This is a guest post from trade lawyer Bixuan Wu of the Hiways law firm:
Last December, the US Commerce Department ruled that, under the EU's Emission Trading System, extra free allowances received by EU producers with high carbon leakage risks constituted a countervailable subsidy. Soon after the DOC’s final determination, Jesse Kreier wrote a post here which I missed. My attention was drawn to this case by the EU’s 39th Annual Report on trade remedies.
At first glance, and by intuition, I thought the DOC’s decision was legally sound. Anyway, under the EU ETS, producers on the “carbon leakage list” indeed receive a favorable treatment by receiving more free allowances than unlisted producers, thus may emit more CO2 with no costs. But I, with a petitioner’s habitual thinking, overlooked the financial contribution factor which is usually the easiest to prove. If my understanding of the EU ETS is correct, emitters that run out of free emission allowances don’t buy allowances from the government. Instead, they buy from other companies subject to the ETS. Thus, as the EU has made clear in its briefs, in the case of free allowances, there was no revenue forgone because there was no revenue “otherwise due” in the first place.
The DOC certainly understood how the EU ETS worked but was determined to establish a financial contribution anyway. It repeatedly asserted that without additional free allowances, companies would have to purchase allowances either from the government or from another private party with allowances to sell. This statement is pivotal to the finding but is half-false. Similarly misleading is the DOC’s analogy between free allowances and favorable tax treatments.
The decision is interesting because it shows existing WTO subsidy rules need to be reformed to address new problems of the climate change age. In essence, the EU favored listed companies over unlisted ones by granting more free allowances to the former, not at the expense of its own pocket (revenue), but rather at the expense of climate mitigation. This is a situation that the drafters of ASCM did not envisage.
Also interesting is that free allowances is one of the two approaches to remedy carbon leakage. The other is a Carbon Border Adjustment Mechanism (CBAM). I wonder if the DOC has considered the ramification of its decision – if the EU’s free allowance is a countervailable subsidy, then the EU’s proposed CBAM is more legitimate. Isn’t it?
