Abstract

States can advance the goal of decarbonisation of energy supply by attracting investments in the renewable energy sector by means of incentive schemes. The considerations presented in this article shed light on the issue of the complex relationship between the framework of the ASCM, in respect to feed-in-tariffs, and regulatory autonomy of States to adopt measures aimed at the decarbonisation of energy supply.

The article points out that the ASCM introduces much uncertainty regarding the categorisation of FITs as a qualifying subsidy and the legal status thereof. While the status of FITs essentially depends on the design of a particular measure, the guiding principles of the ASCM, that is, non-discrimination and neutrality, indicate that it may limit potential ways in which green energy incentive schemes in the form of FITs may be designed and implemented.

Introduction

The strive for mitigation of climate change and attainment of stable energy security necessitates substantial investments from public and private sectors. To limit the negative externalities of energy production and ensure the uninterrupted supply of energy, it is necessary to decarbonise energy production in order to replace fossil fuels with green energy sources. The regulatory autonomy of States to adopt policies aimed at lowering carbon emission in energy production has a pivotal role in attaining these objectives.

In general, feed-in-tariff (“FIT”) is a policy mechanism to incentivise the production and use of green energy. FITs may be characterised by long-term contracts, guaranteed electricity grid access, and the guaranteed purchase price for the energy produced. [1] By providing long-term price and electricity grid-access certainty to eligible energy producers, FITs constitute a tool for regulators to attract investments in renewables and, thereby, a way of developing the domestic green-energy market.
The compatibility of FITs with the disciplines of the multilateral trading system and, in particular, the Agreement on Subsidies and Countervailing Measures (“ASCM”) is of great importance to the regulatory autonomy of States to attract investments in renewable energy and to decarbonise energy supply through such incentive schemes. The legal status of FITs under the framework of the ASCM remains uncertain. Decisions rendered by a WTO DSB shed some light on the relation between FIT schemes and the ASCM. [2] The controversy of the matter pertains to the issue of interaction between the legal status of FITs under the ASCM and its effect on the ability of States to regulate.

This article aims to briefly analyse the status of feed-in-tariffs under the ASCM and the possible effect thereof on states’ autonomy to regulate with the aim of decarbonisation of energy supply.

Ultimately, the considerations presented shed light on some aspects of the complex relationship between the ASCM and the autonomy of states to regulate with the aim of decarbonisation of energy supply.

FITs under the ASCM

The ASCM provides for a regime regulating, inter alia, the legality of subsidies implemented by contracting members. Essentially, the applicability of the ASCM rests on the finding of a qualifying subsidy within the meaning of Article 1 of the ASCM.

The ASCM defines a subsidy as a measure, in the form of a financial contribution, or income, or price support, granted, in principle, by a government, or any public body, which confers a benefit. The ASCM further differentiates between subsidies of a prohibited and actionable nature under Article 3 and 5, respectively.

While there is a substantial basis for arguing that FITs constitute a financial contribution, or income, or price support within the meaning of the ASCM, there is much legal uncertainty in respect to the determination of the nature of the granting entity, conferral of benefit and categorisation of FITs as specific as well as the status thereof under Article 3 and 5 of the said instrument.

FITs as a qualifying Subsidy

By virtue of their very nature, FITs may in principle be qualified as a financial contribution in the form of purchase of goods within the meaning of Article 1.1. (a) (1)(iii) ASCM. [3]

FITs are characterised by a guaranteed electricity grid access and a guaranteed purchase price for generated energy. [4] Accordingly, the fact that FITs grant energy produces uninterrupted market access with a fixed price for the energy generated leads to the consideration that such schemes, de facto, amount to a purchasing guarantee for electricity.

The modalities of implementation of FITs may be twofold. Namely, the obligation to purchase renewables at a fixed price may rest on the government or any public body. On the contrary, the regulator may impose such an obligation on private bodies and, thereby, direct the implementation of a FIT scheme to that body. In this regard, a government may either entrust a private body with the necessary funds to execute the scheme or require it to generate the resources itself. [5]

The issue pertaining to the applicability of Article 1.1. (a)(1)(iii) ASCM to FITs concerns the notion of a “good”. The issue of whether energy in the form of electricity constitutes a good within the meaning of the ASCM has been uncertain.

