Subsidizing solar: the case for an environmental goods and services carve-out from the global subsidies regime.

Author:Simmons, Zachary Scott
Position:IV. The Global Subsidies Regime through VIII. Conclusion, with footnotes, p. 449-484

    Before delving into the arguments as to why the current global subsidies framework provides insufficient leeway for states such as the United States and China to implement effective and non-trade-distorting support measures for solar energy development, a brief discussion of the framework's key provisions is necessary. The Subsidies and Countervailing Measures Agreement (SCM Agreement) emerged in 1994 at the conclusion of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) and "amid widespread recognition that heavy government subsidization of strategic industrial sectors, such as iron and steel misallocated resources, caused overcapacity and distorted trade." (139) The SCM Agreement addressed those problematic forms of government support by providing a definition of "subsidy," outlining categories of permissible and impermissible subsidies, and creating guidelines for multilateral (dispute settlement) and unilateral (countervailing measures) remedies available to allegedly injured states.

    The definition of "subsidy" is found in Article 1 of the SCM Agreement. As set forth, the definition is quite expansive, covering both direct and indirect forms of government support, and requiring three basic elements--(1) a financial contribution (2) by a government or any public body within the territory of a member which (3) confers a benefit. (140) Specific forms of financial contribution mentioned in Article 1 include the direct transfer of funds (grants, loans, and equity infusion) and potential direct transfers of funds or liabilities (loan guarantees); (141) the forgoing of revenue otherwise due (fiscal incentives such as tax credits); (142) and the provision of goods or services other than general infrastructure. (143) As to the second criterion, in order for a financial contribution to be considered a subsidy, it must flow from a government (national or sub-national) or any public body within the territory of a member. (144) Finally, while the SCM Agreement itself provides no guidance as to benefits, (145) the WTO Appellate Body has ruled that the existence of a benefit "is to be determined by comparison with the market-place (i.e., on the basis of what the recipient could have received in the market)." (146)

    Assuming that a government support measure is a "subsidy" within the meaning of Article 1, the next step in the analysis is to determine whether the subsidy is "specific" within the boundaries set forth in Article 2, a necessary requisite in order for the SCM Agreement to apply. (147) The rationale behind having a specificity requirement is that when a subsidy is widely available throughout an economy, it is presumed not to cause trade-distorting effects and is therefore not deserving of discipline. (148) The primary categories described in Article 2 are enterprise specificity (149) (targeting of a company or companies for subsidization); industry specificity (150) (targeting a particular sector or sectors for subsidization); and regional specificity (151) (targeting producers in specified regions for subsidization). (152) If, despite the appearance of non-specificity under this framework, there are lingering suspicions as to whether a subsidy may in fact be specific, other factors may be considered. These factors include use of a subsidy program by a limited number of certain enterprises, predominant use by certain enterprises, and the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy. (153) Non-specificity can be established by a showing that the granting authority or its enabling legislation establishes objective criteria or conditions governing the eligibility for, and the amount of, a subsidy. (154)

