Emissions permits as goods

It is also possible to characterize what would otherwise be called a financial instrument as an intangible good. As the above exercise demonstrates, it may be more accurate to focus on an emissions permit's character as a commodity that can be bought and sold on the market. However, the Appellate Body reiterated a number of times in US–Softwood Lumber that goods are if anything tangible. It referred to them as ‘tangible, but fungible, input material’,Footnote ²⁰ ‘tangible items’,Footnote ²¹ and ultimately focused on stumpage arrangements not as the intangible ‘right to harvest’ but as the tangible timber that would be harvested.Footnote ²² While the Appellate Body was not seeking to establish the full extent of the boundaries of the definition of ‘goods’ under Article 1.1(a)(1)(iii), its focus on the physical incarnation of a good suggests that currently the law will not only exclude emissions permits but could exclude other important forms of contributions from coverage by the disciplines of the SCM Agreement.Footnote ²³ For instance, emissions permits are very similar in nature to patents. Their value lies not only in something that can be traded on the market like a commodity, albeit intangible, but also as a permit to produce another tangible product of economic value.

There has not yet been a decision on how best to characterize the provision of intellectual property rights by a government under Article 1.1(a)(1). The issue has been raised in a case currently before the DSB, US–Large Civil Aircraft.Footnote ²⁴ In that case, the European Communities argues that:

The United States points out in response that as the law stands thus far:

Given the decision in US–Softwood Lumber, it is interesting that the EC chose to argue for the inclusion of intellectual property rights under the definition of ‘goods’. As the EC's resort to the The New Shorter Oxford English Dictionary suggests it is also difficult, in the context of US–Softwood Lumber to find other sources to support a legal interpretation of ‘goods’ in Article 1.1(a)(i) that includes intangible goods. The EC is right in that most municipal law systems characterize IP rights as property rights, thereby rendering the instrument of those rights, such as a patent, a commodity or asset.Footnote ²⁷ However, as the Appellate Body has stated: ‘municipal law classifications are not determinative’ of the ordinary meaning of the term ‘good’ under the SCM Agreement.Footnote ²⁸ If we look instead to the WTO Agreement for context, we note that the various covered agreements are separated into Annexes or groups, with goods under the Annex 1A: Multilateral Agreements on Trade in Goods, and intellectual property rights under the Annex 1C: Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).Footnote ²⁹ This arguably suggests that intellectual property rights should be thought of as separate for the purposes of the WTO Agreements.Footnote ³⁰ Conversely, there are numerous references to ‘goods’ throughout the TRIPS Agreement, as IP rights generally attach to specific goods.Footnote ³¹

The EC did argue in the alternative:

However, as discussed above, the licensing aspect of intellectual property rights is only one representation of the economic value of owning a patent (or an emissions permit). In fact, the government has not only failed to collect licensing fees but has essentially transferred an asset. By owning the patent, the company cannot only make revenue through using the technology to manufacture products for sale (as it could with a license) but it can also earn substantial income by issuing licenses on the patent itself or selling the patent on the market. To continue the analogy with an emissions trading permit, the owner of an emissions permit has not only gained a license to pollute but the potential either to use that in production or to sell it on the market at a profit.Footnote ³³ Arguably, the licensing fee should translate into the economic value gained from using the patent to produce technology or the emissions permit to manufacture goods. However, it does not account for the value of the permit or patent as an asset on the market.Footnote ³⁴ Thus, while both patents and emissions permits can be readily characterized as the licensing or permit fee foregone, this is only one aspect of their economic contribution to the recipient company. In the case of patents in particular, this is likely to be the poorer of the two options.

