*I would like to thank Professor Julia Ya Qin for her great teaching on international economic law in 2015 at Tsinghua University in Beijing, China and her comments that significantly improved the paper draft. Any errors are my own.
Recent WTO cases concerning green power industrial policies have signaled a paradigm shift in the conflict between trade and the environment.01Mark Wu & Salzman James, The Next Generation of Trade and Environment Disputes: The Rise of Green Industrial Policy, 108
Rather than rely on dictionary definitions in its interpretation of treaty provisions, the Appellate Body chose to creatively construe the phrase “relevant market,” a concept frequently used in competition law, in its recently released report.03Id. As it might face a flood of cases related to renewable energy subsidies, the Appellate Body may want to end the renewable energy war once and for all. If a measure is determined to be outside the defined subsidy scope, a subsidy claim cannot proceed. However, the Appellate Body’s approach to defining the relevant market remains questionable because the borrowing of “relevant market” from competition law does not consist with its rationale and application.
This paper examines the Appellate Body’s “relevant market” analysis. Part 2 provides a background to the WTO dispute. Part 3 summarizes the key issues related to subsidy analysis and the “relevant market” approach adopted by the Appellate Body in Canada—Renewable Energy/FIT. Part 4 explores the concept of “relevant market” and it analyses the flaws in the Appellate Body’s supply-side substitutability argument by comparing its rationales and applications in antitrust law and WTO law.
2. Rising of Renewable Energy and its Related WTO Disputes
It is both a cliché and a truth that the free market is not a panacea. Traditional fossil fuel energy sources remain very popular in the market, regardless of their exhaustibility and lack of environmental friendliness. Due to the extraordinarily high costs, the private sector is hardly interested in the renewable energy market without governmental subsidies. It is unreasonable to expect people to automatically choose renewably generated electricity that is significantly more expensive than traditional energy. However, buyers and sellers may not be taking into account the environmental costs of fossil fuel. When such a market failure occurs, the government can step in.
One way that a government can stimulate the development of the green energy industry is to set up a feed-in tariff program (“FIT program”). In a FIT program, a government offers a long-term contract with electricity suppliers at cost price to give them access to the power grid.04
However, FIT programs may be illegal under international trade law. One accusation is that FIT programs may contravene WTO law because they act as a form of subsidy, violating the Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) and jeopardizing market competition. The SCM Agreement, as part of WTO law, sets out rules concerning “specific” governmental subsidies given to particular enterprises,08
WTO lawsuits related to renewable energy subsidies have been emerging among heavyweight players in international trade, including the United States, China, the European Union, Japan, India, and Canada.09See Request for Consultations by the United States, China – Measures Concerning Wind Power Equipment, WTO Doc. WT/DS419/1 (adopted Jan. 6, 2011); Request for Consultations by Japan, Canada – Certain Measures Affecting the Renewable Energy Generation Sector, WTO Doc. WT/DS412/R (adopted Sept. 13, 2010); Request for Consultations by the European Union, Canada – Measures Relating to the Feed-in-Tariff Program, WTO Doc. WT/DS426/1 (adopted Aug. 11, 2011); Request for Consultations by the United States, India – Certain Measures Relating to Solar Cells and Solar Modules, WTO Doc. WT/DS456/R (adopted Feb. 6, 2013). As the first case adjudicated by the WTO Panel, and later by the Appellate Body, concerning renewable energy subsidies, Canada—Renewable Energy/FIT has attracted much attention.
Japan and the European Union claim that Canada violates the SCM Agreement because Ontario’s FIT Program constitutes a subsidy, as defined in the SCM Agreement, that is provided “contingent upon the use of domestic over imported goods.”10Canada – Renewable Energy/ Canada – Feed-In Tariff Program, WTO Dispute Settlement: One-Page Case Summaries [https://perma.cc/TTG2-4HGK]. Under Ontario’s FIT Program, generators of electricity produced from renewable energy are paid a guaranteed price per unit under 20-year or 40-year contracts.11Id. Participation in the FIT Program is open to facilities located in Ontario that generate electricity exclusively from one or more sources of renewable energy, including wind and solar PV.12Id. Those facilities must comply with “Minimum Required Domestic Content Levels.”13Id.
To examine whether Ontario’s FIT Program violates the WTO law and constitutes an illegal subsidy under the SCM Agreement, the first step is to establish whether the Program falls within the definition of subsidy. If not, Ontario’s FIT Program is not a target regulated under the SCM Agreement and there is no need to further discuss the legality of the Program.
