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The Emission Trading Scheme in Korea: at a Crossroads

Last year, the Emission Trading Scheme (ETS) was introduced in South Korea. It was expected to reduce greenhouse gases greatly, but a year after its introduction, the system is exposing numerous problems. Especially after the managing department switched from the Ministry of Environment to the Ministry of Strategy and Finance this June, the scheme has been going through a crisis. The Sungkyun Times (SKT) examines the current status of the Korean ETS and explore ways to resolve its problems.

What is the Emission Trading Scheme?

Concept

Greenhouse gas allowance is the right to emit the six major greenhouse gases that cause climate change during a certain period of time, which differs from country to country. The six greenhouse gases are water vapor (H2O), carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), ozone (O3), and chlorofluorocarbons (CFCs).

climatepolicyinfohub.eu/How the ETS Works

The ETS is a system designed to reduce greenhouse gases indirectly. It allocates the allowances to countries or particular businesses and takes a market-based approach in controlling the greenhouse gas emissions. Nations and companies trade greenhouse gas allowances. In fact, the United Nations Framework Convention on Climate Change (UNFCCC) operates the ETS on a national scale, while each nation manages the system in business units.

The Korean ETS sets up the reduction goal by phase in connection with the government’s aim, and each phase takes a three-year term. The ETS undergoes the process of allocation, trade, and calculation. In the stage of allocation, in relation with the government’s reduction goal, the permits are primarily distributed to industrial sectors such as the steel industry. After that, the allowances are distributed to individual companies in the same industry. In the trading stage, corporations deal in permits by the market principle. In the final stage of calculation, the government measures the reduction and trade quantities of every single company.

The international community began the long process towards building effective international and domestic measures to tackle greenhouse gas emissions. Under these circumstances, the ETS was first introduced under the Kyoto Protocol in 2005. Ten years later, the size of the market grew up to be 22 times larger, with the largest one being the European Union (EU)’s. In fact, there are more than 13,000 companies participating in the EU emission market and its trading volume accounts for 74% of the total amount.

Goal and Effect

The goal of the ETS is to reduce greenhouse gas emission in a cost-effective way without weakening business competition. The system is run and activated by “money” trade. Companies that have to pay excessive amounts of money in decreasing emission buy permits from other companies willing to sell since they are much cheaper. On the other hand, corporations that can reduce emissions easily and cheaply will endeavor to lower the emission level as much as possible. As a result, the entire society would achieve the emission reduction at the lowest cost.

This positive effect of the ETS could be found in the case of Tokyo, Japan. In 2004, more than 90% of businesses in the system exceeded the first goal by six to eight percent and 70% of business exceeded the second goal of 17%.

The EU, which has the largest ETS market in the world, is another example. From 1990 to 2012, the gross domestic product (GDP) of 28 nations increased by 45% while the greenhouse gas emission decreased by 19%. Especially after the establishment of the ETS, low-carbon technologies developed remarkably, which led to the cut-down of emission by a large amount.

The Current State of the Korean ETS

On November 15, 2012, the Act on the Allocation and Trading of Greenhouse Gas Emission was finally implemented in Korea. On July 1, 2015, Korea became the first Asian country to establish the ETS on a national level. Unlike Korea, other Asian nations established the scheme in a regional scale. For example, there are three districts that use the ETS in Japan, including Tokyo.

Presently, the Korean ETS market is deactivated. The market has operated for a year but now there is nearly no trade. Until May of this year, two million tons were traded in total, which takes only 0.36% of the allocated amount of allowances. In addition, the managing department recently moved from the Ministry of Environment to the Ministry of Strategy and Finance.

There are several problems that the Korean ETS is experiencing right now.

m.ecomedia.co.kr/The Opening of the Korean ETS Market

Resistance of Companies

According to the Paris Agreement, the Korean government should reduce 37% of greenhouse gas emission by 2030. In order to accomplish this aim, it is inevitable that companies reduce emission by compulsion.

Most companies that refused to accept the ETS feel concerned about the immediate investment of money in the market. They are, in fact, overlooking the high cost caused by direct reduction of greenhouse gases in the future.

Fading of the Original Intent of the Policy

The consistency of the government’s policy has been damaged as a result of occasions like the change of the managing department without convincing reasons. Other countries handle the ETS via their environmental ministries, so changes of policy in Korea go against international trend. On the surface level, the logic is that the Ministry of Strategy and Finance should handle the ETS because trading systems are parts of a financial scheme. In reality, however, companies have persistently pleaded for the mitigation of the restriction by claiming that the system might weaken business competition.

