Introduction
International law related to the obligation to internalise environmental costs – in this case, carbon emissions – tends to place a more significant burden on developed than developing countries.[1] This obligation is translated into implementing the requirement to pay for each carbon emission produced from production activities. Hence, this condition allows the production costs of goods in developed countries to be higher than in developing countries. Arguably, this situation can reduce the competitiveness of products from developed countries in the international market.
Initially, the argument mentioned above was used to oppose carbon pricing. Politicians and private companies in developed countries are concerned about their competitiveness.[2] As carbon pricing has already been adopted, Trebilcock suggests that the claim often leads to arguments for equalising regulatory compliance costs[3], Including justifying the prevention of carbon leakage.[4] The situation where companies or firms move their production process from a country with stringent environmental policies to a more lenient one.[5]
The European Union (EU) addresses carbon leakage by providing free carbon credit allocation.[6] A credit is a ‘permit to emit’ a certain amount of carbon emission, which is usually auctioned to industry.[7] In the EU, free allocation is aimed at sectors exposed to international trade.[8] Until now, the measure’s compatibility with WTO rules has been contentious. However, according to Durel, many pieces of literature agree with the importance of analysing the Agreement on Subsidies and Countervailing Measure (ASCM) regarding the issue.[9] Therefore, the writing of this article will lead to that topic.
This article will re-analyse the general idea of the free carbon allocation measure with the ASCM concerning the current debate on whether it complies with WTO rules. First, it will provide an overview of EU carbon pricing and free carbon allocation. Second, it will examine the measure through the lenses of the ASCM, analysing whether it falls under the prohibited or actionable subsidy. It should be noted that the scope of this article is limited to the context of the trade of goods. Any topics related to the trade of services and market analysis are beyond the scope of this article.
- The Overview of the EU Free Carbon Allocation
The EU free allocation of carbon allowances works under the big scheme of the Emission Trading System (ETS). The system mainly aimed to lower carbon emissions production. Thus, before going to the overview of the free carbon allocation, we should first understand its relation to the EU ETS.
The EU has responded to the UNFCCC by imposing a price on carbon emissions.[10] It has set a target of reducing emissions by 55% by 2030 compared to 1990. And achieving net zero carbon emissions by 2050.[11] The measure is expected to make polluters pay for emissions and help bring down and generate revenues to fund the EU’s clean transition.[12] It is applied to all EU countries, including Iceland, Liechtenstein, and Norway.[13]
The main idea of the measure is to i) cap or limit the total amount of carbon emission emitted by producers covered by the system and ii) enable emission trading.[14] Companies need to buy allowances on the EU carbon market to comply with the emissions limit or gain free allowances.[15] They can also trade emission allowances with each other or even keep the allowance if the emissions are still below their allocation.[16] As explained, this measure is expected to bring benefits such as pushing down emissions. However, it also brings the disadvantage of increasing costs for domestic industries at the expense of competition with industries from other countries without similar measures.
Policies like this are predicted to impact the economy, so they are implemented gradually. Henschke explains that at the outset stage of implementing carbon pricing, the government needs to ensure that industries will not collapse.[17] There are multiple ways to do so. It could be imposing a low carbon price.[18] It could be giving a free allowance for all sectors.[19] Or even giving free permits to ‘trade exposed’ industries to remain competitive with international industries.[20] The latter option may inflict a presumption that a government has at least two motives. Nurturing the market-based carbon reduction and also protecting its nationals to stay competitive compared to other companies.
In the EU, a carbon cap is translated into permits (or allowances allocation). Every permit represents a number of certain emissions that can be emitted by producers. The permit is primarily obtained by auction. Henschke suggests that the permit has economic value in two ways.[21] First, it performs a function as a license to pollute.[22] Hence, industries can carry out production and profitable activities. Second, it is a tradable instrument that can make a profit if it is sold.[23]
Some of the permits are also free, especially for several eligible companies. For example, between 2013 and 2020, about 57% of the total allowance is auctioned, and the remaining are obtainable for free.[24] The EU implicitly states that this scheme is an exception to the ‘polluter pays’ principle.[25] Consequently, not all producers or installations in the EU will bear a similar financial burden if they emit GHG in their business process. This is the subject analysis of this article—the free carbon allocation.
