CIT Says Financial Contribution, Specificity Findings on Korean Emissions Trading Program Fall Flat

The Commerce Department failed to support its position in a countervailing duty case that the South Korean government gave up some revenue through the provision of its emissions trading program, the Court of International Trade ruled in a Sept. 29 opinion. Judge Mark Barnett wrote that while the Korean government may lose money by fully allocating emissions permits, it doesn't necessarily do so, given that companies that receive a standard allocation can obtain the permits through means that don't involve lining the government's pockets.

Barnett added that Commerce also provided inadequate support for its conclusion that the emissions trading program is de jure specific as part of the 2019 review of the countervailing duty order on hot-rolled steel flat products from South Korea. The judge ruled the agency did not show an explicit limitation of the program to a particular industry.

The Korean emissions trading program applies to large corporate emitters of carbon dioxide or equivalent gasses and uses emissions data to set the number of permits entities are allocated. In 2019, all participating firms received an allocation of 97% of their permits, while the remaining 3% were held in reserve. However, respondent Hyundai Steel Co. received a full allocation of its permits for this period.

Entities that need more permits can get them in five different ways: passing forward unused permits from past years, borrowing permits from future years, earning credits by lowering emissions, buying permits from private entities directly or through an exchange, or buying permits through a government-run auction. If a company receives a full allocation, it cannot buy the permits in the government-run auction. In 2019, Hyundai bought additional permits from private firms and borrowed against its 2020 allocation. Commerce said this was a countervailable benefit, marking Hyundai's subsidy rate at 0.56%, 0.10% of which came from the emissions program.

Hyundai challenged Commerce's financial contribution, benefit and specificity analyses. On the foremost point, Barnett said the agency must go back to the drawing board. Commerce held that the Korean government is forgoing revenue that "is otherwise due" when it provides entities with a full allocation of permits. The judge noted the issue turns on the meaning of the phrase "is otherwise due." The plain meaning of this phrase doesn't include revenue that could, but not necessarily would, have otherwise been collected by the Korean government, the court ruled.

Noting that the word "due" is dispositive for the government's argument, Barnett said the forgone revenue must be due either presently or on some future date and be a sum the recipient "would -- not merely could -- otherwise owe the authority." Commerce's interpretation of the statute "might fare better if the statute provided for a financial contribution in the form of revenue foregone without further qualification, but by adding the phrase 'that is otherwise due,' Congress added a constraint for which Commerce must account," the opinion said.

The full allocation of the emissions permits as compared with a standard allocation of them is not countervailable according to the plain language of the statute, Barnett ruled. Companies that get the standard allocation don't incur any enforceable debt that full allocation recipients avoid via the additional allocation. The Korean government might get revenue from the sale of the permits, but this doesn't mean that the government has forgone revenue it was otherwise due, the court said.

However, Barnett ruled against Hyundai's attack against Commerce's benefit analysis, though the court said the agency must reconsider the decision consistent with its reconsideration of financial contribution. The respondent argued that Commerce ignored the large burden placed on firms subject to the emissions trading program, when compared with the companies not subject to the program. Barnett said the situations where environmental compliance is non-countervailable are not present here, nor does Hyundai say they are. Additionally, there is "no legal requirement for Commerce to compare Hyundai Steel's experience to that of other companies," the opinion said.

Hyundai found more success in its case against Commerce's specificity finding. The agency said the program is de jure specific because Korean law has criteria that result in an express limit on which industries qualify for the additional allocation of permits, even though no specific industries are named. Barnett said Commerce must reconsider this position, noting the program's nonuniform treatment across the economy is not enough to support specificity. The existence of criteria alone "is not enough to demonstrate an explicit limitation to an enterprise or industry," the court said.

"Commerce does not offer a convincing explanation for why the 'international trade intensity' or 'production cost' criteria governing the full allocation establish de jure specificity." Commerce's claim that some industries may benefit while others do not "merely reflects the truism that not all industries will 'qualif[y] under the criteria,'" the court ruled.

(Hyundai Steel Co. v. U.S., Slip Op. 23-144, CIT #22-00170, dated 09/29/23; Judge: Mark Barnett; Attorneys: Brady Mills of Morris Manning for plaintiff Hyundai Steel; Sosun Bae for defendant U.S. government; Derick Holt of Wiley Rein for defendant-intervenor Nucor Corp.)