Furthermore, in the case of emissions permits, arguably the revenue forgone is not so much a licensing fee but the amount that the permit could have obtained on the market in the first place (which would surely see it best characterized as a good). However, the difficulty is that, as in the case of the European Community Emissions Trading Scheme (EC ETS), permits are issued in phases that represent the various stages of the development of the permit market and that also correspond to a progressive tightening of the market and an increase in competition.Footnote ³⁵ Consequently, a permit issued at the first stage of development, will have a substantially different value if retained until the final phase of implementation where emissions caps are further reduced along with the number of permits being issued.Footnote ³⁶ Furthermore, initial free permits have the added value of allowing industries the ability to determine when it is still economically viable to maintain carbon-intensive forms of production and when it is best to spend money to adapt.Footnote ³⁷

Returning now to the EC's arguments in US–Large Civil Aircraft one can understand the policy reasons behind characterizing patents as a ‘goods’ under Article 1.1(a)(1). Characterizing patents as goods is likely to account for more of the financial benefit that is actually transferred than merely looking at the licensing fees foregone. Moreover, it is more in keeping with the reality of the transaction to characterize them as goods and account for the value as an asset.

Ultimately, Article 1.1(a)(1) was designed to provide a finite list of government measures that could be classified as a financial contribution for the purposes of being subject to the disciplines of the SCM.Footnote ³⁸ In that respect to read ‘good’ as encompassing any ‘property or possession’ may be too broad and indiscriminate. However, it is counter-intuitive that the SCM should not cover the provision of important intangible goods, such as the patent. Articles 1.1(a)(1)(i) and (ii) do not pretend to cover the provision of all intangible, monetary resources. They only cover two specific situations: direct or potentially direct transfers of funds and government revenue otherwise due. Moreover, patents and emissions permits behave and have more of the defining characteristics of a commodity on the market than the specific monetary resources envisaged under Articles 1.1(a)(1)(i) and (ii). Thus, as we will see below, while emissions permits, like patents, can be characterized as revenue otherwise due that is foregone, it is not the most accurate and all-encompassing option.

Government revenue that is otherwise due is foregone

Emissions permits can only be characterized as government revenue foregone under Article 1.1(a)(1)(ii) in certain circumstances. There must be a ‘defined, normative benchmark … applied by the Member in question’Footnote ³⁹ with which to compare the provision of emissions permits free of charge or at a reduced rate to certain companies. Consequently, as the emissions permits distributed at each stage are the same, there must be differential treatment in their provision by the government to different entities.Footnote ⁴⁰ Article 1.1(a)(1)(ii) is unlikely to apply where all permits are provided by the government free of charge, for example as in phase one of the EC ETS, because there is no benchmark to suggest that revenue was ‘otherwise due’.Footnote ⁴¹ Likewise, in the first phase of the New Zealand scheme where permits are being provided at a lower cost across the board to all industries and assigned double the emissions value.Footnote ⁴²

In the case of New Zealand, arguably, where the government has identified that it is providing the permits at a reduced rate compared to future prices (the permit's actual designated price) this could amount to revenue otherwise due. However, ‘otherwise due’ is a question of an aberration to the rule that otherwise applies in like circumstances, which must be the prevailing domestic standard of that Member at that point in time.Footnote ⁴³ In this respect, characterizing emissions permits as revenue forgone does not account for the potential benefit gained by enterprises that are able to stockpile excess permits for later use or subsequent sale when their market value may have increased.

Article 1.1(a)(1) is likely to apply where the government offers permits at a reduced rate to emissions-intensive, trade exposed industries (EITEs) – as has been the case in the EC-ETS and has been proposed for the New Zealand schemeFootnote ⁴⁴ – particularly, where EITEs have been identified as being subject to exceptional treatment.Footnote ⁴⁵ However, this analysis could be more complicated if there is a graduating scale of concessions, whereby it became difficult to identify a normative benchmark. For example, in the New Zealand scheme industries appear to be able to apply to the government for concessions, which will be awarded based on their degree of trade exposure and reliance on emissions-intensive production methods.Footnote ⁴⁶ Similarly, in the EC ETS, there has been a degree of discretion for national governments to allocate permits according to national priorities.Footnote ⁴⁷ Consequently, there may not be a clear rule or fiscal treatment that can be said to apply as a comparative normative benchmark.

