A second hearing at the WTO into the Japan and European Union dispute against Canada related to Ontario’s Green Energy Act took place in Geneva this week. Bridges Weekly Trade News reports that positions have not varied much from a first hearing in March but that the legal debate on whether Ontario’s feed-in-tariff measure is a legitimate government procurement or an illegal subsidy is more heated than was expected by observers.
Canada, the EU and Japan also differ on “what criteria or benchmarks should be used to determine whether the purchase price by the [Ontario Power Authority] is above market value and thus confers a benefit,” reports Bridges, a publication of the International Centre for Trade and Sustainable Development. The EU and Japan even go as far in their arguments as to claim that wind and solar energy should be treated equally to carbon-intensive energy when determining what to pay for power.
CIVIL SOCIETY SUBMISSIONS DISTRIBUTED TO WTO PANEL
The Council of Canadians is watching the dispute very closely. Not only does the case pit climate change against free market fundamentalism, but it threatens to fundamentally undermine the use of government procurement or other public supports to achieve broader policy goals such as economic development, reducing greenhouse gas or other pollutants, and transitioning to more sustainable power sources.
Earlier this week, we joined several Ontario and national labour and environmental groups in sending one of two joint amicus curiae submission to the WTO in this case. The second submission came from Ecojustice, the Canadian Environmental Law Association and the International Institute for Sustainable Development. According to Bridges:
It is not clear whether the submissions will be considered by the dispute panel, but Chair of the panel Thomas Cottier (Switzerland) said that he would like them distributed to the parties. Japan and the EU both objected to inclusion of new arguments at such a late stage in the process, but acknowledged that the final decision was up to the panel.
(As a short disclaimer, the Council of Canadians does not uncritically support the Green Energy Act, which has come under attack for the environmental impact and lack of oversight of some power projects, as well as its over-reliance on private versus public power sources. But we do strongly support those aspects of the act which are in dispute at the WTO.)
GOVERNMENT PROCUREMENT ON TRIAL
Our joint media release with unions (CUPE, CAW, OPSEU, CEP), the Canadian Federation of Students and Blue Green Canada focused on the climate obligations of all three parties to the dispute as one important reason why the WTO should avoid ruling on the case. But another crucially important and highly controversial aspect of the dispute involves limits it could place on when a government can be said to be procuring goods for a public purpose.
“According to the EU and Japan the sole issue in dispute in this case is the lawfulness of the domestic content requirement of Ontario’s FIT program,” says our joint amicus submission, prepared by Steven Shrybman of Sack Goldblatt Mitchell LLP. “However their arguments would, if acceded to, dramatically curtail the use of procurement and subsidy measures to achieve domestic public policy goals.”
Canada argues, and our submission agrees, that the EU and Japanese position overreaches any plausible interpretation of the rules of the GATT, the Subsidies and Countervailing Measures (SCM) agreement, and the Trade Related Investment Measures (TRIMs) agreement, and that the position should be rejected.
We also argue that it was precisely to allow local content quotas to be linked with high payments for renewable energy that the Province excluded the Ontario Power Authority and the Green Energy Act from its procurement commitments in the WTO Government Procurement Agreement. Many developing countries have refused to join the GPA or to negotiate procurement agreements with the EU or United States in bilateral trade agreements for the same reasons as Ontario.
Our submission states:
It is relevant that the EU and Canada are currently in negotiations to establish a bi-lateral free trade agreement and that proposals foresee both parties making commitments with respect to procurement beyond those made under the GPA. As the EU knows, Ontario has explicitly reserved its prerogatives to maintain the FIT program as it is. Thus Ontario has proposed a broad reservation that would preserve its:
“right to adopt or maintain any measure relating to investment in or provision of services in renewable energy and renewable energy systems, including the production of wind and solar power.”
It is precisely such measures that are the subject of this dispute.
GATT SAFETY VALVE
Canada is claiming that as a procurement, the Green Energy Act is exempt from National Treatment rules in the GATT which would normally prohibit a government from giving more favourable treatment to local producers than to imports. This is the founding principle of free trade. But GATT Article III:8(a) has a safety valve for government procurement which was inserted in 1947 by the United States and other rich countries to protect their local industries:
The provisions of this Article shall not apply to laws, regulations or requirements governing the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or with a view to use in the production of goods for commercial sale.
As we summarized on our website earlier this week, the EU’s claim that the domestic content requirements in the Act are unnecessary for the purpose of promoting renewable power fails on several grounds.
First, because there is no “necessity test” in GATT Article III:8(a) – in other words the exemption for procurement for a government purpose says nothing about that purpose being “necessary.”
Second, Japan’s and the EU’s claim that governments cannot use procurement to promote economic development renders the exemption described above meaningless. Adopting the EU’s interpretation here would open up all government offsets (local development conditions on public spending) to challenge regardless of any limited protections member states have taken in the WTO’s Government Procurement Agreement.
Finally, 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 (notwithstanding Canada’s recent decision to remove itself from Kyoto).
RENEWABLES THE SAME AS CARBON-HEAVY ENERGY
The EU and Japan also claim that wind and solar power should be treated just like coal-fired, natural gas, nuclear or any other type of energy for the purposes of defining market prices, and that payments above that price mean a benefit is being offered, in this case tied to domestic content requirements. They argue this by insisting the benchmark “should be determined by the Hourly Ontario Energy Price (HOEP) – essentially the price consumers pay at the meter,” as reported by Bridges Weekly Trade News.
The EU submission, which is publicly available (in three parts — 1, 2, 3 — with more to come) on the DG Trade website, says that “Electricity produced by means of any energy source (renewable or not) is physically alike in all respects, and in any event there is a competitive relationship between electricity produced by different sources. In this respect, the EU observes that Canada has not demonstrated that there is a separate product market with respect to electricity produced by particular sources of renewable energy in Ontario.” (Emphasis theirs.)
(As Ellen Gould with the Canadian Centre for Policy Alternatives pointed out to me this week, it’s as if the EU is just handing Canada the arguments it could use to challenge the EU’s Fuel Quality Directive, which Canada has said it will do if it includes a default value for tar sands which is significantly higher than for conventional fuel.)
“The Canadian delegation, however, insists that consumer prices do not reflect market standards for renewable energy, as the HOEP applies for ‘comingled or blended electricity’ from different sources such as hydro, nuclear, solar, etc., which come with different production costs and characteristics,” writes Bridges.
One of the three WTO dispute panel members, Alec Erwin of South Africa, acknowledged “that renewable energy sectors have not been flourishing in an unsupported marketplace,” according to the Bridges report. Green energy doesn’t just grow on trees, in other words. You have to seriously help it along or you’re stuck with a dirty energy grid.
In fact, European members states like Germany and Spain have both used high feed-in-tariff rates to spurn green energy production, sometimes in combination with domestic content requirements. Just because they don’t do this anymore, does not mean they should be kicking the ladder out from under those countries or provinces that want to do the same.
The capacity for this dispute to undermine local development measures around the world will mean it is very closely watched over the coming months. The WTO dispute panel is expected to decide in September, at which time any of the parties can appeal and the process repeats itself. We’ll be reporting updates as we get them.