The ETS is starting a new phase. In 2024, the criteria for free allocation eligibility will be limited to sectors at the highest risk of relocating their businesses outside the EU, carbon leakage. The indicator is determined by multiplying the number of emissions by the intensity of international trade.[26] The latter variable is calculated as the ratio between the total value of exports to third countries plus the value of imports from third countries and the total market size for the European Economic Area.[27] Then, based on the calculation, the EU sets a list of sectors and sub-sectors eligible for free allocation.[28] Most are sub-sectors in manufacturing, coal, and mining.
- Analysing the Free Carbon Allocation with the ASCM
Under the ASCM, a measure will be considered a subsidy if it involves a financial contribution from the government and confers a benefit. [29] Then, WTO members could take action against it if the subsidy is prohibited or deemed specific under the agreement and inflicting adverse effects. In determining whether the free allocation falls under the provision of the ASCM, this article will try to provide its consideration with the element of subsidies within the agreement’s provision.
- Government’s Financial Contribution
Article 1 of the ASCM governs that the government’s financial contribution could be i.) direct transfer of funds potential direct fund or liabilities, ii.) government revenue that is otherwise due is foregone or not collected, or iii.) goods or services. The element of ‘government’ in the context of the measure seems quite clear because the European Commission carried it. Hence, this section will focus on the other elements of the article.
Direct funds and potential direct funds or liabilities
The wording of Article 1.1(a)(1)(i) of the ASCM governs two types of financial contribution. The first one is direct funds, and the provision provides examples of it, including grants, loans, and equity infusion. The WTO’s Appellate Body (AB) suggested that the example is not meant to limit the form of direct funds.[30] It is intended to guide the reader in indicating direct funds.[31] Any form of direct funds similar to the example indicating direct funds. [32]
About ‘loans’ and ‘equity infusion’. The AB explains that the two examples share a similar nature—reciprocity. In a ‘loan’, the receiver is expected to repay the loan. ‘Equity infusion’ usually allows the contributor to receive shares and be eligible to obtain dividends or any capital gains. In comparison, the AB deemed ‘grants’ usually as unconditional contributions.[33] Hence, considering the nature of free carbon allocation without reciprocity, it is unlikely to compare it with ‘loan’ and ‘equity infusion’.
How about ‘grants’. At a glimpse, this illustrative example seems to fit with the characteristic of free allowance because it is given without reciprocity. Moreover, the WTO’s Panel Report indicates that ‘grants’ are not always money, as they pointed out in the case of US-Softwood Lumber VII. It said that ‘a grant normally exist when money or money’s worth is given…’.[34] Consequently, anything other than money but has ‘money’s worth’ is comparable to ‘grants’.
The possible way to deem the measure as a ‘direct fund’ is to compare it with ‘grants’ in Article 1.1(a)(1)(i) of the ASCM. However, to compare it with ‘grants’, we must perceive the carbon permit as ‘money’s worth’. Unfortunately, in the case above, the panel did not explain further what ‘money’s worth’ means.
Regarding the confusion, Henschke explains that all measures within Article 1.1(a)(1)(i) of the ASCM have similar characteristics. All of them have a definite monetary value attached.[35] A similar thought shared by Ismer et. al.[36] If it is the meaning of ‘money’s worth’, then it is unlikely to compare the free allocation of carbon permits a financial contribution in the context of the article for two reasons. First, the permit does not contain any monetary value attached.[37] Second, it only translates into monetary value when it is sold at the market rate at the selling point.[38] The argument also closes the possibility of comparing the measure with ‘potential direct funds or liabilities’.
As a separate note, regardless of the WTO’s understanding of the present discussion, the broad interpretation of ‘money’s worth’ is likely unacceptable. This is because everything that is available in markets could be said to be ‘money’s worth’. For example, cars, gasoline, etc. This interpretation would overlap the other form of ‘financial contribution’ as stipulated in Article 1.1(a)(1)(iii), which covers ‘goods’. Consequently, it is hard to endorse such a broad understanding, including proposing the free allocation as a financial contribution within the meaning of Article 1.1(a)(1)(i).
