I. INTRODUCTION
Following the World Trade Organization (WTO) Appellate Body report in the Canada – Renewable Energy (2013) dispute,Footnote 1 the need for reforming the WTO Agreement on Subsidies and Countervailing Measures (SCM) has been increasingly voiced in the literature, in particular with a view to safeguarding ‘policy space’ for government support for renewable energy (RE).Footnote 2 The essence of the call for reform is that the current SCM disciplines, which were negotiated and designed in the late 1980s and early 1990s, are no longer suitable in the face of the imperative of addressing climate change, among other global public goods. In the particular case of RE support measures, their legal status as ‘subsidies’ that can be challenged under the SCM Agreement is unclear, and this legal uncertainty itself is claimed to be a constraint on policy space. Most fundamentally, it is argued that the problem with the SCM Agreement is that there is no basis for accommodating trade-distortive renewable energy subsidies: if these are contingent on export performance or import-substitution (Article 3 SCM), or are otherwise shown to cause ‘adverse effects’ to the import-competing or export-competing interests of another member (Article 5 SCM), they are SCM-inconsistent and there is no defence. This is so irrespective of the rationale for subsidization: the text of the SCM Agreement is not more tolerant towards the trade-distortive effects of a subsidy because it contributes to mitigating climate change, or any other legitimate policy objective. In light of this growing consensus on the need to review the SCM Agreement, some scholars have suggested turning to the European Union (EU) as a possible source of inspiration, given it is the only other polity that has a centralized system of subsidy control.Footnote 3
While this proposition may appear attractive at first sight, it requires closer analysis and careful reflection. This article is a first attempt to thoroughly explore what lessons, if any, the WTO might draw from the EU in terms of sheltering government support for the development and use of renewable energy, with a particular focus on electricity produced from renewable energy sources (or ‘green’ electricity). In order to do so, it begins by examining the relationship between climate change mitigation, renewable energy and government intervention in order to place the comparative analysis in its broader legal and policy context. It will be shown that whilst renewable energy has been widely recognized as playing an important role in achieving the internationally-agreed 2 °C climate target, and the need for government intervention to boost renewable energy is generally accepted, the specific forms of public support which are most appropriate or effective in combating climate change remains controversial (Section II). And yet, as will be seen, this question is particularly relevant from a WTO law standpoint, as different support measures will fare differently when examined under the microscope of the SCM Agreement. The article then proceeds with an in-depth comparative analysis of the EU and WTO regulatory frameworks on government support for green electricity. It will be shown that whilst the two systems present some similarities in their approach to negative integration, they are fundamentally different in important respects. Overall, EU substantive disciplines and control mechanisms are comparatively much stronger, which is a direct reflection of the more ambitious objectives of EU State aid law. This, in turn, goes a long way towards explaining why the EU's regulatory model is noteworthy for having progressively established a sophisticated system of justifications for State aid for renewable energy, using a combination of both hard-law and soft-law instruments (Section III). However, it will be argued that the EU's experience in sheltering renewable energy aid cannot be easily replicated at the WTO level for a variety of legal, political and institutional reasons (Section IV).
Nonetheless, this comparative analysis sheds light on where the key challenges lie for the WTO in ensuring that international trade rules and climate change mitigation objectives are mutually supportive. Arguably, the most pressing challenge is to improve the transparency and knowledge-enhancing elements of the WTO subsidy control system, so that it becomes clearer which green policy space is actually at stake. In other words, what RE support measures are being implemented by WTO members and is there a risk that these could be constrained by current WTO rules? In this regard, it will be asked whether it is the SCM Agreement alone or WTO trade remedy rules more generally which needs to be revisited (including the Anti-dumping Agreement), the latter being an area on which the EU can hardly offer guidance (Section V).
II. CLIMATE CHANGE MITIGATION, RENEWABLE ENERGY AND GOVERNMENT SUPPORT
A. International Framework and Practice
It is largely uncontested that climate change is possibly the greatest sustainable development challenge presently facing the international community.Footnote 4 The 1992 United Nations Framework Convention on Climate Change (UNFCCC), with its near-universal membership, represents the global response to this challenge and has the ultimate objective of stabilizing ‘greenhouse gas emissions concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system’.Footnote 5 To this end, the main scientific authority for climate policymaking—the Intergovernmental Panel on Climate Change (IPCC)—has estimated that global greenhouse gas (GHG) emissions would need to be reduced to close to zero during the second half of this century in order to achieve the global target of limiting the average increase in temperature to less than 2 °C from pre-industrial levels.Footnote 6 This commitment has been recently enshrined into the landmark Paris Agreement, which entered into force on 4 November 2016, and whose overarching goal of ‘holding the increase in the global average temperature to well below 2 °C above pre-industrial levels’Footnote 7 is to be implemented by all Parties through ‘nationally determined contributions’.Footnote 8 Similarly, there is broad acceptance that replacing conventional ‘brown’ or ‘dirty’ energy (ie generated from fossil fuels such as coal, natural gas and oil) with renewable ‘green’ or ‘clean’ energy (ie generated from naturally replenished resources such as solar, wind, geothermal and hydropower) can play an important role in mitigating climate change and achieving the internationally agreed 2 °C climate target.Footnote 9 This is because the energy sector is by far the largest source of greenhouse gas emissions, being responsible for more than two-thirds of worldwide GHG emissions, with fossil fuels being the source of about 80 per cent of those emissions and in particular electricity produced from fossil fuels accounting for 40 per cent of them.Footnote 10
A much more complex question, however, is whether government support to renewable energy is needed to ensure the transition to a low-carbon green economy. According to economic theory, government intervention may be warranted whenever the market fails to deliver desirable public goods and/or tackle externalities. From this perspective, climate change is often posited as the ‘greatest and widest-ranging market failure ever seen’ whose overall costs, if unaddressed, have been estimated as equivalent to losing at least 5 per cent (and as much as 20 per cent) of the world's gross domestic product ‘each year, now and forever’.Footnote 11 Part of the problem is that market prices do not properly factor in the climate-related benefits (or positive externalities) of green energy, and as a result profit-maximizing private companies will typically underproduce or underinvest in renewable energy and associated technologies due to private production/investment costs exceeding private benefits.Footnote 12 This provides a persuasive justification for public support as a means to incentivize and compensate renewable energy producers for their contribution towards achieving a significant global public good—that is, a stable climate.Footnote 13 In addition, the case for government support is made stronger by the need for a rapid and extensive dissemination of renewable energy, given the undisputed urgency of addressing climate change and reducing global GHG emissions substantially (ie by 40–70 per cent in 2050 compared to 2010 and close to zero in 2100 if the 2 °C climate target is to be achieved).Footnote 14
The other part of the problem is that market prices also fail to capture the real climate-related costs (or negative externalities) of conventional energy, making it relatively cheap vis-à-vis renewable energy.Footnote 15 This market failure is further exacerbated by the fact that the end-user price of conventional energy continues to be artificially lowered through heavily subsidized fossil fuels. According to the latest data by the International Energy Agency (IEA), worldwide fossil-fuel subsidies totalled $510 billion in 2014—an equivalent incentive of $115 per tonne of carbon dioxide emitted.Footnote 16 Correcting these market distortions, however, is only a second-best reason for government intervention in support of green energy.Footnote 17 From an economic efficiency standpoint, the best government response to putting renewable energy on an equal footing with competing and underpriced conventional energy would be to internalize climate-related costs by imposing a carbon tax at the socially optimum level, coupled with a (gradual) phasing-out of distortive fossil-fuel subsidies.Footnote 18 Indeed, both measures have been singled out as an essential component of the climate policy mix by the IPCC,Footnote 19 as well as by the IEA in its recent ‘Bridge Scenario’ aimed at securing the decarbonization of the energy sector in order to stay below the 2 °C climate limit.Footnote 20 In this regard, Howse rightly notes that there is ‘a very limited logic to giving policy space for clean-energy incentives or support to WTO Members who undermine the sought-after environmental benefits by, at the same time, continuing to subsidize dirty energy’.Footnote 21 And yet, this ideal approach of pricing carbon and removing climate-harmful subsidies to conventional energy may be politically difficult to implement and only gradually introduced in practice.Footnote 22 These political economy considerations further reinforce the case for (even imperfect) government intervention to level the playing field, at least in favour of those climate-friendly technologies that are not yet cost-competitive (absent that public support) with other brown energy sources.Footnote 23
