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Subsidies

The Clean Development Mechanism, defined in Article 12 of the Kyoto Protocol, promotes the transfer of low-carbon technologies from industrialized countries to developing countries via projects that reduce GHG emissions and generate Certified Emission Reductions (CERs) that can be used by Annex I parties to meet their emission reduction targets.[1] National support for renewable energy, energy efficiency, or other low-carbon investments may be implemented via “green certificates,” “feed-in tariffs” (FITs), “premiums,” or direct subsidies to electricity producers that use renewable energy sources.[2] Feed-in tariff schemes set a minimum price for the electricity produced from renewable energy installations and establish purchase obligations for electricity suppliers. In contrast, premium schemes set a premium on the electricity market price, so that the amount of support paid to the producers fluctuates with the market price of electricity. The investment issue is whether investors can claim compensation when governments induce foreign investment via these types of subsidy schemes, but then reduce the amount or duration of the subsidy after the investment has been made.

Government subsidies for renewable energy and other carbon mitigation investments may be inconsistent with the WTO Agreement on Subsidies and Countervailing Measures. As we noted in Chapter 3, there are several disputes before the WTO on such subsidies, including feed-in tariff schemes. If national subsidies are found to be inconsistent with the SCM Agreement, the government granting the subsidy is obliged to comply with its WTO obligations, normally by eliminating the subsidy. If a subsidy is withdrawn under these circumstances, can an IIA be interpreted to make the compliance with WTO law a compensable violation of the IIA? If the withdrawal of a subsidy is required under WTO and prohibited in the IIA, there would be a conflict between the two treaties. The presumption against conflict in international law would require an interpretation of the IIA to avoid a conflict with WTO law. One way to avoid this conflict would be to find that the elimination of a subsidy to comply with WTO law does not constitute a “legally significant connection” between a measure and an investor or an investment, and thus does not “relate to” the investment, as we discuss below. IIAs do not eliminate a State’s right to regulate in the public interest.

With subsidies that are granted via the CDM, the subsidy is granted in accordance with international legal provisions in the Kyoto Protocol. Since the presumption against conflicts cannot override explicit treaty language, such a subsidy might still be incompatible with the SCM Agreement. However, such multilaterally based subsidies might not be challenged at the WTO. To date, no measures implemented in accordance with a multilateral environmental agreement have been challenged at the WTO. We analyze this issue in Chapter 8.

On 6 July 2011, Mesa Power Group LLC, a US-based company, served the Government of Canada with a Notice of Intent to Submit a Claim to Arbitration under NAFTA Chapter 11. Mesa Power Group’s complaint concerns measures taken by the Government of Ontario, as they relate to the FIT program enabled by the Green Energy and Green Economy Act.[3] Mesa Power applied to participate in

Ontario’s FIT program through four wind-farm projects. Renewable energy producers in the FIT program receive a premium price and a guaranteed market for the renewable energy that they produce, through long-term fixed price contracts with the Ontario Power Authority. Initially, participation in the wind power projects required 25 percent domestic content. This was raised to 50 percent for projects that became operational after 1 January 2012. Wind power projects over 10kW were required to obtain a minimum ofthis domestic content from Ontario sources. Projects were given a priority ranking for awarding contracts. Mesa Power claims that it lost its priority ranking when the rules were changed and was not offered contracts. Mesa Power claims that the ranking and contract-awarding process was arbitrary and non-transparent, in violation of NAFTA Article 1105. It also claims that the local content rules constitute performance requirements that violate Article 1106. It claims further that Samsung was given more favorable treatment, in violation of the MFN requirement of Article 1103, and that a Canadian company was given more favorable treatment, in violation of the national treatment requirement of Article 1102. Mesa Power claims CAD 775 million in damages.[4]

The nature of Mesa Power’s claims is not unique to the renewable energy sector. Rather, its claims are related to alleged procedural irregularities in the awarding of renewable energy subsidies and contracts. The same FIT program is the subject of WTO disputes alleging that the subsidies violate the WTO Agreement on Subsidies and Countervailing Measures. The latter cases are more likely to succeed than the Mesa Power claims, since the SCM Agreement prohibits subsidies that are contingent on the use of domestic inputs. In Metalclad v. Mexico, the British Columbia Supreme Court (BCSC) held that a lack of transparency does not constitute of violation of Article 1105, because transparency does not form part of customary international law. The other claims are more properly characterized as government procurement claims, but the NAFTA Chapter on government procurement excludes obligations regarding government procurement by provincial governments.

The rule of effective treaty interpretation requires Chapter 11 to be interpreted harmoniously with the other provisions of NAFTA. Allowing an investor to succeed on claims that are excluded from the application of NAFTA would not be in accordance with this rule. Moreover, there is a presumption against conflict in international law. In effect, Mesa Power claims that it is entitled to subsidies that are prohibited by the SCM Agreement. Finally, Mesa Claims that NAFTA Chapter 11 requires the Ontario government to enter into contractual arrangements, a claim that would seem inconsistent with the principle of freedom of contract in contract law. Moreover, as the tribunal held in Waste Management Inc. v. Mexico, NAFTA Chapter 11 does not provide a forum for the settlement of contractual disputes. In that case, there was a contract between the Municipality of Acapulco and the claimant. If a breach of contract claim cannot succeed in Chapter 11, it seems that a claim based on no contract cannot.

Nevertheless, the FIT program cases demonstrate the importance of understanding the way that different areas of international economic law may interact in renewable energy regulation. In this instance, it appears that the design of the Ontario program failed to take into account the litigation risks stemming from NAFTA Chapter 11 and the SCM Agreement. The result is that the Canadian federal government must dedicate human and financial resources to international litigation on several fronts, since it is responsible in international law for the action of sub-national governments. Thus, the faulty design and implementation of Ontario’s program increases the cost of its program and the risks that it will have to be redesigned to comply with Canada’s international legal obligations.