Government revenue that is otherwise due is foregone or not collected
Article 1.1(a)(1)(ii) of the ASCM governs that government contribution could be in the form of government revenue that is otherwise due is foregone or not collected. The AB, in the case of US-FSC, rules that in determining if revenue ‘otherwise due’ has been ‘forgone’, there should be a benchmark of the revenue.[39] Then, it is compared to the situation where it is ‘foregone’.[40] In other words, a situation where something should be collected based on a general rule, but there is an exception where it is exempted.[41] The AB called this deduction a ‘but for’ test.
In the context of free carbon permits, we could say that the auction of the permits will generate revenue for the government, especially if companies buy permits from the government. But how to say that is the general rule or the benchmark. The recital part of the EU Directive 2018/410 itself states that ‘the auctioning of allowances remains the general rule, with free allocation as an exception.[42] The recital statement implicitly shows that the benchmark for installations (owned by industries) is to obtain the permit by action; however, those who are exposed to high intensity of international trade are exempted. Ismer et. al. contend that the situation as reflected in the EU ETS schemes is sufficient to say that the measure falls within the meaning of ‘government revenue that is otherwise due is foregone or not collected’ under Article 1.1(a)(1)(ii) of the ASCM.
Another perspective comes from Henscke. She argues that it is difficult to define the benchmark in the EU ETS schemes. This is because national governments have had a degree of discretion to allocate permits according to national priorities.[43] Consequently, determining the fiscal benchmark will not be as simple as Ismer et. al. have contended. Moreover, the AB in US-FSC also suggests that the benchmark cannot be abstract and should be in ‘defined normative’.[44] Considering the fact that the permit is distributed by auction, and thus the price has fluctuated following the supply and demand in the market, the ‘defined’ benchmark for the fiscal revenue would be harder to conclude.
From the situation, the question of what is the meaning of the ‘defined normative’ benchmark for the ‘but for’ test could arise. It should be an exact rate, as in the case of Canada-Autos[45], or it could be fluctuating, as in the case of EU ETS. No matter what the answer is, the ‘but for’ test is not the only way to indicate the government revenue otherwise due is foregone. The AB in US-FSC[46] and Panel in US-Large Civil Aircraft (2nd complaint)[47] suggest that to find it, one could also compare the fiscal treatment applied to comparable income for taxpayers in comparable circumstances. However, the subsequent question is whether firms with higher exposure to international trade or high carbon intensity can be compared to those without. Although a conclusive answer is absent, it seems difficult to justify a claim that these two are incomparable.
The discussion above shows that the analysis of whether free carbon allocation could fall within the meaning of ‘government revenue that is otherwise due is foregone’ under Article 1.1(a)(1)(ii) of the ASCM is intricating. Moreover, the permit has a ‘tradable’ characteristic, which is available in the market. Henschke argues that something that is quantifiable on the market no longer has the character of government revenue foregone that could otherwise be due.[48] It makes sense to think that way, because not all payments for carbon emissions end up as government income. It should be noted that before 2020, EU nationals could get carbon credits by investing in emission reduction projects in developing countries.[49] Which means the permit could be generated. Even though this mechanism was stopped, alternative ways to obtain it are available. The EU is now in the process of linking its emission trading system to another jurisdiction with a similar market-based mechanism. For now, they have an agreement to link their own with Switzerland in 2017.[50] Consequently, EU companies could also obtain the permit from outside of their government. Including from other companies in the EU, other companies or governments in the linked market.
Henschke’s argument does not finish the debate. It is true that the permit is available in the market. However, the market is artificial. Regulatory engineering creates the demand and supply of carbon permits. The market-based system is a tool for the government to collect money to compensate for environmental costs. Those who are eligible for the free allocation are exempted from paying the cost. This logic alone can yield at least two potential lines of opposing reasoning. First, the condition where the government can raise the cost showing there is a government revenue otherwise due foregone. Second, the collected revenue is aimed at environmental conservation; it cannot be deemed as ‘government revenue’. Finally, it is hard to have a definitive conclusion. However, the possibility of the free allowance falling within the meaning of Article 1.1(a)(1)(ii) of the ASCM is higher than its possibility with Article 1.1(a)(1)(ii) of the agreement.
