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TWN Info Service on WTO and Trade Issues (Jul19/06)
3 July 2019
Third World Network


US measures in renewable energy sector held WTO-illegal

Published in SUNS #8936 dated 1 July 2019

Geneva, 28 Jun (Kanaga Raja) – A dispute panel at the World Trade Organisation (WTO) has ruled that certain measures instituted by several US states providing subsidies in the renewable energy sector conditional on use of domestic content are inconsistent with US obligations under the WTO.

The US states in question are California, Connecticut, Delaware, Massachusetts, Michigan, Minnesota, Montana and Washington.

In a ruling issued on Thursday (27 June) over the complaint brought by India against the US state programmes, the panel recommended that the Dispute Settlement Body (DSB) request the United States to bring these measures into conformity with its obligations under Article III:4 of the GATT 1994.

The panel found that all the US state measures at issue were inconsistent with Article III:4 of the GATT 1994 as they provide an advantage for the use of domestic products, which amounts to less favourable treatment for like imported products.

The panel, however, declined to rule on several other claims made by India on grounds of judicial economy.

[In 2014, the US had launched a similar trade dispute against India’s Jawaharlal Nehru Solar Energy Mission, on the grounds that it included incentives for use of domestically produced solar cells and modules. The WTO’s Appellate Body had upheld the US complaint against India in that case, and India was forced to drastically modify its major domestic effort to switch to renewable energy such as solar energy (and contribute to combating climate change).

[In a tit-for-tat response, India launched its dispute against the US over the measures, at state level, by eight states incentivising domestic production through subsidies conditional on use of domestic content. SUNS]

BACKGROUND

According to the Panel report, India had identified 11 measures in its panel request:

(1) Incentives granted and/or maintained contingent upon the use of domestic over imported goods under Renewable Energy Cost Recovery Incentive Payment Program (RECIP) in the State of Washington;

(2) Incentives granted and/or maintained contingent upon the use of domestic over imported goods under Self-Generation Incentive Program (SGIP) in the State of California;

(3) Incentives granted and/or maintained contingent upon the use of domestic over imported goods under Los Angeles Department of Water and Power’s (LADWP) Solar Incentive Program in the State of California;

(4) Incentives granted and/or maintained contingent upon the use of domestic over imported goods under Montana Tax Incentive for Ethanol Production (TIEP) in the State of Montana;

(5) Incentives granted and/or maintained contingent upon the use of domestic over imported goods under Montana Tax Credit for Biodiesel Blending and Storage in the State of Montana;

(6) Incentives granted and/or maintained contingent upon the use of domestic over imported goods through refund for Taxes paid on Biodiesel by Distributor or Retailer in the State of Montana;

(7) Incentives granted and/or maintained contingent upon the use of domestic over imported goods under Connecticut Residential Solar Investment Program (CRSIP) in the State of Connecticut;

(8) Incentives granted and/or maintained contingent upon the use of domestic over imported goods through the Renewable Energy Credits in the State of Michigan;

(9) Incentives granted and/or maintained contingent upon the use of domestic over imported goods through the Delaware Solar Renewable Energy Credits in the State of Delaware;

(10) Incentives granted and/or maintained contingent upon the use of domestic over imported goods under Made in Minnesota Solar Incentive Program (MSIP) in the State of Minnesota; and

(11) Incentives granted and/or maintained contingent upon the use of domestic over imported goods under Massachusetts Clean Energy Centre’s Commonwealth Solar Hot Water Program (CSHWP) in the State of Massachusetts.

The Panel had found in its preliminary ruling that Measure 3 (Los Angeles Manufacturing Credit Adder) and Measure 11 (Massachusetts Manufacturer Adder) were outside its terms of reference.

The Panel also noted that Measures 1, 2, and 8, and two programs under Measure 10 were amended or repealed following panel establishment.

