The WTO and Non-Trade Related Subsidies: are subsidies to green energy producers legal?

Introduction

The World Trade Organization’s (WTO) Subsidies and Countervailing Measures (SCM) Agreement defines subsidies as a financial contribution or income/price support by any public body within the territory of a Member that confers a benefit. The SCM Agreement also creates categories of subsidies, namely prohibited and actionable subsidies. Prohibited subsidies can be broken down into two types: export subsidies and domestic content subsidies. Export subsidies are subsidies contingent on export performance, and domestic content subsidies are subsidies contingent on the use of domestic over imported goods.

However, scholars have noted that the current scheme regulating subsidies is unclear whether subsidies based on non-trade related public policy rationales are legally prohibited. In this article, I will: 1) discuss the lack of legal clarity in the current WTO’s subsidy regime for non-trade related public policy based subsidies by examining Canada-Measures Related to the FIT Program and highlight other contemporary renewable energy-related subsidy disputes; and 2) identify potential solutions to allow for non-trade related public policy based subsidies.

1. WTO Renewable Energy-Related Subsidy Disputes

WTO renewable energy-related subsidy disputes typically arise in the context of governmental renewable energy support schemes. For instance, the Canada-FIT (2013) case involved complaints by Japan and the EU stemming from Ontario’s Feed-in Tariff (FIT) program that promoted the use of renewable energy sources through the introduction of a guaranteed pricing structure for electricity producers using renewable energy. Japan and the EU also claimed that the FIT program constituted a prohibited subsidy.

On appeal, the Appellate Body (AB) held that the FIT program was illegal due to the domestic content requirements. However, the AB’s holding as it regards benefits conferred is demonstrative of the lack of clarity regarding the prohibition of public policy-based subsidies. Both the WTO Panel and AB agreed that the program satisfied the definition of subsidy since it constituted a governmental purchase of goods. However, unlike the Panel, the AB distinguished between the market for electricity from traditional resources from the market for electricity from renewable resources. Therefore, due to insufficient market data, the AB was unable to determine whether a benefit was conferred to electricity producers from renewable sources. 

Given that the AB was unable to render a final conclusion on the issue of benefit conferred, the case leaves the question of public policy based subsidies unresolved. This decision, along with other challenges – like the US’ challenging of India’s local content requirements for its national solar program, and China’s challenging of similar programs in Italy and Greece – highlight the increasing uncertainty surrounding subsidies based on non-trade related public policy rationales.

2. Solutions to the Legal Uncertainty Regarding Non-Trade Related Public Policy Subsidies.

Given the value of public-policy based subsidies, especially in the context of climate change mitigation schemes, I see the WTO and Member states as having three options in the face of the legal uncertainty surrounding public-policy based subsidies.  One option may be for the WTO to adopt a laissez-faire approach to subsidy regulation. Deregulation would make permissible public-policy related subsidies, but this solution is not entirely satisfactory since it “throws the baby out with the bathwater,” making subsidies that have protectionist intentions legally permissible too.  

Second, the WTO and Member states could seek to amend the SCM Agreement by reintroducing a list of non-actionable subsidies. In addition, the SCM Agreement would be also be amended to include a provision similar to Article XX of the General Agreement on Trade and Tariffs (GATT), which gives states exceptions from GATT obligations with respect to the adoption or enforcement by Members of certain measures. If, for example, the SCM Agreement gave states the option to justify subsidies on the basis that they are “necessary to protect human or animal health or life,” states may be able to justify certain public-policy subsidies that would otherwise be caught by provisions detailing illegal subsidies. The third solution would apply to states seeking to implement public-policy based subsidies by subsidizing consumption rather than production. For instance, take the example of tax credits to consumers who buy energy-efficient cars. Unlike subsidies which distinguish between producers, subsidizing consumption is less likely to discriminate between domestic and foreign producers, allowing states to pursue schemes that involve subsidies without violating WTO rules.  

Conclusion

Currently, the SCM Agreement’s subsidy regulation regime presents states with legal uncertainty regarding the implementation of legitimate non-trade related public policy-based subsidies. By amending the SCM Agreement to re-incorporate types of non-actionable subsidies, and/or allowing states to justify subsidies on certain pre-determined bases, two avenues would be created for the implementation of subsidies within the SCM Agreement framework. Alternatively, states could bypass the current subsidies regime by subsidizing consumption, thus directing consumers towards certain producers without violating WTO rules that regulate subsidies for producers.

Photo: “Renewable Energy” by adege via Pixabay under Pixabay License

Disclaimer: Any views or opinions expressed in articles are solely those of the authors and do not necessarily represent the views of the NATO Association of Canada.

About Dan Poliwoda

Dan Poliwoda is a third-year student at the University of Toronto, Faculty of Law (graduating 2020). In 2017, Dan graduated from the University of Western Ontario with distinction standing, earning a Bachelor of Arts, Honours Specialization in History. Dan has strong academic and professional interests in commercial law, national security law, and international trade law. As a summer associate and future articling student in the Toronto office of the US-based law firm Dickinson Wright LLP, Dan has gained experience with commercial litigation and corporate law matters, as well as cross-border commercial transactions. Dan is currently completing a Certificate in Transnational Law as an exchange student at the University of Geneva. Dan is fluent in English, French, and Hebrew.