University of Amsterdam
International and European Law: International Trade and Investment Law
International Trade and Climate Change
HOW CAN THE WTO CONTRIBUTE TO FULFILLING THE AIMS OF THE PARIS AGREEMENT THROUGH LAWS ON SUBSIDIES?
Alexandra Sulikova
Supervisor: Ioana Ciobanasu Date of submission: 29.07.2016
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Abstract
The aim of this paper is to assess how can the WTO contribute to the promotion of the renewable energy production, thereby allowing Member States to fulfil their commitments under the recently signed Paris Agreement, a phase-out of fossil fuels in particular. Firstly, the current state of the WTO laws on subsidies is analysed, leading to an assumption that the provisions of SCM Agreement are unsatisfactory, especially expired Article 8 on non-actionable subsidies. Several flaws of the wording of Article 8 are discussed, mainly its limited application and burdensome requirements. This is followed by an attempt to provide a possible solution having regard to general exceptions of Article XX of the GATT, as well as the EU law of State aid. The main finding is that various shortcomings of Article 8, particularly its environmental exception, could be well remedied by transposing some of the aspects of the EU approach to environmental State aid into the WTO system.
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Table of Contents
I. INTRODUCTION
II. INITIATIVES TACKLING CLIMATE CHANGE
III. AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES
A. The SCM Agreement
B. Application of the SCM Agreement to energy subsidies C. What does the case law say?
IV. ARTICLE 8 OF THE AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES
A. Negotiating history of Article 8
B. Shortcomings of Article 8 of the SCM Agreement
V. ARTICLE XX OF THE GATT AND THE LAW OF STATE AID IN THE EUROPEAN UNION
A. Article XX of the GATT B. The EU law of State aid
VI. PROPOSAL FOR THE REFORM
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I. Introduction
Environmental concerns that have not been given much attention in the past, especially the issues of climate change and global warming, are now considered serious threats to the planet and society. It is generally agreed that these phenomena are caused by the alarming increase of greenhouse gas (GHG) emissions in the atmosphere, almost two-thirds of which are energy related.1 The reason for this is that
the most important sources of energy, fossil fuels, contain carbon dioxide (CO2), the
primary greenhouse gas, which is emitted to the atmosphere while fossil fuels are burned. Therefore, an urgent action has to be taken by political actors to reduce GHG emissions, which can be done by shifting from high-carbon to low-carbon energy production and use.
This state of events have led to several multilateral agreements, including the United Nations Framework Convention on Climate Change (UNFCCC), which entered into force in 1994. The UNFCCC has been the first treaty dealing with the issue of climate change and did so by encouraging governments to stabilize ‘greenhouse gas
concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system’.2 Moreover, the Kyoto Protocol to the UNFCCC has been adopted in 1997 as the first international binding agreement that commits parties to reduce their GHG emissions below 1990 levels. The overall success of this agreement was impaired largely by the failure to include some of the world’s largest emitters, such as India and China, thereby causing the non-ratification by the United States.
The flaws of the Kyoto Protocol resulted in the decision not to amend the Protocol, but to adopt a separate instrument instead, the Paris Agreement. The Paris Agreement, signed by 177 countries in April this year, is considered to be a historic agreement, which seeks to achieve much greater international cooperation and sets clear
1 International Energy Agency (IAE), ‘World Energy Outlook 2011’ (Paris: International Energy
Agency, 2011) 210 <http://www.iea.org/publications/freepublications/publication/weo-2011.html> accessed 15 April 2016
2 United Nations Framework Convention on Climate Change (UNFCCC), 771 UNTS 107; S. Treaty
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term goals.3 These are stated in Article 2 of the Agreement that requires Parties to ensure that the global average temperature increase stays below 2°C in comparison to preindustrial levels, however, the efforts should be made to limit the temperature increase to 1.5°C. Moreover, according to Article 4, Parties should undertake rapid reductions in their GHG emissions so the stated goals can be met. Satisfying these targets will surely require the transition towards renewable sources of energy, since, according to the International Energy Agency (IEA), at least two-thirds of the world’s fossil fuel reserves will have to remain underground until 2050, if the goals of the Paris Agreement are to be met.4
However, the paradox is that governments spend around US$500 billion every year subsidizing the fossil fuels, while only a fraction of this amount is used to subsidize the renewable energy sector.5 In addition to this, the subsidies to the latter have led to various disputes at the World Trade Organization (WTO), since the WTO rules on subsidies are unsatisfactory and uncertain, as well as they create obstacles for the growth of the renewable energy sector. This I consider to be the main flaw of the current state of law, particularly that the WTO laws do not differentiate between various types of subsidies and their purposes, with the result that the fossil fuel subsidy programs are escaping the WTO scrutiny. The WTO should be concerned about the environment to a greater extent, thereby taking steps to support renewable energy and technology to satisfy the primary goals of the previously mentioned Paris Agreement.
The focus of this paper will be on the current state of the WTO laws dealing with subsidies, as they do not support members taking environmental measures, on the contrary, it could be said that they are in contradiction with the aims of the Paris Agreement. On this basis, I would like to discover what possible steps could the WTO take in this regard to contribute to tackling the climate change. In Chapter 2, I would
3 United Nations Framework Convention on Climate Change, ‘Adoption of the Paris Agreement, 21st
Conference of the Parties’ (Paris Agreement) FCCC/CP/2015/L.9/Rev.1 (2015)
4 International Energy Agency (IAE), ‘ World Energy Outlook 2012: Executive Summary’ (Paris:
International Energy Agency, 2012) <http://www.worldenergyoutlook.org/weo2012/> accessed 15 April 2016
5 International Energy Agency (IAE), ‘World Energy Outlook 2013: Executive Summary’ (Paris:
International Energy Agency, 2013)
<http://www.iea.org/publications/freepublications/publication/weo-2013---executive-summary---english.html> accessed 15 April 2016
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like to assess the initiatives taken to deal with the climate change, including the Paris Agreement, and their implications. The WTO Agreements, especially the one on subsidies, are discussed in Chapter 3. The focus will be on the application of the Subsidies and Countervailing Measures Agreement (SCM Agreement) to energy subsidies, both fossil fuels and renewable energy, and the relevant case law. Following that, the expired provisions of the SCM Agreement will be evaluated in Chapter 4. Chapter 5 focuses on the alternatives routes for the justification of renewable energy subsidies, such as Article XX of the General Agreement on Tariffs and Trade (GATT), as well as EU law and its concept of State aid. Finally, in Chapter 6, I would like to propose a reform to the existing rules, so as to enable states to fulfill their commitments under the Paris Agreement.
