DS-412: Canada — Certain Measures Affecting the Renewable Energy Generation Sector

Summary:

Complainant: Japan
Respondent: Canada
Third Parties: Australia; Brazil; China; El Salvador; European Union; Honduras; India; Saudi Arabia, Kingdom of; Korea, Republic of; Mexico; Norway; Chinese Taipei; United States

In 2009, the Canadian province of Ontario approved a feed-in tariff (FIT) scheme under the Green Energy and Green Economy Act. Under this statute, electricity produced from renewable energy was awarded a guaranteed price per kilowatt hour (kWh) of electricity delivered into the Ontario electricity system under 20-year or 40-year contracts. Such scheme also included a mandatory percentage of local content requirements (LCRs), ranging from 25% to 60%. This entails that a certain amount of components had to be sourced from local enterprises.

Following the adoption of this legislation, on September 13, 2010, Japan filed a request for consultations, claiming that the measures implemented by the State of Ontario to promote electricity from renewable energy sources were inconsistent with Canada’s obligation under:
(a) Articles III:4 and III:5 of the GATT 1994, as they were laws, regulations or requirements affecting the internal sale, offering for sale, purchase, transportation, distribution, or use of equipment for renewable energy generation facilities that accord less favorable treatment to imported equipment than that accorded to like products originating in Ontario;
(b) Article 2.1 of the TRIMs Agreement, as they appeared to be trade-related investment measures that are inconsistent with the provisions of Article III of the GATT 1994; and
(c) Articles 3.1(b) and 3.2 of the SCM Agreement, as they appeared to be a subsidy granted under the measures listed above within the meaning of Article 1.1 of the SCM Agreement, because there would be a financial contribution or a form of income or price support, and a benefit would thereby be conferred.

The Canadian government defended the measures at stake, arguing that they were covered by the government procurement exception under Article III:8(a) GATT, as ‘the laws and requirements that create and implement the FIT Program are laws and requirements that govern the procurement of renewable electricity for the governmental purpose of securing electricity supply for Ontario consumers from clean sources, and not with a view to commercial resale’.

On December 19, 2012, the Panel issued its report on the case, upholding Japan's claims under Article 2.1 of the TRIMs Agreement and Article III:4 of the GATT 1994. In particular, the Panel found that the incentives scheme represented ‘investment measures’ covered by Article 1 TRIMs Agreement, and they were ‘trade-related’ in the sense that the ‘Minimum Required Domestic Content Level’ included in Ontario’s scheme ‘by definition favors the use of domestic products over imported products, and therefore affects trade’. On these grounds, the Panel ruled that the FIT program, to the extent that it features a LCR that is inconsistent with Article III:4 GATT, also integrates a TRIM inconsistent with Article 2.1 TRIMs Agreement. Moreover, the Panel rejected Canada’s exception under Article III:8(a) GATT, according to which the discriminatory measures were justified as government procurement. Instead, the Panel found that renewably generated electricity was indeed subsidized by Ontario ‘with a view to commercial resale’, as it was commercialized through the exact ‘same channels’ as all other generating sources, so that it was ‘in competition with private-sector electricity retailers’. Nevertheless, the Panel rejected the complaint that had been raised under the SCM Agreement, finding that it was not possible to establish that the incentives provided by the State of Ontario constitute a ‘benefit’ within the meaning of Article 1.1(b) SCM Agreement. In the Panel’s reasoning, this is due to the fact that, in practice, renewable electricity would not be able to compete against electricity from conventional sources without the governmental incentives. Therefore, the Panel concluded that due to the lack of a comparable market standard, the program could not be legally characterized as a subsidy.

On May 6, 2013, the Appellate Body issued its report on the case, which provided a partially different reasoning on some of the issues, while not determining substantial changes in the outcome of the case. In particular, the Appellate Body’s analysis focused on the applicability of the government procurement exception under Article III:8(a) GATT and on the existence of a prohibited or actionable subsidy under the SCM Agreement. With regard to the former issue, the Appellate Body provided a different interpretation than the Panel, to the extent that it recognized that the product subject to the local content requirements was renewable energy generation equipment, yet the product purchased by the Government of Ontario under the FIT Program is electricity. On this basis, the Appellate Body found that the lack of a direct competitive relationship between the two products ‘electricity’ and ‘generation equipment’ was determinant to exclude the applicability of the exception under Article III:8(a) GATT. With regard to the existence of a subsidy covered by the SCM Agreement, the Appellate Body argued that the benefit analysis should have been conducted by comparing Ontario’s FIT scheme with previous renewable energy support policies adopted by the Ontario’s government, rather than comparing it with conventional energy sources. However, it concluded that, given the lack of factual findings in the Panel’s report, and due to the procedural restraints under Article 17.6 of the Dispute Settlement Understanding (DSU), it could not complete the analysis and determine ‘whether the challenged measures confer a benefit within the meaning of Article 1.1(b) of the SCM Agreement and whether they constitute a prohibited subsidy inconsistent with Articles 3.1(b) and Article 3.2 of the SCM Agreement’.

At Issue: Whether Canada’s feed-in tariff program for electricity produced from renewable energy represents a violation of the national treatment provisions due to its local content requirements and whether it represents a prohibited subsidy.