UNIVERSITY OF AMSTERDAM FACULTY OF LAW
2019 – 2020
EUROPEAN UNION LAW LLM
NEW SOLUTIONS TO RESOLVE AN OLD DEBATE?
T
HE LEGALITY OF LOCAL CONTENT REQUIREMENTS IN RENEWABLE ENERGY SUPPORTSCHEMES UNDER
CETA
A
RTICLES8.6
AND8.10
Lukas Leibold
lukas.leibold08@gmail.com
12802204
Supervisor: Laurens J. Ankersmit
TABLE OF CONTENTS
TABLE OF CONTENTS ... 2
Chapter I. LCRs in RE schemes between environmental and investor protection: a question of balancing ... 8
§1. RE schemes containing LCRs as nationally determined contributions (NDCs) under the Paris Agreement ... 8
§2. International investment agreements threatening the Paris targets ... 10
§3. The EU’s investment policy: Re-balancing the system ... 11
§4. Interim conclusion ... 12
Chapter II. The vulnerability of LCRs in RE support programs to international investment law ... 13
§1. International disputes targeting LCRs in RE schemes ... 13
A. Canada - Renewable Energy ... 13
B. Mesa Power Group v Canada ... 14
C. Preliminary observations from the Case studies ... 16
§2. Compliance with the National Treatment standard ... 17
§3. Compliance with the Fair and equitable treatment standard ... 20
§4. Interim conclusion ... 22
Chapter III. CETA’s modified Investment chapter: in search of a nuanced approach ... 23
§1. National Treatment and ‘local favoritism’ ... 23
§2. CETA’s novel Fair and Equitable Treatment standard ... 26
§3. The ‘right to regulate’ ... 28
A. General exceptions and their deficiency in distinguishing between LCRs ... 28
B. Opinion 1/17 and the ECJ’s stand on the right to regulate ... 30
C. Not of added value: CETA’s Joint Interpretative Instrument ... 32
D. Contextual interpretation: CETA’s Sustainable Development Chapters ... 33
§4. Interim conclusion ... 34
Concluding remarks ... 36
Abbreviations
BITs Bilateral investment treaties
CETA Canada - EU Comprehensive Economic and Trade Agreement
EU European Union
FET Fair and Equitable Treatment
FIT Feed-in tariff
FTA Free trade agreement
GATT General Agreement on Tariffs and Trade IIAs International investment agreements
GE General exception
GHG Greenhouse gas
ISDS Investor-State dispute settlement IIA International investment agreement IIL International investment law LCRs Local content requirements
MEA Multilateral Environmental Agreement NAFTA North American Free Trade Agreement NDC Nationally determined contribution
NT National Treatment
OECD Organization for Economic Co-operation and Development OPA Ontario Power Authority
RE Renewable Energy
SCM WTO Agreement on Subsidies and Countervailing Measures TEU Treaty on European Union
TFEU Treaty on the Functioning of the European Union TRIMs WTO Agreement Trade-related Investment Measures UNCTAD United Nations Conference on Trade and Development UNFCCC United Nations Framework Convention on Climate Change VCLT Vienna Convention on the Law of Treaties
Abstract
The success of the Paris Agreement depends heavily on the Parties’ rapid and massive scale-up of renewable energy (RE) sources to reduce the greenhouse gas emissions responsible for climate change. To incentivize investments in renewable energy, governments employ various financial support schemes. Local content requirements (LCRs) have become a popular tool in the last decade to gain local benefits from cost-intensive support measures. These policies characteristically require investors to use RE goods and services that are produced locally. Although LCRs are often politically motivated, they can be promising in establishing and expanding regional RE industries if designed judiciously.
While international trade law prohibits most forms of LCRs irrespective of their legal construction, international investment agreements pose an additional risk towards governments endorsing renewable energy LCRs. This thesis considers to what extent the investment chapter of the Comprehensive Economic and Trade Agreement (CETA) permits or prohibits climate-friendly and welfare-enhancing LCRs. It does so by exploring how LCRs can contribute to the achievement of the Paris climate targets and analyzing how investor’s threats to arbitrate under international-dispute settlement mechanisms chill their implementation in RE support schemes. Against this background, this thesis analyzes the EU’s objective to find a better balance between the right to regulate and the need to protect investors based on its constitutional framework.
Based on the EU’s approach to clarify substantive standards and to emphasize more on the right of states to regulate, this thesis explores how LCRs can be challenged and potentially justified in international investment agreements. On the basis of the observations gained through the case studies of Canada – Renewable Energy and Mesa Power Group v Canada, this thesis argues that National Treatment and Fair and Equitable Treatment standards constitute promising legal bases for investor claims. This conclusion sets the stage for the analysis of these two substantive standards under the CETA. This thesis contends that, despite the modifications made, there is still the possibility that investors can take legal action against LCRs. Inspired by the question of whether justification is possible, this thesis analyzes whether the general exceptions in chapter 28 can be interpreted to allow RE LCRs certain circumstances. It concludes that, although uncertain, it is unlikely that future CETA tribunals will take a more nuanced approach despite sufficient policy space to protect the environment is emphasized in the ‘Trade and Environment’ chapter, the Joint Interpretative Statement and Opinion 1/17. Investor’s threats to arbitrate might thus chill the expansion of RE as required by the Paris Agreement.
INTRODUCTION
Renewable energy (RE) is central for addressing global climate change. Massive expansion of renewables is needed and promised. Around 90% of the global warming targets under the Paris Agreement can be achieved by renewable energy alone.1 The European Union (EU), as part of its commitment to become the world’s first climate neutral continent by 2050, assured to further enhance the rapid shift from carbon-intensive energy sources towards renewables.2
In response to the financial crisis in 2008, governments worldwide (including in the EU)3 increasingly combined schemes to incentivize investments in renewable energy with local content requirements (LCRs).4 LCRs generally require investors to use local factors of production in order to receive a benefit.5 In the realms of renewable energy schemes, they frequently require investors to purchase or produce a certain amount of intermediary goods (e.g. wind turbines or solar panels) locally.6 Although LCRs vary in the form they appear, the main aim of the policy measure is usually the same. Governments favor local industries to develop their competitiveness and to create substantial local employment.7 In this way the development of a local renewable energy industry can be fostered. In particular, LCRs can be an effective tool for governments to justify and pass cost-intensive schemes stimulating renewable energy through local legislation.8
LCRs in national support schemes for RE were however seen as distorting trade and consequently came under pressure by the international trade regime. A WTO precedent was created with the landmark ruling in Canada – Renewable Energy.9 But not only can LCRs violate international trade
1 IRENA, ‘Renewable Energy: Key Climate Solution’ (2017) 2 < https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2017/Nov/IRENA_A_key_climate_solution_2017.pdf?la=en&hash=A9561C 1518629886361D12EFA11A051E004C5C98> accessed 28 April 2020.
2 European Commission, ‘The European Green Deal’ (Communication) COM (2019) 640 final, 6.
3 Jan-Christoph Kuntze, Tom Moerenhout, ‘Local Content Requirements and the Renewable Energy Industry – A Good Match? (2013) 23 et seq.; Joanna I. Lewis, ‘The Rise of Renewable Energy Protectionism: Emerging Trade Conflicts and Implications for Low Carbon Development’ (2014) 14 Global Environmental Politics 10, 14; see also Request of
Consultations by China, European Union and Certain Member States - Certain Measures Affecting the Renewable Energy Generation Sector, WTO Doc. WT/DS452/1 (5 November 2012).