In the context of the GATT 1994, electricity may indeed be considered a good. [6] On the contrary, electricity under the GATS is qualified as a service. [7] Accordingly, it becomes clear that the WTO framework does not provide a unilateral and final classification of electrical energy. Nevertheless, in light of a decision delivered in Canada-Renewable Energy, it seems that the framework of the ASCM favours a categorisation of electricity as a good. [8]

This enables the finding that FITs, by reason of their very nature, may constitute a purchasing guarantee and can, therefore, be qualified as a purchase of goods in the form of electricity within the meaning of Article 1.1(a)(1)(iii) ASCM.

FITs as a form of Income or Price Support

The discourse points to the observation that FITs could potentially qualify as a type of income or price support. The alternative under Article 1.1. (a)(2) ASCM provides for much flexibility since the term “any income, or price support” has a relatively broad scope and is not per se qualified to specific types of measures. [9] Accordingly, FITs’ very nature points to a consideration that such incentive schemes could amount to a measure that is adopted to maintain the price of renewable energy at a given level or to guarantee stable income, corresponding to the amount of energy supplied to the grid, to eligible producers. [10]

Nevertheless, the reference to Article XVI GATT may prove to be problematic. Namely, intervention in the form of income, or price support, directed at green-energy producers must lead to an increase of export of the good or decrease of its import. While this form of support may lead to the increase of domestic production of energy from renewables and, therefore, mitigate dependency on energy imports, the matter is not lucid with respect to the increase of this commodity’s exports.

The Nature of the Granting Entity

Financial contribution originating from a government or any public body is of direct nature. Alternatively, Article 1(1)(a)(1)(iv) ASCM enables indirect financial contribution through a funding mechanism or a private body.

Until recently, the Appellate Body’s understanding of a “public body” was premised on the exercise of control by the government over the entity concerned. The control test offered a rather broad and straightforward means of defining the concept since any action of a controlled entity would be attributable to the government. [11] With the decision delivered in the US–AD/CVDs (China), the Appellate Body modified its approach. It held that the term “public body”, for the purposes of the ASCM, concerns an entity entrusted with the exercise of governmental authority or, in the words of the Appellate Body, possesses, exercises or is vested with governmental authority. [12] The Appellate Body emphasised that governmental control in the form of, e.g. majority shareholding, does not, on its own, constitute a sufficient link to the government for an entity to be considered public. [13] Accordingly, the notion of governmental authority implies that an entity must be vested with a public function to be covered by the disciplines of the ASCM. It must be noted that the delegation of authority does not need to be express for the provision, which broadens the scope of the concept. [14]

The approach introduced is problematic. It necessitates a case-by-case determination of what constitutes the function or the exercise of governmental authority and, thereby, introduces legal uncertainty. [15] Nevertheless, the Appellate Body’s reasoning, later confirmed in US-Carbon Steel (India), sheds some light on the factors that may prove to be relevant to the determination of the entity’s nature. [16] Namely, as noted above, meaningful governmental control, although not determinative, indicates the connexity between an entity and a government and, therefore, may prove to be informative to the determination of its nature. [17] The domestic categorisation of what is considered a governmental authority and the exercise of public function may also facilitate the finding of the entity’s nature. [18]

The discourse indicates that the determination of the exercise of function that is vested in a government and the practice that does not, de facto, differs from that followed by governments is a controversial feature of Article 1(1)(a)(1)(iv) ASCM. [19]

The Conferral of Benefit

Article 1.1. (b) ASCM stipulates that a financial contribution, or income, or price support must confer a benefit on the recipient to constitute a qualifying subsidy. Essentially, the existence of benefit necessitates the finding that the financial contribution has been granted on conditions more advantageous than those available on the market. [20]

In the context of energy markets, the determination of a proper market benchmark may be problematic. This is motivated by a distorted nature of such markets due to increased governmental intervention, which leads to the undetectability of the appropriate benchmark for the analysis of benefit. [21] Therefore, the benefit analysis in distorted markets may be characterised by rather high complexity and legal uncertainty.

The issue of whether FITs confer a benefit ultimately depends on the actual design of the measure and the conditions on the relevant market. However, the essential features of FITs, being, inter alia, a fixed price for produced energy and guaranteed grid access, seem to indicate that these measures may indeed confer a benefit on the renewable energy producers. [22]

Nonetheless, one may argue that FITs merely compensate producers for unfavourable conditions prevailing on markets heavily distorted by the subsidisation of producers of energy from other sources and do not satisfy Article 1.1. (b) ASCM. [23] In this sense, FITs could be viewed as a compensatory measure rather than as a scheme conferring an advantage within the meaning of the ASCM.

This implies that the issue of conferral of benefit by FITs is a relative matter, which requires an analysis of the scheme’s design and conditions prevailing on a particular market.

