Renewable energy subsidies and Local Content Requirements: Dream come true or WTO nightmare?

Emily Lydgate
Emily Lydgate

We all (or at least most of us) grasp the importance of switching to renewable energy. The problem is, it’s still expensive. Around the world, countries are using subsidies to incentivize renewable energy use, to shelter these fledgling industries from market competition they cannot yet endure. To make these subsidies more politically attractive, governments often add local content requirements (LCRs). This means that some of the taxpayer payouts go to support local manufacturers of solar panels and wind turbines. Not just the environment, but also local industries, are the winners.

Yet making payments specific to domestic producers is antithetical to the law of the World Trade Organization, to which virtually all of these countries belong. A core principle of the WTO is that domestic and imported products should receive the same treatment.

In a landmark 2013 case brought by Japan and the EU against Canada, the WTO Appellate Body made clear that LCRs are expressly prohibited under WTO national treatment and investment obligations. This is unsurprising. Yet there are some aspects of the case that should provide food for thought.

The first is the dogged persistence of countries to attach LCRs to their subsidies, despite such a clear

REUTERS Suzanne Plunkett
Suzanne Plunkett

signal that they may well end up on the losing end of a WTO dispute. The Canadian disputes have led to several more WTO clashes. The retaliatory nature of these clashes reveals that countries in glass houses are throwing stones at one another. For example, when the EU began an investigation of China’s solar panel subsidies, China responded by initiating a dispute on LCRs in the EU’s renewable energy sector. When the US complained of a LCR in a solar energy programme in India, India responded by pointing out several US programmes that seemed to contravene the same WTO provisions.

This raises the possibility that the WTO’s caseload will be clogged with LCR disputes, quid-pro-quo style, for years. Or perhaps governments will simply go back to looking the other way? In either case, if LCRs are the essential sugar-coating to make the renewable energy pill go down, it could be argued that they are, in a pragmatic sense, an environmental policy. Then this becomes a conflict between trade rules and environmental goals – though it may be impossible to build a formal case for this.

Another important issue raised here is whether the subsidies themselves, in this case Feed-in-Tariffs (FITs), are WTO-illegal. FITs are the most popular form of renewable energy subsidy, adopted by more than 71 countries. Whether WTO law will accommodate them is thus hugely significant. The Appellate Body ducked the question, concluding that it did not have enough information complete the analysis. Thus the dispute did not provide a clear precedent.

What it did do is reveal the inadequacy of WTO subsidy laws to deal with the situation. There is no ‘carve out’ for subsidies that are based upon public policy (eg environmental) goals. Though its ruling was inconclusive, the Appellate Body introduced some significant and innovative legal reasoning which shielded the renewable energy market from comparisons with open conditions of competition. This may open the door for renewable energy support to be justified on an economic rather than a policy basis. However, the approach was widely-criticized for its ‘ends justifies the means’ approach and the complex, ambiguous precedent it created. In other words, the Appellate Body got creative. Instead of stretching the interpretation of how a market is defined in general to accommodate this specific result, it would have been more straightforward to conclude that the subsidy was justified in principle because of its policy rationale. The fact that the legal rules are not fit for purpose (if you’ll excuse the pun) is a cause for concern.

WTO Member States will likely continue to use incentive schemes to encourage renewable energy production, with controversial results. As WTO disputes evolve, this will be an interesting space to watch.

Emily Lydgate is Lecturer in Environmental Law at the University of Sussex

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