But even if ones accepts there is a reasonable theoretical justification for government intervention to boost renewable energy at the general level, this still leaves open the question of which specific support measures are most appropriate or effective in combating climate change. The UNFCC regime does not provide much guidance on this question since, as with most multilateral environmental agreements, it leaves the choice of policy instruments to the Contracting Parties.Footnote 24 This decentralized approach is sensible as there is no one-size-fits-all approach to climate change mitigation for over 190 States with highly divergent GHG emissions profiles and potentials for renewable energy.Footnote 25 When looking at policy practice, the promotion of green electricity generation (particularly using solar photovoltaic (PV) and wind technologies) continues to be the focus of government stimulus,Footnote 26 with the single most common form of support being feed-in tariff (FIT) schemes that offer long-term guaranteed prices for renewably generated electricity fed into the grid. According to the global Renewable Energy Policy Network (REN21), as of year-end 2015, 110 jurisdictions at the national or state/provincial level had FIT programmes in place.Footnote 27 Significantly, this is an increase of 11 compared to 2013Footnote 28 when the WTO Appellate Body's ruling in Canada – Renewable Energy (2013) was delivered. Thus, the uncertainty surrounding the legal status of FITs under the SCM Agreement following that WTO reportFootnote 29 does not seem to have had a ‘chilling effect’ on policy practice. Besides being a popular choice, this price-support mechanism (if ‘well-designed’ and ‘well-implemented’) has been widely recognized as the ‘most efficient and effective’ policy instrument for promoting green electricity by the IPPC and other international expert bodies.Footnote 30 Another common form of government support in the electricity sector are fiscal measures (eg tax exemptions/reductions) and public finance (eg grants and preferential loans) to encourage investment in and deployment of renewable energy technologies,Footnote 31 and have been projected to increase substantially in the IEA's ‘Bridge Scenario’ from $270 billion in 2014 to $400 billion in 2030.Footnote 32
From an international trade perspective, however, it is important to distinguish between government support to generators of green electricity itself (such as FIT schemes) and to manufacturers of green technology products (such as investment aid). This is because the electricity market has traditionally been local, with cross-border electricity trade restrained by geography and grid connection infrastructure. Indeed, recent IEA statistics show that cross-border electricity trade mainly occurs between neighbouring countries and, while steadily increasing, global imports (726 TWh) of electricity in 2015 only amounted to about 3.5 per cent of the world's total electricity consumption (20200 TWh).Footnote 33 These physical constraints of electricity distribution systems necessarily limit the international trade impact of government support to green electricity and, as will be seen, this has a bearing on the question of green policy space under WTO law.Footnote 34 By contrast, the market for RE generation equipment is a global market, with clean technology components (eg solar PV cells and modules or wind turbines) traded intensively across borders. For instance, China supplied about 30 per cent of the global market for PV solar modules in 2013, followed by the United States (US) and Japan, while for wind turbines the top suppliers were Germany, China, US, Denmark, India and Spain.Footnote 35
B. EU Framework and Practice
For its part, the European Union has set for itself the more ambitious targets, to be attained by 2020, of increasing the share of renewable energy to at least 20 per cent of EU total energy consumption, and to at least 10 per cent of energy used in the transport sector in each Member State (the bulk of which is expected to come from biofuels).Footnote 36 These 2020 RE targets are a central element of the EU's climate change mitigation strategy,Footnote 37 given that energy-related emissions accounted for almost 80 per cent of its total GHG emissions in 2010.Footnote 38 However, increasing the use of renewable energy is also seen as a means to reduce the EU's dependence on imported fossil fuels, especially imported oil in the transport sector,Footnote 39 and thereby strengthen its international competitiveness. In other words, the ambition is also to foster the development of domestic RE industries and drive technological innovation and job-creation across Europe.Footnote 40 This industrial policy goal is not unique to EU policy practice but is also found under other RE support programmes (typically by attaching local content requirements),Footnote 41 and as will be discussed is problematic from a WTO law standpoint.Footnote 42
The 2009 Renewable Energy Directive establishes a common framework for the promotion of renewable energy and translates the overall 2020 targets into mandatory and differentiated national targets for each EU Member State.Footnote 43 To achieve these national targets, Member States are required to adopt national renewable energy action plans,Footnote 44 specifying sectoral 2020 targets for the share of energy from renewables in electricity, heating and cooling, and transport; planned policy measures to achieve them; the different mix of RE technologies they expect to employ; and the planned use of cooperation mechanisms.Footnote 45 Most importantly for current purposes,Footnote 46 the Directive contemplates that Member States may introduce support schemes to promote the use of energy from renewable sources, subject to the Treaty provisions on State aid.Footnote 47 It further provides an indicative list of public support measures that can encourage the use of renewable energy by reducing the cost of that energy (eg, investment aid to reduce the capital costs of installing and deploying RE technologies, or tax exemptions/reductions), by increasing its sales price (eg, through direct price-support mechanisms such as FITs and premium payments), or by increasing its sales volume (eg, through RE quota obligations, with or without tradable green certificates).Footnote 48 In a similar vein to the UNFCCC, the EU legislative framework thus adopts a decentralized approach to the choice of means by which renewable energy is supported, with Member States remaining the main drivers of policy development in this field. As may be expected, this has led to large differences in terms of both support levels and forms of support across EU Member States. According to the European Commission, the production of green electricity has been most commonly aided through direct price-support mechanisms (24 Member States), followed by grants and preferential loans (17 Member States), fiscal measures (12 Member States) and quantity-based mechanisms (6 Member States).Footnote 49
In the run-up to the adoption of the 2009 Renewable Energy Directive, the European Commission raised concerns about the multitude of national support schemes from the perspective of the internal electricity market. Nonetheless, it considered then that ‘harmonisation of support schemes would be premature, as the internal electricity market is not functioning properly, greater interconnector capacity is needed, national support to conventional electricity producers continue to distort the market and there has not been sufficient experience accumulated to determine the best choice of support scheme’.Footnote 50 As will be seen, this position has been recently revisited following the adoption of the Guidelines on State Aid for Environmental Protection and Energy (EEA Guidelines) in April 2014.Footnote 51
Finally, it ought to be highlighted that, according to the latest Commission renewable energy report, considerable progress has been made towards meeting the 2020 targets: in 2014, the projected share of RE in EU total energy consumption was 15.3 per cent, with a 10 per cent share in electricity, 16.6 per cent share in cooling and heating, and 5.7 per cent in transport.Footnote 52 Based on current developments and policies, it is estimated that the share of RE in EU total energy consumption could reach 20.9 per cent in 2020.Footnote 53 And yet, the promotion of renewable energy will continue to play a key role in the transition towards a low-carbon and energy-efficient economy beyond 2020: as part of its climate and energy goals for 2030, the EU has committed to a new target of at least a 27 per cent share of RE in its total energy consumption.Footnote 54 This new ambition has triggered a (still ongoing) review of the underpinning legislative framework, including a proposal put forward by the Commission in late November 2016 for a recast of the (presently in force) 2009 Renewable Energy Directive.Footnote 55 While still under consideration, the proposed Directive would introduce significant changes, two of which are worth mentioning here. First, the overall 2030 RE target is binding at EU level and, unlike under the current Directive, it has not been translated into binding national targets allocated to each Member State.Footnote 56 Second, the proposed Directive is more detailed in outlining the measures that may be taken by the Member States in order to ensure the collective attainment of the EU-wide target for renewable energy in 2030. Notably, in the case of green electricityFootnote 57 Member States may continue to implement support schemes subject to EU State aid rules, but a number of principles and specific conditions are further stipulated so as to facilitate a ‘cost-effective’, ‘market-oriented’ and ‘Europeanised approach’ in their design, as well as their ‘gradual and partial opening to cross-border participation’.Footnote 58 Again, this follows the harmonization and market integration spirit of the 2014–2020 EEA Guidelines and will be discussed in more depth in the next part.Footnote 59