The Legality of FITs under the ASCM

The framework of the ASCM differentiates between subsidies of prohibited and actionable nature. For the sake of clarity, one may further add a third category of subsidies of non-actionable nature. These are subsidies that do not qualify as prohibited or actionable and therefore are permitted.

FITs as Prohibited Subsidies

Subsidies contingent on export performance or local content requirements are expressly prohibited under Article 3 of the ASCM. Support so conditioned is deemed to distort trade as such and is subject to rigorous treatment in the form of a total prohibition. [24]

In the context of FITs, the design of a measure is of crucial relevance. Support that is contingent on the use of locally provided services or manufactured goods can be vividly categorised as prohibited under the ASCM. Similarly, the conditioning of subsidy on reaching a particular export level would lead to the same conclusion under Article 3.1. (a) of the ASCM.

FITs as Actionable Subsidies

Subsidies that do not qualify as prohibited may be caught by the disciplines of Article 5 that provides for actionable subsidies. The provision enables contracting States to challenge a measure adopted by another contracting State, provided that it causes adverse effects to a complaining State. Accordingly, the determination of a subsidy’s adverse effect is central to the finding of its actionable nature. In this respect, Article 5 of the Agreement lists three types of adverse effects: nullification or impairment of benefits under GATT 1994, injury to another member’s domestic industry, and severe prejudice to the interests of another Member State.

For this article, it suffices to note that the analysis of adverse effects is a highly complex matter with issues pertaining to, inter alia, determination of a relevant market, the actual injury, and/or causation. [25]

It is neither practicable nor desirable to provide a definitive answer to the issue of actionability of FITs because such schemes, although sharing common characteristics, differ in one way or another and, thereby, require a case-by-case approach to the analysis. Nevertheless, some have argued that the finding of adverse effect is rather unlikely. This is motivated by a distorted nature of energy markets and the resulting hardship in establishing the causal link between a particular FIT scheme and a harmful effect. [26] Furthermore, it seems that States could mitigate the potential risk of causing adverse effect by designing the scheme in a non-discriminatory and neutral way. [27] Although, it must be noted that there are legitimate grounds to argue that FITs lead to the increase of production of renewable energy and, consequently, to the increase of security of energy supply, what, in turn, decreases the demand for energy imports and may cause prejudice to the interests of the energy-exporting State under Article 5(c). [28]

Regulatory Autonomy and Qualification of FITs as a Subsidy: A Conclusion

The analysis of Article 1.1. (a)(1) of the ASCM points to the observation that the provision employs a broad and permissive language to classify a measure as financial contribution. Accordingly, FITs’ shared common characteristics enable the conclusion that such schemes qualify as a financial contribution in the form of a purchase of goods. The fact that the provision at issue accommodates both direct and indirect contributions only add to the argument. Similarly, the wording of Article 1.1. (a)(2) provides for much flexibility and space for arguing in favour of categorising FITs as a form of income or price support.

The considerations in respect to the nature of the granting entity demonstrate that the meaning of any public body or determination of normal governmental practices is characterised by much uncertainty. A lack of consistency in the jurisprudence on the appropriate approach and the controversial nature of FITs further contributes to the issue of legal uncertainty. This, consequentially, may not favour the autonomy of a regulator. [29]

The difficulty of establishing a conferral of benefit by FITs pertains to the determination of a proper market benchmark and the issue of whether a measure, in fact, benefits recipients or merely compensates them for the conditions prevailing on the market. The consideration that FITs function as a compensatory measure would negate the existence of benefit and preserve states’ autonomy. The complexity of benefit analysis and the debated effect of FITs leads to a situation of legal uncertainty, which, essentially, may constrain the regulatory autonomy of States.

FITs may, in principle, be categorised as industry or enterprise-specific. Nonetheless, Article 2.1. (b) accommodates criteria that render a subsidy non-specific. This enables States to limit FITs’ availability without the risk of being subject to the scrutiny of the ASCM, provided that the design of the measure conforms to the principles outlined in the provision. As suggested by academics, the condition of specificity preserves some regulatory space by providing States with guidelines for structuring a subsidy in a neutral and non-discriminatory way. [30] Nevertheless, it may also be observed that the guidelines of Article 2.1. (b), although beneficial at first sight may have a negative impact on the ability of a State to pursue its policies. The principles mentioned may force a regulator to abandon its policy objectives associated with a FIT scheme to minimise the risk of a measure being qualified as specific and, thereby, subject to the disciplines of the ASCM. Therefore, depending on the actual purpose and object of a FIT, the condition of specificity has a twofold impact on the regulatory autonomy of States.