Where there is no clearly identifiable fiscal treatment that applies to all industries with some aberrations, the argument could be made that there are a number of rules that apply in different situations. The Appellate Body has indicated that panels should seek to compare ‘the fiscal treatment of comparable income, in the hands of taxpayers in similar situations’.Footnote ⁴⁸ Hence, it could be argued that the fiscal treatment, between one category of industry and another, regarding the provision of emissions permits is not legitimately comparable. The argument would be that, while the revenue is identical as it relates to ‘licensing fees’ for carbon emissions, treatment is different as it relates to different kinds of industry or companies, which should not be comparable. Accordingly, an attempt would be made to differentiate separate industry sectors and argue that different treatment by the government can be justified or explained in terms of the different, non-comparable situations facing those sectors.

The question then is on what basis should EITEs not be considered comparable to all other carbon emitting industries. Could their degree of emissions intensity constitute a sufficiently different situation to justify placing EITEs into a separate category? It is not clear what factors would make revenue recipients no longer legitimately comparable. The Appellate Body gave the example of the fiscal treatment of foreign source income ‘in the hands of a domestic corporation’ versus ‘in the hands of a foreign corporation’.Footnote ⁴⁹ This is perhaps the most obvious example, as most tax systems treat domestic and foreign corporations differently as a foreign corporation is likely to be subject to tax obligations in another jurisdiction, particularly as relates to foreign source income.Footnote ⁵⁰ It could almost be said that as a general rule of taxation, in the United States jurisdiction, foreign source income earned by foreign corporations and domestic corporations are not treated as like and are therefore not legitimately comparable.Footnote ⁵¹ The novelty of emissions trading schemes means that it would be difficult to point to a similarly long-standing general practice whereby large, trade-exposed emitters are not deemed comparable to smaller, not so exposed emitters.

Conversely, another parallel can be drawn between the fact scenario in United States – Tax Treatment for ‘Foreign Sales Corporations’ (US–FSC) and the provision of emissions permits to EITEs at a reduced rate.Footnote ⁵² In US–FSC, the difference in tax treatment hinged on the extent to which foreign sales corporations' activities were with respect to the sale or lease of goods produced in the United States for export.Footnote ⁵³ Similarly, in the case of emissions permits, the difference in treatment is on the basis of a company's ‘trade exposure’ or vulnerability to international competition. In US–FSC, the Appellate Body did not consider the fact that some revenue came from export sales on the international market by foreign sales corporations was sufficient to treat that revenue as belonging to a different category not capable of legitimate comparison.Footnote ⁵⁴ However, it is perhaps too ambitious to attempt to draw a general rule on which categories of revenue between which recipients are legitimately comparable from the Appellate Body decision in US–FSC. Nonetheless, from a comparison of the facts of the case, it seems unlikely that it could be argued that in a scheme which charges fees based on carbon emissions, emissions-intensive, trade exposed industries are not legitimately comparable to other carbon emitting industries.

The biggest difficulty arises when the private market for permits has developed sufficiently to make acquiring permits on the market a viable alternative. When something can be purchased on the market, by its very nature it ceases to be government revenue foregone within the meaning of Article 1.1(a)(1)(ii), and must become either a transfer or provision under either Article 1.1 (a)(1)(i) (such as a loan) or Article 1.1(a)(1)(iii) as a good or service.Footnote ⁵⁵ This is because, in terms of the text of the Subsidies Agreement, there is now the provision of something quantifiable on the market that no longer only has the character of government revenue foregone that could otherwise be due to the Government by the industry in question. To interpret it otherwise would render Articles 1.1(a)(1)(i) and 1.1(a)(1)(iii) meaningless because anything provided free of charge by the government, that was otherwise available on the market at a cost, could be understood as government revenue foregone. Article 1.1 (a)(1)(ii) ultimately serves to catch another form of financial contribution where a government has not provided something within the meaning of Articles 1.1 (a)(1)(i) and 1.1(a)(1)(iii) but has not collected revenue where it otherwise would. This is perhaps where the artificial nature of characterizing the provision of emissions permits as revenue foregone becomes most evident.

