CURRENT STATUS AND ISSUES OF THE KOREAN EMISSION TRADING SCHEME The 40th IAEE International Conference CURRENT STATUS AND ISSUES OF THE KOREAN EMISSION TRADING SCHEME Seonghee Kim, Ph.D Institute of Energy Economics, Japan 21 June Singapore

Aim and Scope of Research In January 2015, Republic of Korea introduced a greenhouse gas (GHG) emission trading scheme (ETS). covers about 60% of Korea’s GHG emissions a major policy for cutting GHG emissions by 30% from a BAU (business as usual) level by 2020 under a medium-term GHG emission reduction target (2009) ⇒37％　reduction from BAU level by 2030 This research focuses on the government-industry dispute over the initial emission allocations Background of low permit price and quiet trading market Method Analyze the scheme design features and the background for the deviation of actual emissions from the BAU the compliance result as well as supply and demand situation of emission trading market

Overview of the Korean ETS Sectors subject to regulation five industrial sectors -- electricity utilities, manufacturers, buildings, transportation and waste disposal. Business operators that emit more than 125,000 tCO2e annually Facilities that emit more than 25,000 tCO2e annually direct emissions through fuel combustion / indirect emissions from electricity and heat. Implementation period a five-year target period the first target period (phase 1): 2015-2017 the second period(phase 2) : 2018 - 2020

Overview of the Korean ETS: Allocation (1) Free allocations In order to ease the scheme’s burden on industry, free allocations are planned to account for 100% in the first target period, 97% in the second, 95% or less in the third and later periods (2) Allocation methods Phase 1: the grandfathering method is dominantly applied, while the benchmark method is adopted for some equipment in the cement, oil refining and aviation sectors. Phase 2: expected to expand benchmark method

Overview of the Korean ETS: Flexibility measures (1) Banking(Carry over) Emission permits can be carried over within one target period and to the first year of the next target period, with no limit being set on the carryover. (2) Borrowing borrowing limit is 10% of emissions.⇒raise limit to 20% for Phase 1 banned from borrowing any emission allocations in the next target period. Phase 2 Phase 1 banking borrowing

Overview of the Korean ETS: Flexibility measures (3) Offset credits allowed to use credits gained through domestic or foreign emission reduction Credits from the Clean Development Mechanism (CDM) or any other international standards for up to 10% of their respective emissions International offset credits limited to 50% of above limit, international credits will be admitted from 2020⇒changed to allow partially from 2018

Overview of the Korean ETS: Flexibility measures (4) Market stabilization measures Demand and Supply side control additional allocations from reserves (government-held emission permits set aside for future new equipment), the expansion or reduction of the borrowing and offset credit limits, the establishment of a limit on emission permit holdings. Price intervention the government may set an upper or lower temporary limit on prices.

Deviation of actual emissions from the BAU forecast Baseline of emission allocation Fig 1. Deviation of actual emissions from the BAU forecast Actual emissions rapidly increased from 2009 and far exceeded BAU forecasts. The rapid emission increase from 2009 is attributable mainly to a fast rise in energy consumption due to greatly expanded capacity and output in energy-intensive petrochemical, steel and oil refining industries.

Issues of the Korean ETS the dispute over initial emission Industry complained that allocations under the national allocation plan (announced in 2014) were limited to 1,598 million tons, about 20.9% (about 423 million tons) less than an estimated 2,021 million tons in emission permits required for the first target period. Industry then asked the government to (1) review BAU national GHG emissions, (2) lower the reference price (10,000 won) for market stabilization measures, (3) specify how to provide additional emission permits in view of an emission permit shortage under the original reserves for market stabilization and (4) reconsider the emission reduction target Of the 525 companies subject to the Korean ETS, 243 firms or about 46% filed complaints against the initial allocations.

Issues of the Korean ETS the Korean government reconsidered the 2020BAU forecasts in 2011 and 2013. While the 2013 reconsideration came in response to rapid emission growth from 2010, the government refrained from revising the BAU forecasts for the reason of maintaining international confidence. provided a reference price for stabilizing an emission trading market in response to rapid hikes or drops in emission permit prices. the three-month average price for emission permits: 10,000 won (2014)

Trade volume and permit price

Compliance results for 2015 total balance of supply-demand of emission permits ended as an oversupply of 6 million tons in 2015. Of the 522 companies, 236 companies were short of emission permits It is mainly due to the market stabilization measures such as expansion of upper limit of borrowing from 10% to 20% which was implemented urgently by the government at May 2016, just before the end of compliance period.

Conclusion It is important for the government to give a clear signal to industry that investment for low carbon measure would be beneficial in mid and/or long term. In case of Korean ETS, rapid increase of GHG emissions exceeding initial outlook caused the shortage of emissions permits supply the government implemented market stabilization measures to ease industrial burden, then most of companies subject to shortage of emission permits were able to comply with the scheme in 2015 Considering the low permit price and quite trading market during 2015, the government intervention and frequent rule changes potentially generated policy uncertainty and these might delay companies’ decision making of investment for early reduction

Update Permit price soared up to max 26,500won(around 24USD) Then dropped dramatically to 20,000 won after the government announcement to change ETS rule to slash free allocation from 2018 who has excess carry over

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