The Japanese government has filed a complaint against Canada with the World Trade Organization, saying that Ontario's green energy plan unfairly pressures its producers of clean power to buy hardware from manufacturers in the province.
Ontario's new alternative energy structure pays very high prices for wind and solar power, as long as producers source a significant proportion of their equipment in the province. The program has so far been very successful in drawing manufacturers to set up shop in Ontario.
But Japan says the local-content provisions breach portions of the General Agreement on Tariffs and Trade, and fall under the definition of a "prohibited subsidy." It has asked for "consultations" with Canada under the WTO process, the first stage of a formal trade dispute.
Japan says its exports of solar panels and other equipment are treated less favourably than locally produced equipment.
Ontario Energy Minister Brad Duguid said in a statement that the province has not yet seen the details of Japan's claim, but that the view of the provincial and federal governments is "that Ontario's Green Energy Act is consistent with Canada's international trade obligations under the WTO."
The biggest deal under the province's green power plan involved South Korean giant Samsung Group, which agreed to build four manufacturing plants in the province in return for high energy prices for its wind and solar projects and a $437-million incentive package.
But many other equipment makers - based in Europe, the United States and other parts of Canada - have said they will open plants in the province to take advantage of the buying binge which is expected under the green energy plan.
Lawrence Herman, international trade counsel at Toronto law firm Cassels Brock & Blackwell, said he thinks Japan will have an "uphill battle to show that what Ontario has done is contrary to WTO rules."
In some cases, local-content rules are frowned upon by the WTO, he said, but in others they are permitted. One key issue in this case is whether the purchase of renewable power is considered to be government procurement.
GATT rules allow for preference to be given to local producers for government purchases, unless a government specifically agrees that it will not give local preference, Mr. Herman said.
Dalton Albrecht, a lawyer specializing in international trade law at Toronto law firm Miller Thomson, said the dispute could end up as a long and drawn-out process, partly because Japan is obliged to negotiate with the federal government, not Ontario. And Ottawa has no jurisdiction to force Ontario's hand.
Even if Japan is successful, Mr. Albrecht said, the WTO does not have an effective enforcement mechanism, other than to allow the winning country to retaliate with some other kind of tariff.
Aaron Atcheson, chairman of the clean technology group at Miller Thomson, said it is puzzling that Japan has decided to make its move now. Quebec has had a local-procurement program for years for its energy development, he noted, including rules that force power producers to buy equipment from specific regions inside the province. It hasn't drawn any complaints from the Japanese.
Still, Mr. Atcheson said that if Japan eventually wins its claim, it could be a disaster for Ontario's alternative energy plans. The prices the province pays for green energy - for certain types of solar power it is almost 20 times the rate customers pay - can only be justified if Ontario gets significant employment benefits from new development, he said. The province can't afford to pay high prices for renewables "unless they are creating some jobs," he said.