4 Susan Stone, James Messent, Dorothee Flaig ‘Emerging Policy Issues: Localisation Barriers to Trade 2’ (2015) OECD Trade Policy Paper No. 180, 47 <<http://dx.doi.org/10.1787/5js1m6v5qd5j-en> accessed 10 June 2020.
5 Timothy Meyer, 'How Local Discrimination Can Promote Global Public Goods' (2015) 95 BU L Rev 1937, 1939. 6 Ibid 1939; Kuntze, Moerenhout (n 3) 5.
7 Kuntze, Moerenhout (n 3) 5; Vladimir Tomsik, Jan Kubicek, ‘Can local content requirements in international investment agreements be justified?’ (2006) NCCR Trade Regulation Working Paper No. 2006/20, 1 <https://ssrn.com/abstract=1092840> accessed 2 July 2020; Holger Hestermeyer, Laura Nielsen, ‘The Legality of Local Content Measures under WTO Law’, (2014) 48 Journal of World Trade, no. 3, 553, 554.
8 Meyer (n 5) 1941; Kuntze, Moerenhout (n 3) 5.
9 Appellate Body Reports, ‘Certain Measures Affecting the Renewable Energy Generation Section,
Canada-Measures Relating to the Feed-in Tariff Program’, WTO Doc. WT/DS412/AB/R, WT/DS426/AB/R (6 May 2013)
rules. International investment obligations constitute a further yardstick. In particular the national treatment obligation and the fair and equitable treatment standard can form additional barriers. This leads to regulatory action being double squeezed.10 A primary example of how one and the same measure can additionally be challenged under international investment agreements (IIAs) is Mesa Power Group v Canada. A US company challenged the same scheme which was already the subject of the Canada – Renewable Energy dispute.
Claims brought under a system of investor-state dispute settlement (ISDS) pose an even greater risk to incentive measures with LCRs compared to traditional state-state arbitration. In the frequently occurring situation where both contracting states are endorsing towards LCRs, fear of retaliation can deter governments from bringing claims.11 Individual investors on the contrary might fight for their economic survival and are less vulnerable to retaliation measures. ISDS has thus been identified as being capable of having a chilling effect on regulatory action.12 In particular in the field of climate change mitigation, where multilateral environmental agreements (MEAs) require rapid action, international investment law can thus be a major impediment to swift regulatory action.
In the Comprehensive Economic and Trade Agreement (CETA) the EU and Canada made several adjustments regarding investment provisions. Tightening up the substantive standards, more emphasis on sustainable development, environmental protection and the right to regulate raise optimism among environmentalists that governments under CETA have more freedom to speed up the shift from fossil energy sources to renewables. But do the EU and Canada express through CETA that they are willing to exceptionally allow discriminatory measures like LCRs to facilitate this transition? Or do they stick to the WTO approach to generally prohibit the use of LCRs in RE schemes?
Given the current COVID-19 crisis and predictions of a global recession post-COVID, this question is far from being of academic nature only. As has been experienced from the financial crisis 2008, recessions call for government business cycle policy measures. Over 100 new LCRs were then
10 Mavluda Sattorova, ‘International Investment Law, Renewable Energy, And National Policy Making: On “Green” Discrimination, Double Regulatory Squeeze, And The Law Of Exceptions’ in Andrea Bjorklund (ed), ‘Yearbook on
International Investment Law & Policy 2012-2013’ (OUP 2014) 415, 428.
11 Suzy Nikièma, ‘Performance Requirements in Investment Treaties’ (2014) IISD Best Practices Series, 6 <https://www.iisd.org/sites/default/files/publications/best-practices-performance-requirements-investment-treaties-en.pdf> accessed 7 July 2020.
12 Kyla Tienhaara, ‘Regulatory Chill and the Threat of Arbitration: A View from Political Science’, in Chester Brown & Kate Miles (eds), ‘Evolution in Investment Treaty Law and Arbitration’ (Cambridge University Press 2011) 606, 615.
adopted in countries all over the world.13 The upcoming recession forms a fertile ground for measures stimulating local industries while promoting climate change mitigation, thereby killing two birds with one stone.
In the light of the amendments made in CETA to safeguard sufficient regulatory space to protect the environment, this thesis will formulate an answer to the following research question:
“Are local content requirements as eligibility criteria for renewable energy support schemes compatible with CETA Articles 8.6 (National Treatment) and 8.10 (Fair and Equitable Treatment)?” In order to offer a complete answer to the research question, this thesis will focus on several sub-questions and issues. Chapter I will first analyze how LCRs can contribute to climate change mitigation targets of the Paris Agreement. Second, this chapter will illustrate how international investment agreements can impede the achievement of these targets due to conflicting interests of investors. As a third part of this issue, this thesis will examine how the concerns of IIAs threatening states’ efforts to achieve the goals of MEAs have translated into an EU investment policy. The following chapter then goes on to analyze the question whether substantive provisions in international investment law truly threaten the use of LCRs in RE schemes. To this extent, Chapter II will first explore how LCRs in RE schemes have been challenged in benchmark cases under international trade and investment law. Based on these observations, this thesis goes on to argue that LCRs in RE schemes are vulnerable towards national treatment obligations and provisions on fair and equitable treatment. This conclusion sets the stage for Chapter III, where the specificities of these two substantive standards under CETA and the implications thereof for the legality of such schemes will be analyzed. The chapter ends with an analysis of whether the CETA provisions relating to the right to regulate can be interpreted as sufficiently nuanced to justify LCRs in RE support programs. The final chapter will conclude.
13 Gary Clyde Hufbauer et al., ‘Local Content Requirements: Report on a Global Problem’, Peterson Institute for International Economics (2013), 3 < http://files.publicaffairs.geblogs.com/files/2014/08/Local-Content-Requirements-Report-on-a-Global-Problem.pdf> accessed 18 June 2020.
CHAPTER I. LCRS IN RE SCHEMES BETWEEN ENVIRONMENTAL AND INVESTOR PROTECTION: A QUESTION OF BALANCING
The following chapter will first examine how LCRs attached to RE support schemes can contribute to the goals of the Paris agreement. Second, it will be described how international investment law (IIL) threatens the use of such schemes. Lastly, it will be assessed how the EU in its investment policy seeks to address the concerns that IIL might not leave sufficient space to regulate in the interests of climate change mitigation.
§1. RE schemes containing LCRs as nationally determined contributions (NDCs) under the Paris Agreement
The EU and its Member States, as well as Canada, committed themselves to several MEAs. Out of the international climate regime, including the United Nations Framework Convention on Climate Change (UNFCCC),14 the Kyoto Protocol15 and the Paris Agreement,16 the latter is the first concrete worldwide commitment to achieve climate change mitigation by reducing collective greenhouse gas (GHG) emissions.17 It builds upon a bottom-up concept that relies on self-selected commitments of each country.18 The agreement states that ‘each Party shall prepare, communicate and maintain successive nationally determined contributions (NDCs) that it intends to achieve’ in order to achieve the long-term goal of limiting the rise in the global average temperature to well below two degrees’.19 National RE schemes are a key instrument to contribute to climate change mitigation under the Paris Agreement.20 As of November 2019, 90% of the NDCs submitted related to renewable energy action within the power sector.21 The EU has committed itself to reduce GHG emissions by at least 40% below 1990 levels by 2030, inter alia by increasing Renewables to at least 32% share of the final
14 United Nations Framework Convention on Climate Change (UNFCCC) (opened for signature 9 May 1992, entered into force 21 March 1994) 1771 UNTS 107.
