Policy Space for Jobs and Clean Energy: Trade, Investment Rules, and Local Content Requirements in Renewable Energy Policies

Rapel Dam, Litueche, Chile by Francisco Kemeny. Photo via Unsplash.

In an effort to address chronic inequality, air pollution, and climate change in an integrative manner, many nations have deployed Local Content Requirements (LCRs). In the five years following the 2008 Financial Crisis, twenty such policies were put in place all over the world. These policies are justified on both economic and political grounds—by correcting market distortions that favor fossil fuel-based energy and by creating good paying jobs. The two together have the potential to make markets work better, address local air pollution and climate change, and boost employment at the same time.

LCR policies are the subject of increased scrutiny under the existing trade and investment regime, which still incentivizes fossil fuel production and sees linking policies to local content as distortionary rather than market correcting. Since 2010, there have been a total of 9 disputes initiated under the trade and investment regime on the basis of local content requirements in renewable energy policies. These challenges are rooted in both the spirit of international economic law, which overwhelmingly prefers non-discrimination in international trade, as well as the specific letter of certain provisions of World Trade Organization (WTO) agreements and bilateral free trade and investment agreements.

The current exceptions in trade and investment law are not adequate enough to provide the policy space to address market distortion, climate goals, and job creation. Countries seeking to protect their LCRs have turned primarily to exceptions for government procurement practices. Although this provides an interesting window of opportunity, the Appellate Body at the WTO has consistently struck down such arguments. An isolated favorable ruling before a North America Free Trade Agreement (NAFTA) tribunal that is discussed in this paper is also unlikely to produce similar results moving forward. The lack of precedent in investment arbitration may lead to investors bringing similar claims over and over again. Moreover, the high costs of such cases may cause governments to avoid the use of LCRs just to protect themselves from risk.

The trade and investment regime needs to create policy space for linking jobs and clean energy in order to meet our climate change goals in a socially inclusive manner. This paper argues that there are two possibilities for the future of maintaining LCRs in renewable energy policy. First, that countries should seek innovative defenses based on the purpose for these renewable energy programs – the protection of the environment. Article XX of the GATT has provided a safe haven for countries implementing other environmental measures in the past, and countries could rely on it in this context as well. Second, that countries should innovate in their treaty reform and new negotiations. The Agreement on Subsidies and Countervailing Measures Article 8 allowed for “green-light” subsidies aimed at development and environmental protection, until it expired in 2000.  This type of carve out – both in negotiating WTO reform and new trade agreements – could act to make space for a new kind of “green-light” subsidies: subsidy programs supporting renewable energy development, including those that incorporate LCRs.

This Working Paper was also published in the Yearbook on International Investment Law & Policy (2018).

Read the Working Paper