Last September Japan initiated a WTO complaint (starting with a formal request for consultations) against Canada, challenging Ontario’s Green Energy Act and the Feed-in Tariff (FIT) program. The USA and the European Union have jumped in on Japan’s side.

Canada and Japan held two rounds of consultations to see if the matter could be settled, as required under WTO rules. Since their complaint couldn’t be resolved informally, Japan has now asked for an official WTO panel to adjudicate the matter.

The core parts of the Japanese case are that (a) Ontario’s local content rules for green energy projects to qualify for higher FIT electricity rates are discriminatory and offend the “national treatment” obligation under the General Agreement on Tariffs and Trade (GATT) and the Agreement on Trade Related Investment Measures (TRIMS) and (b) the higher electricity rates under the FIT are prohibited under the Subsidies and Countervailing Measures Agreement (SCM Agreement) as contingent on the use of domestic over imported goods.

On the issue of non-discrimination, GATT Article III and the same provision in the TRIMS Agreement require WTO members (i.e., Canada and, indirectly, the provinces) to provide fully equivalent treatment to imported products with that accorded to domestic products. This is the core of the national treatment obligation.

The issue before any WTO panel will be whether the FIT is actually discriminatory or whether it is neutral in its effect. Ontario will probably defend the case by arguing that no Japanese energy company is subject to any requirement that differs from those that apply to Ontario producers. In both cases, local content requirements have to be met to get the higher tariff.

Ontario might try to argue that the case is about energy services and nothing in the WTO Agreement binds Ontario in this area. As well, Ontario could say – although this is more tricky – that green-generated energy going into the Province’s electricity grid is a government procurement and not covered by the WTO Agreement.

On the subsidy part of the Japanese case, a key issue will be whether the FIT is within the definition of “subsidy” under the SCM Agreement. Under the Agreement, a subsidy is defined either as a direct financial contribution or transfer of funds by a government, as the provision of a commercial-type service by a government or as some kind of special fiscal incentives given to a specific industry. In this part of the complaint, the issue will be whether the FIT contract between the Ontario Power Authority and the green energy generator can be brought within the subsidy definition.

Now that the Japanese have moved the case forward to a formal panel proceeding, it will be on the front burner at the WTO. Even so, these cases tend move fairly slowly through the system. It will be at least 18 months before a decision is rendered. Thereafter, if the appellate process is invoked, it could take another 18 months before there is a final WTO decision.

It’s difficult to know the strength of the Japanese case at this point, since no hard information is available on the detailed arguments they – and their US and EU supporters – will ultimately be advancing. Should Japan prevail on any of the points summarized above, the WTO process would require that Ontario change those parts of the Green Energy Act and the FIT found to be inconsistent with Canada’s WTO obligations. We’re a long way from that point, however.

As an interesting development in a related case, China and the US have just settled a US WTO complaint over China’s wind power subsidy program. The Americans complained that grants to Chinese wind turbine manufacturers, on condition that they use locally-produced inputs rather than foreign imports, were prohibited under the SCM Agreement. To settle the dispute, China voluntarily agreed to end the program. It is not clear the impact this will have, if any, on the Japanese case against Ontario when the matter comes before the WTO panel.