II. Initiatives tackling climate change
The United Nations have taken various, arguably unsuccessful, initiatives addressing the climate change problem, that have led to the adoption of the Paris Agreement signed recently. The first major United Nations conference, also known as the United Nations Conference on Environment and Development (UNCED) or the Earth Summit, dealing with the environmental challenges was held in Rio de Janeiro in 1992. The outcome of the Conference has been the adoption of the Rio Declaration on Environment and Development signed by over 170 countries, as well as the negotiation of a key international environmental treaty, the United Nations Framework Convention on Climate Change (UNFCCC). As has been previously mentioned, the UNFCCC aims at stabilization and reduction of greenhouse gases in the atmosphere, however, as a result of the United States’ refusal to accept a legally binding targets and timetable, the agreement does not contain specific targets for any country.6 The non-binding nature of the UNFCCC have caused that most of the
developed countries failed to meet their voluntary goals set out in Article 4, especially the commitment to return GHG emissions to 1990 levels by 2000.7
6 Daniel Bodansky, ‘The United Nations Framework Convention on Climate Change: A Commentary’
(1993) 18 Yale Journal of International Law 451, 516
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The adoption of the UNFCCC has led to the establishment of the supreme decision-making body of the Convention, the COP (Conference of the Parties), which meets annually since 1995.8 The first COP meeting was held in Berlin, where the way for the negotiation of the Kyoto Protocol has been paved.9 At the second COP in 1996 in Geneva, it was officially confirmed that human activity influences the global climate. This was followed by the third, groundbreaking, COP meeting, which has resulted in the introduction of the historic Kyoto Protocol in 1997, the first legally binding international environmental agreement.10 Its main objective was to reduce GHG
emissions, however, the fact that only developed countries included in Annex 1 were legally bound was the Protocol’s main shortcoming.11 An expert on environmental
issued, Larry West, summarized the views of the Protocol’s opponents by stating that ‘Arguments against the Kyoto Protocol generally fall into three categories: it
demands too much; it achieves too little; or it is unnecessary.’12 It should be noted that Annex 1 refers to the Annex 1 to the UNFCCC, which includes 43 parties. This have led to a number of criticisms, since, in practice, only a small number of countries was required to take action, while 80 percent of the world was not legally bound. As has been mentioned previously, the Bush administration has rejected the Kyoto Protocol mainly as a result of this division and failure to include some of the largest future sources of CO2 emissions. The rejection by the US has been considered as
decisive by many experts, since they claim that the Protocol cannot succeed without the participation of the United States. According to Robert N. Stavins, ‘The Kyoto
Protocol may come into force without the U.S. participation, its effects on climate change will be trivial to virtually non-existent.’13
8 United Nations Framework Convention on Climate Change, ‘Conference of the Parties (COP)’
<http://unfccc.int/bodies/body/6383.php> accessed 15 April 2016
9 Bo Kjellen, ‘Reflections on the Berlin Mandate: Discussion Note’ (27 May 2014)
<http://www.eurocapacity.org/downloads/Reflections_on_Berlin_Mandate.pdf> accessed 15 April 2016
10 1997 Kyoto Protocol to the UN Framework Convention on Climate Change (UNFCCC) (Kyoto
Protocol) 2302 UNTS 148 / [2008] ATS 2 / 37 ILM 22 (1998)
11 Ibid. Article 3(1)
12 Larry West, ‘What is the Kyoto Protocol?’ (July 5 2016)
<http://environment.about.com/od/kyotoprotocol/i/kyotoprotocol_2.htm> accessed 20 July 2016
13 Robert N. Stavis, ‘Can an Effective Global Climate Treaty Be Based on Sound Science, Rational
Economics, and Pragmatic Politics?’ (2004) 3
<http://www.rff.org/files/sharepoint/WorkImages/Download/RFF-DP-04-28.pdf> accessed 20 July 2016
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Moreover, it has been argued that its target, five percent reduction of GHG emissions, is not suitable to address the long-term problem of climate change.14 Besides that, all of the reductions in greenhouse gases reached by some of the parties, such as the European Union, Canada or Japan, were erased by the two biggest emitters, namely the United States and China.15 This is evidenced by the fact that, according to the
Netherlands Environmental Assessment Agency, global emissions have increased by almost 40% between 1990 and 2009.16 Another issue regarding the Kyoto Protocol
was the difficulty of its enforcement, as is the case with most of the international environmental agreements, even though the agreement was legally binding and included a non-compliance procedure.17
All of these deficiencies of the Kyoto Protocol, especially the exemption for developing nations from the emissions reduction obligations, have led to the adoption of the Paris Agreement, which has been adopted by consensus of 195 countries in December 2015. As has been suggested, the Paris Agreement removes the strict distinction between parties, thereby requiring all countries to take action based on the principle of ‘common but differentiated responsibilities and respective capabilities, in
the light of different national circumstances.’18 Its main purpose, as set out in Article 2, is to reduce the impact of climate change by ‘holding the increase in the global
average temperature to well below 2 °C above pre-industrial levels.’19Article 4 of the Agreement adds to the requirements of Article 2 by ordering the Parties to remove GHG emissions by the second half of the century, thereby making the transition to renewable energy inevitable.20 It further specifies the rules concerning Nationally
Determined Contributions (NDCs) that each Party should ‘prepare, communicate and maintain’ to fulfill the purposes of the Agreement. In practice, NDCs represent each Party’s highest possible ambition to greenhouse gas emissions reduction. Besides that, under Article 9, signatories are required to mobilize climate finance from a wide
14 Rafael Leal-Arcas, Climate Change and International Trade (Edward Elgar Publishing Ltd, 2013)
245
15 The Guardian, ‘What is the Kyoto Protocol and has it made any difference?’ Extract from The
Rough Guide to Climate Change (11 March 2011)
<https://www.theguardian.com/environment/2011/mar/11/kyoto-protocol> accessed 20 July 2016
16 Ibid.
17 Kyoto Protocol (n 9) Article 18 18 Paris Agreement (n 3) Article 2(2) 19 Ibid. Article 2(1)(a)
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variety of sources to achieve a progression beyond previous efforts.21 However, one of the criticized aspects is that NDCs are not legally binding, as individual targets are not included in the Agreement itself, but in a separate public registry.22 Some of the Parties, especially the EU, opposed non-binding NDCs, but binding targets were unlikely, as it could lead to rejection of the Agreement by the United States.23
Nevertheless, at least 55 Parties to the Convention, representing at least 55% of global GHG emissions, have to ratify the Agreement in order for it to enter into force.24
Views on its effectiveness differ to some extent, as some argue that the Agreement does not go far enough, while others consider it to be a turning point in history. Therefore, it is yet to be seen whether the Paris Agreement will deliver on its promises.
III. Agreement on Subsidies and Countervailing Measures
In this section, I would like to assess the current state of the WTO law on subsidies, especially the Agreement on Subsidies and Countervailing Measures and its implications for the renewable energy subsidies, as well as the fossil fuel subsidies.25 The SCM Agreement, preceded by the Subsidies Code, was result of the Uruguay Round of trade negotiations, which has been launched in 1986 and took almost eight years to cover all of the items.
