I guess I must be the only lawyer on either side of the Atlantic that missed two pending US countervail cases involving the EU's Emission Trading Scheme. The investigations, involving Forged Steel Fluid End Blocks from Italy and Germany, include allegations that the free emission allowances given to the exporters represent countervailable subsidies.
The ETS requires that certain heavy emissions installations (producing such goods as iron and steel, cement, glass, aluminum, petrochemicals and paper) must acquire allowances covering their carbon emissions. Most such installations received free allocations amounting to 44.2% of the most efficient installation's emissions, and have to buy the rest, through government auctions or in the market. But certain installations, in sectors where the additional costs of ETS, or the trade intensity, is particularly high, are placed on a "carbon leakage" list, and receive free allocations amounting to 100% of the most efficient installation's emissions. The alleged subsidy is the difference between the 44.2% and 100% free allowances.
Technically, the principal issue here relates to whether there is revenue foregone that is "otherwise due", i.e., is the "normal" rate of free allowances 44.2%, such that the government is giving up revenue when it gives out a higher rate of free allowances to selected enterprises? This issue of identifying the "normative benchmark" is one that the dispute settlement system has wrestled with in numerous disputes, such as US - Foreign Sales Corporations and US - Large Civil Aircraft. Indeed, the problem is a lot like that in US - FSC: The government imposed an obligation on its enterprises that its foreign competitors do not face (in the EU case, the obligation to pay for carbon emissions, in US - FSC, the obligation of US corporations to pay income taxes on revenues generated by overseas activities), but then relieves the actors in part of the obligation.
But the bigger issue of course is the interaction between subsidy disciplines and the competing policy objectives the subsidies are (sometimes) designed to advance. Is it realistic to expect that countries take vigorous action to address carbon emissions without also making accommodation for the most vulnerable and severely impacted sectors? After all, even enterprises whose installations are on the "carbon leakage" list must meet certain carbon efficiency levels or pay for the failure to do so, and are thus overall disadvantaged by the ETS in their international trade. While technically we may insist that there should be no "offsets", in practical terms countervailing these free allowances is punishing EU economic actors for a scheme which hurts them individually but generates overall benefits not just for the EU but for all the planet's residents.
While a final determination in these investigations may emerge before inauguration (I am not sure of the current schedule), the broader issue is one that the new Administration could and should seek to resolve. If the United States wants to show its partners that it is willing to cooperate on issues of common importance, then a conversation about how to ensure that international trade rules do not interfere with efforts to address climate change is an obvious first step, and a new approach to free allowances would be a good signal of its good faith.