III. COMPARING EU AND WTO APPROACHES TO GREEN ELECTRICITY SUPPORT
A. Different Approaches to Negative Integration
The backbone of EU State aid rules is to be found among the common rules on competition, taxation and approximation of laws in Articles 107–109 of the Treaty on the Functioning of the European Union (TFEU).Footnote 60 These provisions, which have remained largely unchanged since their incorporation into the original Treaty of Rome,Footnote 61 establish a centralized system of State aid control which reflects a sensitive balance between negative and positive integration. With regard to negative integration, Article 107(1) TFEU lays down a general prohibition on ‘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 … in so far as it affects trade between Member States’. According to the case law of the EU Court of Justice (CJEU), four cumulative conditions have to be met for a government measure to fall under this provision: (i) it must confer an economic advantage on the recipient that it would not have received under normal market conditions; (ii) it must entail an actual or potential use of State resources; (iii) it must be selective, by favouring certain undertakings or the production of certain goods; (iv) it must be liable to distort competition and affect intra-EU trade.Footnote 62 In principle, this general prohibition equally applies to renewable energy support schemes, since the purpose of State aid is irrelevant under Article 107(1) TFEU.
In comparison, WTO rules on subsidies are far more detailed but similarly follow the logic of negative integration in constraining trade-distortive governmental support. In doing so, WTO subsidy law shares a number of basic requirements with EU State aid law. This is most noticeable when one looks at the three cumulative conditions for a given measure to qualify as a ‘subsidy’ for the purposes of applying the SCM Agreement: (i) it must be a financial contribution (or income/price support) by a government or public bodyFootnote 63 (or by a private body ‘entrusted’ or ‘directed’ by a government);Footnote 64 (ii) it must confer a benefit (ie, analogous to ‘economic advantage’ under EU State aid law);Footnote 65 (iii) it must be specific (ie, analogous to the ‘selectivity’ condition under EU State aid law).Footnote 66 But as will be seen, the scope and depth of negative integration in these two regulatory regimes differs fundamentally in both substantive and procedural terms, with the overall result that WTO subsidy disciplines are less constraining on green policy space.
Admittedly, this does not hold true for every element of the notion of ‘subsidy’ under WTO law which, in some respects, is broader than that of ‘State aid’ under EU law.Footnote 67 Notably, while the form of the aid is not material under Article 107(1) TFEU (referring to ‘any form whatsoever’),Footnote 68 only measures that are both imputable to a Member State and financed directly or indirectly through ‘State resources’ may be regarded as State aid.Footnote 69 In other words, there is a requirement of a ‘charge on the public account’ (or cost to government) for a measure to constitute State aid under EU law.Footnote 70 Interestingly, in PreussenElektra, the Court held that an obligation on private electricity suppliers to purchase electricity produced from renewable energy sources at fixed (above-market) minimum prices (thus, conferring an economic advantage) did not constitute State aid, because it did ‘not involve any direct or indirect transfer of State resources to undertakings which produce that type of electricity’.Footnote 71 By contrast, no similar ‘cost to government’ requirement exists under WTO law,Footnote 72 and the measure at issue in PreussenElektra could be arguably covered by the SCM Agreement as a financial contribution (ie, purchase of goods) by a private body entrusted or directed by a government.Footnote 73 While EU State aid law could thus be regarded as more lenient in this particular respect, it seems of limited relevance here since the focus is on government-provided price-support mechanisms (FITs or premium tariffs) and fiscal and financial incentives (eg, grants or preferential loans) in light of prevailing policy practice.Footnote 74
A more significant difference for current purposes relates to the threshold requirement of ‘benefit’ for a government support measure to be subject to SCM disciplines, and the parallel ‘economic advantage’ condition under EU State aid law. In both systems, the existence of a benefit or economic advantage needs to be determined in relation to prevailing conditions in the marketplace.Footnote 75 However, what is the relevant market for the benefit comparison under the SCM Agreement has become a more complex matter following the Appellate Body's report in Canada – Renewable Energy (2013). This complaint was brought by Japan and the EU against the local content requirements (LCRs)Footnote 76 in the FIT programme through which the Canadian province of Ontario provided (inter alia) 20-year guaranteed prices for electricity produced by using wind or solar PV technology. The complainants argued that these LCRs violated several WTO provisions, including Article 3.1(b) and 3.2 of the SCM Agreement that forbid subsidies contingent upon the use of domestic over imported goods and are of most pertinence in the present context.Footnote 77
In addressing this prohibited subsidy claim, the Appellate Body agreed that Ontario's FIT programme constituted a financial contribution by government in the form ‘purchase of goods’,Footnote 78 but found that the Panel had erred in conducting the benefit analysis in the competitive wholesale electricity market as a whole (i.e., in the single market for all electricity, no matter how produced), when the relevant market should have been ‘the competitive markets for wind- and solar PV-generated electricity, which are created by the government definition of the supply mix’.Footnote 79 This was because, according to the Appellate Body, the definition of the relevant market cannot stop at demand-side substitutability (as under EU State aid law)Footnote 80 but should also consider supply-side substitutability.Footnote 81 On the demand-side, the fact that electricity is physically identical regardless of how it is generated suggests a high-demand substitutability between electricity generated through different technologiesFootnote 82 and thus weighs ‘in favour of defining the relevant market as a single market for electricity generated from all sources of energy’.Footnote 83 Yet for the Appellate Body, this was outweighed by supply-side factors indicating that ‘windpower and solar PV producers of electricity cannot compete with other electricity producers because of differences in cost structures and operating costs’ and, for as long as these differences remain so significant, ‘markets for wind- and solar PV-generated electricity can only come into existence as a matter of government regulation’.Footnote 84 In other words, the government's choice of the electricity supply-mix is what ‘creates markets for wind- and solar PV-generated electricity’, but in the Appellate Body's view, ‘this cannot in and of itself be considered as conferring a benefit within the meaning of Article 1.1(b) of the SCM Agreement’.Footnote 85 For the purpose of the benefit analysis, the relevant question was ‘whether wind and solar PV electricity suppliers would have entered the wind- and solar PV-generated electricity markets absent the FIT Programme, not whether they would have entered the blended wholesale electricity market.’Footnote 86
This line of reasoning has generated an avalanche of mostly critical reactions in the literature on both legal and policy grounds, but this will not be engaged with here.Footnote 87 The key implication for our purposes is that, by narrowing the relevant market within which appropriate benchmark prices are to be located for the benefit comparison to the ‘competitive markets for wind- and solar PV-generated electricity’ (rather than the ‘competitive wholesale electricity market’ as whole),Footnote 88 the Appellate Body has made it harder for future complainants to demonstrate the existence of a benefit—and hence, that FIT programmes constitute a subsidy to which the SCM Agreement is applicable.Footnote 89 Yet importantly, this does not mean it has become impossible for FITs to be scrutinized under WTO subsidy law. While the Appellate Body was unable to complete the analysis in Canada – Renewable Energy (2013) due to insufficient factual findings on record,Footnote 90 it did provide guidance on how to establish that FITs confer a benefit in future cases (ie, by looking at in-country price benchmarks; or adjusted out-of-country price benchmarks; or proxy construction),Footnote 91 while equally hinted at how this situation may be avoided (ie, by using ‘price-discovery mechanisms’ such as competitive bidding or negotiated prices so as to avoid over-compensation).Footnote 92 Therefore, the Appellate Body's approach to the benefit analysis in Canada – Renewable Energy (2013) offers some flexibility by creating a partial ‘carve-out’—even if not a full ‘safe haven’—for FIT programmes from WTO subsidy disciplines.Footnote 93 Nevertheless, this does not apply to other popular government incentives for green electricity which are likely to face scrutiny under WTO subsidy rules. This is because government (non-repayable) grants and preferential loans to green technology manufacturers are clearly financial contributionsFootnote 94 conferring a benefit,Footnote 95 and often limited (in law or in fact) to ‘certain enterprises’.Footnote 96 But it is important to underline that, at this stage of subsidy definition, only the preliminary question of whether a given form of RE government support is or not subject to SCM disciplines is being considered, not the subsequent question of whether such a measure is or not compatible with that agreement.
