CIT Says No Consideration of de Facto Specificity Factors in de Jure Specificity Analysis

The Court of International Trade on May 2 again sent back the Commerce Department's finding that the South Korean government's full allotment of emissions permits under the Emissions Trading System of Korea (K-ETS) was de jure specific. Judge Mark Barnett said Commerce improperly used de facto specificity analysis factors, including data on who received the allotments, in assessing whether the additional permit allocations were specific as a matter of law.

However, Barnett sustained Commerce's findings in the 2019 review of the countervailing duty order on hot-rolled steel flat products from South Korea that the additional permits amounted to a financial contribution from the Korean government and that respondent Hyundai Steel benefited from the permits.

K-ETS is a program that caps the amount of greenhouse gas emissions large corporate emitters are allowed to release for a compliance year. The Korean government uses baseline emissions data to set a company's maximum allotment. Each company receives 97% of their allotment, though certain subsectors that meet trade intensity or production cost requirements get the full 100% of their permits.

To avoid a penalty for going over an allotment, companies can carry forward unused permits, borrow from future years, earn credits by reducing emissions in external projects, buy credits from third parties directly or from trading exchanges or buy permits via government-run auctions. Commerce countervailed the additional 3% allotment -- a decision that was remanded last year by the trade court (see 2310020025).

Barnett sent back the de jure specificity on the grounds that Commerce hadn't explained why the "international trade intensity" or "production cost" criteria underlying the 3% allotments establish specificity. On remand, the agency said the question is whether the criteria are neutral and don't favor certain subsectors over others, answering the question "in the negative."

Hyundai first said that Commerce must establish de jure specificity under 19 U.S.C. Section 1677(5A)(D)(i) before assessing whether the authority providing the subsidy "establishes objective criteria or conditions governing the eligibility" for a subsidy, under 19 U.S.C. 1677(5A)(D)(ii). The court said this can't be the case since a subsidy that "expressly limits access to an enterprise or industry clearly favors that enterprise or industry and, thus, cannot be rooted in objective criteria."

Where Barnett took issue with the specificity analysis was in the agency's consideration of de facto specificity factors and its failure to show that a subsidy can't operate throughout the economy. Commerce said trade intensity and production costs aren't horizontal in application since the subsectors that receive the allocation by their very nature have more heavy polluting production processes or are more dependent on international markets for sales or sourcing. This rationale "merely repackages the language of the criteria into a statement that certain subsectors are favored," the opinion said.

The judge noted that Commerce relied on "'the list of subsectors' that qualified for the full allocation," offering no interpretation of the de jure specificity statutory provision to support the "consideration of the actual users of the subsidy in order to determine whether the subsidy is specific as a matter of law.”

Elsewhere in its remand, Commerce, after initially saying the additional 3% allocation represented a financial contribution via forgone government revenue, said the allocation is a financial contribution by way of a direct transfer of funds due to the "fungibility and marketable nature of the" emissions credits. The agency said they are "akin to a stock" since they are tradeable on private markets and can be sent to private parties and are also similar to renewable energy credits.

Hyundai contested these findings, arguing that the credits aren't like the specific examples listed in the statute. Barnett said they don't need to be since the examples aren't meant to be exhaustive. As for whether the allocations are sufficiently similar to those examples, "Hyundai Steel points to no evidence to undermine that finding," the court said.

Barnett similarly dispatched with Hyundai's challenges to Commerce's finding that the additional allocation conferred a benefit to the company. The additional allocation "relieved Hyundai Steel from purchasing more permits than it otherwise would have," so a benefit was conferred, the court said. While Hyundai said the treatment of the credits as inputs is inconsistent with Commerce's regulations since the credits relate to a production output, the court said that the exporter "conflates its actual GHG emissions with the emissions permits the GOK allocates to the company." The regulations more broadly define inputs to incorporate the credits, the court said.

(Hyundai Steel Co. v. United States, Slip Op. 24-55, CIT # 22-00170, dated 05/02/24; Judge: Mark Barnett; Attorneys: Brady Mills of Morris Manning for plaintiff Hyundai Steel; Sosun Bae for defendant U.S. government; Alan Price of Wiley Rein for defendant-intervenor Nucor Corp.)