Subsidizing Solar: the Case for an Environmental Goods and Services Carve-Out from the Global Subsidies Regime

Subsidizing Solar: The Case for an Environmental Goods and Services Carve-out from the Global Subsidies Regime Zachary Scott Simmons I. INTRODUCTION ................................................................. 422 II. THE IMPORTANCE OF SOLAR ENERGY AND SUBSIDIES FOR SOLAR ENERGY DEVELOPMENT ................................ 426 III. SUBSIDIES LANDSCAPES ................................................... 432 A. The American Landscape .................................... 432 B. The Chinese Landscape ....................................... 442 IV. THE GLOBAL SUBSIDIES REGIME ..................................... 449 V. PROBLEM WITH THE FRAMEWORK I: THE EASY ROAD TO SUCCESSFUL SUBSIDIES CHALLENGES AT THE WTO ....... 454 VI. PROBLEM WITH THE FRAMEWORK II: THE EASY ROAD TO APPLYING COUNTERVAILING MEASURES .................... 465 VII. AN ENVIRONMENTAL GOODS AND SERVICES CARVE-OUT 477 VIII. CONCLUSION .................................................................... 483 I. INTRODUCTION Anthropogenic climate change is the seminal challenge of the 21st century. The warming of the planet and accompanying consequences have the potential to negatively impact every state on Earth, and to unknown degrees. When and how states decide to tackle this phenomenon—either through unilateral initiatives 422 2014] SUBSIDIZING SOLAR 423 or multilateral action—will in large part determine the extent to which the most negative of its potential effects are incurred. Within the last decade, many states have made a strong commitment to reducing carbon dioxide emissions, the primary driver of climate change, in an attempt to abate the warming of the planet. As these emissions are inextricably linked to the energy sector and the burning of fossil fuels (primarily coal, petroleum, and natural gas) for electricity generation, transportation, and industrial purposes, many states have focused on cleaning up their energy portfolios, introducing renewable sources of energy such as solar, wind, and biofuels into the mix. Due to high cost barriers in producing the technologies associated with these energy sources, however, most states have found it necessary to subsidize the manufacturers or purchasers of renewable energy technologies or the providers of electricity generated from renewable energy sources in order to make investments in renewable energy technologies worthwhile. These types of subsidies include grants, loans, and loan guarantees; tax incentives; local content requirements; renewable portfolio standards; and pricing support. These are available in numerous forms and combinations in most states with a renewable energy presence. The focus of this comment is on government support measures for solar energy, which has an important although still relatively small presence in major producers of renewable energy (and greenhouse gases) such as the United States and China. In the last several years, government support measures for renewable energy development, including solar, have come under scrutiny for alleged inconsistency with international trade laws, including the Subsidies and Countervailing Measures Agreement (SCM Agreement) and a few other World Trade Organization (WTO) agreements. The SCM Agreement governs permissible and impermissible subsidies and serves as a bulwark against protectionist, trade-distorting practices amongst WTO member states. States have challenged each other’s support measures for renewable energy development, alleging that they constitute protectionist policies aimed at “distorting” the balance of trade in favor of domestic over foreign manufacturers and in violation of the SCM Agreement. While most of these allegations 424 JOURNAL OF ENVIRONMENTAL LAW [Vol: 32:2 have focused on government support measures aimed explicitly at favoring domestic over foreign manufacturers (i.e. local content requirements, etc.), other less meritorious claims (focusing on non-trade-distorting measures such as R&D support, etc.) have started to emerge and more may be lurking on the horizon. Challenges of the latter type are predatory in the sense that if successful, they can impair a state’s ability to support its renewable energy industries through legitimate means, to the ostensible advantage of the challenging state’s own renewable energy industries (which are likely the beneficiaries of equivalent support measures). Unfortunately, the rules of the SCM Agreement provide inadequate protection against such frivolous claims and leave states with insufficient policy space to implement beneficial measures in support of the development of renewable energy, including solar. The inadequacy of the SCM Agreement stems from the two tracks available to states in challenging subsidies: multilateral dispute settlement and unilateral countervailing action. Under the first track, multilateral dispute settlement, a state’s non- trade-distorting renewable energy support measures are vulnerable to attack because of the vague language of the provisions governing forms of “actionable” (i.e. challengeable) subsidies. Furthermore, Article XX of the General Agreement on Tariffs and Trade (GATT),1 which shields certain government behavior in furtherance of environmental objectives from discipline, does not apply to subsidies and the SCM Agreement. As a result, a state may be faced with the reality of having to remove all or part of certain support measures for renewable energy industries like solar at the behest of the WTO Dispute Settlement Body. Under the second track, unilateral countervailing action, a state’s renewable energy technology exports that benefited from non-trade-distorting subsidies may also face easy challenge. Through this process, an allegedly injured industry in one state can petition the government to impose countervailing duties on imports (i.e. the alleged source of injury) from another state. 1. The overarching multilateral treaty governing international trade law. 2014] SUBSIDIZING SOLAR 425 Here, one of the SCM Agreement’s requirements for imposing countervailing duties—a causal link between subsidized imports and injury to the domestic industry—requires complex (if not totally impossible) counterfactual analysis,2 especially in the context of the energy sector which is subject to a variety of market forces. Government agencies investigating subsidized imports are thus forced to rely upon the Agreement’s two other criteria—presence of subsidized imports and injury to the domestic industry—which are easily demonstrable. This reliance creates a bent toward finding for the allegedly injured domestic industry in a countervailing duty investigation and has negative implications for exporters of solar energy technologies, among others. This was recently demonstrated by the U.S. countervailing duty (and accompanying antidumping) investigation against Chinese solar panel manufacturers. In light of the narrow policy space available to states in deploying reasonable support measures for solar energy development, a new multilateral framework is needed to address the questions of tariff and non-tariff barriers, including subsidies, as applied to environmental goods and services (i.e. tradable commodities and human services which provide environmental benefits). By explicitly detailing what forms of government support for renewable energy development are permissible, and by exempting such measures from coverage under the SCM Agreement, a comprehensive multilateral agreement would remedy the SCM Agreement’s infirmities, closing off the easy road to both successful subsidies challenges through the WTO’s dispute settlement mechanism and to applying countervailing measures against subsidized imports. While several proposals for environmental goods and services agreements (EGSAs) have been put forward in both regional and global forums, the Asia-Pacific Economic Cooperation’s (APEC) recent adoption of an environmental goods agreement should be lauded and built upon at the global level. Specifically, the WTO should look to expand the APEC agreement by addressing non- tariff barriers—creating a category of permissible government 2. That the domestic industry would not have been injured if the imports in question had not been subsidized. 426 JOURNAL OF ENVIRONMENTAL LAW [Vol: 32:2 support measures for renewable energy development and exempting those measures from coverage under the SCM Agreement—and by concluding a binding agreement to which member states must adhere. This comment proceeds in several stages. Part II addresses the importance of solar energy as a renewable energy source and substantiates the idea that government support measures for solar energy development are necessary. Part II also proposes guiding principles for determining what types of government support measures are, and should be explicitly recognized as, legitimate. Part III covers the current subsidies landscapes for solar energy development in the United States and China and describes several of the positive results which have flowed from government support measures in both counties. Part IV briefly lays out the architecture of the global subsidies regime in order to provide context for later discussion as to its problems per solar energy development. Parts V and VI address the shortfalls of the global subsidies regime, with the discussion divided between issues arising out of the multilateral dispute mechanism track and countervailing duty process, respectively. After detailing these shortfalls in depth, Part VII provides background information and suggestions relevant to

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