Summary of key findings

• The dispute concerns the domestic content requirements that certain generators of electricity utilizing solar photovoltaic and windpower technology must comply with in the design and construction of electricity generation facilities in order to qualify for guaranteed prices offered under the Feed-In Tariff (“FIT”) Programme, adopted by the Government of the Province of Ontario, as well as all individual FIT and microFIT Contracts implementing these requirements since the FIT Programme's inception in 2009 (“the challenged measures”).
• Japan claimed that the domestic content requirements provided for and implemented under the challenged measures place Canada in violation of: (i) the national treatment obligation under Article III:4 of the GATT 1994; (ii) the prohibition that is set out in Article 2.1 of the TRIMs Agreement on the application of any trade-related investment measures that are inconsistent with Article III of the GATT 1994; and (iii) the prohibition on import substitution subsidies prescribed in Articles 3.1(b) and 3.2 of the SCM Agreement.
• The Panel upheld Japan's claims under Article 2.1 of the TRIMs Agreement and Article III:4 of the GATT 1994. After noting that the trade-related investment measures described in paragraph 1(a) of the Illustrative List found in the Annex to the TRIMs Agreement are considered to be inconsistent with Article 2.1 of the TRIMs Agreement and Article III:4 of the GATT 1994, subject to the operation of inter alia Article III:8(a) of the GATT 1994, the Panel set about determining: (i) whether Canada could rely upon Article III:8(a) of the GATT 1994 to remove the challenged measures from the operation of Article 2.1 of the TRIMs Agreement; and if not, (ii) whether the challenged measures were of the kind described in paragraph 1(a) of the Illustrative List.  
• The Panel found that Canada had not established it was entitled to rely upon Article III:8(a) of the GATT 1994 because the Government of Ontario's procurement of electricity under the FIT Programme was undertaken “with a view to commercial resale”. The Panel furthermore found that the challenged measures fell within the scope of paragraph 1(a) of the Illustrative List.  The Panel thereby concluded that Japan had demonstrated that the challenged measures were inconsistent with Canada's obligations under Article 2.1 of the TRIMs Agreement and Article III:4 of the GATT 1994.
• As regards Japan's prohibited subsidy claims under Articles 3.1(b) and 3.2 of the SCM Agreement, the Panel delivered a divided ruling. 
• The Panel majority dismissed Japan's allegations on the grounds that Japan had failed to establish the existence of a subsidy. Among the Panel majority's key findings in support of this assessment was that the Hourly Ontario Electricity Price (“HOEP”) that was at the centre of Japan's main benefit arguments could not serve as an appropriate benchmark against which to determine whether the challenged measures confered a “benefit” within the meaning of Article 1.1(b) of the SCM Agreement, because: (i) the HOEP did not result from the operation of a competitive wholesale electricity market, but rather a market that was significantly influenced by government regulation; (ii) the economics ofcompetitive wholesale electricity markets in general suggest that they will rarely attract the degree of investment in generation capacity needed to secure a reliable electricity system; and (iii) theprevailing conditions of supply and demand in Ontario suggest that a competitive wholesale electricity market would fail to achieve this outcome in Ontario. Thus, the Panel majority concluded that there was no basis to uphold Japan's subsidization arguments.
• After having rejected Japan's arguments, and in response to Japan's specific requests, the Panel majority set out its ownobservations on one approach it considered could have been validly pursued in these disputes to determine the existence of “benefit” under the terms of Article 1.1(b) of the SCM Agreement.  The Panel majority described the approach it contemplated as one that would involve making a comparison between the relevant rates of return of the challenged FIT and microFIT Contracts with the average cost of capital in Canada for projects having a comparable risk profile to the FIT and microFIT projects. The Panel majority went on to explain that, while this comparison would have been useful for the “benefit” analysis, it would have been necessary to explore a number of important questions and factual issues in order to apply it.
• Finally, one member of the Panel expressed a dissenting opinion on Japan's subsidization claims, finding that Japan had demonstrated that the challenged measures conferred a “benefit” under the terms of Article 1.1(b) of the SCM Agreement.  For this member of the Panel, the challenged measures were subsidies because the pricing offered to relatively high cost and less efficient FIT and microFIT generators under the FIT and microFIT Contracts enabled them to enter the wholesale electricity market, when they would otherwise not have been able to in the absence of the FIT Programme implemented by the Government of the Province of Ontario.

Summary of key findings

Canada filed a Notice of Appeal on 5 February 2013. Japan filed an other appeal on 11 February 2013.

The measures at issue in this dispute are the FIT Programme implemented by the Government of Ontario and related FIT and microFIT Contracts.

The Appellate Body declined Japan's request to commence its evaluation with Japan's allegations of error relating to the SCM Agreement.

As regards Canada's and Japan's appeals concerning Article III:8(a) of the GATT 1994, the Appellate Body reversed the Panel's finding that the Minimum Required Domestic Content Levels of the FIT Programme and FIT and microFIT Contracts are laws, regulations, or requirements governing the procurement by governmental agencies of electricity within the meaning of Article III:8(a) of the GATT 1994. The Appellate Body also declared moot and of no legal effect certain other intermediate findings made by the Panel. Moreover, the Appellate Body found that the Minimum Required Domestic Content Levels prescribed under the FIT Programme and related FIT and microFIT Contracts do not meet the conditions of the derogation in Article III:8(a) of the GATT 1994. It thus found that the challenged measures are not covered by Article III:8(a) of the GATT 1994 and that, consequently, the Panel's that the Minimum Required Domestic Content Levels prescribed under the FIT Programme and related FIT and microFIT Contracts are inconsistent with Article 2.1 of the TRIMS Agreement and Article III:4 of the GATT 1994, stands. In the light of its findings, the Appellate Body did not consider it necessary to address Canada's claim that the Panel failed to fulfil its obligations under Article 11 of the DSU in concluding that the Government of Ontario purchases electricity under the FIT Programme “with a view to commercial resale”.

The Appellate Body additionally rejected Japan's claim that the Panel failed to fulfil its obligations under Article 11 of the DSU and exercised false judicial economy by declining to make a finding on Japan's claim that the Minimum Required Domestic Content Levels are inconsistent with Article III:4 of the GATT 1994 independently of the TRIMs Agreement.

With respect to Japan's appeal relating to Article 1.1(a) of the SCM Agreement, the Appellate Body upheld the Panel's finding that the FIT Programme and related FIT and microFIT Contracts are government “purchases [of] goods” within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement. Furthermore the Appellate Body rejected Japan's appeal that the challenged measures may also be characterized as “direct transfer[s] of funds” or “potential direct transfers of funds” under Article 1.1(a)(1)(i) of the SCM Agreement, as well as Japan's claim that the Panel failed to fulfil its obligations under Article 11 of the DSU and exercised false judicial economy by declining to make a finding on Japan's claim that the measures at issue constitute “income or price support” under Article 1.1(a)(2) of the SCM Agreement. The Appellate Body itselfdeclined to make such a finding. The Appellate Body declared moot and of no legal effect the Panel's finding that “government ‘purchases [of] goods’ could [not] also be legally characterized as ‘direct transfer[s] of funds’ without infringing [the] principle [of effective treaty interpretation]”, inasmuch as it negates the possibility that a transaction may fall under more than one type of financial contribution under Article 1.1(a)(1) of the SCM Agreement.

The Appellate Body recommended that the DSB request Canada to bring its measures found in the Appellate Body Report, and in the Panel Report as modified by the Appellate Body Report, to be inconsistent with the TRIMs Agreement and the GATT 1994 into conformity with its obligations under those Agreements.