EU-UK green energy dispute sends clear message to global economy

On July 1, the European Union (EU) and the United Kingdom (UK) stepped back from the brink of a trade war.

You read that correctly. The EU sued the UK at the World Trade Organization (WTO), but last week they reached an out-of-court settlement. The dispute is intriguing for several reasons. First, it’s coincidental that London’s first post-Brexit dispute at the WTO was filed by Brussels. Second, it’s ironic that the EU hit the UK over a green energy scheme that is popular across Europe. Third, Brussels argument hinges on just one legal claim, which is rare, to say the least.

But things are often more complicated than they appear at first blush.

To start, the EU’s case is about the UK’s Contracts for Difference (CfD) scheme. CfD incentivizes green energy production by paying providers of low-carbon energy more stable wholesale prices, the idea being to smooth out market volatility. But there’s a catch. UK eligibility rules were written with “local content” requirements, meaning that, if a provider were to use wind turbines, for example, the turbines would have to include a given percentage of UK inputs. Brussels insisted that this hurt EU exporters, violated WTO law and needed to be removed from the requirements of the UK’s CfD scheme.

The out-of-court settlement aims to do exactly that. It allows the UK to collect information on local content in wind turbines and other green technology but doesn’t require “any particular level of UK content” to qualify for the CfD scheme. As a result, the EU says that “there will be no need to pursue this matter further….”

Countries often reach out-of-court settlements at the WTO. In fact, the WTO encourages them. But it’s doubtful that this is the last we’ll hear about local content and green energy. That’s what makes this case so interesting. It was never just about the UK’s CfD. It was a shot across the bow of every country gearing up to spend lavishly on sourcing low-carbon energy and thinking about including local content requirements in their efforts.

To see why, consider two of the most counterintuitive things about this case. First, if the EU were just focused on the UK, it might have been expected to take the matter up under the EU-UK Trade and Cooperation Agreement (TCA). The TCA is the post-Brexit EU-UK trade agreement, and like the WTO, it prohibits local content requirements. The TCA has a key advantage, however, in that, unlike at the WTO, third countries can’t join in the case, and this increases the odds of an out-of-court settlement.

Second, filing the case to the WTO presented legal risks. Having decided back in 2014 that CfD schemes are legal forms of state aid, Brussels had to avoid raising questions about subsidies. That’s because defeating the UK on subsidies would likely come back to haunt Europe, if the WTO ruled that these CfD schemes are illegal under international law.

In 2011, for example, Brussels brought a WTO case against Canada’s feed-in-tariff (FIT) on renewable energy. The EU hit Canada’s FIT on local content and subsidies. The WTO ruled against the local content but didn’t resolve the subsidies. The EU’s case against the UK’s CfD wasn’t going to help in this regard. In fact, a WTO win on subsidies would have called into question Europe’s CfDs, not just the UK’s.

The most interesting thing about the UK’s first WTO case is that it’s mostly not about the UK. Many countries are gearing up to use green policies as industrial policy, not always with their trade obligations in mind. By filing its case against the UK at the WTO, rather than under the TCA, Brussels sent a clear message to other countries that warrants close attention. Don’t bet on them listening.

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service at Georgetown University. Follow him on Twitter @marclbusch.