MAIN FINDINGS

On India’s claims under Article III:4 of the GATT 1994, the Panel noted that according to India, each measure at issue is inconsistent with the obligations of the United States under Article III:4 of the GATT 1994 because they accord treatment less favourable to imported products than to like domestic products, i.e. products originating in specific municipalities or States of the United States.

According to the United States, India has failed to establish that the measures at issue breach Article III:4 of the GATT 1994.

In particular, according to the United States, India has not met its burden of demonstrating that these measures (i) affect the sale, purchase, transportation, distribution or use of products; or (ii) accord less favourable treatment to imported products within the meaning of that provision.

According to the Panel, to establish a violation of Article III:4 of the GATT 1994, the following three elements must be satisfied:

(a) that the imported and domestic products at issue are like products;

(b) that the measure at issue is a “law, regulation, or requirement affecting their internal sale, offering for sale, purchase, transportation, distribution, or use”; and

(c) that the imported products are accorded treatment less favourable than that accorded to like domestic products.

Following its analysis, the Panel found that in the context of each of the measures at issue, the relevant imported and domestic products are like products within the meaning of Article III:4 of the GATT 1994.

The Panel also found that each of the measures at issue falls within the scope of the phrase “laws, regulations and requirements” as used in Article III:4 of the GATT 1994.

The Panel further found that India has shown prima facie, and the United States has not rebutted, that each of the measures at issue is a “law”, “regulation” or “requirement” “affecting the internal sale, offering for sale, purchase, transportation, distribution or use” of the relevant products within the meaning of Article III:4 of the GATT 1994.

On the issue of less favourable treatment, the Panel noted that India argues that the measures at issue accord treatment less favourable to imported products than to like domestic products by incentivizing the use of domestic inputs and thereby denying effective equality of opportunity to the imported products to compete in the domestic market.

India further argues that the measures at issue do not provide equality of opportunity to the imported products to compete in the domestic market, and that they also modify the conditions of competition in the relevant domestic market to the detriment of imported products.

The United States argues that “if a measure does not “affect” the use … of a product, it is difficult to see how the measure could “modify the conditions of competition” with respect to that product on the market” in such a way as to give rise to less favourable treatment.

According to the United States, since in this case India has failed to show that any of the measures affect the sale, purchase, transportation, distribution or use of a product, it has necessarily failed to show that they modify the conditions of competition.

Following its analysis, the Panel found that India has shown prima facie, and the United States has not rebutted, that each of the measures at issue accords to imported products treatment less favourable than that accorded to like domestic products within the meaning of Article III:4 of the GATT 1994.

In its conclusion on India’s claims under Article III:4 of the GATT 1994, the Panel said that it has found that the relevant domestic and imported products under each measure at issue are like products within the meaning of Article III:4 of the GATT 1994.

It has also found that each measure at issue is a “law”, “regulation” or “requirement” “affecting the internal sale, offering for sale, purchase, transportation, distribution or use” of the relevant products within the meaning of Article III:4 of the GATT 1994.

Finally, the Panel has concluded that each measure at issue accords to relevant imported products treatment less favourable than that accorded to like domestic products within the meaning of Article III:4 of the GATT 1994.

The Panel therefore concluded that India has established, and the United States has not rebutted, that each measure at issue fulfils all three elements of the legal test under Article III:4 of the GATT 1994 and is therefore inconsistent with Article III:4 of the GATT 1994.

On India’s claims under the TRIMs and SCM Agreements, the Panel recalled that, for India, “[its] claims under the TRIMs Agreement and the SCM Agreement clearly emanate from the violation of Article III:4 of the GATT 1994”, as “the core of [its] claims lie in the discriminatory treatment between the imported products and “like” products of domestic origin”.