After the managing department had changed to the Ministry of Strategy and Finance, the Korean government started to increase the supply of greenhouse gas allowances without notification. The real intention was to reduce the companies’ burdens by increasing the total allowances in the market, which is accepted as business-friendly. The justification for the government intervention is to stabilize the market. The government used to keep some extra allowances and distribute them to start-up businesses, but the Ministry of Strategy and Finance increased the supply by releasing the spares in the market. Consequently, the cost of each allowance dropped. The ETS, however, was originally a system run by the market mechanism. Therefore, the intervention of the Korean government does not match with the original meaning of the policy, vitiating the real intention.

wifithermostatjudge.com/The Government(=Man) Being Business(=Dinosaur)-friendly

After the government involvement, however, some corporations that had purchased allowances regretted their early purchases because they encountered loss caused by the price slump. The market is expected to be much more rigid because of uncertainties and constant changes of the government policy.

Fairness Issue

There is an equity issue related to the allocation method of the industrial sectors or companies. The allocation method is based on the potential reduction level. Assigning greenhouse gas allowances in a balanced way is a difficult task since there are many variables to consider. The elements include not just emission quantity, but factors like the current state of environmental business and the technology for reducing greenhouse gas.

Korea utilizes a simple arithmetic expression, which is based on past emission quantities, when measuring potential reductions of greenhouse gas emissions. In other words, the Korean ETS lacks the consideration of quality. Considering the quality means regarding the manageability of reduction. For instance, a power plant would need to alter the entire facility to use bioenergy for the reduction of greenhouse gas. Due to the large sum of money which must be expended on the reduction, attempts to reduce greenhouse gases are not efficient.

As a consequence of the deficient allocation method, companies voice complaints and show discontent toward the ETS. The majority of corporations are arguing that they have gotten fewer allowances than others due to a lack of objective standards.

Ways to Improve

The ETS market is expected to expand in the future. China is planning to introduce the system on a national scale by 2017. Moreover, as the international society is gradually concentrating on the reduction of greenhouse gas emission, the ETS is gaining more attention because it is perceived as a cost-effective method. Therefore, it is imperative to improve and develop the current Korean ETS system.

There are some possible solutions that may aid in solving the problems that the Korean ETS faces today.

Reinforcing Promotion Activities

There should be more direct promotion activities held not only towards businesses, but also towards the public. An easy way to lower the resistance of companies against the ETS is to use the public, as companies pay close attention to the voices of consumers. The government must actively promote the effectiveness and necessity of the system to the public and convince them to utilize eco-friendly products. If the consumption pattern changes and the general public prefers eco-friendly goods, corporations would naturally open up their minds as well and begin to participate in the ETS market more actively.

Raise of Fine

The Korean ETS could raise the fine imposed on companies that emit more greenhouse gases than the allowances. The Korean penalty is much lower than the optimum level. The Ministry of Environment had originally suggested \100,000 per ton as the penalty. The government, however, is currently imposing \10,000 as a result of other ministries’ mass complaints. The cost of a greenhouse gas allowances has also been formed around \10,000. Thus, the fine must be remarkably higher than the price of allowance so that corporations could actively take part in the trading market.

Consistency

The government should also be consistent in policy. It is crucial for the government to eliminate excessively business-friendly policies and declare a solemn pledge to reduce greenhouse gas emissions. The government must transmit a strong and coherent signal to corporations, getting rid of their sense of complacency and the belief that the restrictions would be lifted if they fight against it.

The Ministry of Strategy and Finance is a business-friendly organization interested in economic vitality. It is desirable for the government to consider placing the Ministry of Environment in charge of the ETS again. It would be much easier to maintain restrictions, as the Ministry of Environment is the main department responsible for reducing greenhouse gas emissions. Consequently, the government would be able to maintain the policy, regardless of companies’ complaints.

Advanced Allocation Method

It is necessary to establish an advanced allocation method that focuses on considering the quality regarding the manageability of reduction. Benchmarking, which is the method utilized by the EU, could be the alternative. It is a system of looking for the company that emits the least greenhouse gas in the same line of business. After benchmarking a particular company, all the businesses in the industry set up the reduction goal according to the emissions of the benchmark. This method is a realistic and practical way to determine the potential reduction of greenhouse gas emissions.

It has been a year after the introduction of the Emission Trading Scheme in Korea. The Korean system is in danger of becoming a nominal scheme due to many obstacles. If this downward trend continues in the future, Korea would not be able to reach the greenhouse gas target. The government and businesses should not just look after the immediate profits, but recognize the desperate situation and actively participate in the Emission Trading Scheme.

김하은  haeun047@naver.com

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