A. The SCM Agreement
Firstly, it is important to define what a subsidy actually is, even though there is no generally accepted definition of an energy subsidy.26 Subsidy is defined in Article 1 of the SCM Agreement as a ‘financial contribution by a government or any public
body’, which can take any of the various forms listed. Even though it is a closed list, it
is broad enough, as it includes: direct transfer of funds (grants and loans), government
21 Ibid. Article 9(3) 22 Ibid. Article 4(12)
23 Gerard Wynn, ‘Decoding the Paris climate agreement’ Energy and Carbon (12 December 2015) <
http://energyandcarbon.com/decoding-paris-climate-agreement/> accessed 20 July 2016
24 Paris Agreement (n 3) Article 21(1)
25 Agreement on Subsidies and Countervailing Measures, Part of the Marrakesh Agreement
Establishing the World Trade Organization, Annex 1A, Multilateral Agreements on Trade in Goods of the Uruguay Round Negotiations (SCM Agreement) 1867 UNTS 14 (1994)
26 OECD, ‘Subsidy Reform and Sustainable Development: Economics, Environmental and Social
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revenues that are otherwise due forgone or not collected, and provision or purchase of goods and services by a government. In addition to the requirement of a financial contribution, Article 1 requires a conferral of a benefit. Furthermore, it has to be determined whether is the subsidy specific according to the principles set out in Article 2 of the SCM Agreement. It follows that, a subsidy is considered specific if its availability is limited to certain enterprises27 or to enterprises situated in a designated geographical region,28 however, specificity does not exist in case the availability and
the amount of the subsidy is based on objective criteria and conditions.29 These
criteria are stipulated in the footnote to Article 2.1(b) and include ‘criteria and
conditions which are neutral, which do not favor certain enterprises over others, and which are economic in nature and horizontal in application, such as number of employees or size of enterprise.’
Secondly, there are three different categories of subsidies, namely prohibited, actionable and non-actionable subsidies. However, the third category had expired at the end of 1999, since the WTO Members did not agree to extend its application as is required by Article 31.30 Its purpose was to provide a legal shelter for certain subsidies, such as those granted for research activity or for assistance to promote adaptation of existing facilities to new environmental regulations.31 I would like to focus on this category at a later stage of this paper, since I consider it is one of the possible solutions to the current situation. Nevertheless, the exclusion of this category leaves us with two categories, prohibited and actionable subsidies. The former are set out in Article 3 of the Agreement, which states that subsidies contingent upon export performance or upon the use of domestic over imported goods shall be prohibited.32 The second category includes subsidies that cause adverse effects to the interests of other Members, provided that they meet the requirements of specificity.33 As is
indicated in the Agreement, these adverse effects can be caused by injury to the
27 SCM Agreement (n 25) Article 2.2 28 Ibid. Article 2.1(a)
29 Ibid. Article 2.1(b) 30 Ibid. Article 31 31 Ibid. Article 8 32 Ibid. Article 3.1 33 Ibid. Article 5
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domestic industry, nullification or impairment of benefits, or serious prejudice to the interests of another Member.34
One more issue needs to be discussed before proceeding to the application of the SCM Agreement to energy subsidies, particularly whether energy is a good or a service. This is crucial, since the SCM Agreement applies only to subsidies in trade in goods, while subsidies to services sector are dealt with under the General Agreement on Trade in Services (GATS). It is generally agreed that energy products such as oil, liquefied natural gas and solid fuels, however, the categorization of electricity and non-liquefied natural gas is debatable.35 According to the WTO Secretariat, the case
of electricity is the most complicated, since the electricity ‘generated by the
combustion of other fuels (secondary energy) or by renewable natural resources and nuclear fuels (primary energy) is not easily stored and is distributed to consumers via transmission and distribution grids. The non-stability of electricity might have been a factor, which led the drafters of the GATT to assume that electric power should not be classified as a commodity.’36 On the other hand, most of the WTO Members treat electricity as a commodity, which is demonstrated also by them undertaking tariff bindings on it. Moreover, electricity is also classified as a commodity under Chapter 27 of the Harmonized System (HS) Nomenclature, an internationally standardized system to classify traded products, although, unlike other energy products, it is under an optional heading, meaning that countries are not expressly required to classify it as a commodity. Besides that, regarding the Appellate Body position on this issue, it have held that purchase of electricity under the feed-in tariff program satisfies the conditions of Article 1.1(a)(1)(iii), which requires a government to purchase goods for a measure to be deemed a subsidy.37 Based on all of the information above, especially
the last point, it can be concluded that the SCM Agreement applies to energy subsidies.
34 Ibid. Article 5
35 WTO Secretariat, ‘Energy Services: Background Note by the Secretariat’ Council for Trade in
Services, Document number S/C/W/52 (9 September 1998) para 8
36 Ibid.
37 Appellate Body Report, Canada – Certain Measures Affecting the Renewable Energy Generation
Sector/Canada - Certain Measures Relating to the Feed-in Tarff Program (Canada –Renewable Energy/FIT), WT/DS412/AB/R / WT/DS426/1, 24 May 2013, para 6.1(d)(ii)
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B. Application of the SCM Agreement to energy subsidies
It can be seen that the Agreement does not distinguish between subsidies to fossil fuels and subsidies to renewables, therefore, both could fall under the Agreement if they fulfill the conditions stated above. However, there are differences in how these two types of energy are subsidized with the result that fossil fuel subsidies escape the WTO scrutiny and renewables, on the contrary, are often a source of disputes. I would like to assess each category in turn.