The Panel also recalled that, according to the Appellate Body, some of the key provisions invoked by India in the present dispute overlap as regards discriminatory conduct involving local content requirements: “Both the national treatment obligations in Article III:4 of the GATT 1994 and the TRIMs Agreement, and the disciplines in Article 3.1(b) of the SCM Agreement, are cumulative obligations. Article III:4 of the GATT 1994 and the TRIMs Agreement, as well as Article 3.1(b) of the SCM Agreement, prohibit the use of local content requirements in certain circumstances. These provisions address discriminatory conduct …”

“This raises the question whether a positive resolution of this dispute requires us to assess India’s additional claims under the TRIMs Agreement and the SCM Agreement, or whether – in light of our findings under Article III:4 of the GATT 1994 – we should exercise judicial economy on India’s claims under the TRIMs and SCM Agreements,” said the Panel.

On India’s claims under the TRIMs Agreement, the Panel noted that in several past cases, panels have decided to exercise judicial economy on claims under the TRIMs Agreement after having found violations under the GATT 1994, in particular its Article III:4.

Citing several past panel rulings, the Panel said that “we do not find it necessary to address India’s claims under the TRIMs Agreement in order to provide a positive solution to this dispute.”

Bearing in mind that Article 2 of the TRIMs Agreement is only concerned with TRIMs that are inconsistent with Article III (or Article XI) of the GATT 1994, and also in light of the relatively consistent practice of past panels when faced with claims under Article III:4 of the GATT 1994 and Article 2 of the TRIMs Agreement, the Panel considered that steps taken by the United States to bring the measures at issue into compliance with Article III:4 of the GATT 1994 will also eliminate the alleged non-conformity of the same measures with obligations under the TRIMs Agreement.

“We therefore exercise judicial economy with regard to India’s claims under Articles 2.1 and 2.2 of the TRIMs Agreement,” said the Panel.

On India’s claims under the Subsidies and Countervailing Measures (SCM) Agreement, the Panel exercised judicial economy on, and refrained from addressing, India’s claims under Articles 3.1(b) and 3.2 of the SCM Agreement, as well as on India’s claims under Article 25 of the SCM Agreement.

OVERALL CONCLUSIONS

As regards its terms of reference, the Panel found that:

(a) for the reasons set forth in its preliminary ruling, the Los Angeles Manufacturing Credit (LAMC) Adder (Measure 3), and the Massachusetts Manufacturer Adder (Measure 11) fall outside its terms of reference, whereas the Minnesota solar thermal rebate and the Minnesota solar photovoltaic rebate under Measure 10 fall within its terms of reference; and

(b) for the reasons set forth in section 7.1.1.2 of the Report, the “made in Washington” bonus in Section 82.16.165 of the Revised Code of Washington under Measure 1 does not fall within its terms of reference.

In light of their amendment following the establishment of the Panel, for the reasons set forth in section 7.1.1 of the Report:

(a) the Panel decided to make findings, and, if necessary, recommendations on Measures 1 and 8 as amended; and

(b) the Panel decided to make findings, and, if necessary, recommendations on Measure 2 as implemented through both the 2016 and 2017 California Self-Generation Incentive Program (SGIP) Handbooks.

In light of their repeal following the establishment of the Panel, for the reasons set forth in section 7.1.2 of the Report, the Panel decided:

(a) to make findings, and, if necessary, recommendations on the Minnesota solar energy production incentive (SEPI) program under Measure 10; and

(b) not to make findings and recommendations on the Minnesota solar thermal rebate under Measure 10.

The Panel concluded that the following measures are inconsistent with the United States’ obligations under Article III:4 of the GATT 1994:

(a) the Washington State additional incentive (Measure 1), as contained in Sections 82.16.110 to 82.16.130 of the Revised Code of Washington, and Section 458-20-273 of the Washington Administrative Code;

(b) the California Manufacturer Adder (Measure 2), as embodied in Section 379.6 of the California Public Utilities Code, and implemented through the 2016 and 2017 SGIP Handbooks;

(c) the Montana tax incentive (Measure 4), as embodied in Sections 15-70-502, 15-70-503, and 15-70-522 of the Montana Annotated Code, and Administrative Rules of Montana, Sections 18.15.701 – 18.15.703 and 18.15.710 – 18.15-712;

