Creating an International Framework to Better Support the Development of Renewable Energy Infrastructure
Target 7.2 of the United Nations’ Sustainable Development Goals (SDGs) seeks to increase the share of renewable energy in the global mix by 2030. The development of renewable energy infrastructure is mainly supported by domestic regulations and policies. International trade law does not currently have a cohesive and comprehensive framework to support the transition to renewable energy and to address disputes that arise between states related to it. International trade in renewable energy infrastructure benefits states by providing greater access to products and reduced prices to support a quicker transition to renewable energy while increasing economic growth and creating jobs.
The international energy industry is regulated mainly by the World Trade Organization (“WTO”) and its General Agreement on Tariffs and Trade (“GATT”), although governance is highly fragmented among various institutions and instruments. Unfortunately, the WTO and its agreements on trade and investment were not created for the energy sector, so these obligations do not fit the needs of the industry. States use this incompatibility to their advantage to get around obligations and institute protectionist measures to bolster their domestic energy industry. For example, GATT creates obligations for WTO members to put domestic and international goods on equal playing fields, but also includes general and security exceptions, which allows for states to invoke a legitimate public policy purpose to get around these obligations. To fix this incompatibility, the international community should create a comprehensive international framework specific to the energy industry with specific provisions to handle protectionist measures.
For the renewable energy industry, one of the most common protectionist measures are local content requirements (“LCRs”). Local content requirements are policies imposed by governments requiring firms to use domestic goods or services. These policies promote the use of domestic resources and protect domestic suppliers in the short term but lead to higher costs on infrastructure, the potential use of inferior technology, and negative long-term growth.
WTO case law has been consistently opposed to LCRs. Since 2010, there have been nine trade disputes initiated by WTO members over renewable energy infrastructure and protectionist measures brought under GATT and related trade agreements. In the first two disputes, the WTO Appellate Body held that the LCRs used by Canada to protect its domestic electricity generation equipment was inconsistent with GATT and other relevant trade agreements. The WTO upheld this determination that LCRs are inconsistent with WTO member obligations in another case brought by the United States against India’s LCRs to protect its domestic solar power developers.
Adjudicating these disputes on a case-by-case basis is inefficient and ineffective. The cases before the WTO take years to get to a decision. By the time the WTO decides on a dispute, the state has had enough time to develop its industry enough where the LCRs are not even needed anymore. Many of these disputes are brought by states who lead renewable energy development, which indicates that this is more of a power struggle to control the global market than an issue with renewable energy infrastructure itself. Because international regulation of the renewable energy industry is set up to act retroactively, it is more focused on trying to handle strategic protectionist measures and disputes on competition than encouraging and supporting current and future development.
Way Ahead: Creating a Comprehensive International Agreement
To encourage the renewable energy transition now and in the future, a new international framework specific to the energy industry and with provision to proactively addresses protectionist measures and state competition is needed. Although there is wide support that such an agreement is necessary, many believe it is not possible in today’s political climate. It would be a tough negotiation process, but an essential one. To start, a delicate balance must be drawn between international regulation and national control over industries and resources. This may mean allowing states to use LCRs if these measures do not discriminate against foreign suppliers and create stricter enforcement procedures when the LCRs are found to be discriminatory. To proactively address disputes, more transparent and obligatory notification procedures could be created so a state implementing an LCR must inform other states and allow them to respond.
Alternatively, this international energy agreement could draw from other frameworks, such as the Agreement on Agriculture, which uses a box system to combat domestic protectionist measures. This box system requires a state to determine if its policy is trade-distorting and if so, the state calculates the costs of the distortion for the WTO, who then establishes reduction commitments over a specified number of years until the policy is eliminated. This system allows for de minimis exceptions where the policy is not significant enough to warrant reduction requirements. An international energy trade agreement could use a similar setup to permit a state to invoke protectionist measures for its younger domestic renewable energy industries with international oversight into the gradual reduction of these measures for wider international investment and development.
Domestic protectionist measures like LCRs are a reality in the energy and trade system we see today, so any agreement that completely bans them would be unlikely to get much traction. Instead, an international trade agreement will best support the development of renewable energy infrastructure if it allows states to create some domestic protections with clear and strict limits in the greater overall regulatory system. The international community needs to take this step to create a comprehensive international energy agreement sooner rather than later.