As mentioned earlier, fossil fuels, which include oil, gas and coal, are still subsidized to a great extent, despite all of the initiatives taken to reduce GHG emissions in the atmosphere. One of the main arguments for the continued subsidization is usually the claim that energy subsidies, by reducing the costs for consumers and producers, serve some social or economic development goals and support low income or vulnerable groups in society. However, it should be noted that, according to the statistics provided by the International Energy Agency, the subsidies decreased to US$490 billions in 2015, as a result of reforms taken in 2009, while the number expected was around US$600 billion.38 In relation to the benefits of subsidizing the fossil fuels, the IEA states that these are generally outweighed by the costs,39 which were summarized in the Preamble of the G20 Summit statement. It was stated that these ‘inefficient
fossil fuel subsidies encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change.’40 Despite the fact that adverse effects of subsidizing fossil fuels are well known, it seems that governments are unwilling to take steps to reform their harmful policies. It has been suggested that the governments’ reluctance to act is caused by various factors, such as the ‘lack of clear standards and definitions, limited
transparency on subsidy levels, and lack of an enforcement mechanism.’41
38 International Energy Agency (IAE), ‘World Energy Outlook 2015 Factsheet: Global nergy trends to
2040’ (Paris: International Energy Agency, 2015)
39 International Energy Agency (IAE), ‘World Energy Outlook 2011 Factsheet: How will global energy
markets evolve to 2035’ (Paris: International Energy Agency, 2011)
40 University of Toronto, ‘G20 Leaders’ Statement: The Pittsburgh Summit (2009) para 24
<http://www.g20.utoronto.ca/2009/2009communique0925.html> accessed 5 May 2016
41 Harrison Institute for Public Law, ‘Using the Transatlantic Trade and Investment Partnership to
Limit Fossil Fuel Subsidies’ Discussion Paper (2010) 3
<http://www.greens-efa.eu/fileadmin/dam/Documents/Studies/Fossil_Fuel_Subsidies_TTIP__9January2014.pdf> accessed 5 May 2016
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Subsidies to fossil fuels can take various forms, as they can provide support either to consumers, such as direct cash transfer or tax emption, as well as to producers in the form of preferential tax treatment or providing of infrastructure.42 Some of these have direct impact on costs prices, while others are affecting the market indirectly. According to the studies, consumption subsidies are usually several times higher than those provided to producers and do not differentiate between groups of consumers, instead they apply to all.43 This is probably one of the main reasons why fossil fuel
subsidies are not caught by the provisions of the SCM Agreement, particularly Article 2 requiring the subsidy to be specific. Production subsidies, on the other hand, are usually provided to certain producers, therefore, fulfilling the requirement under Article 2. This creates a disadvantage for renewable energy subsidy programs that are intended to support producers of renewable energy, as is demonstrated by the WTO case law on this issue that will be discussed below. However, some argue that subsidies to fossils could satisfy the specificity requirement as well, since they might be considered de facto specific on the basis that they will disproportionately benefit energy-intensive industries.44
Subsidies for renewable energy production, as has been mentioned, are usually provided to producers, especially in the form of quite popular feed-in tariffs (FITs), as well as power purchase agreements, loan guarantees, favourable tax treatment and R&D funding.45 The purpose of FITs is to accelerate investment and to incentivize renewable energy, this being done by guaranteeing minimum payments to energy producers for energy produced from renewable sources. However, the most problematic aspect is that these FIT programs frequently contain local-content requirement, meaning that they are available exclusively to purchasers of domestic technology, thereby being discriminatory and not allowed under the SCM Agreement. This has been illustrated by various recent international trade disputes triggered by
42 United Nations Environment Programme, ‘Reforming Energy Subsidies: Opportunities to Contribute
to the Climate Change Agenda’ (2008) 9
<http://www.unep.org/pdf/pressreleases/reforming_energy_subsidies.pdf> accessed 5 May 2016
43 International Institute for Sustainable Development, ‘Global Subsidies Initiative: Fossil Fuels: At
What Cost?’ (2010) <http://www.iisd.org/gsi/fossil-fuel-subsidies/fossil-fuels-what-cost> accessed 10 May 2016
44 Robert Howse, ‘Climate Mitigation Subsidies and the WTO Legal Framework: A Policy Analysis’
9 <http://www.iisd.org/pdf/2009/bali_2_copenhagen_subsidies_legal.pdf> accessed 5 May 2016
45 Henok Birhanu Asmelash, ‘Energy Subsidies and WTO Dispute Settlement: Why Only Renewable
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subsidy programs containing domestic-content requirements, especially those concerning Canadian and Chinese measures, that will be discussed in turn.46
C. What does the case law say?
Before proceeding to disputes mentioned above, a non-energy, but very complex significant WTO case, EC – Aircraft, will be discussed to illustrate some of the general rules governing subsidies.47 This dispute concerned a number of measures,
taken by the EU and four of its members, complained of by the United States that argued that the measures, more than 300 instances of alleged subsidization, were prohibited export subsidies within the meaning of Article 3.1(a) of the SCM Agreement,48 as well as specific subsidies within the meaning of Articles 1 and 2.49 In addition, the US claimed that these measures have caused adverse effects to its interests within the meaning of Articles 5(a) and (c) of the SCM Agreement.50 Firstly, the Panel had to determine whether there was a subsidy and, if so, whether it was specific.51 This was followed by the assessment of any adverse effects, as specified by Articles 5 and 6 of the SCM Agreement.52 In relation to the definition of export subsidies, the Panel had stated that ‘in order to qualify as a prohibited export subsidy,
the grant of the subsidy must be conditional or dependent upon actual or anticipated export performance; or as we have put it above, a subsidy must be granted because of actual or anticipated export performance.’53 However, this finding had been reversed by the Appellate Body that had ruled in its report that the focus should be on whether the subsidy provides an incentive to export as opposed to selling domestically, thereby allowing some of the disputed subsidies.54 Nevertheless, the Appellate Body
had found some of the actionable subsidies to be incompatible with Article 5 of the SCM Agreement, as they have caused adverse effects to the interests of the US and advised the EU to take appropriate steps.55
46 Canada – Renewable Energy/FIT (n 37), China – Measures Concerning Wind Power Equipment
(China – Wind Power), WT/DS419/1, 22 December 2010
47 European Communities – Measures Affecting Trade in Large Civil Aircraft (EC – Aircraft),
WT/DS316/AB/R, 1 June 2011
48 Panel Report, EC – Aircraft, para 7.583 49 Ibid. para 7.717
50 Ibid. para 7.1610 51 Ibid. para 7.919
52 Ibid. paras 7.1729-7.2186 53 Ibid. para 7.648
54 Appellate Body Report, EC- Aircraft, para 1047 55 Ibid. 1416
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Secondly, a dispute resulting from a typical FIT program requiring the use of domestic goods will be considered. It concerned a FIT program provided by the province of Ontario in Canada, which was opposed by Japan and the EU on grounds that the ‘Minimum Required Domestic Content Level’ of 25-60% was ‘a necessary
condition and prerequisite for electricity generators to participate in the FIT Programme.’56 The purpose of the measure was, according to the Ontario Minister of Energy and Infrastructure, not only to ‘increase capacity of renewable energy supply
to ensure adequate generation and reduce emissions’, but also to ‘introduce a simpler method to procure and develop generating capacity from renewable sources of energy, enable new green industries through new investment and job creation and provide incentives for investment in renewable energy technologies.’57 In addition, it aimed at stabilizing the domestic economy and creating as much as 50,000 new jobs.58 Under the Ontario’s FIT program, the producers of green energy, from sources such as wind, sunlight or biomass, were entitled to fixed rates, above the market price, for period of 20 years.59 Moreover, the program provided for one exception regarding hydropower, producers of which were paid fixed price under 40-year contract.
However, the Panel, in its Report, did not evaluate on the measure’s consistency with the SCM Agreement to a large extent, as it did not find the measure to satisfy the definition of a subsidy under Article 1.1.60 Even though the Panel agreed that the FIT program was a ‘financial contribution by a government’, since it have amounted to purchase of goods by the government as required by Article 1.1(a)(1)(iii), the Panel could not come to an agreement regarding the second requirement, particularly the conferral of a benefit by the measure.61 Despite that the Panel rejected claims presented by both parties, it did not identify a proper benchmark for determining whether a benefit is conferred by the challenged measure. One of the claimants, Japan, has argued that the measure is a subsidy within the meaning of Article 1.1(b), especially since the prices guaranteed to renewable energy producers were
56 Panel Report, Canada – Renewable Energy/FIT, para 7.158-7.165 57 Ibid. para 7.65
58 International Institute for Sustainable Development, ‘Global Subsidies Initiative: WTO subsidy
dispute round-up’ (2010) <http://www.iisd.org/gsi/news/wto-subsidy-dispute-round-0> accessed 15 May 2016
59 Panel Report, Canada – Renewable Energy/FIT, para 7.64 60 Ibid. para 7.328
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significantly higher than those provided in the market.62 Moreover, the European Union supported this claim by arguing that the 20-year duration of the guaranteed high rates would not otherwise be available to energy producers, thereby constituting a benefit.63 As has been stated, Canada’s arguments and proposed benchmarks have been rejected as well.