Again, there is unlikely to be one clear point where it can be said that a market for emissions permits exists. For example, during the second phase of the EC ETS where the government does not provide permits for free, it will sell them to companies through a series of auctions.Footnote ⁵⁶ Consequently, it will be some time before a market for emissions permits establishes itself independently of the government. Nonetheless, where emissions permits can be obtained on a market it would be difficult to argue that their provision at a reduced rate would constitute government revenue foregone.

Consequently, to make a case that the provision of emissions permits constituted government revenue foregone within the meaning of Article 1.1(a)(1)(ii) there would need to be a difference in the provision of permits between companies or industries within the same Member State so that a comparison could be made between a general rule or normative benchmark and other treatment. It is therefore unlikely to apply where permits are provided free of charge to everyone. It is also unlikely to apply where permits are otherwise obtainable on a market. Thus, Article 1.1(a)(1)(ii) would have a more limited application than Articles 1.1 (a)(1)(i) and 1.1(a)(1)(iii). This is because, as the author contends, while intangible goods have not yet been recognized by the Appellate Body, emissions permits are better characterized as goods under Article 1.1 (a)(1)(iii).

Permits as revenue foregone

The difficulties in determining revenue that was otherwise due for the provision of emissions permits by the government has been discussed above. Where the government has charged for some permits, those companies that have not had to pay for some of their permits can be shown to have benefited in the amount that would have otherwise been due.Footnote ⁶² Thus, in an examination of revenue foregone under Article 1.1(a)(1)(ii), there is no question of whether the government measures ‘merely defray the cost of business’Footnote ⁶³ complying with compulsory government regulations. This is because WTO Members are free to decide what income to tax, where to draw licensing fees, and when to enforce additional costs on industry.Footnote ⁶⁴ However, once a government decides which income is due and then chooses not to collect it, or to collect a lesser amount in certain situations, then the disciplines of the SCM Agreement apply by virtue of Article 1.1(a)(1)(ii) and a benefit will exist to the extent of the amount that was otherwise due.Footnote ⁶⁵

Permits as goods

Howse and Eliason's proposition may be more accurate in limited situations where a financial contribution is said to exist through the provision of emissions permits, characterized as the provision of goods by a government under Article 1.1(a)(1)(ii). Another author similarly said that ‘permits are a financial contribution to the extent that they are surplus to operating needs’.Footnote ⁶⁶ In other words, the argument is that the free provision of emissions permits only confers a benefit when it goes beyond enabling an enterprise to continue its operations without incurring an additional cost under the new emissions trading scheme, and give rise to profit. However, again, this proposition needs to be carefully examined in terms of the requisite analysis for determining benefit under Article 1.1(b).

‘Benefit’ under Article 1.1(b) is measured by reference to the situation that the recipient company would have been in absent the measure. Arguably, this broadly corresponds to Howse and Eliason's notion of a ‘surplus’ of permits as opposed to the mere defraying of a government imposed cost. However, fundamental to the premise of a mere defraying of a government cost is a definition of benefit based on a comparison between the position of a company under the emissions trading scheme, who receives free permits, and the position of a company absent the emissions trading scheme. Conversely, under the SCM Agreement the notion of ‘better-off’ is determined by reference to the nature of the financial contribution. Thus, since Article 1.1(a)(1)(iii) has defined the financial contribution as the provision of goods, ‘the measure’ or point of comparison is the provision of the permits, not the whole creation of an emissions trading scheme. Consequently, as seen in the case of ‘revenue foregone’, Article 1.1 is not concerned with whether a Member government has created a regulative scheme that increases the cost to national industry. Therefore, any benefit received through the free provision of emissions permits cannot be seen as defraying other government costs under Article 1.1(b).