In this regard, WTO subsidy rules appear less strict than EU State aid law in one critical aspect: how determinant are the effects of government support for the compatibility question. Here, the threshold under Article 107(1) TFEU is seemingly low: to be prohibited, selective State aid needs only to ‘be liable’ to affect competition and intra-EU trade, and there is no requirement that this potential effect be significant or substantial.Footnote 97 In other words, any State measure that provides selective aid through public resources is, in principle, incompatible with the EU internal market, without having to prove an actual distortive effect on competition or intra-EU trade.Footnote 98 Conversely, under WTO law, trade-distortive effects are only presumed in two specific cases: export subsidies (ie, those contingent upon export performance) and import-substitution subsidies (ie, those contingent upon the use of domestic over imported goods). These are both expressly aimed at distorting trade and investment flows, and thus prohibited outright.Footnote 99 All other specific subsidies are only actionable under the SCM Agreement, which means they are only WTO-incompatible if it is demonstrated that they cause actual ‘adverse effects’ to the import-competing (in the form of ‘material injury’)Footnote 100 or export-competing (in the form of ‘serious prejudice’)Footnote 101 interests of another WTO member.
To illustrate the importance of this distinction, it is useful to return to the Canada – Renewable Energy (2013) case. There is little doubt that the Canadian FIT programme, if held to be a subsidy under the SCM Agreement, would have been sanctioned as a prohibited import-substitution subsidy (Article 3.1(b) SCM) because the 20-year guaranteed rate for wind- and solar PV-generated electricity was made conditional upon using a certain percentage of Ontario-produced RE generation equipment (e.g. Ontario-made wind turbines or solar panels) in developing and constructing generation facilities. But this result would have been largely immaterial (other than for the remedy issue),Footnote 102 given that these local content requirements were already found to violate the core national treatment obligations under other WTO agreements.Footnote 103 Yet importantly, this should not be mislabelled as a direct conflict between international trade and climate change mitigation regimes: LCRs are primarily tools of industrial policy (in casu, to stimulate local investment in and manufacturing of RE generation equipment),Footnote 104 and there is no clear evidence that attaching a LCR condition to FITs brings any added environmental benefits.Footnote 105 Therefore, from a trade/environment perspective, the critical question is whether FIT programmes without LCRs would run afoul of WTO subsidy law.
In answering this question, the most relevant provision is Article 6.3(a) SCM Agreement, which requires it to be demonstrated that ‘the effect of the subsidy [in casu, a FIT without LCRs] is to displace or impede the imports of a like product [in casu, brown electricity or electricity from renewable energy sources not covered by the FIT] of another Member into the market of the subsidizing Member’ (emphases added). Here, unlike under EU State aid law, the threshold is not low since there needs to be a ‘genuine and substantial relationship of cause and effect’ between the subsidy and the current (or imminent)Footnote 106 trade distortion.Footnote 107 But most fundamentally, for a FIT scheme to cause such adverse effects and be found SCM-incompatible, there must exist trade flows or opportunities in electricity between the FIT-providing WTO member and another WTO member: if there is no trade, there can simply be no actual or potential trade-distortive effects. However, as mentioned earlier,Footnote 108 electricity is sparsely traded internationally: for instance, even between neighbouring countries such as the Canada and the US which have interconnected electrical grids, imports of electricity from Canada into the US in 2014 only amounted to 1.6 per cent of its overall power consumption.Footnote 109 Similarly, on the overall EU-28 level, net imports of electricity in 2015 were less than 1 per cent of the electricity consumption by end-users.Footnote 110 In fact, it is highly doubtful that the EU and Japan would have challenged Ontario's FIT programme in the WTO absent the LCRs, given they have no electricity trade with Canada.Footnote 111 While not impossible, the risk that non-discriminatory FITs are in breach of WTO subsidy law is limited inasmuch as cross-border electricity trade is, and this is reassuring for the mutual supportiveness between WTO law and climate change law.
