This week, a World Trade Organization (WTO) panel decided in favor of the United States and against India in a dispute over Indian domestic content requirements for sourcing solar power. Reading the headlines, one might worry that “The WTO Just Ruled Against India’s Booming Solar Program” or, worse, that the “WTO swats down India’s massive solar initiative.”
The histrionics from progressive media outlets are overblown. In fact, whereas judges of international law have reaffirmed that national procurement of renewable energy favoring domestic manufacturers is illegal, the jury is still out on whether this helps or hurts efforts to deploy clean energy worldwide. Because domestic content requirements can reduce supply and increase prices, I am inclined to call this ruling a small victory that makes it cheaper to combat climate change. But I do still worry that in the future, liberalized trade and prudent climate policies might come into conflict.
WTO Panel TRIMs India’s Solar Program
The WTO panel ruling did not overturn India’s solar program, the centerpiece of India’s plan to curb emissions growth. India is targeting 100 GW of solar—around half of the world’s current solar capacity—by 2022. And at the 2015 Paris Climate Change Conference, Prime Minister Modi unveiled the International Solar Alliance, a confederation of 120 solar-friendly countries, to be headquartered near Delhi. None of this is materially affected by the WTO ruling, which narrowly focused on solar installations accounting for about 0.5 percent of India’s 100 GW target.
The panel found that in a portion of its solar procurement from 2010 to 2014, India violated international trade law by barring foreign-made solar panels and, in some cases, the constituent solar cells in a panel. This was accomplished through “domestic content requirements,” which applied to roughly 500 MW of solar capacity installed by private developers, from whom government agencies promised to purchase the solar energy for 25 years. The panel concluded that these domestic content requirements breached India’s obligation under the WTO Agreement on Trade-Related Investment Measures (TRIMs) not to “require the purchase or use by an enterprise of products of domestic origin or from any domestic source…” The panel also found that India had not followed its legal responsibility under the 1994 General Agreement on Tariffs and Trade (GATT): “The products of the territory of any Member imported into the territory of any other Member shall be accorded treatment no less favourable than that accorded to like products of national origin…”
The direct consequences of this case are minimal. The panel concluded that India should “bring its measures into conformity with its obligations under the TRIMs Agreement and the GATT 1994.” But since the beginning of this case, India has proactively reduced its domestic content requirements, from 50 percent in 2013 to 33 percent in 2014 to just 12.5 percent in its ongoing procurement. Moreover, a very similar case decided in 2014 by the WTO Appellate Body, Canada—Renewable Energy, failed to find that these domestic content requirements constituted actionable subsidies that could legitimize retaliation. So India may have to curtail its already minimal domestic content requirements moving forward, but nothing else really happens.
In My Humble Opinio Juris…
Even though the direct consequences of this ruling are minimal, the issues raised in the case have broader significance in the long run. This explains why twelve countries and the European Union followed the case as third-party observers, with some countries providing extensive comments cited in the final ruling. Most observers sided with the United States; for example, Japan bluntly called India’s policies “protectionist.” But even though this particular case was relatively easy to decide, onlookers were deeply invested in the precedents this case could set.
The clearest outcome from the case was a reaffirmation of the 2014 ruling in Canada—Renewable Energy that domestic content requirements for renewable energy are illegal. Some environmental groups object that outlawing such policies can reduce the incentive to deploy clean energy. Under free trade, they contend, countries will end up importing cheap solar panels from China and never build up a domestic industry that would create local economic benefits. This may well be true, but restricting trade also raises the price of clean energy. And the biggest obstacle to clean energy deployment that I’ve consistently heard from policymakers in the developing world is not that imports fail to create jobs but that the cost is too high. So my conclusion is that this ruling is a felicitous example of the trade agenda aligning well with the climate agenda; reducing barriers to trade can also speed the deployment of clean energy.
But India raised another, more interesting, objection on energy security grounds to the U.S. allegation that its domestic content requirements were illegal. Under Article XX of the GATT, countries can derogate from their international trade obligations, i.e., enact contrary policies, so long as certain conditions are met. One such condition is met if a contrary policy is “essential to the acquisition or distribution of products in general or local short supply.” India argued that since it had “abysmally low” domestic production capacity, and since it plans to sharply ramp up its deployment of solar power, it could face a shortage of solar panels if foreign supply were to disappear.