The correct inquiry under Article 1.1(b) is if the government had not provided the emissions permits for free, could the company have otherwise obtained them on the same terms on the market. As the Appellate Body stated in Canada–Civilian Aircraft, a benefit exists where ‘the recipient has received a financial contribution on terms more favourable than those available to the recipient on the market.’Footnote ⁶⁷ The second aspect to Howse and Eliason's proposition is the notion that ‘the enterprise has not acquired any competitive advantage over other enterprises, which neither take the subsidy nor have to perform these actions’.Footnote ⁶⁸ The ‘other’ enterprises in this instance are foreign enterprises that are not subject to the national scheme. Again, Howse and Eliason's proposition is asking the reader to compare the situation where there is an emissions permits market and where there is not. However, the test under Article 1.1(b) is by reference to the terms of purchase available on the market. Article 14 of the SCM Agreement states that the ‘benefit’ derived from a provision of goods under Article 1.1(a)(1)(iii) is determined by reference to the prevailing market conditions in the same country in which the goods are provided; that is, the domestic market.

However, while benefit must be calculated for each permit by reference to the terms of the domestic market, the argument could be made that it should then be adjusted by reference to the additional regulatory costs on the enterprise to more accurately reflect whether an actual advantage was gained. Arguably, to not do so would be interpreting Article 1.1 too literally at the expense of the purpose of the SCM Agreement. The Appellate Body in Canada–Civilian Aircraft said that ‘the market place provides an appropriate basis for comparison in determining whether a benefit has been conferred’ because it identifies ‘the trade-distorting potential of a “financial contribution”’.Footnote ⁶⁹ Moreover, a “benefit’ does not exist in the abstract, but must be received and enjoyed by a beneficiary or a recipient.’”Footnote ⁷⁰ Ultimately, the fundamental principle is that there must be an advantage conferred to the recipient of the contribution that has a trade distorting effect.Footnote ⁷¹

In the case of an emissions trading scheme, arguably, there will be some circumstances in which ‘the [recipient] enterprise has not acquired any competitive advantage over other enterprises’ and thereby has no trade distorting effect.Footnote ⁷² Not all the emissions permits provided will distort trade by providing an advantage, and should not be counted as such. Arguably, ‘permits issued and used to support on-going operations are more appropriately classified as regulatory instruments – they calibrate the degree of emissions reduction required – rather than subsidies.’Footnote ⁷³ The essence of this argument is that the provision of emissions permits for ongoing operations by the government is a national regulatory act that the SCM agreement was not intended to cover because it has no affect on trade outside the national jurisdiction. This would require a Panel to distinguish between those permits that simply ‘calibrate the degree of emissions reduction required’ and those that provide an additional advantage to the recipient. This proposition arguably corresponds to the unique challenges posed by emissions trading schemes and the fact that the schemes do not fit any of the scenarios previously considered by the WTO. The principle would have to derive its justification from the purpose of the SCM Agreement and Article 1.1's role as gatekeeper to the disciplines of the Agreement.Footnote ⁷⁴ However, it would be difficult to argue that these considerations should override the ordinary meaning of Article 1.1(b), apparent on its face.

Some commentators have further argued that economically it is difficult to define a subsidy other than in theory and that Article 1.1(b) has been defined too broadly without taking into account national taxation or regulatory systems.Footnote ⁷⁵ However, again the ordinary meaning of the text does not ask for additional national specific regulatory costs to be taken into account, and to start doing so is potentially dangerous. For instance, where is the line between additional costs under an emissions trading scheme and any other national specific regulatory costs? Would we then be in a situation where any benefit could be offset against additional national taxes, licensing fees, or the costs of regulatory compliance? Arguably, the adjustment could be limited to the provision of emissions permits because of their exceptional nature as regulatory instruments and not to other provisions of goods or services or transfers of funds under Article 1.1(a)(1)(i) of the SCM Agreement. However, this is somewhat artificial given that the permits have otherwise been defined as a good under Article 1.1(a)(1)(iii).

