Government support plays a crucial role in the development of renewable energy sources, including wind and solar. Recently, two such government support programs of Canada and China were challenged before the World Trade Organization (“WTO”) as being discriminatory and in violation of the rules of the WTO Subsidies Agreement. While China recently announced that it was terminating its challenged wind power support program, Canada appears to be preparing for litigation in defense of Ontario's Feed-In Tariff (“FIT”) program.

WTO Rules on Green Energy Subsidies

The WTO Subsidies Agreement defines a subsidy as a financial contribution by the government or a public body that confers a benefit to a specific enterprise or industry. Only two categories of subsidies are prohibited under WTO rules: export subsidies and import substitution subsidies.

Export subsidies are subsidies that are, either in law or in fact, conditional upon export performance.

Import substitution subsidies, sometimes referred to as “local content” subsidies, are subsidies that are conditional upon the use of domestic over imported goods.

Governments are allowed to use non-prohibited subsidies as an industrial policy tool, although most of these other subsidies are actionable under WTO rules if they cause serious prejudice to the trade interests of other WTO members. In such cases, the subsidizing government must either withdraw the subsidy or alter it in such a way as to eliminate the serious prejudice.

The WTO does not distinguish between subsidies based on their policy objectives, whether environmental, health, or other. Subsidies intended to support renewable energy are thus subject to the same rules as subsidies to any other industry sector.

China Terminates Subsidy Program for Wind Power Equipment Manufacturers Following Consultations at the WTO

Over the last four years, the wind power market in China has grown annually by more than 100 percent. China's cumulative installed capacity is said to now rank second in the world, ahead of Germany and behind the United States. Last year, its installed capacity was the largest in the world. The country's equipment manufacturing capability also took first place in the world. [1] The Chinese government has developed a number of subsidy programs supporting wind energy generation in China, a country particularly apt to become a leading wind energy generating country given its enormous land mass and long coast line.

One such subsidy program supporting wind energy, China's Special Fund for Wind Power Manufacturing (the “Special Fund”), was challenged before the WTO by the United States acting on a Section 301 request by the United Steelworkers. [2] According to estimates of the United States Trade Representative (“USTR”) office, grants provided under this program since 2008 may amount to several hundred million dollars. The United States argued that the Special Fund is a WTO-prohibited import substitution subsidy since it makes grants under the program contingent on Chinese wind power equipment manufacturers using domestic parts and components over foreign-made parts and components. To qualify for the grant, certain designated “critical” components of the turbines must be produced in China.

Earlier this month, and following WTO-mandated consultations between China and the U.S., China announced that it had formally terminated the subsidy program. This does not mean that China will need to stop supporting wind energy production or the manufacturers of wind power equipment. China may well continue the program in a different form, no longer requiring the use of domestic over imported goods as a condition for obtaining governmental subsidies.

Canada Prepares for WTO Litigation in Defense of Ontario’s Feed-In Tariff Program

The Canadian province of Ontario's FIT program has been challenged before the WTO by Japan as discriminating against imported products and as a WTO-inconsistent import substitution subsidy. [3] The FIT program allows producers of renewable energy such as solar energy to benefit from the FIT program only if they commit to produce their renewable energy by using at least 50 – 60 percent of locally sourced goods and services. Because of these local content requirements, the Ontario FIT program means that for solar energy, for example, FIT-eligible solar modules and their components must be manufactured in Ontario to be eligible for the program. Japan therefore considers that Ontario's FIT program discriminates against imported products such as those of Japan or the United States. Japan also alleges that, because of the eligibility conditions imposed, the FIT program is a prohibited import substitution subsidy.

On 17 June 2011, the WTO Dispute Settlement Body examined Japan's complaint for the first time. In July it will likely establish a WTO Panel of experts to adjudicate the dispute. If found to be WTO inconsistent, Canada will be required to withdraw the subsidy without delay. If it fails to do so, Japan may be authorized to impose trade retaliatory measures on Canadian products.