15 Kyoto Protocol to the United Nations Framework Convention on Climate Change (opened for signature 11 December 1997, entered into force 16 February 2005) 2303 UNTS 148.
16 Paris Agreement (opened for signature 22 April 2016, entered into force 4 November 2016).
17 John A Mathews, ‘Global trade and promotion of cleantech industry: a post-Paris agenda’ (2017), 17:1 Climate Policy, 102.
18 Charles E. Di Leva, Xiaoxin Shi, ‘The Paris Agreement and the International Trade Regime: Considerations for Harmonization’ (2017) 17:1 Sustainable Development Law & Policy, 20.
19 Article 4 (2) of the Paris Agreement. 20 IRENA (n 1) 2.
21 IRENA, ‘NDCs in 2020: Advancing renewables in the power sector and beyond, International Renewable Energy
Agency’ (2019), 13
energy consumption.22 However, even when current government commitments and targets are added together, the Paris targets will be missed. The increase in the average global temperature is forecasted to be approximately 2.8 °C above pre-industrial levels.23 The international climate regime thus requires a more rapid expansion of renewables to reduce GHG emissions.
Whether LCRs can contribute to that target is difficult to assess and cannot be answered in a general manner. Certainly, LCRs bear the risk of being misused for protectionist purposes without contributing to climate change mitigation. Some forms may even entail negative consequences for the efficiency of RE generation. Nevertheless, LCRs can, under certain conditions,24 have positive impacts on the reduction of carbon emissions in three ways. First, by requiring enterprises to use local factors of production, an infant local industry is allowed to mature and bring forth new global players to the international and domestic energy market.25 Increased competition on the markets should lead to lower prices, enabling renewable energy to compete with fossil fuels.26 Second, the development of an infant industry is enhanced by LCRs inducing companies to transfer technology to local businesses that are now included in the production chain.27 Enterprises are stimulated to do as they want to ensure the quality-level of their product.28 Lastly, LCRs can help to gather political support for RE support programs with high financial volumes.29 The generation of new green local jobs can serve as a decisive argument to convince key interest groups of the need for financial incentives. In this way, the political feasibility of large-scale RE projects may be ensured. If used judiciously30, LCRs can thus be an effective tool for governments to comply with their international obligations under the Paris Agreement.
22 Georgios Amanatidis, ‘European policies on climate and energy towards 2020, 2030 and 2050’ Briefing, PE 631.047 (2019), 6 < https://www.europarl.europa.eu/RegData/etudes/BRIE/2019/631047/IPOL_BRI(2019)631047_EN.pdf> accessed 16 May 2020.
23 As of December 2019, see Climate Action Tracker, ‘Global temperatures projections’ <www.climateactiontracker.org/global/temperatures/> accessed 22 April 2020.
24 See for an effectiveness framework of LCRs for national welfare creation Kuntze, Morenhout (n 3) 9 et seq.; Oliver Johnson, ‘Exploring the effectiveness of local content requirements in promoting solar PV manufacturing in India‘ (2013), Discussion paper (Deutsches Institut für Entwicklungspolitik Vol. 11/2013), 12 et seq. < https://unctad.org/meetings/en/Contribution/DITC_TED_13062013_Study_GDI.pdf> accessed 2 July 2020.
25 Kuntze, Moerenhout (n 3) 6.
26 Kuntze, Moerenhout (n 3) 6; Aaron Cosbey, ‘Renewable energy subsidies and the WTO: The wrong law and the wrong venue’ (2011) 44 Subsidy Watch, 1.
27 Kuntze, Moerenhout (n 3) 6; Cosbey (n 26) 1. 28 Kuntze, Moerenhout (n 3) 6.
29 OECD, ‘Overcoming Barriers to International Investment in Clean Energy’ (2015) Green Finance and Investment, OECD Publishing, 48; Cosbey (n 26) 1; Kuntze, Morenhout (n 3) 5.
However, particularly measures introduced as NDCs under the Paris Agreement are exposed to the risk of being held incompatible with international trade and investment law.31 In case of a clash between these regimes, the international climate regime does not claim precedent over the former. The UNFCCC and the Paris Agreement rather indicate that measures taken to combat climate change need to be consistent with international economic law.32
§2. International investment agreements threatening the Paris targets
From the perspective of international trade and investment law, LCRs are perceived with more skepticism. Next to the national treatment obligation under Article III:4 GATT, the TRIMs Agreement explicitly prohibits the use of LCRs as they are seen to violate that very provision of the GATT.33 This approach is based on the reasoning that LCRs regularly reduce competition artificially for the benefit of local businesses without effectively enhancing public welfare.34 LCRs are thus often seen as a harmful tool used for protectionist purposes.35
IIAs mirroring this approach provide investors with effective tools to challenge RE schemes employing LCRs. Whereas claims under the WTO state-state arbitration system cannot be brought by private individuals, international investment treaties frequently provide a parallel lane to challenge regulatory measures through investor-state dispute settlement (ISDS). Under this procedure, tribunals cannot directly bind governments to revoke legislation, as they cannot declare invalid regulatory measures. They can however award considerable compensation payments to be paid to the injured investor. Already the mere unpredictability of the outcome of a case affects the decision of governments whether to regulate in the public interest or to abstain from such actions, as they face high compensation payments in the event of defeat.36 International investment disputes are characterized by this uncertainty, which roots in the ambiguity of many provisions in IIAs and the corresponding broad scope for interpretation attributed to arbitration tribunals.37 The inconsistency of the case-law caused hereby is what leads to legal and regulatory uncertainty. In particular ISDS thus has the potential of forcing states to hit the brakes on regulatory action for renewables. This
31 Di Leva, Shi (n 18) 25.
32 Di Leva, Shi (n 18) 22; see also Article 3 of the UNFCCC and principles 12 and 16 of the Rio Declaration on Environment and Development (adopted 14 June 1992, entered into force 12 August 1992) A/CONF.151/26 (Vol. I) <http://www.un.org/documents/ga/conf151/aconf15126-1annex1.htm> accessed 1 May 2020.
33 Article 2(1) in conjunction with the Illustrative List contained in the annex of the TRIMS Agreement. 34 Kuntze, Moerenhout (n 3) 5; Johnson (n 24) 11.
35 Kuntze, Moerenhout (n 3) 4; Lewis (n 3) 13; Mukta Batra, Namit Bafna, 'Renewable Energy: The WTO's Position on Local Content Requirements' (2018) 39 Energy LJ 401, 402.
36 Kyla Tienhaara, ‘Regulatory Chill in a Warming World: The Threat to Climate Policy Posed by Investor-State Dispute Settlement’ (2018) 7 Transnational Environmental Law 229, 233.
phenomenon has been discussed under the term ‘regulatory chill’.38 This in turn has an impact on the effectiveness of MEAs, which are particularly reliant on the rapid energy system transformation in order to achieve their goals. The progress achieved through the adoption of the Paris agreement might thus be neutralized by the threats of international investment disputes.
§3. The EU’s investment policy: Re-balancing the system
Governments in the EU may find themselves facing a dilemma when considering introducing RE support schemes with LCRs. Should they implement such schemes to be able to effectively fulfill their obligations under MEAs like the Paris Agreement? Should they take the risk of being held liable to high compensation payments by investment tribunals? The EU did not address the question how to deal with LCRs in RE support schemes specifically. However, it was aware to generally ensure sufficient space to regulate in the public interest in future investment agreements in order to minimize the risks of finding itself in such a situation.