By the same token, the risk of WTO-inconsistency is relatively higher for government measures supporting the investment in and manufacturing of RE generation equipment (eg, solar PV modules) which, unlike electricity itself, are easily and extensively traded globally. Whereas a conclusive assessment can only be made on the basis of a fact-intensive enquiry into the economic effects of the specific subsidy at issue, a ‘serious prejudice’ scenario is not so difficult to imagine. That is, lower-cost subsidized solar PV modules from country A may ‘displace’ imports of solar PV modules from country B (Article 6.3(a) SCM), or result in ‘significant lost sales’ of country B's solar PV modules in a third-country market or the world market (Article 6.3(c) SCM).Footnote 112 Similarly, it is possible that lower-cost subsidized solar PV modules from country A are exported to country B and cause ‘material injury’ to its domestic solar PV industry (Article 5(a) SCM).Footnote 113 In this sense, a tension is apparent between WTO law and climate change law: wouldn't it make sense from an environmental (and indeed economic) perspective to simply allow country A to continue exporting its cheap solar PV panels to country B and rest of the world?Footnote 114
Aside from these important substantive differences, the aspect on which EU State aid law and WTO subsidy law differ most crucially concerns monitoring and enforcement mechanisms. In the EU context, the general prohibition under Article 107(1) TFEU is backed up by sophisticated procedures for ex ante and ex post centralized control by a supranational agent—the European Commission.Footnote 115 As a general rule, Member States are required to notify the Commission of planned State aid measures (including material alterations to existing aid), which has exclusive competence for assessing their compatibility with the internal market, and any such aid measures can only be implemented once the Commission has given its approval.Footnote 116 Unauthorized implementation of State aid is unlawful and the Commission is empowered to suspend the relevant aid measure and order full repayment of any aid already given.Footnote 117 Similarly, the Commission may initiate a formal investigation procedure in relation to any authorized State aid used in contravention of its approval decision (misused aid), and in such cases has similar powers of suspension and recovery as in the case of unlawful aid. Moreover, any existing aid is subject to regular reporting and continuous review by the Commission.Footnote 118
These extensive powers of the European Commission in the field of State aid control are by no means matched by the surveillance role of the WTO Committee on Subsidies and Countervailing Measures, which is composed of governmental representatives.Footnote 119 First, the SCM Agreement only requires WTO members to notify (by 30 June of each year) specific subsidies that are already granted or maintained within their territories,Footnote 120 and thus there is no scrutiny and authorization prior to implementation. This means that the policy space for boosting renewable energy is not constrained a priori under the SCM Agreement, but may only be constrained ex post when and if a given support measure is challenged through the WTO dispute settlement system. Even so, the compliance record with the notification requirement under the SCM Agreement has been far from impressive: according to the WTO Secretariat, over the period 1995–2013, the number of WTO members that have complied with this procedural obligation (either by notifying specific subsidies or submitting a nil notification) has remained relatively stable, whereas the number of WTO members that have failed to do so has risen sharply as membership has increased.Footnote 121 To take the most recent data, in 2016, 33 members gave notice of subsidy measures and 15 notified that they did not maintain any notifiable specific subsidies,Footnote 122 meaning that the vast majority of the WTO membership (106 out of 136)Footnote 123 did not honour the notification requirement. Second, the review of notified subsidies by the SCM Committee does not amount to an assessment of their WTO- compatibility but just affords WTO members the opportunity to request additional information and exchange views on them.Footnote 124
Finally, unlike in the EU context, the enforcement of WTO subsidy rules is not systematic and fully centralized, happening only if a WTO member decides to lodge a complaint in the WTO dispute settlement system.Footnote 125 To date, out of the 116 cases brought under the SCM Agreement, only six have concerned renewable energy and all of them allegedly discriminatory (ie, local content-contingent) measures.Footnote 126 Thus far, the WTO dispute settlement organs have only ruled in one such case (Canada – Renewable Energy (2013)), while other cases are still in panel proceedings or are (formally) pending at the consultation stage.Footnote 127 Further, in the case of subsidized imports which cause ‘material injury’, the SCM Agreement gives WTO members the choice of responding multilaterally through the WTO dispute settlement system or, alternatively, taking unilateral remedial action: namely, the imposition of countervailing duties (CVDs)Footnote 128 —something which is not permitted under EU State aid law. Government support to manufacturers of green technology products has been mainly challenged through this national trade remedy track,Footnote 129 with well-known examples being the parallel countervailing and anti-dumping duty investigationsFootnote 130 conducted by both the EU and the US on (allegedly) subsidised imports of solar panels and their components from China.Footnote 131 In fact, according to a global survey conducted by the United Nations Conference on Trade and Development (UNCTAD), the number of anti-dumping and countervailing duty cases in the renewable energy sector ‘far outnumbers the number of [renewable energy] disputes that have arrived at the WTO’.Footnote 132 While only covering the period from 2008 to early 2014, the survey already recorded a total of 41 trade remedy investigations initiated in the renewable energy sector, with almost half of these cases (18) targeting solar technology products and another seven cases involving wind technology products.Footnote 133 This overview of WTO dispute settlement and unilateral practice highlights an important question: which international trade rules are actually constraining the policy space to support green energy as a means of combatting climate change? Is the multilateral track under the SCM Agreement the main problem, or is it unilateral action under WTO trade remedy rules (including also the Anti-Dumping Agreement)?
B. EU Distinctiveness: A Two-Track Justification for Green State Aid
The preceding comparative analysis has revealed that while EU State aid law and WTO subsidy law share some basic tenets of negative integration, the former is much more constraining on government support in both substantive and procedural terms. This is, in particular, because the general prohibition on State aid under Article 107(1) TFEU is broader, with no need to prove actual trade-distortive effects, and is backed up by the singularly powerful and centralized control of the European Commission. In turn, this goes a long way in explaining why the EU's approach to State aid control is distinctive for its positive legal dimension. That is, the wide prohibition is counterbalanced by a relatively extensive system of justifications,Footnote 134 which sets out the terms and conditions under which State aid is deemed legitimate and permitted. The legal basis for a positive justification is found in Articles 107(2) and (3) TFEU, which qualify the general prohibition by introducing a number of derogations for categories of State aid that are sheltered mainly in light of their purpose. These are deemed compatible with the internal market and hence admissible,Footnote 135 either automatically (paragraph 2)Footnote 136 or in most cases at the Commission's discretion (paragraph 3).Footnote 137 Of most relevance here is Article 107(3) TFEU, the key underlying principle of which is that decisions by the Commission concerning the compatibility of State aid must weigh their positive impact in achieving a set of legitimate objectives against any negative trade-distortive effects. However, the TFEU defines these objectives in rather vague terms: glaring examples are references to ‘aid to important projects of common European interest’ (Article 107(3)(b)), and to ‘aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest’ (Article 107(3)(c) TFEU). Similarly, there is not much guidance on how to balance objectives of ‘common interest’ against the potentially trade-distortive effects of the State aid in question. As Blauberger aptly notes, this ambiguity in EU treaty law provides the Commission with wide discretion and enabled it to ‘act as a supranational entrepreneur, not only in enforcing the prohibition of distortive State aid, but also developing its own vision of ‘good’ State aid policy … and thus created positive integration from above’.Footnote 138
In the current case, there is little doubt that environmental protection in general, and in particular combating climate change and promoting the development of renewable energy, are objectives of ‘common interest’ for the EUFootnote 139 which, in certain circumstances, may justify the granting of State aid in spite of any potential distortion on competition and/or intra-EU trade. That being so, a complex system of justifications for ‘good’ environmental State aid has been developed by the European Commission in a hybrid form, using a combination of both hard-law and soft-law instruments which have been recently reviewed following the ‘State Aid Modernisation’ process initiated in May 2012.Footnote 140 More specifically, there is presently a two-track approach for sheltering renewable energy support measures from the basic prohibition in Article 107(1) TFEU: either under (i) the general 2014 General Block Exemption (GBE) Regulation,Footnote 141 which automatically authorizes State aid under certain conditions without prior notification and individual scrutiny by the Commission;Footnote 142 or, if not eligible under this Regulation, under (ii) the specific 2014–2020 Guidelines on State Aid for Environmental Protection and Energy,Footnote 143 which set out the principles and criteria against which the Commission assesses the compatibility of notified State aid and authorizes it on a case-by-case basis.
With regard to the first track, the 2014 GBE Regulation significantly extends the margins for Member States to grant aid without prior notification, in an attempt to focus ex ante compatibility assessments by the Commission on cases with the biggest potential to distort competition and intra-EU trade.Footnote 144 However, it is important to highlight that the 2014 GBE Regulation does not apply to State aid ‘to export-related activities towards third countries or Member States’, nor State aid ‘contingent upon the use of domestic over imported goods’Footnote 145 —in other words, the category of prohibited subsidies under WTO law finds no legal shelter under the Regulation. Otherwise, the scope of the current Regulation has been considerably broadened compared with its predecessor: not only does it cover ‘investment aid’Footnote 146 for the production of energy from renewable energy resources,Footnote 147 but it also covers ‘operating aid’Footnote 148 for producing electricity from renewable energy resources and energy from renewable energy resources in small-scale installations.Footnote 149 These RE support measures must, in turn, meet a number of generalFootnote 150 and category-specific conditions in order to be block exempted under the Regulation, which are briefly outlined next.