Nevertheless, the FIT program has been found in violation of other provisions, specifically Article 2.1 of the TRIMs Agreement64 and Article III;4 of the GATT
1994,65 which have lead both parties to the dispute to appeal the decision. The Report of the Appellate Body, similar on many grounds, reversed some of the Panel’s conclusions, most importantly, the Panel’s ‘benefit’ finding.66 However, it could not complete the legal analysis and determine whether a benefit was conferred, as the Panel Report did not provide sufficient factual findings and undisputed facts, leaving the question unanswered.67 According to Avidan Kent, the decision seems to be ‘an
evolution in the interpretation of the SCM Agreement, which priori to this case was described as operating in isolation from the motives for the subsidies.’68 This is a favourable development from the renewable energy producers’ perspective, as the consideration of the measure’s purpose, especially those relating to environmental issues, could prevent some of these claims under the SCM Agreement.
Another dispute concerning subsidies to renewable energy production, particularly wind power, that I would like to discuss, is one of the first ‘green technology’ disputes brought to the WTO and the third successful WTO challenge brought by the United States against Chinese subsidies. Similarly to the two previous disputes, it has been resolved during the consultation stage, as China had terminated its subsidy program, thereby depriving the WTO of another opportunity to consider the
62 Ibid. para 250 63 Ibid. para 255
64 Agreement on Trade-related Investment Measures, Part of the Marrakesh Agreement Establishing
the World Trade Organization, Annex 1A, Multilateral Agreements on Trade in Goods of the Uruguay Round Negotiations, 1868 UNTS 186 (1994)
65 General Agreement on Tariffs and Trade 1994, Part of the Marrakesh Agreement Establishing the
World Trade Organization, Annex 1A, Multilateral Agreements on Trade in Goods of the Uruguay Round Negotiations (GATT 1994) 1867 UNTS 187; 33 ILM 1152 (1994)
66 Appellate Body Report, EC – Renewable Energy/FIT, para 223 67 Ibid. para 224
68 Avidan Kent, ‘The WTO Law on Subsidies and Climate Change: Overcoming the Dissonance?
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availability of the SCM agreement to justify environmental measures.69 In its request for consultation, the US had complained of the Chinese support program, the Special Fund for Wind Power Manufacturing, which was, similarly to the Canadian FIT program, contingent upon the use of domestic equipment. On this basis, the US claimed that the program has been inconsistent with Articles 3 and 25 of the SCM Agreement. Moreover, since the funds provided by the Chinese government were between $6,7 million and $22,5 million, it has been argued that the measure costs America jobs.70 This has been also confirmed by the Chinese newspaper People’s
Daily, in which it has been stated that ‘the rapid development of wind power owes its
success to the ‘equipment first’ strategy.’71 The statistics provided specify that while
90 percent of the installed wind power equipment in 2004 was imported from foreign countries, 90 percent of the total wind power equipment used in China in 2010 was Chinese-made. Furthermore, according to International Energy Agency, China became a leader in wind and photovoltaic energy production in 2009,72 which have probably been a result of its support measures. On the other hand, Permanent Mission of China to the WTO has argued that the US had misunderstood the purpose of its measure and further stated its aim was to ‘enhance investments on research and
development in wind power technology, but not to use domestic goods instead of imported goods.’73 The outcome of this case has been quite criticized, since the expansion of the renewable energy sector is exactly what is needed to reduce carbon emissions, however, it is negatively affected by claims such as the one in question.
Moreover, it should be noted that, the US brought claims against China regarding the subsidization of solar panel industry as well, followed by the imposition of anti-dumping duties of 31% on these panels, which have led China to request for
69 China – Wind Power (n 45)
70 Jonathan Watts, ‘Wind Direction Unchanged by US Trade Victory over China’ The Guardian (9
June 2011) <https://www.theguardian.com/environment/blog/2011/jun/09/china-us-trade-dispute-wind-power-subsidies> accessed 10 May 2016
71 People’s Daily Online, ‘With policy support, China’s wind industry growing exponentially’ (30 May
2011) <http://en.people.cn/90001/90778/90860/7394662.html> accessed 10 May 2016
72 International Energy Agency (IAE), ‘World Energy Outlook 2010’ (Paris: International Energy
Agency, 2010) 87 <http://www.worldenergyoutlook.org/weo2010/> accessed 10 May 2016
73 International Centre for Trade and Sustainable Development, ‘China to End Challenged Subsidies in
Wind Power Case’ (June 13 2011) <http://www.ictsd.org/bridges-news/biores/news/china-to-end-challenged-subsidies-in-wind-power-case> accessed 8 June 2016
18
consultations with the United States.74 China have argued that its measures did not constitute a ‘subsidy’ within the meaning of the SCM Agreement, as the requirements under Article 1.1(a)(1), Article 1.1(b) and Article 2 have not been satisfied. According to Avidant Kent, as a result of the measures taken by the US regarding the ‘low-priced Chinese-subsidized solar panels, such panels are expected to become less
popular among US customers.’75 In addition to that, the low prices provided by the Chinese producers will not be possible to maintain, leading to a decrease in the demand and, as mentioned earlier, negatively affecting the production of energy from renewable sources. On this basis, I would suggest that the exemption for energy subsidies attaining environmental objectives would be quite a positive development, possibility of which will be discussed in the following section.
IV.
Article 8 of the Agreement on Subsidies and Countervailing Measures
After the assessment of the Agreement on Subsidies and Countervailing Measures (ASCM) as a whole, I would like to focus on one of the three categories mentioned earlier, particularly the category of non-actionable subsidies set out in Article 8 of the Agreement, which is no longer in force. Section 1 of Article 8 provides that subsides which are not specific according to Article 2 of the Agreement, as well as subsidies, which are specific, but which fall under one of the paragraphs of section 2, should be non-actionable. Section 2 recognizes three types of non-actionable subsidies: a)
assistance for research activities conducted by firms or by higher education or research establishments, b) assistance to disadvantaged regions within the territory of a Member given pursuant to a general framework of regional development and non-specific (within the meaning of Article 2) within eligible regions and c) assistance to promote adaptation of existing facilities to new environmental requirements imposed by law and/or regulations which result in greater constraints and financial burden on firms. It is evident that the third type of assistance will be the most relevant when
looking for a way to support renewable energy production. On this basis, Sadeq Bigdeli argues that the ‘environmental green light’ should be distinct from the other
74 United States – Countervailing Duty Measures on Certain Products from China, WT/DS437/1, 25
May 2012
19
two so-called green light provisions, namely the R&D (research and development) and regional development subsidies.76 The reason is that R&D subsidies, unlike regional development subsidies, are mostly used by the developed countries, therefore, the global issue of the environment should ‘be dealt with under a separate
heading to save it from the North-South political dynamics of the other two categories.’77 However, before expanding on the possible formulation and design of the green light subsidies, the negotiating history of the provision will be discussed, as its content was the cause of many disagreements between the parties.