On November 8, 2012, the US company Lone Pine Resources Inc. submitted a Notice of Intent to Submit a Claim to Arbitration against the Government of Canada under the dispute settlement provisions of NAFTA Chapter 11. The case concerns Quebec’s decision to cancel oil and gas exploration permits for deposits under the St. Lawrence River as part ofawider moratorium on the controversial extraction technique of fracking. It is claiming CAD 250 million in damages. Lone Pine Resources claims a lack of due process, compensation, and public purpose in the revocation of its permits, in violation of NAFTA Articles 1105 and 1110. The Government of Quebec established a strategic environmental assessment committee to evaluate shale gas development in Quebec, but established the moratorium on June 13, 2011 with the Act to Limit Gas and Oil Activities before the environmental assessment was completed.[5]

Does the granting of oil and gas exploration permits imply that the ensuing activities, including exploratory drilling and eventual extraction activities should the resources be found, are not subject to environmental law or environmental impact assessment? Does the answer depend on the procedural and scientific basis for imposing the moratorium? In Methanex v. United States, a NAFTA Chapter 11 tribunal held that a ban on the gasoline additive methanol was not a measure relating to investment, but rather an environmental measure based on scientific evidence. As such, it was not subject to NAFTA Chapter 11. However, in ECHormones, the WTO Appellate Body held that the status of the precautionary principle in customary international law has not been established and found a ban on imports of hormone-treated beef to be inconsistent with the WTO Agreement on Sanitary and Phytosanitary Measures. IfQuebec’s moratorium on the extraction technique of fracking is based on the precautionary principle, and there is insufficient scientific evidence regarding its environmental impact, would this be a sufficient basis for a tribunal to conclude that the moratorium is not a measure relating to investment, but rather an environmental measure?

As we noted in Chapter 2, the precautionary principle has been recognized in international environmental instruments. Is that recognition sufficient to sustain such a finding under NAFTA Chapter 11? What degree of latitude does the precautionary principle allow for governments to regulate foreign investments that may pose environmental risks? In Metalclad v. Mexico, the Tribunal found that NAFTA Article 1114 allows governments to require that foreign investors comply with environmental regulations. However, because it had assured Metalclad that it had complied with all relevant environmental regulations when in advance of its decision to invest in a hazardous waste facility, Mexico was found liable to pay compensation for a measure tantamount to expropriation when the area in which the plant was located was later declared an ecological zone by the state government. Does this mean that Quebec had to deny the exploration permits ex ante or lose its right to regulate fracking ex post based on environmental concerns?

On October 17, 2012, Windstream Energy LLC filed a claim against Canada relating to Ontario’s FIT program, alleging violations of NAFTA Articles 1102, 1103, 1105, and 1110. Windstream claims compensation for a moratorium introduced on offshore wind energy projects after it was awarded a contract under the FIT program. The Ontario Government justified the moratorium on the grounds that further scientific research had to be completed before offshore wind development could proceed, but Windstream alleges that other factors in the decision were political opposition to offshore wind development on the Great Lakes and the higher cost of energy from offshore wind projects, as compared to onshore wind projects. Wind- stream was included in the moratorium even though it already had a contract. Windstream invoked the force majeure clause of the contract on the basis of the moratorium. The contract entitles the Ontario Power Authority to unilaterally terminate the contract if the force majeure delays the commercial operation for more than 24 months. Windstream claims expropriation of its investment in the project, a violation of the principle of fair and equitable treatment, as well as less favorable treatment than Samsung and less favorable treatment than Canadian companies, neither of which were subject to the moratorium (because their projects were land-based). Windstream claims damages of CAD 475 million.[6]

Like the Mesa Power case, the Windstream case involves Ontario’s FIT program. In contrast to Mesa Power, Windstream had a contract. However, Windstream’s invocation of the force majeure clause may entitle the Ontario Power Authority to unilaterally terminate the contract, in which case there would be no contract either. Were that not the case, the dispute might still be considered a contractual dispute that is not within the scope of Chapter 11, as in the Waste Management case. Like the Lone Pine Resources case, the Windstream case involves a moratorium that affects the rights of a foreign investor, though the rights are contractual rather than based on the issuance of permits. In both cases, the justification for the moratorium appears to be political opposition and a desire for further scientific research.

  • [1] Maria Netto and Kai-Uwe Barani Schmidt, “CDM Project Cycle and the Role of the UNFCCCSecretariat” in David Freestone and Charlotte Streck (eds.), Legal Aspects of Implementing the KyotoProtocol Mechanisms: Making Kyoto Work (Oxford University Press, Oxford 2005) 175.
  • [2] Commission of the European Communities, The Renewable Energy Progress Report: Commission Report in Accordance with Article 3 of Directive 2001/77/EC, Article 4(2) of Directive 2003/30/EC and on the Implementation of the EU Biomass Action Plan, COM (2009) 192 Final, at 6—7 (April2009); Commission of the European Communities, Communication on the Support of Electricityfrom Renewable Energy Sources, COM (2005) 627 Final, at 4—5 (December 2005).
  • [3] MesaPowerGroup LLCv. Canada,UNCITRAL (accessedMarch 15, 2013).
  • [4] Mesa Power Group LLC v. Canada, UNCITRAL, Notice of Intent to Arbitrate (July 6, 2011).
  • [5] Lone Pine Resources Inc. v. The Government of Canada, UNCITRAL, Notice of Intent to Submita Claim to Arbitration (November 8, 2012) (accessed March 13, 2013).
  • [6] Windstream Energy LLC v. Canada, UNCITRAL, Notice of Intent (October 17, 2012) (accessed March 15, 2013).
 
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