The World Trade Organization released today its decision on complaints by Japan and the European Union regarding Ontario’s Feed-In Tariff local content rules.

Ontario’s Feed-In Tariff (FIT) program was established in 2009 under the Green Energy and Economy Act.  The FIT program enables power producers to sell renewable electricity to the Ontario Power Authority under 20-year power purchase agreements.  Under the FIT, electricity generated from wind, solar, hydro, biomass, biogas and landfill gas is sold for prices that include premiums over prices paid in Ontario for electricity generated from other sources.  These premiums are intended to provide incentives for renewable energy project development and to help build a green energy industry in Ontario.[1]

Local content rules form a key component of Ontario’s FIT program.  These rules require a percentage of each renewable energy project’s equipment and services to be manufactured or sourced in Ontario before the project will be considered eligible for the FIT program.

In September 2010, Japan triggered a World Trade Organization challenge against the FIT program’s local content rules.  Consultations began between Japan and Canada with the United States and the EU subsequently joining in.  On October 6, 2011, after the consultations failed to resolve the matter, the WTO Dispute Settlement Body composed a dispute resolution panel to resolve the dispute.[2]

In August 2011, the European Union initiated its own WTO complaint against the FIT program’s local content rules, with the US and Japan joining in consultations.[3]

Japan and the EU complained that Ontario’s local content rules breach the General Agreement on Tariffs and Trade 1994 (“GATT”) by treating imported products less favourably than domestic products.  They also argued that the premium electricity prices paid under the FIT program constituted a subsidy that is contingent on use of domestic rather than imported goods, and is therefore prohibited.

In its ruling[4], the WTO panel said Ontario’s FIT program local content requirements breached Canada’s obligations under the GATT and the international Agreement On Trade-Related Investment Measures by treating domestic and imported renewable energy equipment and components differently.  The WTO panel did not agree, however, with Japan’s and the EU’s claim that the local content rules constitute an illegal subsidy.

Canada may appeal the WTO panel’s decision.  Canada had 60 days, starting on the date the panel’s decision was circulated to WTO members, to notify the WTO of its intention to exercise its right to appeal.  Approximately 70% of GATT panel reports are appealed.[5]  The appeal process considers legal arguments only and cannot re-examine existing evidence.  The result of the appeal will be either the upholding, modification or reversal of the panel’s decision.  Appeals can last up to 90 days.

If Canada does not appeal the panel’s decision, or if its appeal is unsuccessful, it will have a further 30 days to state its intention to adopt the panel’s decision at a WTO Dispute Settlement Body meeting.  If complying with the panel’s decision is impractical, Ontario may be given a “reasonable period of time” to bring itself into compliance. 

Generally speaking, compliance with the panel’s decision would involve Ontario dismantling the local content requirements of the FIT program.  If Ontario fails to take the actions that are necessary to comply with the decision, it may ask Canada to commence negotiations with the complaining countries to determine mutually-acceptable compensation such as tariff reductions.  If such negotiations do not produce a mutually acceptable result, the complainants may retaliate by imposing sanctions against Canada’s exports.

According to the Globe and Mail, Ontario’s Energy Minister, Chris Bentley, stated before the WTO panel’s report was publicly released that Ontario intended to ask the federal government to appeal the decision if it was made against Ontario.[6]  It remains unclear whether Canada’s Conservative federal government will bring such an appeal  in support of the Ontario Liberal government’s  Green Energy and Economy Act.

The WTO Panel’s decision will likely have an impact on a number of other countries’ similar renewable energy programs.  On November 5, 2012, China made a similar complaint to the WTO regarding local content requirements under the renewable energy FIT programs of European Union member states, including Italy and Greece.[7]

The WTO Panel’s decision is a significant setback to the McGuinty government’s efforts to foster a green energy industry in Ontario and illustrates a challenge that governments face when trying to promote home-grown technology, innovation and industry.  New technological and industrial innovation often require, and receive, direct or indirect government financial support.  The WTO panel decision indicates that international free trade obligations will restrict governments’ means of supporting and fostering nascent local industries and technologies. 

Environmental groups are particularly concerned with this development.  They argue global trade rules should not restrict the ability of governments to enact policies that support a transition to a clean-energy economy. [8]

Unless Canada successfully appeals the WTO Panel’s ruling, or refuses to comply with it, the WTO decision will put an end to a significant effort by Ontario’s government to foster a local renewable energy technology and manufacturing industry and to promote the generation of renewable energy in Ontario.