”.

  82. Article 2.1 TRIMS stipulates that: “Without prejudice to other rights and obligations under GATT 1994, no Member shall apply any TRIM that is inconsistent with the provisions of Article III or Article XI of GATT 1994”.

  83. Panel, Canada—Certain Measures Affecting the Renewable Energy Generation Sector—Canada—Measures Relating to the Feed-in Tariff Program, WT/DS412/R; WT/DS426/R, para 7.127.

  84. Ibid., para 7.128.

  85. Ibid., paras 7.134–7.136.

  86. Ibid., para 7.147–7.152.

  87. Ibid.

  88. Ibid., para 7.125–7.126; Appellate Body, Canada—Certain Measures Affecting the Renewable Energy Generation Sector, cit., para 5. 52.

  89. Ibid. China and the US endorsed this view. In particular, the former highlighted that the LCRs “are only remotely related to the procurement of electricity by the Government of Ontario, and that the Government of Ontario may purchase electricity without such Minimum Required Domestic Content Levels”. Ibid., paras 2.205 and 2.216.

  90. Appellate Body, Canada—Certain Measures Affecting the Renewable Energy Generation Sector, cit., para 5.79. Appellate Body, India—Certain Measures Relating to Solar Cells and Solar Modules, WT/DS456/AB/R, 16 September 2016, para. 5.24. In this respect, it has been observed that: “This finding shuts the door on perhaps the most feasible legal shelter for discriminatory FITs. The Appellate Body did not explicitly say that domestic content requirements attached to FITs could not be justified as government procurement programme under GATT Article III:8(a). What it said instead is that the products procured by a government and less favourably treated must be the same. However, what governments procure under FITs is electricity generated from renewable sources of energy, while the products they (want to) discriminate against are not renewable electricity (as they hardly face competition from such imports), but equipment used in the generation of renewable electricity, such as solar panels and wind turbines." See H. Birhanu Asmelash, “Energy Subsidies and WTO Dispute Settlement: Why Only Renewable Energy Subsidies Are Challenged”, cit., 276.

  91. Appellate Body, Canada—Certain Measures Affecting the Renewable Energy Generation Sector, cit., para 5.79.

  92. Ibid., para 5.84.

  93. Ibid., para 5.89.

  94. Ibid., para 5.151.

  95. Ibid.

  96. Ibid.

  97. L. Rubini, “‘The Good, the Bad, and the Ugly.’ Lessons on Methodology in Legal Analysis from the Recent WTO Litigation on Renewable Energy Subsidies” (2014) 48 Journal of World Trade 895, 911.

  98. See E. Lydgate, “Appellate Body Reports, Canada—Certain Measures Affecting the Renewable Energy Sector (“Canada Renewable Energy”) and Canada—Measures Relating to the Feed-in-Tariff Program (“Canada-Feed-in-Tariff Program”) in G. Sacerdoti et al. (eds) Italian Yearbook of International Law-WTO case law in 2013 (Brill, 2014), 398.

  99. A. Cosbey, P. C. Mavroidis, “A turquoise mess: Green subsidies, blue industrial policy and renewable energy: The case for redrafting the subsidies agreement of the WTO” (2014) 17 Journal of International Economic Law 11, p. 27; R. Pal, “Has the Appellate Body’s decision in Canada-Renewable Energy/Canada—Feed-in Tariff Program opened door for production subsidies?” (2014) 17 Journal of International Economic Law 125, 134.

  100. S. Shadikhodjaev, “First WTO Judicial Review of Climate Change Subsidies” in D.P. Stewart (ed) International Decisions (2013) 107 American Journal of International Law 864, 877.

  101. E. C. Laurenza, “How Canada-Renewable Energy supports the use of the ‘commercial reasonableness’ standard in future fee-in-tariff disputes” (2014) 9 Global Trade and Customs Journal 104, 115.

  102. Panel Report, European Communities—Countervailing Measures on Dynamic Random Access Memory Chips from Korea, WT/DS299/R, 17 June 2005.

  103. Ibid., para 7.177.

  104. A. Biondi, P. Eeckhout, J. Flynn, The Law of State Aid in the European Unio n (Oxford University Press, 2004), 10.

  105. Panel Report, European Communities—Countervailing Measures on Dynamic Random Access Memory Chips from Korea, cit., para 7.205.

  106. Panel Report, Japan—Countervailing Duties on Dynamic Random Access Memories from Korea, WT/DS336/R, 13 July 2007, para 7.275.

  107. Ibid.

  108. A. Cosbey, P. C. Mavroidis, “A turquoise mess: Green subsidies, blue industrial policy and renewable energy: The case for redrafting the subsidies agreement of the WTO”, cit., 35; L. Rubini, “Ain’t Wastin’ Time No More: Subsidies for Renewable Energy, the SCM Agreement, Policy Space and Law Reform” (2012) 15 Journal of International Economic Law 525, 562.

