I'm at the BIICL WTO conference, which has me thinking about a good discussion last year of the Appellate Body's ruling on "benefit" in the Canada - Feed-In Tariff case (see prior posts here and here). As I recall, there were two people on the BIICL Feed-In Tariff panel last year who were praising the ruling, and one criticizing it. (I won't name names -- they can weigh in with a comment on this post if they'd like). I had been meaning to do a post about this at the time, but never got to it. The one year anniversary seems like a good occasion to come back to it.
I'm pretty sure where I stand on these issues (there was definitely a benefit in the case, and the AB got it wrong), but the conversations at BIICL forced me to think about it all a bit more carefully. Why exactly is there a benefit in the situation where a government financial contribution "creates a market," as the AB put it? Recall that the following was a key point in the AB's reasoning:
5.188. Nevertheless, a distinction should be drawn between, on the one hand, government interventions that create markets that would otherwise not exist and, on the other hand, other types of government interventions in support of certain players in markets that already exist, or to correct market distortions therein. Where a government creates a market, it cannot be said that the government intervention distorts the market, as there would not be a market if the government had not created it. While the creation of markets by a government does not in and of itself give rise to subsidies within the meaning of the SCM Agreement, government interventions in existing markets may amount to subsidies when they take the form of a financial contribution, or income or price support, and confer a benefit to specific enterprises or industries.
I think one possible answer is this: There's actually no such thing as "creating a market." The financial contribution arising from the feed-in tariff has not, in fact, created a market for energy produced from solar panels and wind energy. That market already existed. Of course, this energy was so expensive that no one wanted to buy it. But that doesn't change the fact that a market was there. If someone offered enough money for the product (clean energy), someone else would provide it. The fact that no one is currently offering the money or providing the product does not mean there is no market. It just means that everyone has chosen not to participate in the market at the going sales price.
Let's take another example. You could probably pay someone an exorbitant sum to build a rocketship that would take you to the moon. But no one does it, because it's not worth the money to them. That doesn't mean there is no market. It just means no one wants to participate at the market price.
Thus, the financial contribution in the feed-in tariff market here does not create a market, but rather stimulates the development of an industry, by offering a high enough price so that companies enter the market. In other words, the measure just lures participants into the market. Just like if the government subsidized moon trips, clean energy subsidies are not creating a market, but rather bringing people into the market.
Furthermore, the distinction the AB drew between creating a market and supporting players or correcting market distortions is a false one. A typical financial contribution goes to producers who can't compete with other producers, so as to help them enter a market. They are inefficient and can't sell at a price people want to pay. Imagine a new aircraft producer comes along and can't compete with the incumbent. The government might offer some money to help it compete. (I think I vaguely recall that happening!)
What we have with wind and solar is just a variation on this. No producer can sell at a price people want to pay. Demand is not strong enough to create a steady supply at the market sales price. The financial contribution helps producers enter the market, despite this. That's the whole point. A subsidy brings producers into a market they could not otherwise enter. A situation with no prior transactions is no different than the one with prior transactions. Through the financial contribution, the government is stimulating demand so that supply starts up or increases (or vice versa). It is no different if supply already existed or if it did not -- a demand stimulus changes the intersection of the supply and demand curves. Basically, in these circumstances, benefit is all about whether demand for, or supply of, a product has been stimulated.
So, governments never really create markets. Markets exist outside of any government action. There is always a market. We often say, casually, "there is no market," but that's generally not correct. What we really mean is that, at the market price, there are currently no buyers or sellers, as demand and supply do not match up.
Since we are talking about AB decisions, to help with all this let's now turn to a "specialized dictionary," i.e., my undergrad econ textbook (Samuelson and Nordhaus), which defines "market" as: "An arrangement whereby buyers and sellers interact to determine prices and quantities of a commodity." As I read it, the focus here is on the interaction, not the actual transaction. You don't need a sale for there to be a market. If you take your antiques to a flea market, and no one buys them, you have still been participating in a market.
Thus, to sum up, the market is just the level of supply and demand that exists in the absence of the artificial government stimulation. Benefit is not so much about actual market transactions; rather, it is about government stimulation of supply and demand. Existing supply and demand levels are the market, and government actions -- in the form of financial contributions -- that influence supply and demand can confer a benefit.
Let me conclude by saying that I'm just thinking out loud here, and I reserve the right to retract all of this if I decide at some later point that it's nonsense.