RE investment aid needs to be below the specified notification threshold of €15 million per undertaking per investment project,Footnote 151 which implies a remarkable increase from the 2008 GBE Regulation (ie, €7.5 million per undertaking per investment project).Footnote 152 In addition, it can only be granted to new installations and shall be independent from output,Footnote 153 as well as within the specified maximum aid intensities: 30–45 per cent, 55 per cent and 65 per cent of eligible costsFootnote 154 respectively for large, medium-sized and small enterprises.Footnote 155 However, this may go up to 100 per cent of eligible costs, if the aid is granted through a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria.Footnote 156 As a general rule, operating aid to green electricity production ought to be granted through such competitive bidding processes which are open to all green electricity generators on a non-discriminatory basis,Footnote 157 in which case the notification threshold is set at a total of €150 million per year.Footnote 158 As will be seen below, this competitive allocation of public support is in line with the Commission's drive towards the gradual integration of mature RE technologies into the internal electricity market provided for in the 2014–2020 EEA Guidelines. Nonetheless, Member States may limit the bidding process to specific RE technologies in certain circumstances (eg, if this is necessary to achieve diversification or to secure grid stability).Footnote 159 A special exemption is made for small-scale installations producing electricity from renewables, whereby operation aid may be granted in the absence of a competitive tendering process but may not exceed €15 million per undertaking.Footnote 160
These thresholds on both the amount and intensity of renewable energy aid are said to be based on the ‘Commission's market experience and decision-making practice, in particular from the application of State aid frameworks and guidelines’.Footnote 161 The underlying assumption appears to be that any potentially distortive effects of renewable energy aid exempted under the GBE Regulation are limited and outweighed by the benefits in contributing to the common objective of climate change mitigation, insofar as it is within the established ceilings and other conditions.Footnote 162 To ensure this, any aid measure granted by Member States pursuant to the GBE Regulation is subject to transparency and reporting obligations so that the Commission can exercise ex post control of such measures.Footnote 163 According to the Commission's 2016 State Aid Scoreboard, about 95 per cent of State aid measures implemented by Member States have been exempted under the 2014 GBE Regulation, with the general category of ‘environmental protection and energy savings’ taking up the largest combined expenditure (9.5 billion in 2015).Footnote 164
Turning to the second track, the 2014–2020 Guidelines on State Aid for Environmental Protection and Energy extend the scope of the previous 2008 Guidelines on State Aid for Environmental ProtectionFootnote 165 in the energy field (eg, to cover aid for energy infrastructure and aid for generation adequacy measures),Footnote 166 and also adopt a more stringent approach towards renewable energy support measures. Like its predecessor, the 2014–2020 EEA Guidelines cover both investment and operating aid that does not fall within the ambit of the 2014 GBE Regulation and is thus subject to the ex ante notification requirement under Article 108(3) TFEU. However, there is no explicit exclusion of State aid contingent upon export performance or import substitution—meaning that prohibited subsidies under WTO law could, in principle, be sheltered under the EEA Guidelines (unlike under the 2014 GBE Regulation).Footnote 167 All environmental/energy aid measures authorized under these Guidelines are subject to annual reporting and monitoring by the Commission.Footnote 168
The most salient feature of the current EEA Guidelines are the so-called ‘Common Assessment Principles’, which lay out an overarching ‘balancing test’Footnote 169 as the principal basis for the Commission's compatibility assessment of all notified environmental/energy aid measures.Footnote 170 It comprises the following key components:
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• Contribution to an objective of common interest: the planned State aid measure aims at an objective of common interest in accordance with Article 107(3)TFEU (in this context, environmental protection, the shift towards a resource-efficient and low-carbon economy, and achieving a well-functioning, secure, affordable and sustainable European energy market);Footnote 171
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• Need for State intervention: the planned State aid measure is targeted towards a situation where aid can bring about a material improvement that the market cannot alone deliver. In particular, the Member State concerned is required to demonstrate that the State aid targets a well-defined market failure hampering the achievement of the specified environmental or energy objective and which is not being addressed by other measures;Footnote 172
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• Appropriateness of the aid: the proposed State aid measure is an appropriate instrument to address the specified environmental or energy objective. In particular, Member States are required to demonstrate that the same positive contribution to the sought objective cannot be achieved through other less trade-distortive policy instruments or types of aid;Footnote 173
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• Incentive effect of the aid: the proposed State aid measure induces the beneficiary to change its behaviour to increase the level of environmental protection or to improve the functioning of a secure, affordable and sustainable energy market, and such a change in behaviour would not have occurred but for the aid;Footnote 174
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• Proportionality of the aid: the planned aid amount is limited to the minimum necessary to achieve the environmental or energy objective aimed for. As a general rule, aid is considered to be proportionate if it corresponds to the net extra costs necessary to achieve the relevant objective, and in the case of investment aid respects the maximum aid intensities (set out in Annex 1);Footnote 175
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• Avoidance of undue negative effects on competition and trade between the Member States: the negative effects of the planned State aid measure in terms of distortions on competition and intra-EU trade must be limited and outweighed by the positive effects in terms of contribution to the sought environmental or energy objective, so that the overall balance is positive. In particular, the Commission will be considering product market distortions (eg, any negative impact of the aid on non-aided competitors of like environmentally-friendly products or technologies since this is not inherently linked to the objective of the aid) and location effects (eg, whether the aid merely leads to a change in location of economic activity without any net improvement in the level of environmental protection);Footnote 176
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• Transparency of aid: Member States, the Commission, economic operators and the public should have easy access to all relevant acts and pertinent information about the aid awarded thereunder.Footnote 177
In addition, the 2014–2020 EEA Guidelines provide specific compatibility criteria for certain categories of aid. With regard to RE investment aid, these mainly take the form of maximum aid intensitiesFootnote 178 that are similar to those under the GBE Regulation: 45 per cent, 55 per cent and 65 per cent of eligible costsFootnote 179 respectively for large, medium-sized and small enterprises,Footnote 180 with the possibility of reaching 100 per cent for aid provided following a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria.Footnote 181 Of most relevance for present purposes are the specific conditions applicable to operating aid for green electricity production, which have been considerably strengthened compared to the 2008 Guidelines. In essence, the current EEA Guidelines promote a progressive convergence of green electricity support measures through the gradual introduction of market-based aid instruments and allocation mechanisms. As a first step, for all new aid measures adopted after 1 January 2016, generators have to sell their green electricity directly in the market and aid may only be granted as a premium in addition to the market price.Footnote 182 In other words, the Guidelines seek to phase out the feed-in tariff schemes commonly used by Member States, which guarantee the purchase of renewably generated electricity at regulated minimum fixed prices, and replace these by feed-in premiums that expose green electricity generators to market signals and changing electricity prices.Footnote 183 In a second step, the Guidelines foresee the gradual introduction of competitive bidding as the principal means for granting aid to green electricity producers. Roughly speaking, this is a market-based mechanism for setting the premium price. During a transitional phase covering 2015 and 2016, aid for at least 5 per cent of the planned new green electricity capacity had to be provided through a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria.Footnote 184 From 1 January 2017, such a competitive bidding process became the general rule for the allocation of all operating aid granted (ie, 100 per cent of the planned new green electricity capacity).Footnote 185 In principle, this process should be technology-neutral and open to all generators producing electricity from renewable energy sources on a non-discriminatory basis.Footnote 186 However, the Guidelines still allow RE technology-specific tenders to be carried out by Member States in certain circumstances (eg, if necessary to promote the long-term potential of a new and innovative technology or to achieve diversification or secure grid stability).Footnote 187 Operating aid schemes compatible with these conditions are authorized for a maximum period of ten years, and if maintained after such a period, should be re-notified and re-evaluated by the Commission.Footnote 188
This drive towards harmonizing the form and means of allocating public support to green electricity generation certainly implies a departure from the decentralized approach initially adopted under the 2009 Renewable Energy Directive and which, as previously noted, has been enshrined in the 2016 Commission's proposal for a revised Directive within the Union's 2030 climate and energy policy framework.Footnote 189 According to the Commission, such a move is now justified and indispensable in order to adjust current support schemes to the growing share of renewables in the European market and the decreasing costs of more established RE technologies.Footnote 190 In particular, the Commission is concerned that the rigidity of administratively established FIT prices fails to take account of falling production costs, thereby running the risk of overcompensating green electricity producers. In addition, by fully insulating beneficiaries from market price signals, FIT schemes have led to excessive production of renewably generated electricity irrespective of actual demand.Footnote 191 The basic premise is, therefore, that renewables should be gradually integrated into the internal electricity market through more flexible feed-in premiums, and government support phased out as RE technologies mature and become grid-competitive.Footnote 192 In this sense, the Commission sees genuinely competitive bidding as a self-regulating subsidy phase-out mechanism, which will reward low-cost RE technologies and eventually approach zero as technology costs reach grid parity.Footnote 193 This market-based approach to green electricity support is posited as the ‘only pathway’ to further increase renewables in a cost-effective manner, by ensuring that public intervention is limited to what is necessary to correct market failures.Footnote 194 Nevertheless, the Commission recognizes that market integration may not be appropriate for small installations, which benefit from a differentiated regime under the 2014–2020 Guidelines (notably, no competitive bidding process is requiredFootnote 195 and FITs and other equivalent forms of support are still allowedFootnote 196 ).
