Commerce Alters Financial Contribution Analysis of Korean Emissions Credit Trading Program

The Commerce Department on remand altered its analysis on whether an additional allotment of traceable carbon emissions credits in South Korea constituted a financial contribution. Submitting remand results to the Court of International Trade on Jan. 5, Commerce said that the South Korean government's decision to distribute additional free allowances of carbon emissions credits constitutes a "direct transfer of funds," rather than revenue forgone by the foreign government (Hyundai Steel Co. v. U.S., CIT # 22-00170).

Commerce also said it "continues to develop its theory of financial contribution in the examination" of the program, noting it continues to believe the additional credit allotment amounts to revenue forgone by the South Korean government.

The case concerns the 2019 countervailing duty review on hot-rolled steel flat products from South Korea. CIT originally remanded over concerns about the South Korean emissions trading program.

Under this cap-and-trade system, companies must pay to be permitted to emit more than a certain volume of carbon by submitting Korean Allowance Units (KAUs). Certain sectors that meet "high international trade intensity" or "high product costs" criteria receive 100% of their assigned units, while others get only 97% of their assigned units. To get more KAUs, business can borrow from their future allotment, buy more through a government auction, purchase more from other companies or pay a penalty.

The trade court previously rejected the claim that the Korean government forgoes revenue under this scheme because companies that receive a standard allocation can obtain additional permits through means that don't involve enriching the government (see 2310020025). The trade court echoed this ruling in a separate countervailing duty case (see 2312190051).

In its remand, Commerce first noted that the South Korean government itself created the entire market for KAUs, meaning the additional allocation of units to a select group of companies amounts to the Korean government choosing not to collect payments from companies to cover payments otherwise due. While companies can buy credits from other parties instead of from the government, "each ton of carbon has a price and, absent the government-issued additional free KAUs, this 'cost' (i.e., a carbon payment) would have been otherwise due by some company, at some point."

Despite this additional explanation, Commerce switched the basis on which it made its countervailing duty finding in light of the court's order. The agency said the additional KAU allotment amounts to a "direct transfer of funds." While the allotment "may not be a traditional transfer of 'funds' (e.g., a cash grant), the fungibility and marketable nature of the KAUs makes the issuance of such allocations, nonetheless, analogous."

Commerce also fleshed out its specificity finding for the cap-and-trade system in light of the court's finding against its de jure specificity finding. The agency noted that the law says a program is not specific when eligibility is automatic, its criteria for eligibility are strictly followed and its criteria are clearly set forth in the relevant statute or other official document so as to be verifiable.

Commerce said that limits are set on what industries qualify for the additional allocation in the form of "international trade intensity" and "production costs." These factors "are not horizontal in application" and thus are not neutral in that they do not favor certain subsectors. The result is that specific sectors receive the additional KAU allotment, the agency said.