    Not all subsidies that are specific are prohibited. The SCM Agreement "disciplines government subsidy practices through a method of categorization based on the 'stop/proceed with caution' ... symbolism of the common traffic light." (155) Prohibited (i.e., "red light") subsidies are covered in Article 3. The two categories of prohibited subsidies referenced are those contingent upon export performance (export subsidies) (156) and those contingent upon the use of domestic over imported goods (local content subsidies). (157) These subsidies are "considered to have the most pernicious trade-distorting effects" (158) and are subject to complete withdrawal should the WTO Dispute Settlement Body (DSB) adopt a finding that they are in effect in a member state. (159) A specificity finding is not required in order to take action against prohibited subsidies as they are deemed "specific" by Article 2.3. Most subsidies, however, fall into the actionable (i.e., "yellow light") category, (160) and maintain the specificity requirement. Actionable subsidies are not prohibited, but they may be challenged, either through multilateral dispute settlement proceedings or unilateral countervailing measures. As to the former option, an allegedly injured state must show that it has incurred certain "adverse effects" in order to proceed. (161) Article 5 lists three types of adverse effects which are recognized under the Agreement- an injury to the domestic industry of another member; the nullification or impairment of benefits accruing directly or indirectly to other members under GATT 1994; and serious prejudice to the interests of another member. (162) As detailed in Article 6, "serious prejudice" arises when (1) the total subsidization of a product exceeds 5 percent of its value; (2) subsidies cover operating losses sustained by an industry; (3) subsidies cover operating losses sustained by an enterprise (other than one-time measures which are non-recurrent and are given to provide time for the development of long-term solutions and to avoid acute social problems); or (4) the government provides direct forgiveness of debt. (163) Where a panel or Appellate Body report determines that a subsidy has resulted in adverse effects in a member state, the member state granting that subsidy must take appropriate action to remove the adverse effects of the subsidy or withdraw the subsidy completely. (164) In order for an allegedly injured member state to take unilateral action in imposing countervailing measures, however, the state only need determine that it has acquired subsidized imports, that a domestic industry has been injured, and that there is a causal link between the subsidized imports and the alleged injury. (165)

    Of significance to the current global subsidies regime and solar energy development is that a third, non-actionable (i.e., "green light") category of subsidies was introduced by the 1994 SCM Agreement but expired after 5 years. Until the year 2000, Article 8 of the SCM Agreement permitted certain narrow classes of subsidies which WTO members desired to insulate from attack. (166) These included assistance for R&D activities conducted by firms, higher education, or research establishments; (167) assistance to disadvantaged regions within the territory of a member state; (168) and assistance to promote adaptation of existing facilities to new environmental requirements imposed by law and/or regulations which imposed greater constraints and financial burdens on firms. (169) Due to a lack of consensus as to whether to extend the Article 8 exemptions into the new millennium, the SCM Agreement became stricter, no longer providing a safe harbor for many types of subsidies. (170)

    Similar to the now-expired exemptions provided for in Article 8 of the SCM Agreement, Article XX of the GATT "provides the express recognition of other-than-trade values and the possibility for these values to trump trade under certain circumstances." (171) While Article XX's applicability to the SCM Agreement is contested, as discussed further below, its function within the GATT itself is significant, allowing member states, "under specific conditions, to give priority to certain societal values and interests over trade liberalization." (172) The two Article XX exceptions which are of particular importance to solar energy development are those found in paragraph (b) (subsidies necessary to protect human, animal or plant life or health) (173) and (g) (subsidies relating to the conservation of exhaustible natural resources). (174) If a government support measure falls into either one of these exceptions and satisfies the requirements of the Article's introductory paragraph (the chapeau),175 it is excluded from discipline under the GATT.


    Major areas of textual vagueness in the Subsidies and Countervailing Measures Agreement (SCM Agreement) make it relatively easy for solar energy development support measures to be challenged (176) through the World Trade Organization's (WTO) multilateral dispute settlement mechanism. Specifically, there are no clear standards within the text governing the ideas of "benefit conferred" (Article 1.1(b)) and "revenue otherwise due" (Article 1.1(a)(1)(ii)) within the category of actionable (i.e., "yellow light") subsidies. This lack of clarity leaves a wide range of non-trade-distorting government support measures aimed at boosting solar energy development, including R&D support and tax incentives, subject to easy challenge from other states. While a state might try to assert an Article 2.1(b) non-specificity defense in response, the lack of clarity as to the relative import of the defense vis-a-vis the rest of the Article makes it a weak retort at best. Additionally, despite several arguments which have been advanced suggesting otherwise, the Article XX General Exceptions provision of the General Agreement on Tariffs and Trade (GATT), which would itself remedy the aforementioned textual vagueness problems if applicable to the SCM Agreement, likely does not apply to the SCM Agreement (a WTO panel has never ruled...

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