IV. WHAT LESSONS, IF ANY, FOR THE WTO?
As one of the most vocal proponents for ‘greening’ WTO subsidy disciplines through law reform rather than through climate-friendly flexible interpretations as made by the Appellate Body in Canada – Renewable Energy (2013), Rubini posits that the EU's system of justifications for RE government support just examined can be a source of inspiration for the WTO in terms of rule-design and procedural mechanisms.Footnote 197 At first sight, this may appear an attractive idea since there is no obvious reason why the SCM Agreement presently lacks a justification clause or other explicit basis for balancing the negative trade-distortive effects of renewable energy subsidies against their positive contribution towards the common legitimate objective of fighting climate change. In fact, this principle of balance or compromise between trade and non-trade concerns is found in other areas of WTO law, including the GATT where Article XX (‘General Exceptions’) affords the possibility of a conditional defence for subsidies found inconsistent with GATT Article XVI.Footnote 198 And yet, the suggestion that the WTO should draw lessons from the EU's regulatory experience warrants closer analysis and reflection. As we have seen, the two systems of subsidy control are fundamentally different in both substantive and procedural terms and, importantly, these differences reflect distinct objectives and political/institutional contexts. Rubini does generally recognize that the EU's regulatory approach to government support for renewable energy cannot be simply transposed as a ‘single package’ beyond the Union,Footnote 199 but it is nonetheless necessary to fully grasp which factors limit such a direct transposition.
To begin with, EU State aid law is much more ambitious in terms of objectives, being driven by the desire to create and maintain the internal market and budgetary discipline considerations.Footnote 200 As a result, the EU's regulatory system is also more far-reaching in terms of the degree of control which it seeks to exercise over State aid (ie, a broad general prohibition that is effectively and centrally enforced) and which is, and needs to be, counterbalanced by relatively expansive grounds for authorization.Footnote 201 Conversely, the essential purpose of the SCM Agreement is limited to providing remedies only with respect to those subsidies that have been shown to have a distortive effect on international trade flows. This in itself affords some policy space for public stimulus that is unlikely to cause such adverse effects because the subsidized products are not, or are just barely, traded internationally. Precisely for this reason, as already argued, the risk of WTO-incompatibility is not the same for all government measures promoting renewable energy. Significantly, this risk is much lower in the case of non-discriminatory FIT programmes given the limited cross-border electricity trade, while this is the policy tool most widely recognized for its environmental effectiveness. The probability of WTO-incompatibility is admittedly higher with regard to fiscal/financial incentives to stimulate the manufacture of RE generation equipment which is extensively traded at the global level, but there is as yet no similar broad consensus on their environmental effectiveness.Footnote 202 However, the key point is that the case for a legal shelter for green electricity subsidies is not as obvious in the WTO context as it is under EU State aid law. Rather, it needs to be carefully considered on the basis of a proper understanding of the different legal risks to which each green electricity subsidy is exposed under WTO law. In other words, which are the measures of support that actually warrant protection under current WTO subsidy rules because of their potential to distort trade but which are nevertheless desirable in order to mitigate climate change?
To the extent that such a trade/climate change tension really exists, may the WTO draw valuable insights from the EU's two-track justification system? In this regard, two options have been often aired in the literature for sheltering climate-friendly support measures under WTO law: (i) the revival (and renegotiation) of the (now expired) category of non-actionable (ie, immune from multilateral and unilateral remedies)Footnote 203 subsidies under Article 8 SCM Agreement (ie, following the logic of full exemption under the GBE Regulation); and (ii) the possible applicability of Article XX GATT or the introduction of a specific exception clause in the SCM Agreement (ie, following the logic of case-by-case assessment under the EEA Guidelines).
With respect to the first option, it is doubtful whether simply reinstating Article 8.2(c) of the SCM Agreement on non-actionable environmental adaptation subsidies would help to shield green electricity subsidies, including FIT programmes as the most commonly used and largely effective form of support. This is because the exemption in Article 8.2(c) SCM Agreement is quite limited in scope due to it being subject to stringent conditions: notably, it covers only one-off non-recurring aid measures for a maximum of 20 per cent of the costs of adaption to new environmental requirements, with only extra investment costs and not operating costs being eligible.Footnote 204 Nonetheless, one could argue in favour of relaxing these conditions so as to broaden the scope of the exempted environmental/energy subsidies along the lines of the GBE Regulation.Footnote 205 However, there are clear hurdles in replicating this EU example at the WTO. In the first place, there is little prospect for such a reform to be politically feasible in the WTO,Footnote 206 given that consensus could not be reached to renew the limited Article 8.2(c) SCM Agreement.Footnote 207 Moreover, the WTO membership is comparatively more heterogeneous than that of the EU in terms of both countries’ individual potential for renewable energy and economic capacity to provide support. As a result, it would certainly be far more difficult to agree among over 160 WTO members on specific criteria that predetermine which clean energy subsidies can be presumed to be minimally trade-distortive and be carved-out from SCM disciplines altogether.Footnote 208 Moreover, as Bigdeli rightly notes, broadening the scope for exempting renewable energy subsidies should inevitably be accompanied by a proportionate tightening of abuse-prevention rules and monitoring procedures. Here again, the institutional capacity for subsidy surveillance in the WTO is substantially weaker, and in all likelihood there would never be an equivalent to the supranational authority and control exercised by the European Commission.Footnote 209
As regards the second option, an exception clause clearly has the advantage of being more general in terms of the conditions to be established, while offering the flexibility of case-by-case assessment of any challenged green electricity subsidy by the WTO dispute settlement organs. That being so, why not simply make the GATT Article XX-defence available to violations of the SCM Agreement? Leaving aside the legal controversy over the applicability of GATT Article XX-defence to the SCM AgreementFootnote 210 and assuming arguendo that it does apply,Footnote 211 the EU experience serves to expose the limited suitability of this provision for justifying trade-distortive renewable energy subsidies. To some extent, the ‘necessity test’ of Article XX GATTFootnote 212 bears some resemblance with the ‘balancing test’ carried out under the 2014–2020 EEA Guidelines, albeit in a simplified version.Footnote 213 However, the first obvious limitation is that the environmental exception in Article XX(g) GATT does not stipulate such a necessity test but a more flexible ‘related to’ requirement,Footnote 214 which would not involve a balancing between the environmental effectiveness of the support measure and its trade-distortive effects. In addition, Article XX(g) GATT contains an additional condition that any measure justified therein be ‘made effective in conjunction with restrictions on domestic production and consumption’, which is not readily applicable to FIT programmes or other public measures promoting renewable energy.