To address the prerequisite issue of subsidy definition, the Panel used a two-prong test:
- Under the first prong, it is indisputable that Ontario’s FIT Program is one of many “government purchases of goods” which constitute a government “financial contribution,”14Panel Report, Canada—Certain Measures Affecting the Renewable Energy Generation Sector; Canada—Measures Relating to the Feed-in Tariff Program, ¶ 7.243, WTO Docs. WT/DS412/R,WT/DS426/R (adopted Dec. 19, 2012) [hereinafter “Panel Report of Canada—Renewable Energy/FIT”]. under Article 1.1(a)(1)(iii) of the SCM Agreement.15Agreement on Subsidies and Countervailing Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A,
The Legal Texts: The Results of The Uruguay Round of Multilateral Trade Negotiations231 (1999), 1869 U.N.T.S. 14 [hereinafter “SCM Agreement”] art. 1.1(a).
- The second prong asks whether there is a “benefit conferred” to the local facility providers under Ontario’s FIT Program, pursuant to Article 1.1(b) of the SCM Agreement.16SCM Agreement art. 1.1(b).
The Panel and the Appellate Body diverged on the second prong, which was decisive in determining whether Ontario’s FIT Program can be treated as a subsidy.
3. New Approach: “Relevant Market” and “Supply-Side” Substitution
In considering the second prong, both the Panel and the Appellate Body started with the concept of “relevant market.” To determine how a certain group of businesses benefit from the FIT Program, it is necessary to know the scope that the market competition takes place, or the “relevant market.” In particular, to compare the subsidized price with a market benchmark, it is essential to first make sure the products are competing against each other.
The Panel believed that such a relevant market refers to the wholesale electricity market, while the Appellate Body divided the wholesale market into two parts: electricity from renewable energy, and electricity from traditional sources. The Panel focused its analysis on the wholesale market of electricity products in Ontario.17Panel Report of Canada—Renewable Energy/FIT, supra note 15, ¶ 7.322. This analysis relies on the fact that, due to a supply mix operated by the Government of Ontario, consumers cannot tell which source is used to generate the electricity they are using.
The Appellate Body, however, proposed a different test: taking the suppliers’ differentiated characteristics into consideration, thereby isolating the green power market. The Appellate Body disagreed with the Panel’s approach of using “the market of electricity generated from all sources of energy” as the relevant market.18Appellate Body Report of Canada—Renewable Energy/FIT, supra note 2, ¶ 5.167 (emphasis added). Taking into account both the supply and demand sides of the electricity market, the Appellate Body held that renewable-energy-generated electricity is not in competition with other electricity producers because of “differences in cost structures and operating costs.”19Id. ¶ 5.174-179. Following this analysis, the Appellate Body reached the conclusion that the Government of Ontario, by initiating the FIT Program, created a renewable energy market and that analysis cannot be completed due to lack of evidence.20Id. ¶ 5.188-191.
The approach of taking into account supply-side analysis is new and surprising. Before the Appellate Body Report was released, scholars barely focused on the market characterization in the case.21See Wu & James, supra note 1; Kenina Lee, An Inherent Conflict Between WTO Law and a Sustainable Future? Evaluating the Consistency of Canadian and Chinese Renewable Energy Policies with WTO Trade Law, 24
4. Why the New Approach is Problematic
There is no extensive explanation of the concept “relevant market” in WTO law. Subsidy regulation under WTO law is designed to produce fair competition at an international level. The concept of relevant market in domestic antitrust law and the one in WTO law share the same rationale and, consequently, the antitrust law concept is used to illustrate the problem in the Appellate Body’s analysis.
4.1 “Relevant Market”
Like the subsidy analysis, “relevant market” in antitrust law refers to a market where competition takes place. Defining a relevant market, in respect of geography and product, is a prerequisite for all kinds of antitrust analysis.27
Besides relevant geographic market, antitrust analysis takes into account relevant product market. In a market competition, more than one product can be involved. Substitutes for suppliers’ production and customers’ demand may belong to relevant product market as well. For example, green tea and black tea can be substitutes in the same relevant market because consumers will shift from one product to the other when the price of either product changes.
Dumping or subsidizing under WTO law and predatory pricing under antitrust law can be compared and contrasted. Predatory pricing is a strategy where a seller set products or services at a price lower than the marginal cost, by which means the seller can “drive competitors out of the market,” or “create barriers to entry” for potential competitors.28Id. at 276–90. Once the current competitors are forced away and incoming competitors are shut out by the price war, the predatory merchant gains a monopolistic market position, and is able to recoup any losses by raising its prices and profits. The possibility of this recouping is key to the success of a predatory pricing strategy.