The EU’s investment policy started to diverge significantly from the so called ‘best-practices’ of the Member States after the conferral of competence on foreign direct investment.39 The EU pursued a more comprehensive and encompassing investment policy in its international agreements. Its value-based investment policy has its roots in the EU’s constitutional framework post-Lisbon. Several coherence and consistency obligations place the common commercial policy (CCP) in the context of the general external relation objectives, internal policies and general integration principles as laid down in Articles 7 to 11 TFEU. Articles 207(1) sentence 2 and 205 TFEU set out the obligation to exercise the competence over CCP in coherence with the external action objectives laid down in Article 21 TEU. 40 Given this link, EU investment agreements are destined to be used as a tool to promote the EU’s constitutional values. The protection of the environment and the goal of sustainable development are explicitly mentioned under the list of objectives in Article 21(2) TEU.41
However, with the incorporation of non-trade related objectives in EU negotiations of free trade agreements (FTAs) and IIAs, the problem of reconciling the often conflicting interests of public
38 Ibid 233; Aikaterini Titi, ‘The Right to Regulate in International Investment Law’ (Nomos 2014), 46; André von Walter, Maria Luisa Andrisani, ‘Resolution of Investment Disputes’ in Makane Moïse Mbengue, Stefanie Schacherer (eds), ‘Foreign Investment Under the Comprehensive Economic and Trade Agreement (CETA)’ (2019), 194; Batra, Bafna (n 35) 420.
39 Catharine Titi, ‘International Investment Law and the European Union: Towards a New Generation of International Investment Agreements’ (2015), 26 EJIL no. 3, 639, 661.
40 Anne Thies, ‘Principles of EU external relations’ in Ramses A Wessel, Joris Larik, ‘EU external relations law‘ (Hart 2020) 53, 54.
policy and investor protection surfaces.42 The EU, being aware of the threat investment protection standards and ISDS can have on its policy space43, sought to ‘re-balance’ the system of investment protection by a two-fold approach: Improving and limiting access to ISDS on the one hand while clarifying substantive standards and emphasizing more on the states ‘right to regulate’ on the other.44 Intertwined with the latter is the EU’s objective to include sustainable development chapters that contain commitments and references to multilateral environmental agreements.45 To assess the legality of LCRs in RE schemes under CETA’s investment chapter, this thesis will focus on the second prong of the EU’s approach to ensure sufficient regulatory space through improvements on substantive standards on the one hand and protection of the right to regulate on the other.
§4. Interim conclusion
It has been seen that the international environmental and investment regime do not truly stand on an equal footing due to the specific enforcement procedure for investors under most IIAs. When considering RE schemes employing LCRs, governments might be induced to prefer compliance with their commitments under IIAs. In its investment policy, the EU tries to address these concerns. The EU’s proposed improvements on substantive law are crucial to eliminate risks of LCRs coming under scrutiny. To what extent these proposed modifications lead to a clear-cut legal situation regarding the legality of LCRs in RE schemes under CETA will be examined in the remainder of this thesis.
42 Sieglinde Gstöhl, Dominik Hanf, ‘The EU's Post‐Lisbon Free Trade Agreements: Commercial Interests in a Changing Constitutional Context’ (2014) 20 European Law Journal Issue 6, 733, 744.
43 European Commission, Investment Protection and Investor-to-State Dispute Settlement in EU Agreements, (Fact Sheet 2013), 5 <https://www.italaw.com/sites/default/files/archive/Investment%20Protection%20and%20Investor-to-State%20Dispute%20Settlement%20in%20EU%20agreements_0.pdf> accessed 2 June 2020.
44 Ibid 2; European Commission, ‘Towards a Comprehensive European International Investment Policy’ (Commission White Paper) COM (2010) 343 final, 9.
45 European Commission, ‘Trade for All: Towards a more responsible trade and investment policy’ (Communication) COM (2015) 497 final, 24.
CHAPTER II. THE VULNERABILITY OF LCRS IN RE SUPPORT PROGRAMS TO INTERNATIONAL INVESTMENT LAW
Before LCRs in RE schemes were challenged by private investors, a number of trade-related disputes arose under the WTO framework. With the landmark ruling in Canada - Renewable Energy it became clear that international trade law is opposed to the use of LCRs due to their discriminatory nature.46 When looking at legal implications of these provisions on the use of LCRs, one should however bear in mind that the results cannot be transferred automatically to international investment law. The two regimes differ in several ways. But as similar legal questions arise under both international trade and investment law, it is nevertheless useful to look at the approach of WTO law. 47 The case of Mesa Power Group v Canada on the other hand provides an illustration of how investment provisions may be used to challenge LCRs in renewable energy schemes. This thesis will proceed to analyze the two landmark cases. This analysis will provide an insight as a starting point to assess how different standards, exceptions and interpretations in IIAs can influence the outcome for the legality of LCRs.
§1. International disputes targeting LCRs in RE schemes
A. Canada - Renewable Energy
In Canada – Renewable Energy, Japan, joined by the EU, complained against a feed-in-tariff (‘FIT’) program established by the Canadian province of Ontario in 2009 using the WTO dispute settlement mechanism. This program offered generators of certain forms of renewable electricity to enter into contracts with the Ontario Power Authority (OPA).48 These contracts guaranteed eligible generators of electricity a fixed price paid for a period of either 20 or 40 years.49 In order to be eligible for the scheme, electricity generators had to comply with ‘Minimum Required Domestic Content Levels’, obliging them to source a certain percentage of the equipment or facility components used to produce energy domestically.50 Both Japan and the EU accused Canada of violating the national treatment obligation under Article III:4 GATT by treating ‘like’ equipment of European or Japanese origin in a less favorable manner.51 For the same reason they argued that Article 2.1 of the TRIMs Agreement was violated. 52 The measure was alleged to fall within the scope of paragraph 1(a) of the Illustrative
46 Kuntze, Moerenhout (n 3) 4; Batra, Bafna (n 35) 403.
47 Elizabeth Trujillo, ‘Balancing Sustainability, the Right to Regulate, and the Need for Investor Protection: Lessons from the Trade Regime’ (2018) 59 B.C.L. Rev. 2735, 2747.
48 Canada – Renewable Energy (n 9) 1.3. 49 Ibid.
50 Ibid 1.4. 51 Ibid 1.6.-1.7. 52 Ibid.
List which provided that LCRs constituted prohibited trade-related investment measures. Lastly, Canada was alleged to breach Articles 3.1(b) and 3.2 of the SCM agreement by establishing a subsidy ‘contingent upon the use of domestic over imported goods.’53
The case attracted considerable attention mostly because of the Appellate Body’s finding that the program did not constitute a subsidy under the SCM agreement. Compared to this highly debated ruling, the Panel’s decision finding that the LCRs in Ontario’s FIT program constituted prohibited discriminatory trade-related investment measures on grounds of the GATT and TRIMs Agreement were quite straightforward.54 In fact, Canada did not even challenge these findings before the Appellate Body.55 Neither did Canada try to justify its program on the basis of Article XX GATT, although it mentioned that the program’s aim was to protect the environment.56 In its defense on appeal, Canada solely relied on exception for government procurement contained in Article III:8(a) GATT. It argued that the government of Ontario did not purchase electricity with the intent to resell it for profit, but in order to ‘ensure a sufficient and reliable supply of electricity for Ontario consumers and to protect the environment.’57 The Appellate Body ruled otherwise. It held that to rely on the exception, the product discriminated against must be the product that is ‘consumed by government or what is provided by government to recipients in the discharge of its public functions.’58 In the case of Ontario’s FIT program, the product procured was electricity, while the product being discriminated against was generation equipment.59 With the exception being inapplicable, the Panel’s finding of prohibited discrimination was not overturned. As a result, the Appellate Body held that Canada had to bring its measures in conformity with WTO law.60
B. Mesa Power Group v Canada
Mesa Power Group LLC is a US-based company which owned four wind farms to produce electricity in Ontario. Mesa Power had applied to participate in the same FIT program in Ontario that was challenged in the Canada – Renewable Energy case. For wind power projects, the program required applicants to meet a LCR of 25%, for projects after 1 January 2012 of 50%.61 When deciding which
53 Ibid.
54 Ibid 1.23.-1.24.
55 Canada only challenged the Panel’s finding that Article III:8 of the 1994 GATT did not apply, Canada – Renewable
Energy (n 9) 2.1.1. 56 Ibid 1.6 – 1.7. 57 Ibid 2.6. 58 Ibid 5.6.8. 59 Ibid 5.3.4. 60 Ibid 6.2.