G.A. Res. 70/1, Transforming Our World: the 2030 Agenda for Sustainable Development (Oct. 21, 2015). ↑
Thomas Cottier, Renewable Energy and WTO Law: More Policy Space or Enhanced Disciplines, 5 Renewable energy Law and Policy Review 40, 40 (2014). ↑
See Id. at 41; see also Rupam Dubey, On the Potential of GATT Article XX for the Renewable Energy Sector: Revitalizing Local Content Requirements, Völkerrechtsblog, (Apr. 21, 2023), https://voelkerrechtsblog.org/on-the-potential-of-gatt-article-xx-for-the-renewable-energy-sector (“Due to the absence of clear international trade regulations regarding renewable energy, implementation of policies that support it may lead to international trade disputes.”). ↑
Anne Ong Lopez, Protectionism and Trade in Renewable Energy Infrastructure, 2-3 (Asian Infrastructure Investment Bank, Working Paper, Feb. 2020). ↑
See Yulia Selivanova (Energy Charter Secretariat), Trade in Energy: Challenges for International Trade Regulation, World Trade Organization (June 11, 2010), https://www.wto.org/english/res_e/publications_e/wtr10_forum_e/wtr10_11june10_e.htm; see also Cottier, supra note 2, at 42; see also Rafeal Leal-Arcas, New Frontiers of International Economic Law: The Quest for Sustainable Development, 40 U. Pa. J. Int’l 83, 91. ↑
Anna-Alexandra Marhold, The Current WTO Legal Framework Relevant to Energy, in Energy in International Trade Law: Concepts, Regulation and Changing Market 66 (Cambridge University Press ed. 2021). ↑
See Lopez supra note 4, at 2-3; see also Marhold, supra note 6, at 77-80. ↑
General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. A-11, 55 U.N.T.S. 194 [hereinafter GATT]; Marhold, supra note 6, at 73. ↑
Henok Asmelash, The First Ten Years of WTO Jurisprudence on Renewable Energy Support Measures: Has the Dust Settled Yet, 21 World Trade Review 455, 459 tbl.1 (2022). ↑
OECD, Local Content Requirements Impact the Global Economy (October 8, 2023), https://www.oecd.org/trade/topics/local-content-requirements/. ↑
Dubey, supra note 3; Lopez, supra note 4, at 7; OECD, supra note 10; see Cathleen Cimino-Isaacs and Jan Zilinsky, Local Content Requirements: Backdoor Protectionism Spreading Under the Radar, Peterson Institute for International Economics (July 22, 2016), https://www.piie.com/blogs/trade-and-investment-policy-watch/local-content-requirements-backdoor-protectionism-spreading.html (explaining the negative long-term effects of LCRs). ↑
Cottier, supra note 2, at 44; see also Dubey, supra note 3. ↑
Asmelash, supra note 9, at 455, 463. ↑
See Appellate Body Report, Canada – Certain Measures Affecting the Renewable Energy Generation Sector/Canada – Measures Relating to the Feed in Tariff Program, WTO Doc. WT/DS412/AB/R, WT/DS426/AB/R (adopted May 24, 2013). ↑
See Appellate Body Report, India – Certain Measures Relating to Solar Cells and Solar Modules, WTO Doc. WT/DS456/R (Oct. 14, 2016). ↑
Two cases have been in the beginning stages of the WTO process since May 2013 and August 2018. See WTO, European Union and Certain Member States – Certain Measures on the Importation and Marketing of Biodiesel and Measures Supporting the Biodiesel Industry, WTO Doc. WT/DS459/1 (adopted May 23, 2013); see also WTO, United States – Certain Measures Related to Renewable Energy, WTO Doc. WT/DS563/4 (adopted Oct. 23, 2018). ↑
Cottier, supra note 2, at 44. ↑
Asmelash, supra note 9, at 460. ↑
See Cottier, supra note 2, at 49 (Developments in renewable energy trade “will require new disciplines in international trade law.”); see also World Bank and Energy Charter Secretariat, Enabling Foreign Direct Investment in the Renewable Energy Sector: Reducing Regulatory Risks and Preventing Investor-State Conflicts 55-56 (The World Bank Group eds., 2023); Energy Charter Secretariat, Best Practices in Regulatory Reform: Minimising Potential Conflicts with Foreign Investors, CCDEC201704, (Oct. 11, 2017). ↑
Asmelash, supra note 9, at 476. ↑
Selivanova, supra note 5. ↑
Dubey, supra note 3. ↑
Hanna Deringer et al., The Economic Impact of Local Content Requirements: A Case Study of Heavy Vehicles, European Centre for International Political Economy (January 2018), https://ecipe.org/publications/the-economic-impact-of-local-content-requirements.html. ↑
Marhold, supra note 6, at 80-81 (explains that the Agreement on Agriculture was designed to reduce export subsidies and import tariffs and to control domestic protectionist measures for such a highly strategic sector). ↑
Domestic Support, The Uruguay Round Reform Programme for Trade in Agriculture, World Trade Organization (October 21, 2023), https://www.wto.org/english/tratop_e/agric_e/ag_intro03_domestic_e.htm; Anita Regmi, Randy Schnepf, & Nina Hart, Reforming the WTO Agreement on Agriculture, Congressional Research Service, July 20, 2020 at 5. ↑
Regmi et al., supra note 25. ↑