On a separate note, it is possible to see that the permit is a ‘government revenue otherwise due forgone’ on the one hand, but on the other hand, it is something similar to ‘goods’ that are available in the marketplace. When the permit is distributed from the primary source, it is auctioned, which is potentially a source of government revenue. But, when the permit is held by the recipient, it can be a tradable item, which is similar to ‘goods’ characterisation. The AB in Canada-Renewable Energy also sees the possibility of a measure falling within more than one type of ‘financial contribution’.[51] However, according to them, the customary rule of international law interpretation might not allow this interpretation.
Carbon Allowances as Goods
If we assume that free carbon permits are not ‘funds’ or ‘government revenue otherwise due foregone’, then the last possibility is treating the permit as ‘goods’. The provision regarding it is Article 1.1(a)(1)(iii) of the ASCM. According to the article, financial contribution could be in the form of ‘provides goods’. The AB in US-Softwood Lumber IV gives a reference to what the article means. The AB upheld the panel’s definition, ‘goods’ shall include anything that is ‘tangible and capable of being possessed. [52] The AB also opens a potential interpretation to cover any ‘property or possession’ things.[53] The case concludes that standing timber, which is potentially tradeable if harvested, is included within the meaning. However, there is no further explanation of the limitation of the definition. As a result, the limited AB reasoning in the US-Softwood Lumber IV case is hard to implement in the case of a carbon permit. Despite both having economic value, the inclusion of standing timber, in that case, is primarily due to its tangible form characteristic.[54]
Another relevant case is US-Large Civil Aircraft (2nd complaint). The key subject of assessment in the case is patents. The EU argues that patents and other intellectual property can be treated as ‘goods’ within the meaning of Article 1.1(a)(1)(iii) of the ASCM. However, the panel denied the EU’s argument. The panel maintained that the term is typically applied to tangible products, as distinguished from intangible services (a distinction made in the context of trade law and trade policy).[55] The panel also saw that there is no basis for extending the sense of ‘goods’ to encompass all possible forms of property.[56] As a result, we can conclude that in the discipline of the SCM agreement, the definition of ‘goods’ is relatively limited to only covering ‘tangible’ property.
The panel’s evaluation of the patent is arguably relevant to asses carbon permits. The characteristics of the property between the two instruments are similar. They are intangible, and their value is not only lies in something that can tradable in the market but also as a permit to produce another tangible product of economic value.[57] Consequently, proposing the permit as ‘goods’ could end up in rejection as in the case of a patent. Moreover, the SCM Agreement was adopted long before the establishment of the ETS mechanism. Consequently, it is likely that instruments such as carbon permits were not anticipated.
- Benefit
Although it is still uncertain whether the free carbon allowance could fall within the meaning of the ‘government’s financial contribution’ under Article 1.1(a)(1) of the ASCM, let’s just assume it could. So, we can continue the analysis to assess the benefit.
Article 1.1 (b) of the agreement requires that the government’s contribution should confer benefit to see whether a measure is a subsidy. The AB in US-Large Civil Aircraft (2nd complaint) summarised that a determination of ‘benefit’ requires identifying whether the financial contribution has made the recipient ‘better off’ than it would otherwise have been absent that contribution.[58] Also, the Panel in Canada-Aircraft gives a similar evaluation. A financial contribution will only confer a ‘benefit’ if an advantage is provided on terms that are more advantageous than those that are available to the recipient on the market.[59] So the question is, could the EU market provide an appropriate comparison in assessing the free allowances.
One may argue that the EU’s ETS market is an inappropriate comparison due to the condition of government involvement in creating the supply and the demand of the permits. In US-Softwood Lumber IV, where the government is seen has distorted the domestic market, and the AB allows the use of other countries’ markets to be compared.[60] However, this condition may not work for EU ETS. The AB in Canada-Renewable Energy draws a line between when a government created a market and when a government intervened in it.[61] When a government create a market, it does not mean that the market has distorted due to government intervention. It then concludes that when a market is created by the government, conditions in other markets will not be identical.[62] Consequently, occurrences in that market cannot be directly compared to those in other markets.
Free permits in EU ETS could be seen as conferring benefits to its recipient. Imagine an EU business entity. If the entity intends to engage in business activities that generate emissions, it must purchase permits through an auction at market prices. However, if it were to obtain these permits for free while other market participants must pay, this would undoubtedly constitute an advantage. Unless the market indicates that the price of such permits is zero.