The analysis of anti-dumping or countervailing is similar to that of predatory pricing. Take countervailing as an example: If firms from Country A are subsidized, the cost of their products is artificially decreased, and the price will be lower than it otherwise would. If those subsidized firms export products to Country B, the same issues are raised as with predatory pricing, namely price-cost comparison and the likelihood of recouping. For the latter, if the subsidy is not going to be withdrawn when the firm’s Country B competitors are driven out of market without a chance of re-entering, as Richard Posner put, “there is an argument that the subsidy should be treated as conferring a permanent benefit” on consumers in Country B that “is likely to exceed the costs to the producers.”29
4.2 “Supply-Side” Substitution
The rationale of demand-side substitution is rather straightforward. If a monopoly raises the price of its product above the normal level, consumers will turn to substitutes and the monopolistic action fails.
Supply-side substitution is more complicated. Sometimes consumers may be unable to react to a price increase. Nevertheless, producers may be able to do so by for example, increasing their supply to satisfy the demand of these consumers. Beyond the existing suppliers, the increase in supply may come from those who provide other products but do not have to spend a lot to shift to the monopolized product.30Morgan, supra note 27, at 801–13. Thus, the increased level of supply may render the monopoly’s attempted price increase unprofitable. In this case, those producers with the ability for supply-side substitution should be included in the relevant market.
Take United States antitrust law as an example: Use of supply-side substitution in defining relevant product market has been included in the United States Merger Guidelines since 1982.31Mark Jamison & Janice Hauge, Lessons from the Evolution of Merger Guidelines in the United States, 4
Recent cases have confirmed the description in those Merger Guidelines. For example, in 2000, the United States Department of Justice alleged that the acquisition of Fort James by Georgia-Pacific would hurt competition in the “away-from-home (AFH) tissue market” in the United States.33United States v. Georgia-Pacific Corp., 2001 U.S. Dist. LEXIS 24736 (D.D.C. May 8, 2001) [https://perma.cc/YVX4-AENC]. Later in 2001, the Department explained the definition of the relevant market in its Competitive Impact Statement. There were three different types of AFH tissue products, which the Department considered were “no interchangeable substitutes” from the demand perspective—AFH bathroom tissue, AFH paper napkins, and AFH paper towels.34Competitive Impact Statement, United States v. Georgia-Pacific Corp., 2001 U.S. Dist. LEXIS 24736 (2001), [https://perma.cc/8WK4-CRUU]. Since they cannot be regarded as demand substitutes, they cannot therefore be part of the same relevant market. Notwithstanding the lack of demand substitutability, the Department claimed that the markets for the three types of AFH tissues could be deemed as an aggregated “AFH tissue market,” because “the manufacturing process of AFH tissue products” allows manufacturers of the three AFH tissues to shift easily from one to another.35Id. In other words, the supply-side substitutability test holds.
European Union competition law holds the same rationale and a similar regulation to the United States antitrust law. Commission Notice on the Definition of Relevant Market in 1997 defines supply-side substitutability as the question of “whether other suppliers can readily switch production to the relevant products and sell them on the relevant market”.36European Commission, Commission Notice on the Definition of the Relevant Market for the Purposes of Community Competition Law, 372
The “supply-side consideration within the relevant market” approach adopted by the Appellate Body in Canada–Renewable Energy is inconsistent with the economic rationale of “relevant market” in antitrust law as illustrated above. A noticeable disparity of the Appellate Body’s approach from the antitrust law is that, instead of enlarging the relevant product market by considering supply-side substitutability, the Appellate Body narrows the relevant market. The zoom-in/zoom-out distinction makes a big difference. In antitrust law, the consideration of supply-side substitution is demand-oriented because producers have the ability to switch production, the supply increase will make the product price lower in the market and therefore attract more consumers. In other words, new producers entering the market will eventually affect consumer choices.
On the contrary, in the Canada-Renewable Energy situation, the suppliers’ condition will never influence the consumers because of the supply mix. Following the analysis, electricity from renewable energy and that from traditional energy have perfect demand substitutability.