61 Mesa Power Group LLC v Government of Canada, Notice of Arbitration from 4 October 2011, 20 [hereinafter Mesa
applicants would be awarded with the fixed contract, the OPA ranked applicants, while prioritizing ‘shovel-ready’ projects.62 After the rules on the ranking mechanism were changed in 2011, Mesa Power lost its priority ranking and was ultimately not awarded with contracts under the FIT scheme.63 Subsequently, the company claimed that Canada had violated several investment rules laid down in Chapter 11 of the NAFTA and requested damages of approximately US$ 75 million. Mesa Power based its allegations firstly on the non-discrimination rules under NAFTA. Canada was accused to violate the national treatment obligation of NAFTA Article 1102 when treating Canadian companies more favorably than Mesa in the ranking and contract-awarding procedure.64 Additionally, the most favored nation obligation under NAFTA Article 1103 was allegedly violated with a view to Canada’s treaty practice, including its bilateral investment treaty with the Czech Republic.65 Additionally, Mesa Power argued that Canada breached the Fair and Equitable Treatment (FET) standard under NAFTA Article 1105. Its argumentation was mainly based on the non-transparent procedure and the arbitrary last-minute changes to the governing rules and discriminatory treatment.66 The latter allegation resulted from Ontario entering into a Green Energy Investment Agreement with a consortium led by the Korean company Samsung, which ultimately resulted in Samsung gaining preferential access to renewable energy transmission and generation.67 All these claims however did not concern the use of LCRs.68 Mesa directly challenged the LCRs solely on the basis of NAFTA Article 1106.69 This Article contains a specific prohibition on performance requirements. While the first paragraph states a general prohibition of performance requirements, Article 1106(3) prohibits the imposition of LCRs specifically in combination with provisions providing for an advantage. However, the tribunal lacked jurisdiction to rule on the claims directly challenging the LCRs in Canada’s FIT program.70 The tribunal was not convinced that Mesa Power in accordance with NAFTA Article 1139 had made an investment or sought to make an investment prior to the adoption of the LCRs by the Ministerial direction of 24 September 2009.71 Nevertheless, the tribunal stated that even if it had jurisdiction over this claim, it would have been dismissed for the very same reason as any other claim based on non-discrimination provisions: the government procurement exception.72 In stark contrast to the WTO Appellate body in Canada – Renewable Energy, the tribunal held that the FIT program constituted
62 Ibid paras 14-15. 63 Ibid paras 43-50. 64 Ibid paras 54-58. 65 Ibid paras 59-60. 66 Ibid para 61-64. 67 Ibid paras 22-27. 68 Ibid paras 29-32. 69 Ibid paras 65-68.
70 Mesa Power Group LLC v Government of Canada, PCA Case No. 2012-17, Award, 24 March 2016, para 335. 71 Ibid paras 330-334.
government procurement under NAFTA Articles 1108(7)(a) and 1108(8)(b), which provide for exceptions to the non-discrimination provisions under NAFTA Articles 1102, 1103 and 1106.73 According to the NAFTA tribunal the nexus requirement, which was essential in the WTO case, was ‘irrelevant here, because Article 1108(7)(a) of the NAFTA is broader than Article III:8(a) of the GATT.’74 Finding that consequently none of the non-discrimination rules were applicable, the tribunal turned to the next bone of contention: the fair and equitable treatment standard under NAFTA Article 1105. It needs to be noted that the FET standard under NAFTA is not subject to the general exception of government procurement as described above. The tribunal ultimately held that Canada had also not breached its obligation to provide fair and equitable treatment.75 As a result, Canada was entirely successful on the merits.
C. Preliminary observations from the Case studies
The two cases illustrate how one and the same measure establishing LCRs can come under pressure not only by international trade but also international investment law. The approach of WTO law seems to be straight-forward. LCRs violate several provisions of WTO agreements if they do not fall under the government procurement exception of GATT Article III:8.76 Due to the narrow interpretation of the government procurement exception, most forms of LCRs will be inconsistent with WTO law despite their diverse legal constructions.77 However, significant differences in the approach of the two regimes can be identified.
First, Mesa Power did not rely on the national treatment obligation under NAFTA to challenge the LCRs directly. This already indicates that invoking this cornerstone provision in LCR disputes might be more cumbersome for investors. Second, some IIAs include a specific provision regarding performance requirements. This provides investors with an additional tool to challenge LCRs. Third, there may be differences regarding the application of exceptions such as the exception for government procurement. Depending on the wording of the exemption at hand, it may be applied more deferential towards the government. Fourth, international investment agreements impose investment protection obligations on states that additionally might interfere with LCRs. Although Mesa’s claim based on the FET standard was ultimately dismissed, this does not imply that FET provisions cannot be
73 Ibid para 465 et seq. 74 Ibid para 459. 75 Ibid para 682.
76 Hestermeyer, Nielsen (n 7) 566; Trujillo (n 47) 2735; Cees Verburg, ‘Local content requirements in renewable energy schemes - government procurement or a violation of international obligations?’ (2017), 5 I.E.L.R. 185, 186.
invoked successfully in disputes concerning RE schemes.78 However, the question arises whether the FET standard can serve as a basis for challenging LCRs directly or whether there must be additional circumstances to the individual case. Lastly, Canada did not invoke an exception modelled after Article XX GATT in either case. In Mesa Power, this is simply due to the fact that the NAFTA does not know such a clause applicable to its investment chapter.79 Other investment treaties such as the CETA provide for such general exceptions. This raises the question whether violations of non-discrimination provisions can be justified on that basis.80
It follows that in international investment law compliance with non-discrimination provisions and the fair and equitable treatment standard is crucial in disputes dealing with LCRs in RE schemes. The thesis will thus primarily focus on the compatibility of LCRs with these standards.
§2. Compliance with the National Treatment standard
National Treatment (NT) has been a central piece of IIAs and sits prominently within the debate over the legality of LCRs. Its main purpose is to provide a level-playing field for investors.81 NT provisions typically oblige the host state to accord treatment to foreign investors ‘no less favorable than the treatment it accords in like circumstances to its own investors with respect to the establishment, acquisition, expansion, operation, management, maintenance, use, enjoyment and sale or other disposition of investments.’82 In order to find a violation, tribunals regularly apply a three-step test: First, the tribunal examines whether the foreign investor is in ‘like circumstances’ as a domestic investor as the relevant comparator. The criterion can be answered in the affirmative if the foreign investor proves that he is operating in the same (economic or business) sector as any domestic investor who might receive preferential treatment.83 Second, it is for the foreign investor to present evidence that less favorable treatment was accorded to it compared to any single national investor.84 Foreign investors can claim both de jure and de facto discrimination in this respect.85 Third, if the first two
78 See for a successful claim Windstream Energy v Canada, PCA Case No. 2013-22, Award, 27 September 2016, paras 380-382.
79 NAFTA Articles 2101(1) and (2) are not applicable for NAFTA’s investment chapter. 80 Articles 28.3.1 and 28.3.2 CETA.
81 Ion Gâlea, Bogdan Biriş, ‘National Treatment in International Trade and Investment Law’ (2014) 55 Acta Juridica Hungarica, 174, 181; Louis-Marie Chauvel, ‘The Influence of General Exceptions on the Interpretation of National Treatment in International Investment Law’ (2017) 14 Revista de Direito Internacional, 140, 142.