Another style of indicating benefit can be found in the case of Canada-Autos. The AB does not explicitly mention any use of ‘market comparison’ analysis in determining benefit. It could be because the question measure is ‘government revenue otherwise due foregone’, which is usually not quantifiable in markets. However, the analysis could end up with a similar result as discussed above. In that case, the AB implies that where a government has collected payment for permits, those companies that had not paid for it gain benefit. [63] Consequently, we can argue that the recipient of free carbon allocation has an advantage compared to those who need to buy it through auction.
- Do the Free Carbon Allowances Qualify as A Subsidy?
The determination of subsidy in Article 1 of the agreement requires two things: (i) the government’s financial contribution and (ii) it confers benefit. The first one does not easily fit within the legal standard. The most possible way to see the free allowances as the government’s financial contribution is to see them as ‘government revenue otherwise due foregone’. The latter is quite apparent. The recipient of the allowances has an advantage compared to if they had not received it.
Although benefits are apparent in the free allowance scheme, it is not automatically considered a subsidy. The Panel in Softwood Lumber VII (also the AB in US-DRAMs) explains that not all government measures that confer benefits could be seen as subsidies under the ASCM.[64] The measure should fall within one of the variations of the government’s financial contribution in Article 1.1(a)(1). As a result, a conclusive answer to the question is uncertain. Although the possibility is there.
- Specificity
Let’s just assume that the free allowances are a subsidy. Then, the question will move to specificity. A subsidy will be seen as specific if it falls under the criteria of prohibited subsidy[65] under Article 3 of the provision or if it is granted to certain enterprises.[66] A subsidy that falls to the first possibility (prohibited) is automatically actionable.[67] However, the latter needs further analysis to determine whether the subsidy is adversely affecting the interests of other WTO members.
Prohibited Subsidy
Article 3 of the agreement states that a subsidy shall be prohibited if it is i) contingent upon export performance or ii) contingent upon the use of domestic product. The two can be argued based on ‘de jure’ or ‘de facto’ condition. In other words, the analysis could be assessed on the basis of the very word of the law provision or on the basis of factual occurrence.
The Panel in Australia-Automotive Leather II suggests that the term ‘contingent’ is dependent on something else for its existence.[68] It is arguably the meaning of Article 3.3.1(a) of the agreement is a subsidy that the existence is dependent on export performance. Then, the question is whether the provision of free allowance requirement is contingent upon export performance.
The free allowance is aimed at enterprises prone to carbon leakage. The indicator calculates emission intensity and trade intensity, as shown in Article 10b of the EU Directive 2018/410.[69] Furthermore, the trade intensity factors are the number of imports and exports divided by turnover plus imports.[70] The higher the number of indicators, the more chance an industry will obtain the free carbon allowances. In this case, we can see that the free allowance requires an industry to be exposed to a certain number of trade intensities. The trade intensity could be acquired by both exports and imports. The value of exports alone is sufficient to reach the trade intensity figure. The same applies to imports. So, we cannot say that the measure is only dependent on exports. What is safe to say is that the export alone is sufficient to trigger the measure. Ismet et al., in their analysis, found the same conclusion.[71] While Henschke seems more interested in assessing the specificity within the meaning of Article 2 of the Agreement.[72] In the absence of WTO’s dispute settlement ruling in this situation, it is hard to achieve a conclusive answer.
How about the de facto analysis. The standard in the case of Australia-Automotive Leather II also applies. It should be evident by the fact that the existence of a subsidy is dependent on export performance. the relationship of contingency between the subsidy and export must be shown by the facts surrounding the granting of the subsidy.[73] The AB in EC-Large Civil Aircraft explains that the fact could include (i) the design and structure of the measure, (ii) the modalities of operation, and (iii) the factual circumstances that provide the context to comprehend the intention of the measure.[74] Unfortunately, the further analysis of this kind of assessment is beyond the scope of this article.
Move on to the second condition as stipulated in Article 3.3.1(b) of the agreement, contingency upon the use of domestic products. Based on the AB in EC-Aircraft (Article 21.5-US), the standard of both contingency and factual or law analysis in Article 3.3.1(a) and Article 3.3.1(b) is identical.[75] There is no evidence that the provision of the free allowances states any contingency upon the use of domestic products. The factual analysis of the measure is also beyond the scope of this article.