4.3 Re-evaluating “Relevant Market”
A conclusion that electricity from renewable energy and that from traditional energy have perfect demand substitutability may be drawn following the analysis above. However, a more significant flaw that appears, in both the Appellate Body’s report and in the above argument, is that relevant market analysis is applied to the possibly distorted, subsidized market, instead of the pre-existing free, competitive market. In United States antitrust law, it is known as the Cellophane fallacy.39Gregory J. Werden, The History of Antitrust Market Delineation, 76
As the Appellate Body found, no pre-existing competitive market containing the two types of electricity products exists in Ontario. One option is to use an actual free market similar to the demand and supply relationship in Ontario as an alternative. For example, different from Ontario’s regulation, the United States does not compulsorily require a supply mix. Some suppliers in the market sell “green energy” electricity only, including wind power and solar power. People can purchase different types of electricity based on their own choices at relatively free-market prices.40U.S. Department of Energy, Buying Green Power (Aug. 21, 2015),
Supposing an alternative market can be found, there are ways that demand substitutability can be measured. For instance, in United States antitrust law and European Union competition law, the SSNIP test (test of Small but Significant and Non-transitory Increase in Price) has been developed as a method to measure the subtlety of monopolistic market power concerning demand-side substitutability among similar products within a particular geographic region.41See Horizontal Merger Guidelines; Organization for Economic Co-operation and Development, Roundtable on Market Definition—Note by the European Union, DAF/COMP/WD(2012) 28 (2012).
The line drawing in reality however, is not an easy job. It is unclear from the evidence presented in the case whether market of electricity products from renewable energy can be categorized as one relevant market. One possibility is that, the price of electricity generated from renewable energy will be significantly higher than that from traditional energy sources. According to the United States Department of Energy’s Green Power Markets website, “customers have expressed a preference and willingness to pay more, if necessary, for cleaner energy sources.”42U.S. Department of Energy, Green Power Markets,
The reason why the Appellate Body adopted such a creative approach may have something to do with the facts that the green light category of subsidies expired in 2000 and that countries have not reached any consensus for a new exception clause under the SCM Agreement.43U.N. Conference on Trade and Development, Dispute Settlement – World Trade Organization – 3.7 Subsidies and Countervailing Measures (2003) [https://perma.cc/9J8E-GLK3]. Without an exception clause for environmental protection policy, it is difficult for the Appellate Body to support green power and stop the ongoing trade war of renewable energy subsidies for good. To block such cases out of the door of subsidy definition, the Appellate Body creatively injected a zoom-in supply-side substitution argument into the relevant market analysis.
Though it might be a good policy consideration behind the supply-side approach, the flaw of the approach has negative implications. As the Appellate Body found by adopting the approach, no pre-existing competitive market containing the two types of electricity products exists in Ontario and the Ontario government created a new market of green power by its FIT Program.44Appellate Body Report of Canada—Renewable Energy/FIT, supra note 2, ¶ 5.175. Following this logic, a government can always create a new “relevant market” and avoid violating the WTO law by introducing different manufacturing methods on the “supply-side” with subsidies to an existing market. Judging from the possible consequences if the WTO panels or Appellate Body applies the approach to broader sets of cases, the Appellate Body’s new approach stretched too much out of the definition analysis of subsidy. Having countries reach a new agreement on green power and environmental protection policy under the SCM Agreement is the fundamental way of solving the issue.
References [ + ]
|01.||↵||Mark Wu & Salzman James, The Next Generation of Trade and Environment Disputes: The Rise of Green Industrial Policy, 108 |