  109. Ibid., 563–566; P.D. Farah, E. Cima, “The World Trade Organization, renewable energy subsidies, and the case of feed-in-tariffs: Time for reform toward sustainable development?”, cit., 534; P. D. Farah, E. Cima, “L’energia nel contesto degli accordi dell’OMC: sovvenzioni per le energie rinnovabili e pratiche OPEC di controllo dei prezzi” (2013) 27 Diritto del Commercio Internazionale 343, 364–365; R. Howse, “Climate mitigation subsidies and the WTO legal framework: A policy analysis”, International Institute for Sustainable Development, 2010, <https://www.iisd.org/pdf/2009/bali_2_copenhagen_subsidies_legal.pdf> (accessed on 20 February 2017), 17–19.

  110. L. Rubini, “Ain’t Wastin’ Time No More: Subsidies for Renewable Energy, the SCM Agreement, Policy Space and Law Reform”, cit., p. 562.

  111. Ibid.

  112. Ibid.

  113. P.D. Farah, E. Cima, “The World Trade Organization, renewable energy subsidies, and the case of feed-in-tariffs: Time for reform toward sustainable development?”, op. cit., p. 534; P. D. Farah, E. Cima, “L’energia nel contesto degli accordi dell’OMC: sovvenzioni per le energie rinnovabili e pratiche OPEC di controllo dei prezzi”, cit., 365.

  114. Appellate Body, China—Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/AB/R, 21 December 2009. P.D. Farah, E. Cima, “The World Trade Organization, renewable energy subsidies, and the case of feed-in-tariffs: Time for reform toward sustainable development?”, cit., 535. It has been noted that the decision of the AB was linked to the specific circumstances of the case. See L. Rubini, “Ain’t Wastin’ Time No More: Subsidies for Renewable Energy, the SCM Agreement, Policy Space and Law Reform”, cit., 564.

  115. P.D. Farah, E. Cima, “The World Trade Organization, renewable energy subsidies, and the case of feed-in-tariffs: Time for reform toward sustainable development?”, cit., 534.

  116. R. Howse, “Climate mitigation subsidies and the WTO legal framework: A policy analysis”, cit., 19.

  117. L. Rubini, “Ain’t Wastin’ Time No More: Subsidies for Renewable Energy, the SCM Agreement, Policy Space and Law Reform”, cit., 566–567.

  118. A. Cosbey, P. C. Mavroidis, “A turquoise mess: Green subsidies, blue industrial policy and renewable energy: The case for redrafting the subsidies agreement of the WTO”, cit., 35.

  119. Ibid., 45.

  120. Ibid., 46.

  121. Ibid.

  122. Article 3.9 of the Understanding on Rules and Procedures Governing the Settlement of Disputes also makes reference to the authoritative interpretation mechanism.

  123. C.D. Ehlermann, L. Ehring, “The authoritative interpretation under Article IX:2 of the Agreement establishing the World Trade Organization: Current law, practice, and possible improvements” (2005) 8 Journal of International Economic Law 803, p. 806.

  124. T. Gazzini, “Can Authoritative Interpretation under Article IX:2 of the Agreement Establishing the WTO Modify the Rights and Obligations of Members?” (2008) International and Comparative Law Quarterly 169, 178.

  125. C.D. Ehlermann, L. Ehring, “The authoritative interpretation under Article IX:2 of the Agreement establishing the World Trade Organization: Current law, practice, and possible improvements”, cit., 807.

  126. For instance, the same question arose with respect to the Interpretative Notes of the NAFTA Free Trade Commission. See G. Kaufman-Kohler, “Interpretive Powers of the Free Trade Commission and the Rule of Law” in E. Gaillard, F. Bachand (eds.) Fifteen Years of NAFTA Chapter 11 Arbitration (Juris Publishing, 2011), 189–193.

  127. T. Gazzini, “Can Authoritative Interpretation under Article IX:2 of the Agreement Establishing the WTO Modify the Rights and Obligations of Members?”, cit., 172–180.

  128. C.D. Ehlermann, L. Ehring, “The authoritative interpretation under Article IX:2 of the Agreement establishing the World Trade Organization: Current law, practice, and possible improvements”, cit., 808.

  129. Ibid.

  130. Ibid., 809.

  131. C.D. Ehlermann, L. Ehring, “The authoritative interpretation under Article IX:2 of the Agreement establishing the World Trade Organization: Current law, practice, and possible improvements”, cit., 818.

  132. N. Stern, “Stern Review on the Economics of Climate Change”, Government of the United Kingdom, London, 2006, 24–27.

  133. See, e.g. Article x.1, Section II, Chapter 11, EU-Vietnam FTA; Articles 177 and 200, China-New Zealand FTA; Chapter 16, China-Korea FTA.

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Acknowledgements

The present article has been written within the research project “EU-China Disputes on Trade Remedies, Climate Change and Natural Resources: A Legal Analysis for A Better Legal Framework and Cooperation”, financed by the China-EU School of Law, under the scientific supervision of Prof. Elisa Baroncini.

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  1. Bocconi University, Milan, Italy

    Leonardo S. Borlini & Francesco Montanaro

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  1. Leonardo S. Borlini
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  2. Francesco Montanaro
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Correspondence to Francesco Montanaro.

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Borlini, L.S., Montanaro, F. Climate change and trade: challenges and lingering questions on the relationship between renewable energy subsidies and WTO disciplines. China-EU Law J 6, 81–101 (2018). https://doi.org/10.1007/s12689-017-0079-x

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