The panel was unmoved by this objection. Because India could not prove an “imminent” risk of shortage, the panel held that India could not shirk its legal responsibilities. Surprisingly, the third party observers concurred, and Japan was unsympathetic to India’s argument. As one of the most energy-insecure countries, following the Fukushima nuclear disaster, one might expect Japan to favor retaining the right to prioritize national energy security over international trade liberalization. In this particular case, though, Japan’s opposition to trade barriers in the solar industry has to do with the make-up of Japan’s own solar industry, which largely relies on importing and relabeling Chinese panels.
Setting Japan aside, other countries will increasingly want to switch to renewable energy to reduce reliance on fossil fuel imports. But if renewable energy industries become heavily concentrated—as the solar industry has become in China—then countries may not want to shift from one source of concentrated energy imports to another. So the summary WTO panel ruling against India’s energy security objection could set a precedent that discourages renewable energy adoption in the future.
The second interesting objection raised by India was that the auctions for solar energy were conducted by the government, and therefore the domestic content requirements counted as government procurement that is exempt under GATT Article III:8(a). Again, the panel disagreed, upholding the prior decision in Canada—Renewable Energy that the government was procuring electricity, not solar panels, so it did not have the right to preferentially procure domestic solar panels. In this case, this prohibition on using preferential government procurement probably does not impede clean energy deployment, again because free trade lowers prices.
But I can think of examples in the future where preferential government procurement might be a good idea, especially for advancing new clean energy technology. For example, I advocate targeted U.S. government procurement of emerging technology as a stepping-stone toward free market competition. And it might be logical only to procure technologies that had previously received government research, development, and demonstration (RD&D) support, to ensure that government support follows technologies through every phase of technology readiness. But this sort of program may well give preference to domestic firms eligible to receive public RD&D funds. Following the precedent set by the WTO panel ruling against India, preferential government procurement of domestic clean energy may not be a legally acceptable instrument of technology policy. And since this might hinder efforts to bring new clean technologies to market, this is another potential example in the future where the trade and climate agenda might conflict.
Outside of the issues raised in this case, another potential clash between the trade and climate agendas could be the future interaction between carbon pricing and trade barriers. I was (and still am) prepared to call the Trans-Pacific Partnership (TPP) a step forward for climate policy, but TPP does not explicitly authorize trade barriers based on a product’s carbon content. In a related proposal, William Nordhaus calls for “climate clubs,” which would erect trade barriers against countries unwilling to enact harmonized climate policies. If such proposals gain momentum, the climate agenda could run afoul of the trade liberalization agenda.
As countries around the world implement climate policies and seek to expand clean energy, many more trade disputes will arise. Trying to forecast future rulings at this point is pure speculation. But even if the outcome of this case is far less exciting than the headlines suggest, it hints at what to look out for in the next one.
 In fact, it is not entirely clear why the United States continued to pursue this case. India’s initial domestic content requirements from 2010–2012 actually helped the United States, by screening out silicon solar panels and cells that China specializes in while enabling U.S. companies like First Solar to export their thin-film products to India. Recognizing that their domestic content requirements had shifted, rather than deterred, solar imports, India revised domestic content requirements from 2012–2014 to plug the loophole, banning all foreign panels. But now that India has generally scaled back all domestic content requirements, the United States has little to gain in the Indian market from a ruling in its favor. One explanation for pursuing the case is that the United States may instead have been seeking a broader precedent to prevent other countries from passing similar domestic content requirements.
 There was some intrigue about this third-party participation. On behalf of all the third parties, Canada requested “enhanced third-party rights” to make oral statements during hearings and provide several written submissions. It contended that “issues relating to ‘green energy measures’ are of systemic importance to WTO Members.” Both the United and India effectively told Canada to mind its own business, and the panel rejected the request. Undeterred, Canada, Japan, and the European Union submitted extensive comments to the WTO panel. Oddly, China, which had by far the most at stake in this case, remained totally silent, perhaps content to let the other countries make arguments in China’s favor.