|02.||↵||Appellate Body Report, Canada—Certain Measures Affecting the Renewable Energy Generation Sector; Canada—Measures Relating to the Feed-in Tariff Program, WTO Docs. WT/DS412/AB/R, WT/DS426/AB/R (adopted May 6, 2013) [hereinafter “Appellate Body Report of Canada—Renewable Energy/FIT”].|
|05.||↵||Dominique Finon & Philippe Menanteau, The Static and Dynamic Efficiency of Instruments of Promotion of Renewables, 12 |
|06.||↵||Richard F. Hirsh, PURPA: The Spur to Competition and Utility Restructuring, 12 |
|07.||↵||REN21, Renewables 2010 Global Status Report, 37–8 (Sept. 2010) [https://perma.cc/DC5L-J4AR].|
|09.||↵||See Request for Consultations by the United States, China – Measures Concerning Wind Power Equipment, WTO Doc. WT/DS419/1 (adopted Jan. 6, 2011); Request for Consultations by Japan, Canada – Certain Measures Affecting the Renewable Energy Generation Sector, WTO Doc. WT/DS412/R (adopted Sept. 13, 2010); Request for Consultations by the European Union, Canada – Measures Relating to the Feed-in-Tariff Program, WTO Doc. WT/DS426/1 (adopted Aug. 11, 2011); Request for Consultations by the United States, India – Certain Measures Relating to Solar Cells and Solar Modules, WTO Doc. WT/DS456/R (adopted Feb. 6, 2013).|
|10.||↵||Canada – Renewable Energy/ Canada – Feed-In Tariff Program, WTO Dispute Settlement: One-Page Case Summaries [https://perma.cc/TTG2-4HGK].|
|14.||↵||Panel Report, Canada—Certain Measures Affecting the Renewable Energy Generation Sector; Canada—Measures Relating to the Feed-in Tariff Program, ¶ 7.243, WTO Docs. WT/DS412/R,WT/DS426/R (adopted Dec. 19, 2012) [hereinafter “Panel Report of Canada—Renewable Energy/FIT”].|
|15.||↵||Agreement on Subsidies and Countervailing Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, |
|16.||↵||SCM Agreement art. 1.1(b).|
|17.||↵||Panel Report of Canada—Renewable Energy/FIT, supra note 15, ¶ 7.322.|
|18.||↵||Appellate Body Report of Canada—Renewable Energy/FIT, supra note 2, ¶ 5.167 (emphasis added).|
|19.||↵||Id. ¶ 5.174-179.|
|20.||↵||Id. ¶ 5.188-191.|
|21.||↵||See Wu & James, supra note 1; Kenina Lee, An Inherent Conflict Between WTO Law and a Sustainable Future? Evaluating the Consistency of Canadian and Chinese Renewable Energy Policies with WTO Trade Law, 24 |
|22.||↵||See Paolo D. Farah & Elena Cima, Energy Trade and the WTO: Implications for Renewable Energy and the OPEC Cartel, 16(3) |
|23.||↵||Sherzod Shadikhodjaev, First WTO Judicial Review of Climate Change Subsidy Issues, 107 |
|25.||↵||See Aaron Cosbey & Mavroidis C. Petros, A Turquoise Mess: Green Subsidies, Blue Industrial Policy and Renewable Energy: The Case for Redrafting the Subsidies Agreement of the WTO, 0|
|26.||↵||Luca Rubini, “The Good, the Bad, and the Ugly.” Lessons on Methodology in Legal Analysis from the Recent WTO Litigation on Renewable Energy Subsidies, 48(5) |
|28.||↵||Id. at 276–90.|
|30.||↵||Morgan, supra note 27, at 801–13.|
|31.||↵||Mark Jamison & Janice Hauge, Lessons from the Evolution of Merger Guidelines in the United States, 4 |
|33.||↵||United States v. Georgia-Pacific Corp., 2001 U.S. Dist. LEXIS 24736 (D.D.C. May 8, 2001) [https://perma.cc/YVX4-AENC].|
|34.||↵||Competitive Impact Statement, United States v. Georgia-Pacific Corp., 2001 U.S. Dist. LEXIS 24736 (2001), [https://perma.cc/8WK4-CRUU].|
|36.||↵||European Commission, Commission Notice on the Definition of the Relevant Market for the Purposes of Community Competition Law, 372 |
|37.||↵||Atilano Jorge Padilla, The Role of Supply-side Substitution in the Definition of the Relevant Market in Merger Control, A Report for DG Enterprise A/4, European Commission (June, 2001), at http://ec.europa.eu/DocsRoom/documents/2658/attachments/1/translations/en/renditions/pdf.|
|38.||↵||Thanh Nguyen, Defining Relevant Market Under the European Union Competition Law – Regulations and Practice – Experience for Vietnam (May 29, 2012), [https://perma.cc/JC5K-7S8Y].|
|39.||↵||Gregory J. Werden, The History of Antitrust Market Delineation, 76 |
|40.||↵||U.S. Department of Energy, Buying Green Power (Aug. 21, 2015), |
|41.||↵||See Horizontal Merger Guidelines; Organization for Economic Co-operation and Development, Roundtable on Market Definition—Note by the European Union, DAF/COMP/WD(2012) 28 (2012).|
|42.||↵||U.S. Department of Energy, Green Power Markets, |
|43.||↵||U.N. Conference on Trade and Development, Dispute Settlement – World Trade Organization – 3.7 Subsidies and Countervailing Measures (2003) [https://perma.cc/9J8E-GLK3].|
|44.||↵||Appellate Body Report of Canada—Renewable Energy/FIT, supra note 2, ¶ 5.175.|