WTO is right in the solar panel dispute
IN a significant ruling last week, a World Trade Organisation ( WTO) panel found that the domestic content requirement imposed under India's national solar programme is inconsistent with its treaty obligations under the global trading regime. The ruling has been described as yet another instance of archaic trade rules trumping important climate imperatives. However, this criticism is not entirely justified.
India's national solar programme, which was launched in 2010, aims to "establish India as a global leader in solar energy, by creating the policy conditions for its diffusion across the country as quickly as possible". To incentivise the production of solar energy within the country, the government under the programme agrees to enter into long-term power purchase agreements with solar power producers, effectively "guaranteeing" the sale of the energy produced and the price that such a solar power producer could obtain. Thereafter, it would sell such energy through distribution utilities to the ultimate consumer. However, a solar power producer, to be eligible to participate under the programme, is required compulsorily to use certain domestically sourced inputs, namely solar cells and modules for certain types of solar projects. In other words, unless a solar power producer satisfies this domestic content requirement, the government will not ' guarantee' the purchase of the energy produced.
In 2013, the U.S. brought a complaint before the WTO arguing that the domestic content requirement imposed under India's nation- al solar programme is in violation of the global trading rules. Specifically, it said, India has violated its "national treatment" obligation by unfavourably discriminating against imported solar cells and modules. In other words, India was discriminating between solar cells and modules which were otherwise identical on the basis of the national 'origin' of the cells and modules, a clear violation of its trade commitment. India principally relied on the ' government procurement' justification, which permitted countries to derogate from their national treatment obligation provided that the measure was related to "the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or use in production of goods for commercial sale". India also argued that the measure was justified under the general exceptions since it was necessary to secure compliance with its domestic and international law obligations relating to ecologically sustainable development and climate change.
The panel, in its 140-page report, examined in detail the submission of the parties and rightly concluded that India, by imposing a mandatory domestic content requirement, had violated its national treatment obligation. In so far as the government procurement derogation was concerned, the panel found that the product being subject to the domestic content requirement was solar cells and modules, but the product that was ultimately procured or purchased by the government was electricity. The domestic content requirement was therefore not an instance of "government procurement". Finally, the panel found that since India failed to point out any specific obligation having "direct effect in India" or "forming part of its domestic legal system", which "obligated" India to impose the particular domestic content requirement, the general exception was not available to the Indian government in the instant case.
The ruling, however, has come under intense criticism, particularly from environmentalists, as undermining India's efforts towards promoting the use of clean energy. However, there appears to be no rational basis for how mandatory local content requirements contribute towards promoting the use of clean energy. If the objective is to produce more clean energy, then solar power producers should be free to choose energy-generation equipment on the basis of price and quality, irrespective of whether they are manufactured locally or not. In fact, by mandatorily requiring solar power producers to buy locally, the government is imposing an additional cost, usually passed on to the ultimate consumer, for the production of clean energy. The decision may therefore stand to benefit the interest of the ultimate consumer. It is entirely possible to give preferential treatment to clean energies (in the form of tax rebates for solar power producers and so on) without requiring mandatory local content. Perhaps, what is even more instructive is the fact that India during its submissions before the WTO did not invoke the general exceptions under article XX(b) or (g) of the General Agreement on Tariffs and Trade typically relied upon in trade disputes by parties seeking to protect their domestic regulations on 'environmental' or 'health' grounds. India therefore did not itself believe that the local content requirement under the programme was imposed for the 'conservation' of 'clean air'.