82 OECD, ‘Draft Convention on a Multilateral Agreement on Investment’ (1998), 13 <http://www.oecd.org/daf/mai/pdf/ng/ng987r1e.pdf> accessed 13 July 2020.
83 S.D. Myers Inc. v Canada, UNCITRAL (NAFTA), First partial Award, 13 November 2000, ICSID Rep. 8 (2005), 18-65, para 250; Gâlea, Biriş (n 81) 178.
84 Pope & Talbot v Canada, NAFTA, Award, 10 April 2001, ICSID Rep. 7 (2005), 102–147, para 42; Gâlea, Biriş (n 81) 181.
conditions were found in the affirmative, the host state has the chance to justify its measure by relying on public policy objectives. Legitimate aims of public policy measures are traditionally drawn from state practice.86 Some IIAs on the other hand provide for a limited list of policy goals in general exception clauses similar to Article XX GATT.87
This test differs significantly from the application of NT provisions in trade disputes. Investment tribunals apply different concepts of ‘likeliness’ and ‘less favorable treatment’ than trade tribunals.88 The findings in Canada – Renewable Energy can therefore not automatically be transferred to the area of investment law. Rather, an individual assessment of the legality of LCRs in RE schemes must be carried out. Of significant importance is who brings the case before an investment tribunal. Two different types of investors may act as claimants: foreign generators of renewable energy and foreign manufacturers of energy production equipment.
Producers of RE would have to prove that they are in ‘like circumstances’ with a domestic investor receiving more favorable treatment. Since domestic investors must operate in the same sector as the claimant, only other producers of RE may be considered as relevant comparators. However, claiming that LCRs in RE schemes are de jure discriminatory seems rather futile. LCRs in RE schemes usually apply to all RE providers competing for the support scheme irrespective of their nationality. Additionally, enterprises who operate in the host sate’s territory are unlikely to argue that less favorable treatment was de facto accorded to them. The economics of the situation are more likely to be the same for both national and foreign RE producers. Solely in the situation where the energy is produced outside the host state’s territory and then fed into the grid, foreign investors might for instance argue that purchasing equipment from manufacturers located in the host state would result in higher transportation costs.
Tribunals might further deny claims of de jure discrimination in a situation where the complainant should be a supplier of equipment. Where LCRs do not oblige energy producers to purchase equipment from domestic enterprises but rather require them to source equipment which has been produced locally, LCRs do not discriminate manufacturers directly by means of their nationality. In fact, both domestic and foreign manufacturers would need to fabricate the equipment in the host state’s territory. However, foreign manufacturers could argue that they are de facto disadvantaged whenever their fabrication facilities are located outside the relevant area of the host state. For instance,
86 Gâlea, Biriş (n 81) 181. 87 Chauvel (n 81) 150. 88 Gâlea, Biriş (n 81) 181.
increased costs to find local facilities or unavailability of manufacturing facilities in the host state may be put forward as possible arguments.89 The burden of proof however lies with the investor.90 Consequently, LCRs might not always survive scrutiny against NT obligations in IIAs. However, the outcome of a dispute depends on the type of LCRs used, on who brings the case before a tribunal and whether the investor is capable of providing sufficient evidence. Investors would find it easier to rely on specific provisions on performance requirements as they would not need to evidence the occurrence of unequal treatment. One of the most commonly prohibited performance requirements is the requirement to source a certain level of domestic content for products and services.91 However, only a limited number of countries include such provisions in their model bilateral investment treaties (BITs).92 Where investors cannot invoke performance requirement provisions, NT remains the most relevant head of claim.
The application of NT obligations is however subject to the condition that governments cannot rely on an exception clause. One common approach in IIL is to shield government procurement from NT provisions and performance requirement prohibitions.93 This matches the widespread strategy of many countries to condition government procurement projects to LCRs and other performance requirements.94 The Mesa Power case illustrates how divergently worded exceptions for government procurement can cause different outcomes in LCR disputes. Exceptions phrased like NAFTA Articles 1108(7) and (8)(b) increase the chances of governments to shield LCRs effectively from investor claims based on non-discrimination rules. The NAFTA exceptions were interpreted to be much broader in scope compared to the procurement exception of the GATT. The Appellate Body in Canada – Renewable Energy did not apply Article III:8a GATT, because it requires that the product procured and the product that is being discriminated against have to be in a ‘competitive relationship’.95 According to the Appellate Body, such a competitive relationship does not exist between electricity and generation equipment.96 In contrast, the NAFTA exception already applies where a scheme merely constitutes ‘procurement by a Party’.97 However, whether a NAFTA tribunal would in fact apply the government procurement exception when examining it in relation to a LCR
89 ADF Group Inc. v United States of America, ICSID Case No. ARB (AF)/00/1, Award, 9 January 2003, para 157. 90 Matteo Sarzo, ‘The National Treatment Obligation’ in Andrea Gattini, Attila Tanzi, and Filippo Fontanelli, ‘General
Principles of Law and International Investment Arbitration’ (2018), 378, 385.
91 Nikièma (n 11) 2.
92 Ibid 7; Alexandre Genest, ‘Performance Requirement Prohibitions in International Investment Law’ (2017), 28. 93 Genest (n 92) 164.
94 Ibid; ADF (n 89) para 94; Mesa Power (n 70) para 419. 95 See Canada – Renewable Energy (n 9) 5.79.
96 Ibid.
claim cannot be predicted with final certainty. After all, the tribunal in Mesa Power had no jurisdiction over this matter.98 Nevertheless, the tribunal’s statement indicates that IIAs may offer more permissive exceptions for governments to shield LCRs.
A second approach for governments is to rely on the ‘right to regulate’ in the public interest. A state can either rely on the fact that investors were not in like circumstances due to the public policy nature of the measure at hand99 or invoke general exceptions (GEs) if provided in the agreement. The incorporation of GEs modelled Article XX GATT is a trend started by Canada in 1994 and has been adopted by the EU in several agreements, including CETA.100 However, invoking these exceptions to justify LCRs in RE schemes for environmental purposes could prove cumbersome if they were to be interpreted like Article XX GATT.101
In summary, the NT standard might be invoked to successfully challenge LCRs in RE schemes. On the other hand, exceptions for government procurement and measures in the public interest may equip governments with tools to defend the use of LCRs.