A. Negotiating history of Article 8
Several different versions of Article 8 have been drafted during the Uruguay Round of trade negotiations, however, a significant shift occurred in the final stage of the negotiations as a result of change in the attitude of the United States. Despite the fact that the exemption of regional development subsidies, proposed by the EC and supported by other parties, was opposed by the US, it has been included in the draft of the Agreement in 1991, the Dunkel draft.78 However, the other two exemptions were sources of conflict between the negotiating parties. The EC had proposed rather wide exemption for environmental subsidies, which included ‘compensation of higher cost
of developing and/or adopting “clean” technologies, or inducement to consumers/users to prefer environment-friendly, albeit more expensive, products’.79
The EC had claimed that as no competitive advantage has been conferred on the recipient under this type of support, it should not be actionable. Other negotiating parties, such as Switzerland or Nordic countries, had proposed exemptions for environmental subsidies as well, albeit formulated quite differently. In the Communication from Switzerland the focus was on the polluter pays principle (PPP), as it has stated that ‘environmental policies should be based on the
polluter-pays-principle. Where this principle is complemented by governmental assistance
76 Sadeq Z. Bigdeli, ‘Resurrecting the Dead? The Expired Non-Actionable Subsidies and the Lingering
Question of ‘Green Space’ (2011) 8(2) Manchester Journal of International Economic Law 2,3
77 Ibid.
78 Draft Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations,
MTN.TNC/W/FA (20 December 1991) at <https://docs.wto.org/gattdocs/q/UR/TNC/WFA.PDF> accessed 10 June 2016
79 Uruguay Round – Group of Negotiations on Goods (GATT) – Negotiating Group on Subsidies and
Countervailing Measures – Elements of the Negotiating Framework – Submission by the European Community, MTN.GNG/NG10/W/31 (27 November 1989)
20
specifically to reduce pollution, the subsidy should not exceed more than a particular percentage (to be negotiated) of the total costs, in order to be non-actionable.’80 None of these proposals, arguably as a result of the US opposition, have been included in the Dunkel text. Therefore, even though the Draft Text on Subsidies and Countervailing Measures of 1990 provided exemptions for all of the three types of non-actionable subsidies81, the Draft Final Act of 1991 included only two of the green light provisions, assistance for research activities and assistance to disadvantaged regions.82
However, in January 1993, soon after the Clinton administration took office, Mexico had proposed to revise the Dunkel text, so as to include subsidies granted for environmental protection purposes, especially for developing countries. 83 The representative of Mexico had asked for the incorporation of environmental matters into the Final Act through the inclusion of ‘green’, non-actionable subsidies, as ‘this
was not a new subject, but rather an element which had been deleted in the latter text as a result of a obscure deal among the major trading partners.’ 84 The radical change of the approach taken by the US have led to the expansion of the R&D subsidies, up to 75 percent of the costs of research, and the reinsertion of the deleted provision on environmental green light subsidies.
B. Shortcomings of Article 8 of the SCM Agreement
As has been mentioned previously, Article 8 of the SCM Agreement is no longer in force, since it has been provisionally applied for the period of five years, which had expired in 1999.85 One of the reasons why the provision has not been extended or modified was presumably the fact that it has never been invoked by any Member, as
80 Uruguay Round – Group of negotiations on Goods (GATT) – Negotiating Group on Subsidies and
Countervailing measures – Elements of the negotiation Framework – Communication from Switzerland, MTN.GNG/NG10/W/26 (13 September 1989)
<https://docs.wto.org/gattdocs/q/UR/GNGNG10/W26.PDF> accessed 10 June 2016
81 Draft text on Subsidies and Countervailing Measures, MTN.GNG/NG10/23 (7 November 1990) 82 SCM Agreement (n 25) Articles 8.2(a), 8.2(b)
83 Terence P. Stewart, GATT Uruguay Round: A Negotiating History (1986-1992), Vol. IV, The end
game (Part I) (Boston: Kluwer Law and Taxation Publishers, 1999) 224
84 Trade Negotiations Committee, ‘Thirty-Third Meeting: 19 November 1993’ (1993) para. 31
<https://www.wto.org/gatt_docs/English/SULPDF/92140117.pdf> accessed 10 June 2016
21
well as no notification of a green light subsidy has been made.86 Although there have been supporters of the extension of Article 8, such as Switzerland, Canada or European Communities, the views of some Members were that the provision is in favor of developed countries as it, according to Pakistan, does not take into account concerns and needs of developing countries and disturbs the balance of the Agreement.87 On the other hand, Canada argued that Article 8, as well as Articles 6.1 and 9, were ‘essential to the traffic light framework of the Agreement’, followed by the statement that ‘the loss of that provision would be viewed as a regressive step, and
would reduce the ability of the Agreement to address environmental concerns.’88 The delegate of Switzerland pointed out to the lack of experience with the category of non-actionable subsidies and suggested that the provision should be tested before it will be completely changed. In addition, he mentions three main implications of excluding Articles 6.1, 8 and 9 of the SCM Agreement: a loss of the balanced structure reached in earlier negotiations by creating the categories of prohibited, actionable and non-actionable subsidies, a loss of predictability and a negative and wrong signal to the public by eliminating the possibility of subsidizing adaptation to new environmental laws.89 All in all, Switzerland considered it to be shortsighted to not extend Article 8.
It can be seen that there was a substantial disagreement between the Members regarding the content of Article 8, as well as the issue of its extension, thereby, the question stands, what will be the best solution for the future of renewable energy production, either to revive Article 8 in its initial form or to amend it so as to broaden the scope for exemptions, and what will be the consequences. One of the issues with the wording of Article 8, particularly paragraph (c), is that it imposes several requirements for the subsidy to be exempted, thus making it quite difficult for the support measure to fall under the paragraph in question. Paragraph (c) of Article 8 requires that the measure is: i) a one-time non-recurring measure; ii) limited to 20
86 Rios Herran, Pietro Poretti, ‘WTO – Trade Remedies’ in Rudiger Wolfrum, Peter obias Stoll and
Michael Koebele (eds), WTO – Trade Remedies: Max Planck Commentaries on World Trade Law (Leiden, Boston: Martinus Nijhoff Publishers, 2008) Vol. 4, 545, 551-552
87 WTO Committee on Subsidies and Countervailing Measures, ‘Minutes of the regular meeting of the
Committee on Subsidies and Countervailing Measures held on 1-2 November 1999’ G/SCM/M/24 (26 April 2000) paras 20-53
88 Ibid. para 25 89 Ibid. para 24
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percent of the cost of adaptation; iii) does not cover the cost of replacing and operating the assisted investment, which must be fully borne by firms; iv) is directly linked to and proportionate to a firm’s planned reduction of nuisances and pollution, and does not cover any manufacturing cost savings which may be achieved; and v) is available to all firms which can adopt the new equipment and/or production processes. It could be argued that the manner in which this provision was formulated
was one of the reasons why Article 8.2 was never invoked during its provisional application. According to Sadeq Bigdeli, the provision was so limited in scope, especially the one-time benefit of maximum 20% of the costs, that it could have led to the discouragement of potential users.90 There has been a possibility that the benefit in
question would be outweighed by the procedures required by the SCM Agreement, such as the notification of a subsidy program to the Committee91, the review of the notification by the Secretariat, followed by the review process of the Committee92 and, in cases of a disagreement, arbitration.93 This leads us to a question, whether Article 8.2 has never been invoked as a result of the short period of its application or as a result of the very limited benefit it actually offers.