An interesting observation can be made with respect to the finding of adverse effects of a scheme for the purposes of Article 5 and 6 ASCM. As suggested, much depends on the actual design of a FIT scheme. The concept of actionability seemingly incorporates policy space by recognising that the finding of adverse effects may, potentially, be minimised by the adherence of a regulator to the principle of non-discrimination and neutrality in structuring the scheme. On the other hand, the principles mentioned will often lead to a situation where a State is forced to abandon its policy objectives associated with a FIT scheme which may, ipso facto, curtail its regulatory autonomy to adopt FITs to develop the domestic green energy industry. [31]

About the Author

Aleksander Szostak is a lawyer at Eversheds Sutherland in Poland. He is also a Ph.D. candidate in International Economic Law and a Ph.D. fellow at Study Hub for International Economic Law and Development at the University of Copenhagen. He has an LL.B. from the Maastricht University European Law School, a Master’s degree from the University of Amsterdam on International Trade and Investment Law and has participated in an exchange program with the Chinese University of Hong Kong.

The views, opinions, and conclusions expressed herein are personal to this author.

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Preferred Method of Citation 

Aleksander Szostak, “Towards Decarbonization of Energy Supply: Feed-in-Tariffs, Agreement on Subsidies and Countervailing Measures, and Autonomy of States to Regulate” (IJPIEL, 20 April 2021)

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Endnotes

[1] Marie Wilke, Feed-in Tariffs for Renewable Energy and WTO Subsidy Rules: An Initial Legal Review 1-3 (ICTSD, Issue Paper No. 4, 2011); TOBY D. COUTURE ET AL., NREL TECHNICAL REPORT/ TP-6A2-44849, A POLICYMAKER’S GUIDE TO FEED-IN TARIFF POLICY DESIGN 6-7 (2010).

[2] For e.g., Appellate Body Report, Canada – Certain Measures Affecting the Renewable Energy Generation Sector, WT/DS412/AB/R (adopted May 24, 2013); Appellate Body Report, Canada – Measures Relating to the Feed-In Tariff Program, WT/DS426/AB/R (adopted May 24, 2013).

[3] Marie Wilke, Feed-in Tariffs for Renewable Energy and WTO Subsidy Rules: An Initial Legal Review 11-12 (ICTSD, Issue Paper No. 4, 2011).

[4] DAVID JACOBS, RENEWABLE ENERGY POLICY CONVERGENCE IN THE EU: THE EVOLUTION OF FEED-IN TARIFFS IN GERMANY SPAIN AND FRANCE 43-44 (Routledge 2016).

[5] Marie Wilke, Feed-in Tariffs for Renewable Energy and WTO Subsidy Rules: An Initial Legal Review 11 (ICTSD, Issue Paper No. 4, 2011).

[6] JULIA SELIVANOVA, REGULATION OF ENERGY IN INTERNATIONAL TRADE LAW: WTO, NAFTA, AND ENERGY CHARTER 59-60 (Kluwer Law International 2011); art. II GATT Schedules of concession; GIOVANNA ADINOLFI ET AL., INTERNATIONAL ECONOMIC LAW: CONTEMPORARY ISSUES 195 (Springer 2016).

[7] GIOVANNA ADINOLFI ET AL., INTERNATIONAL ECONOMIC LAW: CONTEMPORARY ISSUES 195 (Springer 2016).

[8] Appellate Body Report, Canada – Certain Measures Affecting the Renewable Energy Generation Sector, ¶ 5.128, WT/DS412/AB/R (adopted May 24, 2013); Appellate Body Report, Canada – Measures Relating to the Feed-In Tariff Program, ¶ 5.128, WT/DS426/AB/R (adopted May 24, 2013); Alexandre Genest, The Canada – FIT case and the WTO subsidies agreement: Failed fact-finding, needless complexity, and missed judicial economy, 10(2) MCGILL INT’L J. OF SUSTAINABLE DEV. L. & POL’Y, 240-241 (2014).

[9] Luca Rubini, Ain’t Wastin’ Time No More: Subsidies for Renewable Energy, The SCM Agreement, Policy Space, and Law Reform, 15(2) J. OF INT’L ECON. L., 543-544 (2012).

