The Presidential Decree implementing the Republic of Korea's emissions trading scheme (ETS) received official approval on
13 November 2012, paving the way for the commencement of the ETS in 2015.
The ETS represents an important step in Korea achieving its goal to reduce greenhouse gas (GHG) emissions by 30% from projected levels by 2020.
The Act on Allocation and Trading of Greenhouse Gas Emissions Allowances (ETS Act), was passed by the Korean Parliament on 2 May this year without a dissenting vote, demonstrating bipartisan support for the Legislation. The passage of the ETS Act was followed by the draft Presidential Decree (Decree) released on 23 July, which set out the detailed rules governing the scheme. The latest decision affirms the Decree without making major changes to the rules set out in it.
The ETS Act is the latest step in a wider strategy to transform Korea's economy into a world leader in green growth and development. Underpinning this strategy is the Green Growth Act passed in 2010, which aims to simultaneously lower the country's emissions while transforming its economy to adopt green technology and green industries as core engines for economic growth.
While the ETS does not commence until 1 January 2015, Korea has pre-existing GHG emission reduction obligations on certain entities known as the Emissions Target Management Scheme (ETMS), which commenced January this year. The ETMS was established to serve as a transitional measure under the green-growth strategy to allow industry to familiarise themselves with the relevant reporting obligations and to allow a smooth transition to an economy-wide ETS.
Operation of the ETS
Commencing on 1 January 2015, the ETS will place an economy wide cap on the GHG emissions of approximately 490 of the country's largest emitters. Liability will be triggered by company-level GHG emissions of 125 000 ktCO2-e or emissions by a single facility of 25 000 ktCO2-e.
The first phase of the scheme will be from 2015 to 2017, with the first surrender date falling in 2016. The second phase will be from 2018 to 2020 and the third phase from 2021 to 2026.
During the first phase of the ETS, liable entities will be allocated 100% of their emissions permits for free based on their average emissions between 2012-2015. Therefore demand for units will only be generated by entities who exceed their predicted emission levels. This free allocation level will drop to 97% during the second phase from 2018 to 2020 and below 90% in the third phase from 2021. However, certain key emissions-intensive trade-exposed industries are likely to be exempt from this reduction in free allocations for at least the first two phases of the scheme.
A unique characteristic of the Korean ETS is its exclusion of all international units during the first two phases of the scheme. Even during the third phases of the scheme, post-2020, international units will only be allowed to be used to meet up to 10% of a liable entity's surrender obligations and the volume must not exceed the number of domestic offsets used.
While this policy excludes the vast majority of certified emissions reductions (CERs) under the Clean Development Mechanism (CDM), it does not prevent liable entities from surrendering CERs generated by CDM projects located in Korea, of which there are currently 68 registered, expected to produce 20 million CERs annually. While this reflects a strong commitment on the part of the Korean Government to transition to a low carbon economy, it does have the potential to increase the price of units in the scheme. However, the high levels of freely allocated units during the first two phases are likely to counteract this concern. A maximum charge of approximately USD$88 for a failure to surrender sufficient units also creates a price cap within the scheme.
Further regulation is expected in the beginning of 2013, which will detail the allocation strategy for emissions-intensive trade-exposed industries as well as other details of the scheme.
The timing of the commencement of the Korean ETS in 2015 coincides with the continuation of the EU ETS through to Phase III, the expected commencement of a number of pilot ETS in China and the transition of the Australian ETS to a flexible price period linked to the EU ETS. The decision to exclude international units until at least 2021 limits Korea's participation in the international carbon market but does provide the opportunity for further investment in the domestic carbon offsetting and green technology industries.