Certain Enterprises in the EU’s ETS ‘specificity’
The wording of Article 2.1 of the agreement indicates that specificity is a general term. It sets a general principle to determine whether a subsidy is specific to certain enterprises. Article 2.1 (a) implies that where authority or legislation explicitly limits access to a subsidy to certain enterprises, such subsidy is specific.[76] While Article 2.1 (b) seems like a caveat of the previous provision. It stipulates that where the legislation establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy, specificity shall not exist.[77] The footnote on the article indicates that ‘objective’ means neutral, which does not favour certain enterprises over others, and which are economic in nature and horizontal in application, such as number of employees or size of enterprise.[78]
Interestingly, Article 2.1 (c) states that if the result of the assessment based on the previous article results in a ‘non-specificity’ conclusion, other factors can be used to indicate the ‘specificity’. Such factors are:[79]
- use of a subsidy programme by a limited number of certain enterprises
- predominant use by certain enterprises
- the granting of disproportionately large amounts of subsidy to certain enterprises
- and the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy.
In the case of the EU’s ETS, eligibility for accessing the free allowances is based on the industry’s tendency to carbon leakage. There is no explicit limitation on what enterprises should be restricted from the measure. However, the criterion of being prone to ‘carbon leakage’ itself limits the measure to a group of industries that i) emit a high number of emissions and ii) are exposed to international trade. The caveat on Article 2.1 (b) inflicting a question. Whether the tendency to ‘carbon leakage’ is an objective or neutral criterion. Apparently, it remains unclear. Further analysis should be taken to find that the criteria are similar characteristic to the example in the footnote of Article 2.1(b). Market diversification research based on positive evidence should be undertaken. Again, it is out of the scope of this article.
As of now, what is evident from the case is the limitation of the subsidy’s recipient by a limited number of certain enterprises. The criterion based on carbon leakage risks is translated into a finite list of several specific industries as stipulated in the annex to the EU’s Supplementing Directives 2003/87/E (Decision 2019/331).[80] Such a sectoral list certainly established a preclusion of new industries that satisfy the ‘carbon leakage’ criteria from receiving free allowances. The Panel in EC-Large Civil Aircraft rules that, to indicate de jure specificity, requires the establishment of the existence of a limitation that expressly and unambiguously restricts the availability of a subsidy to a certain group of recipients.[81] Consequently, attempts to translate the criteria into a finite list could potentially limit access to certain enterprises to gain free allocation. And the free permit allocation is also potentially deemed to be specific in law.
- Actionable Subsidies?
A specific subsidy (other than those classified as ‘prohibited subsidies’) requires further analysis to assess whether it leads to adverse effects on other WTO members. Before the determination of actionable or not. Article 5 of the ASCM sets three types of adverse effects: a) injury to the domestic industry of another member, b) nullification or impairment of benefit under GATT 1994 (especially the benefits of concession bound under Article II of the GATT 1994), and c) serious prejudice to the interest of another member. [82] The calculation methods for the three of them are different.
The nullification or impairment of benefits under GATT 1994 is not an endemic issue in the ASCM. The analysis benchmark mostly hinged on the provision of GATT 1994, which is a separate discipline from the ASCM. Hence a further analysis is beyond the scope of this article.
Similarly, the assessment of the ‘injury to the domestic industry of another member’ and the ‘serious prejudice‘ are outside the scope of this article. Both of them cannot simply be analysed with only legalistic approaches. The standard evidentiary of proofing injury requires positive evidence and an objective examination of both: a) the volume of the subsidised import and its effect on the price of the like products, and b) the impact of these imports on the domestic producers of such products.[83] One possible analysis in this article is whether the product that is produced from an installation that received the free carbon permit is a different type of product. If yes, on what basis. The distinction between ‘environmentally friendly’ and ‘unfriendly’ products seems impossible. This is because recipients of this scheme are exempted from internalising environmental costs. Thus, even at the outset, the question of whether a product is ‘environmentally friendly’ or not becomes irrelevant.