[10] LUCA RUBINI, THE DEFINITION OF SUBSIDY AND STATE AID: WTO AND EC LAW IN COMPARATIVE PERSPECTIVE 123-124 (Oxford University Press 2009); Id. at 544-545; Aaron Cosbey and Luca Rubini, Does it FIT? An Assessment of the Effectiveness of Renewable Energy Measures and of the Implications of the Canada – Renewable Energy/FIT Disputes, INT’L CENTRE FOR TRADE & SUSTAINABLE DEV., 4-6 (2013), http://e15initiative.org/wp-content/uploads/2015/09/E15-Clean-Energy-Technologies-CosbeyRubini-FINAL.pdf.

[11] Marie Wilke, Feed-in Tariffs for Renewable Energy and WTO Subsidy Rules: An Initial Legal Review 13 (ICTSD, Issue Paper No. 4, 2011); Panel Report, Korea-Measures Affecting Trade in Commercial Vessels, ¶ 7.50, WT/DS273/R (adopted April 11, 2005).

[12] Appellate Body Report, United States — Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, ¶ 317, WT/DS379/AB/R (adopted Mar. 25, 2011).

[13] GREGORY MESSENGER, THE DEVELOPMENT OF WORLD TRADE ORGANIZATION LAW: EXAMINING CHANGE IN INTERNATIONAL LAW 176-177 (Oxford University Press 2016).

[14] Appellate Body Report, United States — Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, ¶ 318, WT/DS379/AB/R (adopted Mar. 25, 2011).

[15] MESSENGER, supra note 14, at 177-178.

[16] Appellate Body Report, United States—Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from India, ¶ 4.20, 4.29, 4.37, WT/DS436/AB/R (adopted December 19, 2014).

[17] Appellate Body Report, United States — Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, ¶ 318, WT/DS379/AB/R (adopted Mar. 25, 2011).

[18] Appellate Body Report, United States — Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, ¶ 297, WT/DS379/AB/R (adopted Mar. 25, 2011); Marie Wilke, Feed-in Tariffs for Renewable Energy and WTO Subsidy Rules: An Initial Legal Review 13-14 (ICTSD, Issue Paper No. 4, 2011).

[19] Marie Wilke, Feed-in Tariffs for Renewable Energy and WTO Subsidy Rules: An Initial Legal Review 15 (ICTSD Issue Paper No.4 2011); Rubini, supra note 10, at 541-543.

[20] Appellate Body Report, European Communities – Measures Affecting Trade in Large Civil Aircraft, ¶ 974, WT/DS316/AB/R (adopted June 1, 2011).

[21] Rubini, supra note 10, at 545.

[22] Daniel Behn and Ole Kristian Fauchald, Governments under Cross-fire? Renewable Energy and International Economic Tribunals, 12(2) MANCHESTER J. OF INT’L ECON. L., 130 (2015).

[23] Robert Howse, Climate Mitigation Subsidies and the WTO Legal Framework: A Policy Analysis 5-7 (IISD, 2010).

[24] Paolo Davide Farah and Elena Cima, The World Trade Organization, Renewable Energy Subsidies, and the Case of Feed-in Tariffs: Time for Reform toward Sustainable Development?, 27(515) THE GEORGETOWN INT’L ENVTL. L. REV., 522 (2015).

[25] See MITSUO MATSUSHITA ET AL., THE WORLD TRADE ORGANIZATION: LAW, PRACTICE, AND POLICY, SECTION ON SUBSIDIES AND COUNTERVAILING DUTIES (Oxford University Press 2015).

[26] Marie Wilke, Feed-in Tariffs for Renewable Energy and WTO Subsidy Rules: An Initial Legal Review 18 (ICTSD, Issue Paper No. 4, 2011).

[27] Luca Rubini, The Subsidization of Renewable Energy in the WTO: Issues and Perspectives 28 (NCCR Trade, Working Paper 2011/32).

[28] Michael Smith and Johannes Urpelainen, The Effect of Feed-in Tariffs on Renewable Electricity Generation: An Instrumental Variables Approach, 57(3) ENVTL. & RES. ECON., 386-389 (2014); Andrew Jerjian, The Feed-in Tariff Controversy: Renewable Energy Challenges in WTO Law, SOC’Y OF INT’L ENVTL. L. PAPER, 12 (2012).

[29] Luca Rubini, The Subsidization of Renewable Energy in the WTO: Issues and Perspectives 24 (NCCR Trade, Working Paper 2011/32).

[30] Id. at 26-27; Sadeq Z. Bigdeli, Resurrecting the dead? The expired non-actionable subsidies and the lingering question of ‘green space’, 8(2) MANCHESTER J. OF INT’L ECON. L., (2011).

[31] Luca Rubini, The Subsidization of Renewable Energy in the WTO: Issues and Perspectives 28 (NCCR Trade, Working Paper 2011/32).