On the other hand, the logic behind the limitation of the benefit to the 20% of the costs of adaptation to new environmental requirements is the Polluter Pays Principle, which, as mentioned previously, was one of the main concerns of Switzerland when negotiating the SCM Agreement. This principle, which has been interpreted as a ‘no-subsidy principle’94, is considered to be ‘the oldest, most durable, and arguably the most important doctrine bridging environmental and trade policies’.95 It requires the
party causing the damage to the natural environment to be responsible, thereby any government subsidy relating to the costs incurred as a result of environmental regulations should be excluded. Moreover, the principle is a central principle of the EU’s environmental policy as is demonstrated by the wording of Article 191 of the TFEU, which states in paragraph 2 that Union policy should be based on principles
90 Bigdeli (n 76) 11
91 SCM Agreement (n 25) Article 8.3 92 Ibid. Article 8.4
93 Ibid. Article 8.5
94 Judith Marquand, David R. Allen, ‘A Note on Some Aspects of the ”Polluter-Pays” Principle and its
Implementation’ (OECD, 1994) 77,78
95 Charles S. Pearson, ‘Testing the System: GATT + PPP = ?’ (1994) 27(3) Cornell International Law
23
that ‘environmental damage should as a priority be rectified at source and that the
polluter should pay.’
Nevertheless, as has been argued earlier, the wording of expired Article 8 of the SCM Agreement creates difficulties for the renewable energy producers for various reasons, one of them being the condition set out in the footnote to paragraph 2(c) requiring the facilities to be in operation for at least two years before the adoption of the new environmental regulation. The implication of this provision is that it does not encourage investing in new renewable energy plants, since subsidizing these plants would not satisfy the chapeau of Article 8(c). On the other hand, its purpose was presumably the prevention of abuse of the environmental green light exemption, as is the case with conditions set out in paragraphs (iii) and (iv). The former stipulates that it does not allow assistance for the costs of operating the investment, therefore, only extra costs incurred as a result of adaptation to new environmental regulation will be covered. The latter introduces the principle of proportionality, which requires the government support to be ‘directly linked and proportionate to a firm’s planned
reduction of nuisances and pollution.’ Lastly, the fifth requirement, the implication of
which is quite questionable, orders the subsidy to be available to all firms. The issue is that, if the subsidy in question would be available to all firms adjusting to new environmental standards, then, arguably, the subsidy will be non-specific under Article 8.1(a) and thus non-actionable. However, it should be noted that the requirement of specificity seems rather vague, as it is not stipulated in Article 2 of the SCM Agreement, how broad the targeted group of enterprises has to be in order to be considered as non-specific. Based on all of the information provided, it may be concluded that although the expired environmental green light provision aims at abuse prevention, the requirements it had imposed on the potential users have led to little or no use of the exemption in question. Therefore, if the provision is revived in the future, the ‘green space’ it provides should be significantly broader.
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V.
Article XX of the GATT and the Law of State Aid in the European Union
A. Article XX of the GATT
In this chapter, two possible avenues of justification available to renewable energy subsidies should be explored. The first, somewhat controversial, option is to justify subsidies for renewable energy under Article XX of the GATT, particularly paragraphs (b) and (g), as they are environmentally relevant.96 The former aims at
protecting ‘human, animal or plant life or health’, while the latter is applicable to measures ‘relating to the conservation of exhaustible natural resources’. The availability of both for environmental measures has been confirmed by the WTO case law. In Brazil – Measures Affecting Imports of Retreaded Tyres, the Appellate Body have held that climate change is within the scope of paragraph (b),97 however, according to the Report of the Panel, the justification of the relevant measure would require specific evidence of its contribution to the protection of human, animal or plant life or health.98 Regarding paragraph (g), the Appellate Body had similarly concluded that clean air can be protected under this provision.99
The application of these environmental exceptions to the SCM Agreement is quite questionable, as there are many arguments against it, one of them being that, since the expiration of non-actionable category, the SCM Agreement does not contain a provision similar to Article XX of the GATT, thereby implying that inclusion of such provision has not been intended. It has been argued that the availability of Article XX to justify environmental subsidies could possibly lead to claims of applicability for all other covered agreements, thereby undermining market access significantly.100 The
very narrow scope of Article 8 indicates the intention to provide exceptions different
96 GATT 1994 (n 65)
97 Appellate Body Report, Brazil – Measures Affecting Imports of Retreaded, WT/DS332/AB/R, 17
December 2007, para 151
98 Panel Report, Brazil – Measures Affecting Imports of Retreaded Tyres, WT/DS332/R, 17 December
2007, para 7.46
99 Appellate Body Report, United States – Standards for Reformulated and Conventional Gasoline,
WT/DS2/AB/R, 20 May 1996, para 18
100 Luca Rubini, ‘Ain’t Wastin’ Time No More: Subsidies for Renewable Energy, the SCM Agreement,
25
from the general exceptions of the GATT,101 however, as has been demonstrated in the previous section, the negotiations of Article 8 have been surrounded by many disagreements regarding its content.