Ultimately, where permits are defined as goods under SCM Article 1.1(a)(1)(iii), once a market for permits emerges, which implies that they have a value, then any granting of permits for less than the market value must be treated as a benefit under Article 1.1(b). The fact that the permits might not change the competitive position of recipient enterprises vis-a-vis foreign producers is immaterial at this stage of the analysis under the SCM Agreement. However, the issue of competitive advantage or harmful effects on other Member's competing industries is addressed to some extent in the adverse effects analysis for actionable subsidies discussed below.

Specificity in the context of emissions trading schemes

WTO Members have not tended to implement legislation that explicitly favours the provision of subsidies to a specific enterprise or industry or group of enterprises or industries.Footnote ⁷⁶ If they were to do so, the measure would be specific within the meaning of Article 2.1(a). However, a number of tendencies in the development of carbon trading schemes suggest that Article 2.1(c) specificity is possible.

Under Article 2.1(c), a measure is de facto specific if, notwithstanding the absence of explicit regulations, the distribution of subsidies is characterized by any of the following factors:

• • use of a subsidy program 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.’Footnote ⁷⁷

In practice, political pressure on governments and the need to maintain the viability of certain sectors that are more vulnerable, has lead to the targeting of subsidization under emissions trading schemes. For instance, in January 2005 the European Union introduced the world's largest greenhouse gases emissions trading scheme (the EU-ETS).Footnote ⁷⁸ Under the first two phases of implementation of the EU-ETS (January 2005–January 2012), Member States have been able to develop their own national allocation plan, including the total level of emissions and how many emission allowances each installation in their country receives.Footnote ⁷⁹ In practice, allowances have reportedly been distributed ‘mainly to address the competitiveness concerns of energy-intensive industries’.Footnote ⁸⁰ The scheme also focused assistance on industries subject to ‘carbon leakage’, where increased production costs in the EU are seen as likely to lead companies to move production off shore.Footnote ⁸¹

Similarly, the New Zealand emissions trading scheme provides assistance in the form of free allowances based on the emissions intensity and trade exposure of an applicant company.Footnote ⁸² This was also the case in the AustralianFootnote ⁸³ and the United StatesFootnote ⁸⁴ draft schemes, which never made it through their respective legislatures. The draft Australian scheme proposed assistance to ‘emissions-intensive trade-exposed industries (EITES) through the allocation of free emissions permits’.Footnote ⁸⁵ Likewise, the main United States model considered by Congress provided for free permits to be issued to energy-intensive, trade-exposed industries and specifically mentions merchant coal generators and oil refineries.Footnote ⁸⁶

These all point to a targeting of government assistance to certain groups of enterprises or industries within the meaning of Article 2.1 that could potentially satisfy the factors identified in Article 2.1(c) in terms of predominant use by certain industries. This paper ends its analysis of the question of specificity here. Emissions trading schemes do not pose any novel challenges to the SCM Agreement provisions on specificity. The nature of the de facto specificity test under Article 2.1(c) means that each measure will be assessed on a case-by-case basis according to the detail of how emissions permits and financial assistance are provided to certain industries under the scheme in question.Footnote ⁸⁷ It is sufficient for the purposes of this paper, to conclude that emissions trading schemes are capable, even likely, to satisfy the standard Article 2 test for specificity so as to trigger Part III of the SCM Agreement on actionable subsidies.

Assessing adverse effects and the issue of ‘like product’

Arguably, if the provision of permits has minimal affects on competition with foreign industry because of the commensurate additional costs on national companies, then this will be evidenced in an examination of adverse effects to the complaining Member's industry.

It should be noted that to demonstrate injury within the meaning of Article 5(a) or serious prejudice within the meaning of Article 5(c) requires a comparison between the ‘like product’ on both Member markets. ‘Like product’ has its own meaning under the SCM Agreement as defined in footnote 46, which requires the ‘like product’ to be identical, ‘or in the absence of such a product, to have characteristics closely resembling those of the product under consideration. This has been interpreted very broadly and would permit a comparison between those products made with reduced carbon emissions and those that are not.Footnote ⁸⁸ However, arguably where there is an ‘identical’ product that has similarly been produced in a cleaner manner on the complaining Member's market, then the argument could be made not to include the same product produced with more emissions in the comparison. Irrespective of the whether the product comparison is with the ‘dirty’ version of the same product, this will not affect the outcome if the subsidy is genuinely only provided to compensate for the additional costs under the emissions trading scheme.