In the alternative, these renewable energy subsidies could be scrutinized under the necessity test of Article XX(b) GATT,Footnote 215 but the difficulty with this test as currently interpreted is that it is focused on the trade-restrictive impact of the measure at issue, whereas the trade-distortive effects of a subsidy are not limited to impeding imports into the market of the subsidizing WTO member (as per Article 6.3(a) SCM). That could well be the most plausible adverse effects of FIT programmes but, as we have seen, other green electricity subsidies (eg, a grant or preferential loan to manufacturers of solar panels) could conceivably cause adverse effects through increased exports of the subsidized product, eg, in the form of ‘material injury’ to the import-competing interests of another WTO member (Article 5(a) SCM) or ‘serious prejudice’ to the export-competing interests of another WTO member in a third-country or world market (Article 6.3(c) SCM).Footnote 216 Put simply, trade diversion refers to a policy measure that alters the amount and direction of trade flows down or up, and is thus a broader notion that trade restrictiveness under Article XX(b) GATT.
But even if these limitations of Article XX GATT could be adjusted through the introduction of a specific exception clause into the SCM Agreement, this would only be made available for justifying clean energy subsidies that are directly challenged in the WTO dispute settlement system. Unlike under EU State aid law, the balancing between the positive (climate change mitigation) and negative (trade distortion) effects of renewable energy subsidies will not always be undertaken by a neutral decision-maker at the multilateral level (in casu, the WTO dispute settlement organs), since the SCM Agreement also allows for unilateral responses to certain trade-distortive subsidies by domestic authorities, which have an inherent tendency to protect local interests.Footnote 217 And yet, as we have seen, practice thus far shows that the main threat to governments supporting green electricity is not from disputes being brought before the WTO, but rather from the proliferation of unilateral trade remedy actions against imports of subsidized green technology products.
These observations further corroborate the point that it is largely elusive to engage in general discussions over safeguarding policy space for government support to renewable energy under the SCM Agreement without a proper appreciation of where the ‘real’ constraints actually lie. Such discussions ought to be informed by more consistent data on WTO members’ practice in promoting green energy, as well as by a clearer picture of the possible trade-distortive impact of different support measures (ie, whether cross-border trade in the subsidized product is likely to exist or to be limited) and associated risks under WTO law (ie, multilateral challenge or unilateral trade remedy action). In fact, the most important lesson that may be drawn from the EU's regulatory experience for the WTO is that transparency and knowledge are an indispensable prerequisite for any subsidy control system. Regrettably, as previously mentioned, the transparency procedures under the SCM Agreement have not produced the necessary breadth and depth of information regarding WTO members’ subsidy practice. While some attempts have been made to enhance the SCM notification requirements, including the creation of a useful notification template,Footnote 218 the overall compliance record remains, in the words of the SCM Committee Chair, ‘discouragingly low’.Footnote 219 Part of the reason for this may be the lack of incentives to notify, coupled with the lack of sanctions for non-notification. Here again, the EU's system mainly relies on the investigating and recovery powers of the European Commission to effectively enforce notification and transparency obligations, and is thus not easily transposable to the WTO. But as a first modest step, the existing institutional mechanisms could be used more effectively to reinforce the knowledge-enhancing elements of the WTO subsidy control system. In particular, renewable energy subsidies could receive more focused attention in the context of the Trade Policy Review Mechanism and within discussions in the SCM and Trade and Environment Committees.Footnote 220
V. CONCLUSIONS
Following the Appellate Body's report in Canada – Renewable Energy (2013), government policies to boost renewable energy and clean technologies are increasingly perceived in the academic community as the most acute testing ground for assessing the extent to which WTO subsidy rules and climate change mitigation goals are mutually supportive, and there is a growing anxiety over the need to reform the SCM Agreement and some tendency to look to EU State aid law for inspiration. While this suggestion may appear appealing at first, on closer analysis it becomes apparent that the two systems of subsidy control are fundamentally different both substantively and procedurally and, importantly, these differences reflect distinct objectives and political/institutional contexts. Accordingly, it is hardly conceivable, or even desirable, that the EU's regulatory approach to RE government support could be transposed to the WTO. Nonetheless, this comparative analysis has highlighted a number of important points. On the one hand, the comparatively weaker constraining capacity of the WTO system in both substantive (ie, no general prohibition on subsidies but only if proven to cause trade distortions) and procedural terms (i.e., no equivalent to Commission's supervisory and enforcement powers) means that the need for greater flexibility or policy space is not as strong or self-evident within the WTO context as it is under EU State aid law. On the other hand, the less centralized control system of the WTO (ie, permitting also unilateral trade remedy action against trade-distortive RE subsidies) creates distinct challenges on which the EU regulatory model cannot offer much guidance.
In this sense, the Canada – Renewable Energy (2013) dispute may have placed too much emphasis on the wrong green electricity support measure (FITs with LCRs) and on the wrong WTO rules (SCM multilateral track). From the perspective of ensuring mutual supportiveness between the international trade and climate change regimes, the focus should be on whether FIT schemes without LCRs actually face genuine legal risks under current WTO subsidy disciplines. As we have seen, non-discriminatory FIT programmes are generally on a safer footing, not so much because of the flexibility created by the Appellate Body's interpretative approach to the benefit analysis in Canada – Renewable Energy (2013), but because the probability that such FITs can cause trade distortions is inherently limited (though not impossible) by the geographical and infrastructural constraints on cross-border electricity trade. For the opposite reason, the case of incentives (eg, grants or preferential loans) to manufactures of RE technology products merits more thorough analysis, since these are being increasingly exposed to unilateral countervailing and anti-dumping proceedings, whilst projected to rise substantially in the IEA's ‘Bridge Scenario’. However, this raises more complex questions concerning the relationship between climate change mitigation objectives and WTO trade remedy rules as a whole (including the Anti-Dumping Agreement).
In sum, the key argument advanced here is that the case for reviewing the SCM Agreement cannot be made by simply forging parallels with the EU's system of justifications for green State aid, but needs to be carefully conducted on the basis of a proper understanding of whether and how different RE support measures are impeded under the current WTO subsidy and trade remedy rules. Put differently, where exactly does the real-world trade/climate change friction actually lie? It is beyond the scope of this article to answer this question in a comprehensive manner,Footnote 221 but it is hoped that attention has been drawn to the most pressing challenges in ensuring mutual compatibility between climate-friendly energy subsidies and international trade rules. Addressing these challenges, however, requires better information on existing WTO members’ practice in relation to renewable energy subsidies, as well as in-depth assessments of the environmental effectiveness and trade-distortive impact of each form of support (particularly beyond non-discriminatory FIT programmes). In fact, the most valuable lesson that the WTO can draw from the EU's regulatory experience is the imperative of improving the transparency and knowledge-enhancing dimension of its subsidy control system.