Although this article does not further assess whether the free carbon allocation has adverse effects on other WTO members, this does not mean that this aspect is unimportant. According to the Panel in the US—Offset Act (Byrd Amendment), a measure constitutes an actionable subsidy if it is a subsidy, if it is specific, and if it causes adverse effects.[84] Consequently, even if the free allocation is seen as a specific subsidy, such a measure will not be actionable if it does not cause adverse effects.
- Conclusion
The free allocation of carbon permits in the EU ETS scheme is granted to industries that face a high risk of carbon leakage. The permit’s allocation scheme potentially falls within the meaning of subsidy in Article 1 of the ASCM. However, it seems uneasily fits with the available types of ‘financial contribution’ in the article. The closest is ‘government revenue otherwise due foregone’. While, the benefit aspect of the subsidy is quite apparent.
Regarding specificity, it is still uncertain whether the measure falls under the meaning of ‘prohibited subsidy’. The recipient’s criteria do not solely depend on export performances, although export performance can sufficiently achieve them alone. However, its ‘specificity’ is evident. The finite list of recipient sectors arguably limits the range of prospective subjects. Consequently, there is still a possibility of seeing the measure as an actionable subsidy if it has adverse effects on other WTO members.
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[1] See the United Nations Framework Convention on Climate Change, opened for signature 9 May 1992, 1771 UNTS107 (entered into force 21 March 1994) (‘UNFCCC’) preamble para 10. Also, see United Nations Climate Change, what is Kyoto Protocol? (Web Page) <https://unfccc.int/kyoto_protocol>.
[2] ‘Correcting the Great Failure’ in The Garnaut Review 2011 (Cambridge University Press, 2011) 67.
[3] Michael J. Trebilcock and, Advanced Introduction to International Trade Law (2nd ed, Edward Elgar Publishing, 2015), 187.
[4] Michael Mehling and Michael Jakob, “Subsidy-Related Aspects of the EU Carbon Border Adjustment Mechanism (CBAM)” (2024) 12(1) Journal of Environmental Law and Policy, 364.
[5] “What Is Carbon Leakage?” (Web Page, UC Davis, 24 April 2023) <https://clear.ucdavis.edu/news/what-carbon-leakage>.
[6] European Commission, “Carbon Leakage” (Web Page, 1 July 2023) <https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/free-allocation/carbon-leakage_en>.
[7] Durel, Laurie, ‘Border Carbon Adjustment Compliance and the WTO: The Interactional Evolution of Law’ (2024) 27(1) Journal of international economic law ,29.
[8] Ibid.
[9] Ibid.
[10] See European Commission, “What Is the EU Emissions Trading System?” (Web Page, 8 May 2023) <https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/what-eu-ets_en>.
[11] Ibid.
[12] Ibid.
[13] Ibid.
[14] Luca Rubini and Ingrid Jegou, ‘Who’ll Stop the Rain? Allocating Emissions Allowances for Free: Environmental Policy, Economics, and WTO Subsidy Law’ (2012) 1(2) Transnational Environmental Law 326.
[15] Lauren Henschke, ‘Going it alone on climate change – A new challenge to WTO subsidies disciplines: are subsidies in support of emissions reductions schemes permissible
under the WTO’ (2012) 11(1) World Trade Review 28.
[16] Ibid.
[17] Ibid.
[18] Ibid.
[19] Ibid.
[20] Ibid.
[21] Ibid 30.
[22] Ibid.
[23] Ibid.
[24] European Commission, Free Allocation, EU Emissions Trading System (EU ETS) (Web Page, 2024) <https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/free-allocation_en.>
[25] Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, and Decision (EU) 2015/1814 [2018] OJ L 76/3 (‘Directive 2018/410’), Recital 8.
[26] European Commission, “Carbon Leakage” (Web Page, 24 June 2024) <https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/free-allocation/carbon-leakage_en>. See Also Directive 2018/410, art 10b.
[27] Directive 2018/410, art 10b.
[28] Commission Delegated Decision (EU) 2019/331 of 15 February 2019 supplementing Directive 2003/87/EC of the European Parliament and of the Council with regard to the determination of sectors and subsectors deemed at risk of carbon leakage for the period 2021 to 2030 [2019] OJ L 59/8 (‘Decision 2019/331’), Annex.
