The conflict between environmental policy and the current international trade regime has been long, controversial, and inconclusive. As the world comes to terms with the severity of the climate crisis and its causes in human economic activity, questions about whether climate change mitigation strategies are legal or not under World Trade Organization and other trade rules are more pressing than ever.
The same uncertainty has haunted local procurement and job creation measures post-financial crisis, some of which are tied to broader environmental goals. A good example is Ontario's Green Energy Act, which directs local and international investment toward the creation of green jobs in the province.
But is the Act WTO-compliant? Thanks to a trade complaint against Canada filed this month by Japan, we may be within a few years of an answer. Regardless of the outcome, the challenge to Ontario's green jobs and energy policy is smoking-gun proof that corporations, through their national governments, will use international trade rules to attack even modest steps toward more sustainable economies.
Japan is challenging at the WTO the local content quotas in the Green Energy Act. Up to 50 per cent of the material in new solar and wind power projects must now be made in Ontario for power companies, local governments, communities or individuals to qualify for generous feed-in tariffs. The rate for solar is 80 cents/kW/hour -- the highest in the world. These tariffs are designed to shift provincial energy use from coal to renewables while added production from local preferences is predicted to create 50,000 green jobs in the next three years.
Japan claims these preferences are illegal because they treat Japanese companies differently than those producing locally, which is true to a point. Solar panels made in Japan or anywhere outside of Ontario do not constitute local content and create fewer local jobs. Fundamentally, however, the measure does not distinguish between companies based on national origin. German, Chinese, U.S., Indian, Japanese and Canadian renewable energy companies will all qualify for the feed-in tariffs if they can meet the quotas.
By most accounts, the plan is working. Reuters reported in March that Ontario's green energy strategy was making the province "a magnet for global heavy hitters in the green energy sector, drawn by alluring subsidies at a time when incentives are being scaled back elsewhere." Said one energy analyst, "I'm sure any major player in the clean energy space is looking at Ontario, now that they've put the sign out that they're open for business and willing to have attractive incentives."
Clearly not everyone is impressed. Japan is a major exporter of solar technology with well known brands such as Sanyo, Mitsubishi and Sharp. Many Ontario solar power firms use these brands in residential or larger-scale business installations. But when local content quotas go up to 60 per cent in March, it will be difficult for companies not producing solar modules in Ontario to qualify for high feed-in tariffs.
It was only a matter of time before a solar or wind energy exporter took Canada to the WTO for Ontario's policy. We know from leaked European Commission documents that the E.U. is trying to eliminate local preferences in the Green Energy Act through ongoing trade negotiations with Canada. They would like to see Ontario include the Act in its WTO Agreement on government procurement commitments, which would ban the preferences as an illegal offset. Municipal spending powers are also on the E.U.'s hit list, putting local sustainable procurement initiatives at risk.
Europe is also home to a thriving renewable energy industry, in no small part because of government incentives in its early days. It is hypocritical and a touch desperate of the E.U. and Japan to deny Ontario the opportunity to develop its local capacity.
There are flaws with the Green Energy Act that make Ontario's power sector vulnerable to other trade challenges. For example, as a larger share of generation comes from private firms in a progressively deregulated system, it becomes more difficult for the government to enforce policies designed to ensure environmentally friendly, secure and accessible electricity for all Ontarians. Under NAFTA, not just local preferences but any new regulation affecting profits could be fought by an investor as a form of expropriation in front of a private arbitration panel.
Also, as private renewable energy production increases, so will the pressure to export into the market-based U.S. grid. This could undercut provincial renewable targets, put upward pressure on prices for Ontario households, and make local preferences much more vulnerable to trade complaints. The more public an electricity system, and the more it is designed to meet local needs instead of exports, the better from a trade and environmental perspective.
But the immediate threat for Ontario now is that the McGuinty government will keep the high feed-in tariffs for solar, wind, biomass and other renewable projects while eliminating the local preferences -- as Japanese and E.U. trade officials would like to see. Companies could then import their solar panels and wind turbines from anywhere in the world and still profit from high renewable energy rates.
It's an unacceptable compromise. We will need both green jobs and green energy to make a truly sustainable economy. If global trade rules threaten that goal -- Japan's WTO complaint suggests they do -- we should be thinking about how to change those rules, not the policies that get us part way there.
Stuart Trew is the trade campaigner for The Council of Canadians.
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