§3. Compliance with the Fair and equitable treatment standard
The FET standard constitutes an additional basis to challenge LCRs in RE schemes on which investors are likely to rely on. FET provisions are preferably found in IIAs rather than trade law.102 With only 5% out of 1964 examined not containing a binding provision on FET, its use is widespread practice.103 It is further the most successful head of claims for investors.104 And unlike the national treatment standard, it is typically not subject to the exceptions intended to safeguard national interests.105 Against this background, the FET standard appears promising for investors. However, it is difficult to assess whether the mere use of LCRs in RE schemes would fall under its scope due to the different wording and interpretation of FET provisions in IIAs.106
98 Verburg (n 76) 194 et seq.
99 S.D. Myers Inc. v Canada (n 83) para 246; Pope & Talbot v Canada (n 84) para 78. 100 Chauvel (n 81) 143.
101 Hestermeyer, Nielsen (n 7) 590; Kuntze, Moerenhout (n 3) 39.
102 Sofya Matteotti, Tetyana Payasova, ‘The Role of the Fair and Equitable Treatment Standard: Regulatory Coherence for Trade and Investment in Renewable Energy’, in Thomas Cottier, Ilaria Espa (eds), ‘International Trade in Sustainable
Electricity’ (2017), 428, 448.
103 Patrick Dumberry, ‘Fair and Equtiable Treatment’ in Makane Moïse Mbengue, Stefanie Schacherer (eds), ‘Foreign
Investment Under the Comprehensive Economic and Trade Agreement (CETA)’ (2019), 96.
104 UNCTAD, ‘Fair and Equitable Treatment: A Sequel’ (2012), UNCTAD Series on Issues in International Investment Agreements ii, UNCTAD/DIAE/IA/2013/2, 1.
105 Roland Klaeger, ‘Fair and Equitable Treatment in International Investment Law’ (CUP 2011), 42 et seq.; Matteotti, Payasova (n 102) 431.
Looking at case-law, one way to challenge LCRs directly could be the approach used by Methanex Corporation under NAFTA Chapter 11. It argued that violations of international law, in particular of certain WTO/GATT rules, would also constitute a violation of the FET provision included in NAFTA.107 The Panel however declined that line of argument. But even if the tribunal had ruled otherwise, this approach would only have been suitable for a few instances. Unlike NAFTA Article 1105, the broad majority of FET provisions in IIAs do not make a specific reference to ‘international law’.108
FET was also invoked in a case concerning South Africa’s Black Economic Empowerment mining policy, which obliged mining companies to offer 26% of their shares to historically disadvantaged South Africans at market price.109 The case was however discontinued before the tribunal delivered a decision on the merits. Consequently, no definite answers to the question whether LCRs can be challenged directly via FET provisions can be inferred from case-law.
But looking at the substantive scope of many FET rules, investors are likely to claim that LCRs are discriminating on the basis of nationality. Some FET provisions have even been interpreted by tribunals to be always violated in cases of nationality-based discrimination.110 However, it should be noted that discriminatory measures based on nationality may also be excluded from its scope.111 Lastly, sudden regulatory revisions introducing LCRs in support schemes could disappoint the legitimate expectations of investors in a stable legal situation. The risk of such claims increases where financial support was already granted for a set period of time. However, whether this alone results in a violation of the FET standard depends again on the provision in question.112
As a result, depending on the FET standard at hand, investors may find another legal basis to challenge LCRs in the FET standard. But even if uncertainty remains, considering the success of the FET standard in general, threatening to invoke it might already be effective to deter the government considering LCRs in their support schemes.
107 Methanex Corporation v United States, Draft Amended Claim, 12 February 2001, 58 et seq; Mohammad F. A. Nsour, ‘Rethinking the World Trade Order: Towards a Better Legal Understanding of the Role of Regionalism in the Multilateral Trade Regime’ (2010), 253.
108 Matteotti, Payasova (n 102) 433.
109 Piero Foresti et al v South Africa, ICSID Case No. ARB(AF)/07/1, Award, 4 August 2010, para 78.
110 Noble Ventures Inc. v Romania, ICSID Case No. ARB/01/11, Award 12 October 2005, paras 180-182;
Parkerings-Compagniet AS v Republic of Lithuania, ICSID Case No. ARB/05/8, Award, 11 September 2007, para 287.
111 This is the case under NAFTA Article 1105, see Grand River Enterprises Six Nations, Ltd., et al v United States of
America, UNCITRAL, Award, 12 January 2011, paras 208-209; Glamis Gold, Ltd. v The United States of America,
UNCITRAL, Award, 8 June 2009, para 52.
112 Under NAFTA Article 1105, the mere failure to respect the investors legitimate expectations does not automatically lead to a violation of the FET standard. See Mesa Power (n 70), para 502.
§4. Interim conclusion
RE schemes that employ LCRs might not survive legal scrutiny based on two cornerstone provisions in international investment law: the national treatment obligation and the fair and equitable treatment standard. However, due to the variety of provisions, exceptions to and interpretations thereof, the compatibility of characteristic LCRs in RE schemes with international investment law at large cannot be reliably predicted from the outset. Tightened up substantive standards as well as broad exceptions for government procurement and public policy measures may have the potential to shield LCRs in RE schemes. Whether the modifications in CETA provide for more deferential provisions will be examined in the next chapter.
CHAPTER III. CETA’S MODIFIED INVESTMENT CHAPTER: IN SEARCH OF A NUANCED APPROACH
CETA’s investment chapter illustrates how the EU’s investment policy has been translated into treaty text. Compared to other IIAs, it features modifications to the substantive obligations that affect the parties’ policy space. Additionally, CETA is not a purely bilateral investment agreement, but part of a comprehensive FTA. The specifics of the investment chapter must thus be placed in the overall context of the agreement. This chapter explores whether CETA provides for a more nuanced approach towards the use of LCRs in RE support schemes. In a first step it will be examined to what extent LCRs in RE schemes may be plead illegal relying on the modified national treatment and fair and equitable treatment standards. The EU and its Member States are particularly exposed to that risk. In contrast to Canada, the former did not make any reservations to such schemes.113 In a second step, this chapter addresses the question whether the ‘right to regulate’ provisions can lead to a justification of LCRs in RE programs for environmental purposes. In that regard, it will be analyzed to what extent the statements of the European Court of Justice (ECJ) in opinion 1/17, the Joint Interpretative Instrument and the incorporation of sustainable development chapters in CETA influence the interpretation of the general exceptions.
§1. National Treatment and ‘local favoritism’
The NT obligation has been identified as the central yardstick for the legality of LCRs in RE schemes. For investors claiming LCRs to violate the CETA investment rules, NT becomes even more relevant since investors are excluded from bringing a case based on provisions prohibiting the use of performance requirements.114
The obligation to accord no less favorable treatment to foreign investors contained in the first paragraph is not phrased much differently than its counterparts in other investment treaties.115 Thus,
the traditional three-step test applied for violations of NT obligations principally applies.116 For
investors in equipment manufacturing and renewable energy production it follows that similar
113 See Canada’s reservations made in CETA Annex I, Schedule of Canada – Provincial and Territorial, I-PT-63 (Newfoundland and Labrador), I-PT-94 (Nova Scotia), I-PT-115 (Ontario), I-PT-134 (Prince Edward Island), I-PT-157 (Yukon), CETA Annex II, II-PT-49 (Ontario), II-PT-51 (Prince Edward Island).
114Article 8.18 excludes from the scope of the investor-state dispute settlement claims based on section B of Chapter 8
and thus also Article 8.5.
115 Andrea K. Bjorklund, Lukas Vanhonnaeker, ‘National Treatment’ in Makane Moïse Mbengue, Stefanie Schacherer (eds), ‘Foreign Investment Under the Comprehensive Economic and Trade Agreement (CETA)’ (2019), 45, 57.
116 However, the inclusion of general exemptions modelled after GATT Article XX in CETA could have an impact on the determination of ‘like circumstances’, see Chauvel (n 81) 146 et seq.
situations may arise as described above Chapter II §2. LCRs in RE schemes could thus violate Article 8.6(1).