[29] See Agreement on Subsidies and Countervailing Measures (‘ASCM’), opened for signature 15 April 1994, 1869 UNTS14 (entered into force 1 January 1995), art 1(1.1.)
[30] Appellate Body Report (‘AB’), Japan-DRAMs (Korea), WTO Doc WT/DS336/AB/R (17 December 2007), [251].
[31] Ibid.
[32] Ibid.
[33] AB, US-Large Civil Aircraft (2nd complaint), WTO Doc WT/DS353/AB/R (23 March 2013), [616], fn 1292.
[34] Panel, US-Softwood Lumber VII, WTO Doc WT/DS533/R (24 August 2020), [7.618]
[35] Henschke (n 15) 31.
[36] Roland, Ismer, et al., ‘Supporting the Transition to Climate-Neutral Production: An Evaluation Under the Agreement on Subsidies and Countervailing Measures’ (2023) 26(2), Journal of International Economic Law, 220-221.
[37] Henschke (n 15) 31.
[38] Ibid.
[39] AB, US-FSC, WTO Doc WT/DS108/AB/R (20 March 2000), [90-91].
[40] Ibid.
[41] Ibid.
[42] Directives 2018/410 (n 26), Recital 8.
[43] Henschke (n 15), [36].
[44] AB, US-FSC (n 39), [90-91].
[45] AB, Canada-Autos, WTO Doc WT/DS139/AB/R; WT/DS142/AB/R (31 May 2000), [91].
[46] AB, US-FSC (n 39), [90].
[47] Panel, US-Large Civil Aircraft, WTO Doc WT/DS353/R (31 March 2011), [7.120].
[48] Henschke (n 15), 38.
[49] European Commission, Use of International Credits, EU Emissions Trading System (EU ETS) (Web Page, 2024) <https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/use-international-credits_en.>
[50] Ibid.
[51] AB, Canada-Renewable Energy, WTO Doc WT/DS412/AB/R (24 May 2013), [7.247.]
[52] AB, US-Softwood Lumber IV, WTO Doc WT/DS257/AB/RA (15 December 2005), [56].
[53] Ibid.
[54] Ibid., [67].
[55] Panel Report (‘Panel’), US-Large Civil Aircraft (2nd complaint) (Article 21.5 – EU), WTO Doc WT/DS353/RW (9 June 2017), [8.382].
[56] Ibid.
[57] Henschke (n 15) 32.
[58] US-Large Civil Aircraft (n 33), [635-636].
[59] Panel, Canada-Aircraft, WTO Doc WT/DS70/R (20 August 1999), [9.112].
[60] AB, US-Softwood Lumber IV (n 50), [119].
[61] Canada-Renewable Energy (n 49), [5.118].
[62] Ibid.
[63] Canada-Autos (n 61), [10.164-165].
[64] AB, US-United-DRAMs, WTO Doc WT/DS296/AB/R (27 June 2005), [114].
[65] ASCM, art 2.2.3.
[66] ASCM, art 2.1.
[67] ASCM, art 4.
[68] Panel, Australia-Automotive Leather II, WTO Doc WT/DS126/R (25 May 1999), [9.55.].
[69] Directive 2018/410, art 10b
[70] Ibid.
[71] Ismer, et. al (n 36), 223.
[72] Henschke (n 15), 44.
[73] Panel, Canada-Aircraft (n 57), [166-167].
[74] AB, EC and certain member States-Large Civil Aircraft, WTO Doc WT/DS316/AB/R (18 May 2011) [1046].
[75] Panel, EC and certain member States – Large Civil Aircraft (Article 21.5 – US), WTO Doc WT/DS316/RW (22 September 2016), [6.778].
[76] ASCM, art 2.1 (a)
[77] ASCM, art 2.1 (b)
[78] Ibid., footnote 2.
[79] Ibid., art 2.1 (b)
[80] Decision 2019/331 (n 28), Annex.
[81] Panel, EC-Large Civil Aircraft (n 73), [7.190].
[82] ASCM, art 5.
[83] ASCM, art 15.
[84] Panel, US-Offset Act (Byrd Amendment), WTO Doc WT/DS217/R;WT/DS234/R (16 September 2022), [7.106.].