Moreover, unlike other Annex A1 Agreements, such as the Agreement on Sanitary and Phytosanitary Measures (SPS Agreement)102, which states in its fifth recital that it desires to ‘elaborate rules for the application of the provisions of GATT 1994, which
relate to the use of sanitary or phytosanitary measure, in particular the provisions of Article XX(b)’, the SCM Agreement does not contain any express reference to Article
XX. Nevertheless, according to Henok Birhanu Asmelash, the most persuasive argument against the application of Article XX as a justification for renewable energy subsidies is the expression ‘nothing in this Agreement shall be construed to prevent
the adoption or enforcement by any contracting party of measures’ contained in
Article XX, which limits it to the provisions of GATT.103
On the other hand, especially since the expiration of Article 8, Article XX should be available for subsidies aimed at the prevention of climate change. There is nothing in the SCM Agreement expressly prohibiting the application of Article XX to subsidies. Some argue that the language of the chapeau discussed above, particularly the phrase ‘nothing in this Agreement’, ‘cannot be read to imply more than what it says
expressly’.104 Therefore, the fact that there are no obstacles in the GATT itself does not determine the application to other agreements, which have not even been in existence at the time GATT was drafted. Moreover, the assumption that Article XX cannot justify the use of subsidies would lead to inconsistent application, since prohibited and more trade restricting measures, such as quotas, would be justifiable, while subsidies, which are less trade distorting, would not. Another argument in favor of the application of Article XX is the Panel Report in US – Customs Bond, where it
101 Ingrid Jegou, Luca Rubini, ‘The Allocation of Emission Allowances Free of Charge: Legal and
Economic Consideration (Geneva: International Centre for Sustainable Development, 2011) 40
102 Agreement on the Application of Sanitary and Phytosanitary Measures, Part of the Marrakesh
Agreement Establishing the World Trade Organization, Annex 1A, Multilateral Agreements on Trade in Goods of the Uruguay Round Negotiations, 1867 UNTS 493 (1994)
103 Asmelash (n 45) 280 104 Rubini (n 100) 563
26
has been argued, even though not definitely decided, that a measure violating the Antidumping Agreement may be justified under Article XX(d).105
However, even if we presumed that none of the arguments discussed would prevent application of Article XX to the SCM Agreement, it is very unlikely for some of the subsidy programs, especially those containing domestic content requirements, to meet the requirements contained in the chapeau of Article XX, as well as the ‘necessity test’ of paragraph (b). The chapeau requires the measures to be ‘not applied in a
manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade.’ Therefore, for the measure to be justified under Article XX, the
respondent State would have to show that the measure is necessary, as well as that it does not result in arbitrary or unjustifiable discrimination. Regarding the case of Canadian FIT program mentioned earlier, the measure requiring the 25-60% of the equipment used to be domestic, would probably not satisfy this test.106 It is evident that production subsidies would be more likely to satisfy the requirement of the chapeau than local content subsidies. On the other hand, it should be noted that in Canada - FIT case, the Appellate Body did not expressly exclude possible justification of discrimination based on the processes and production methods (PPMs) when it relates to climate change.107 Similarly in the case concerning Chinese support program, which has been discussed earlier, the possibility of the local content measure being considered necessary and not discriminatory was not expressly ruled out.108 However, it is important to assess the specific circumstances and conditions in
the granting country, as well as the availability of alternative less trade restrictive measure.
In conclusion, it has been demonstrated that the possibility of using general exceptions under Article XX of GATT to justify renewable energy subsidies is not unworkable, nor unrealistic. Although there are some obstacles, especially the
105 Panel Report, United States – Customs Bond Directive for Merchandise Subject to Anti
Dumping/Countervailing Duties, WT/DS345/R, 29 February 2008, para. 6.13
106 Canada – Renewable Energy/FIT (n 37) 107 Avidan Kent (n 68) 360
27
unpredictability surrounding the expansion of its application, there is a need for more regulatory autonomy of WTO Members when tackling climate change.
B. The EU law of State aid
Secondly, the European Union’s perspective on subsidies to renewable energy should be considered, as it may be relevant for future development of the WTO rules, particularly the SCM Agreement. To begin with, the EU law of State aid is governed by Articles 107 and 108 of the Treaty on the Functioning of the European Union (TFEU), the former of which declares incompatible with the internal market ‘any aid
granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States.’ Paragraphs 2 and 3 of Article 107 further specify permitted and compatible
instances of State aid, none of which relates to environmental issues specifically. However, since the European Council have made various ambitious commitments in the name of the EU, including the reduction of its greenhouse gas emissions by at least 20% compared to a 1990 baseline by 2020,109 the new guidelines on State aid for environmental protection have been implemented in 2008, aiming at the promotion of renewable energy sources. In addition to that, the General Block Exemption Regulation (GBER) for State aid has been adopted by the European Commission for the similar purpose of approving environmental aid.110 However, both of these pieces of legislation have been superseded recently, namely by the 2014 Guidelines on Environmental and Energy aid (EEAG), which extend the scope of existing guidelines to the energy field, and the 2014 General Block Exemption Regulation (GBER). The purpose of the latter is for the Commission to declare specific categories of State aid to be compatible with the Treaty, thereby relieving them from the obligation of prior notification and approval required under the Guidelines.
Under the GBER, numerous types of environmental aid are allowed, including investment aid for early adaptation to future Union standards (Article 37), investment aid for energy efficiency measures (Article 38), investment aid for remediation of
109 Community Guidelines on State Aid for Environmental Protection’ (Guidelines) [2008] OJ C82/4 110 Commission Regulation (EC) 800/2008 on the application of Articles 87 and 88 of the Treaty
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contaminated sites (Article 45), investment aid for waste recycling and re-utilisation (Article 47), investment aid for energy infrastructure (Article 48), and, most importantly, investment and operating aid for the promotion of energy from renewable sources (Articles 41 and 42).111 Therefore, concerning the State aid available to renewable energy production, after the conditions set out in Articles 41 and 41 and Chapter I of the Regulation have been fulfilled, the aid is considered to be within the meaning of Article 107(3) of the TFEU and thus exempted from the notification requirement of Article 108(3) of the TFEU.112
One of the advantages of the EU approach, as compared to the WTO system, is an individual case-by-case scrutiny by the Commission in addition to the set of pre-defined strict rules of the GBER. Under the 2014 Guidelines, the Commission ultimately decides whether the environmental aid should be authorized or not, thereby allowing for higher levels of aid intensity. When assessing the aid, the Commission should base its decision on the ‘balancing test’ introduced in the State Aid Action Plan, which balances the positive impact of the aid against its negative side effects.113 The balancing exercise consists of three steps: i) is the State aid aimed at a well-defined objective of common interest (environmental protection)? ii) is the measure designed to address that objective (appropriate instrument, incentive effect and proportionality)? and iii) does it involve limited distortion of competition and effect on trade, thus making the overall balance positive?114 It is evident that the EU system allows the Commission to take the purpose of the subsidy into account, thereby differentiating between good and bad subsidies, while the WTO rules are concerned only with the procedural aspects of the state support. Moreover, even though the WTO Members are required to notify about any granted or maintained subsidy under Article 25 of the SCM Agreement, they do not do so very consistently.115 This is
another significant distinction between the two sets of rules, since the EU system contains extensive notification obligations backed up by appropriate sanctions that
111 Commission Regulation (EU) No 651/2014 declaring certain categories of aid compatible with the
internal market in application of Articles 107 and 108 of the Treaty [2014] (GBER)
112 Ibid. Articles 41(1) and 42(2)
113 State Aid Action Plan, COM (2005) para 20 114 Ibid.
115 Gary N. Horlick, ‘Subsidies Discipline under WTO and US Rules’ in CD. Ehlermann and M.
Everson (eds), European Competition Law Annual 1999: Selected Issues in the Field of State Aids (Oxford: Hart, 2001) 593, 601
