Renewable Energy, Subsidies, and the WTO: Where Has the 'Green' Gone?

Abstract

Faced with the energy transition imperative, governments have to decide about public policies to promote renewable electrical energy production and to protect domestic power generation equipment industries. These policies can generate trade frictions. For example, in the Canadian renewable energy dispute the EU and Japan claimed that Feed in Tariff (FIT) programs in Ontario constitute discriminatory subsidies because of a local content requirement (LCR) clause that is incompatible with World Trade Organization obligations. This paper investigates this issue using an international quality differentiated duopoly model in which power generation equipment producers compete on price. FIT programs including those with a LCR are compared for their impacts on trade, profits, amount of renewable electricity produced, and welfare. When sales are taken into account, the results confirm discrimination. However, introducing a difference in the quality of the power generation equipment produced on both sides of the border has a moderating effect on the results. Finally, the results enable discussion of the question of whether environmental protection can be a reason for subsidizing renewable energy producers in light of the SCM Agreement.

Keywords: Feed-in tariffs, Subsidies, Local content requirement, Industrial policy, Canada - Renewable energy dispute, Trade policy

JEL Classification: F18, L52, Q42, Q48, Q56