However, in its second and third limb CETA’s NT provision provides for a peculiarity. The obligation to accord no less favorable treatment to foreign investors is extended to sub-national and Member State governments. However, it only applies in a more limited manner. This is of particular importance with regard to LCRs in support programs for RE, as such schemes are often operated at local level.117 Such limitations allow the federal government to escape liability for measures of local
governments, which have been observed to frequently prioritize local industries over foreign investors.118 For Canadian treaty practice such specifications are far from unknown. In fact, Canadian
model BITs provide for similar provisions.119 For the EU on the other hand drafting such rules was a
novelty.120 The text of Canadian model BITs had to be adjusted for the EU due to its unique
federal-like structure and the variety of federal systems within the EU Member States. The adopted text in paragraph three of Article 8.6 now permits Member State governments as well as sub-national governments to treat local investors more favorably. Preferential treatment is not considered a violation of the national treatment principle as long as other EU investors are not accorded more favorable treatment than Canadian investors in the territory of the local government. Consequently, Article 8.6(3) allows for some form of ‘local favoritism’.121
What impact does this provision then have on the ability of local governments in the EU member states to link RE support schemes with LCRs? At first glance, one may think that hereby LCRs are shielded from NT-based claims. In fact, some forms of LCRs may be protected against claims asserted by certain investors. Sub-national governments are principally bound by the EU internal market rules, in particular the fundamental freedoms. More favorable treatment accorded to local investors would thus often need to be granted to all EU investors. The result are EU-wide LCRs,122 which are unlikely
to result in less favorable treatment towards Canadian investors producing renewable energy or manufacturing equipment in the territory of any EU Member State compared to other EU investors. Even when LCRs are not designed as EU-wide LCRs, Canadian investors could be excluded from bringing a claim due to other EU investors not receiving a more favorable treatment.
117 Meyer (n 5) 1939.
118 Andrea K. Bjorklund, ‘The national treatment obligation’ in Katia Yannaca-Small (ed), ‘Arbitration under
international investment agreements: a guide to the key issues’ (OUP 2010), 411, 440.
119 Article 4(3) Canada Model FIPA 2014; Article 3(3) Canada Model BIT 2004. 120 Bjorklund, Vanhonnaeker (n 115) 66.
121 Ibid.
Nevertheless, there are scenarios where Canadian investors may successfully claim a violation of the NT principle. First, equipment manufacturers as well as producers of renewable energy might operate outside of EU territory. In that case, EU-wide LCRs may cause de facto less favorable treatment is accorded to Canadian investors compared to a single EU investor with fabrication facilities within the EU.123 Second, claims based on NT may arise in a situation where a local government employs
EU-wide LCRs that only leave out nationals operating in other territories of that Member State. Such ‘reverse’ discrimination against domestic investors is principally permitted under European law.124
However, Canadian investors operating in another territory of the particular Member State might as a result receive less favorable treatment than other EU investors with facilities in another Member State. While the latter were allowed to generate renewable energy or manufacture equipment within their own facilities, the former would need to move its fabrication process to the local territory or another EU Member State. Whether such claims could be rejected on the basis that Canadian investors are treated no less favorable than other domestic investors within that Member State is uncertain. Paragraph three of Article 8.6 leaves ambiguities as to who is considered ‘investors of the EU’ and thus a suitable comparator. Third, where local governments implement RE support schemes containing LCRs on the basis of an EU regulation or an EU directive, the question arises whether not paragraph three but paragraph one of Article 8.6 applies. 125 CETA tribunals would have to interpret
who the true author of the discriminatory act in question is: the EU or the sub-national government? If a tribunal would find the EU and not the local government to be the relevant author, the limitation of paragraph three would not apply. LCRs in RE programs can thus not be completely absolved of their vulnerability to the NT obligation.
Claims based on the NT obligation could however be carved-out by means of government procurement exceptions. As has been argued in Chapter II, exceptions for government procurement in IIAs may be more permissive towards governments shielding such programs. Article 8.15(5)(a) CETA provides for such an exception. Looking at the wording of this provision, the proximity to Article III:8(a) GATT is however striking. Unlike its counterpart contained in the NAFTA, the CETA makes explicit reference to the good or service being procured. This may encourage CETA tribunals to follow the narrow interpretation adopted in the Canada – Renewable Energy dispute.126 That such
123 For possible arguments for a de facto discrimination see Chapter II §2.
124 Peter Oliver, Martín Martínez Navarro, ‘Free movement of goods’ in Catherine Barnard, Steve Peers, ‘European Union
Law’ (OUP 2017), 339, 355.
125 Bjorklund, Vanhonnaeker (n 115) 66; See for instance Case C-573/12, Ålands Vindkraft v Energimyndigheten, ECLI:EU:C:2014:2037 and Joined Cases C-204/12 to C-208/12, Essent Belgium NV v Vlaamse Reguleringsinstantie, ECLI:EU:C:2014:2192. In both Ålands Vindkraft and Essent Belgium the respective schemes, which were only open to national renewable energy producers, were adopted on the basis of Directive 2009/28/EC.
a narrow interpretation was indeed intended by the drafters of CETA is indicated by the submissions made by the EU and Canada to the trade-related India-Solar case. Both had argued against a broad interpretation that solar cells and modules cannot be seen to be in a ‘competitive relationship’ with the electricity procured, as otherwise India would have been allowed to discriminate against imports through the backdoor.127 For programs that impose an obligation to use local equipment or services,
such a narrow interpretation would render the exception meaningless.128
Nevertheless, a question mark has to be placed behind the simple transfer of WTO jurisprudence. In
Canada – Renewable Energy, the Appellate Body has made it clear that its interpretation is based on
the context of the other paragraphs of Article III GATT.129 These rules govern specifically the equal
treatment of goods. However, in the context of investment law disputes, the measure in question would need to discriminate against investors or their investment. Whether this circumstance alone would in turn prevent CETA tribunals from merely adopting WTO jurisprudence is however questionable.
In summary, it can be observed that the vulnerability of local support programs is reduced owing to modifications to the NT obligation. However, not all forms of LCRs adopted by sub-national governments of EU Member States are protected. It further cannot be excluded that investors will use remaining ambiguities to successfully plead the incompatibility of LCRs with the NT rule.
§2. CETA’s novel Fair and Equitable Treatment standard
The Commission's objective of more precise and clearer investment protection rules as part of the new EU investment policy130 has translated into a novel clause on fair and equitable treatment.131 The FET clause in Article 8.10 CETA is in fact the first of its kind contained in an IIA.132 It provides for an exhaustive enumeration of conducts that amount to a violation of the standard.133 This clarification allows to reduce and abandon most of the risks for LCRs in RE schemes caused by FET provisions in IIAs. First, Article 8.10(2)(d) CETA indicates that nationality-based discrimination does not amount to ‘targeted discrimination on wrongful grounds’.134 Second, violations of international
127 Panel Report, India - Certain Measures Relating to Solar Cells and Solar Modules, WT/DS456/R (16 September 2016), 7.131; Batra, Bafna (n 35) 414.
128 See above Chapter II §2.
129 Canada – Renewable Energy (n 9) 5.79. 130 European Commission (n 49) 7.
131 The fair and equitable treatment standard is claimed to be ‘clearly defined’ by the Joint Interpretative Statement, para 6c).
132 Dumberry (n 103) 100.
133 Ibid; see also Opinion 1/17 (CETA) ECLI:EU:C:2019:341, para 158 [hereinafter Opinion 1/17]. 134 Dumberry (n 103) 112.