Thus should the provision of emissions permits get to the ‘adverse effects’ stage of analysis under the SCM, this would address the competition issues raised by Howse and Eliason's proposition to some extent, provided that there was in fact no competitive advantage. It would also provide an indication of where ‘surplus’ permits have been used to gain an additional competitive advantage to the disadvantage of other Member industries. However, the adverse effects stage of analysis is only a litmus test as to whether harm has occurred, it does not purport to calculate the amount of that harm.Footnote ⁸⁹ This is instead done under Article 14 in terms of the calculation of benefit.

The calculation of benefit under Article 14

Article 14 becomes relevant once a subsidy is deemed to be actionable under Part III of the SCM Agreement. The issue of the calculation of benefit under Article 14 points to some of the other fundamental difficulties in applying the SCM disciplines to emissions reductions schemes.

As discussed above, where the subsidy is in the form of government revenue foregone (Article 1.1(a)(1)(ii)), the amount of the subsidy in terms of benefit is the amount of revenue that would have otherwise been due.Footnote ⁹⁰ Where the subsidy is in the form of a transfer of funds under Article 1.1(a)(1)(i), Article 14 provides specific measures for calculation where this takes the form of equity capital, a loan, or a loan guarantee.Footnote ⁹¹ The calculation of benefit becomes more complicated under Article 14(d) in the situation where emissions permits have been characterized as the provision of goods by the government under Article 1.1(a)(1)(iii). Article 14(d) provides that the provision of goods shall not be considered as conferring a benefit unless the provision is made for less than adequate remuneration as determined ‘in relation to’ the prevailing market conditions in the country of provision.

Article 14 has traditionally been read broadly. As the chapeau to Article 14 suggests ‘WTO Members have the possibility to select any method that is in conformity with the “guidelines” set out in sub-paragraphs (a)–(d).’Footnote ⁹² Thus, there is a degree of flexibility in the method a Member can choose to calculate benefit, so long as that method conforms with sub-paragraphs (a)–(d).Footnote ⁹³ Article 14(d) clearly defines ‘benefit’ in the situation where a government provides ‘goods or services’ within the meaning of Article 1.1(a)(1)(iii). ‘Benefit’ is where goods are provided for less than ‘adequate remuneration’, anything else ‘shall not be considered as conferring a benefit’.Footnote ⁹⁴ This ultimately frames the whole analysis of benefit under the SCM Agreement. In the context of Article 1.1(b), it means that ‘benefit’ will only exist to the extent that it can be shown that the goods are provided for less than adequate remuneration. In the context of Article 14(d), while a Member is free to choose a method of calculation, the enquiry can only be as to whether there was ‘adequate remuneration’.Footnote ⁹⁵

A further obligation on Member States is that ‘adequate remuneration’ must be determined ‘in relation to prevailing market conditions for the good or service in question in the country of provision’ [emphasis added]. The Appellate Body has interpreted this particular obligation broadly, stating that ‘a restrictive reading of Article 14(d) is not supported by the text of the provision, when read in light of its context and the object and purpose of the SCM Agreement’.Footnote ⁹⁶ In doing so, they focused on the importance of the Article 14 calculation of benefit ‘as a necessary condition for the application of countervailing measures under the SCM Agreement’Footnote ⁹⁷ and in ultimately determining distributive justice between the Member States involved. Following this logic, the Appellate Body interpreted the words ‘in relation to’ as not requiring a Member to conduct a rigid comparison with ‘private prices in the market of provision’: ‘Rather, it must be demonstrated that, based on the facts of the case, the benchmark chosen relates or refers to, or is connected with, the conditions prevailing in the market of the country of provision.’Footnote ⁹⁸ The Appellate Body gave some examples of potentially legitimate alternatives to private prices in the market, including; ‘proxies that take into account prices for similar goods quoted on world markets, or proxies constructed on the basis of production costs’.Footnote ⁹⁹