(d) the Montana tax credit (Measure 5), as embodied in Section 15-32-703 of the Montana Annotated Code;

(e) the Montana tax refund (Measure 6), as embodied in Section 15-70-433 of the Montana Annotated Code;

(f) the Connecticut additional incentive (Measure 7), as embodied in Section 16-245ff of the General Statutes of Connecticut, and Request for Qualification for Eligible Contractors and Third Party PV System Owners;

(g) the Michigan Equipment and Labour Multipliers (Measure 8), as embodied in Public Act No. 342;

(h) the Delaware Equipment and Workforce Bonuses (Measure 9), as embodied in Sections 356(d) and (e) of the Renewable Energy Portfolio Standards Act, and Rules and Procedures to Implement the Renewable Energy Portfolio Standard;

(i) the Minnesota solar photovoltaic rebate under Measure 10, as embodied in Section 116C.7791 of the 2016 Minnesota Statutes; and

(j) the Minnesota solar energy production incentive (SEPI) under Measure 10, as embodied in Sections 216C.411 – 216C.415 of the 2016 Minnesota Statutes.

The Panel further concluded as follows:

(a) With respect to India’s claims under Articles 2.1 and 2.2 of the TRIMs Agreement, the Panel exercised judicial economy for the reasons set forth in section 7.4.1 of the Report.

(b) With respect to India’s claims under Articles 3.1(b), 3.2, and 25 of the SCM Agreement, the Panel exercised judicial economy for the reasons set forth in section 7.4.2 of the Report.

In light of Article 3.8 of the DSU, the Panel concluded that, to the extent that the measures at issue are inconsistent with Article III:4 of the GATT 1994, they have nullified or impaired benefits accruing to India under that agreement within the meaning of Article XXIII:1(a) of the GATT 1994.

Pursuant to Article 19.1 of the DSU, the Panel recommended that the DSB request the United States to bring the following measures into conformity with its obligations under Article III:4 of the GATT 1994:

(a) the Washington State additional incentive (Measure 1), as embodied in Sections 82.16.110 to 82.16.130 of the Revised Code of Washington, and Section 458-20-273 of the Washington Administrative Code;

(b) the California Manufacturer Adder (Measure 2), as embodied in Section 379.6 of the California Public Utilities Code, and implemented through the 2017 SGIP Handbook; and additionally, as implemented through the 2016 SGIP Handbook to the extent that the latter continues to govern certain aspects of the California Manufacturer Adder for past applicants;

(c) the Montana tax incentive (Measure 4), as embodied in Sections 15-70-502, 15-70-503, and 15-70-522 of the Montana Annotated Code, and Administrative Rules of Montana, Sections 18.15.701 – 18.15.703 and 18.15.710 – 18.15-712;

(d) the Montana tax credit (Measure 5), as embodied in Section 15-32-703 of the Montana Annotated Code;

(e) the Montana tax refund (Measure 6), as embodied in Section 15-70-433 of the Montana Annotated Code;

(f) the Connecticut additional incentive (Measure 7), as embodied in Section 16-245ff of the General Statutes of Connecticut, and Request for Qualification for Eligible Contractors and Third Party PV System Owners;

(g) the Michigan Equipment and Labour Multipliers (Measure 8), as embodied in Public Act No. 342;

(h) the Delaware Equipment and Workforce Bonuses (Measure 9), as embodied in Sections 356(d) and (e) of the Renewable Energy Portfolio Standards Act, and Rules and Procedures to Implement the Renewable Energy Portfolio Standard;

(i) the Minnesota solar photovoltaic rebate under Measure 10, as embodied in Section 116C.7791 of the 2016 Minnesota Statutes; and

(j) the Minnesota solar energy production incentive (SEPI) program under Measure 10, as embodied in Sections 216C.411 – 216C.415 of the 2016 Minnesota Statutes, to the extent that incentive payments under this program continue following its repeal.

 


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