In that case, prices were artificially low on the domestic market due to government intervention. To restrict the investigating Member to a comparison with that benchmark would produce a smaller amount of ‘benefit’ that arguably did not accurately reflect the ‘adequacy of the remuneration’ and advantage gained by the recipient industry.Footnote ¹⁰⁰ In such a situation, this could mean that ‘the subsidy disciplines in the SCM Agreement and the right of Members to countervail subsidies could be undermined or circumvented when the government is a predominant provider of certain goods’.Footnote ¹⁰¹ This is because a Member would not be able to seek full redress, or be able to countervail the full extent of the ‘benefit’. As the Appellate Body explained:

This, the Appellate Body said, ‘frustrates the object and purpose’ of the SCM Agreement, which includes disciplining certain harmful subsidies and allowing injured WTO Members to seek financial redress to cover the full extent of their losses.Footnote ¹⁰³ In this respect, the SCM Agreement can be seen as attempting to re-distribute financial benefit unfairly gained by a Member's industry, through actionable government subsidies, to those Member's who suffered loss as a result.

In the case of emissions permits, arguably Article 14(d) produces the opposite phenomenon; it risks producing an artificially inflated measure of the advantage or benefit gained by recipient enterprises. In line with the reasoning in Howse and Eliason's proposition, this inflation is due to the fact that a government created national permit market assigns a financial value to permits, while no foreign national or international market exists. Howse and Eliason argue that a true calculation of benefit would need to take account of the additional costs incurred by domestic industry subject to the trading scheme; for instance, by conducting a comparison with a proxy as used by the Appellate Body in US–Softwood Lumber. Thus, arguably, if a comparison between the terms of provision of permits by the government could be made with a proxy constructed on the basis of overall production costs including the costs of emissions, this would provide a more accurate measure. It also ‘relates or refers to, or is connected with, the conditions prevailing in the market of the country of provision’.Footnote ¹⁰⁴ However, to do so requires a fair amount of creativity and departure from the text of Article 14(d). This is because, unlike the case before the Appellate Body in US–Softwood Lumber, Howse and Eliason's proposition does not call for a comparison of price but of conditions of competition between domestic and foreign industry, including regulatory measures increasing production costs. Article 14(d), while interpreted liberally, still limits the calculation of benefit to an inquiry about price and remuneration for goods.Footnote ¹⁰⁵

Nonetheless, much of the Appellate Body's reasoning in terms of the interpretive context and the purpose of Article 14(d) in US–Softwood Lumber could be transposed to support Howse and Eliason's proposition.Footnote ¹⁰⁶ The importance of the Article 14 calculation of benefit ‘as a necessary condition for the application of countervailing measures’Footnote ¹⁰⁷ and in ultimately determining distributive justice between Member States equally applies in the case of emissions permits. The principle being that only those aspects of the provision of permits that provide an actual advantage should be counted as ‘benefit’ and be countervailed as such.Footnote ¹⁰⁸ To do otherwise is to potentially allow Member's to claim countervailing duties in excess of the actual ‘benefit’ gained by industry under a carbon trading scheme. This, like the case in US–Softwood Lumber, would similarly appear to ‘frustrate the object and purpose’ of the SCM Agreement in re-balancing the profit and market gains unfairly made through actionable subsidies and the corresponding losses suffered by competing Members. However, the text of Article 14(d), on its face, simply does not provide any flexibility to take into account factors other than price. In this respect, emissions permits pose an unprecedented challenge to the provisions of the SCM Agreement. They provide an overt example of where the mode of enquiry provided by the SCM Agreement arguably prevents a result consistent with the stated purpose of the Agreement.