Korea’s approach to overcoming difficulties in adopting the emission trading scheme

Abstract

In this study, we aim to describe the background for design characteristics of emissions trading schemes (ETS) in developing and emerging economies, with a particular focus on the case of Korea. These countries may face unique hardships such as fierce opposition from industry sectors, the presence of a power imbalance between the Ministry of Environment (MOE) and ministries that are in charge of supporting output growth, and the absence or incomplete development of financial markets and auctioning mechanisms. To overcome these hardships, the Korean government legislated laws that defined timelines for every stage of ETS development, established a strategic governance architecture to make up the weak position of the MOE, offered strong market-stabilizing measures focused on maintaining the allowance price below a certain level, and provided support packages to make the low-carbon transition easy by compensating for losses caused by the Korea Emissions Trading Scheme (KETS). Such policy instruments that made adoption of KETS easier could be obstacles to making it efficient.

Policy relevance

In the process of adopting a cap-and-trade system, both a developing economy and an emerging economy may face unique hardships, such as strong opposition from industry sectors, the presence of a power imbalance between the Ministry of Environment (MOE) and ministries that are in charge of supporting output growth, and the absence or incomplete development of financial markets and auctioning mechanisms. To make up for the weak base of Korea’s ETS, the government legislated laws that defined timelines for every stage of the ETS development, established a strategic governance architecture to make up for the weak position of the MOE, offered strong market-stabilizing measures focused on maintaining the allowance price below a certain level, and provided support packages to make the low-carbon transition easy by compensating for losses caused by the Korea’s ETS. Korea’s experiences can be shared with other developing economies that are considering adoption of a cap-and-trade scheme.

Keywords:

• carbon emissions trading
• governance
• institutional framework
• legislative processes

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 BAU is defined as the normal execution of standard functional operations under the precept that there is no effort to reduce GHG emissions. Korea's GHG emissions reduction aspiration is a 30% reduction of the expected BAU emissions level in 2020.

2 The Korea Chamber of Commerce and the Federation of Korean Industries argued that the government should not adopt the KETS until both China and Japan, Korea's competitors in international markets, put a price on carbon. They were concerned about possible negative impacts of the KETS on international price competitiveness. As reported in the first Master Plan conducted by the MOSF in 2014, the scope and the level of negative impacts vary to an extreme extent in different studies.

3 The number of news articles reporting debates on the KETS was largest in the summer of 2014.

4 Although the industrial sector did not concede to KETS implementation, the MOSF proceeded with the Allocation Plan. To persuade the industrial sector, the MOSF and the MOE decided to further decrease the cap reduction burden on KETS businesses by an additional 10% from the previously set cap.

5 There existed financial and tax supports for installing low-carbon equipment and investments to improve energy-efficiency (specifically, actions from small- and medium-sized enterprises).

6 Provisions and policy implementation shall be transparent and temporary; they should not discourage any motives to invest in low-carbon options; they should be implemented in a fair manner; negative impacts of the KETS on low-income households should be taken into account; auction revenues should be used for funding these support policies; policy instruments should be prepared to reduce compliance burdens of small- and medium-sized enterprises.

7 Criteria are listed in Table 2.

8 The Korea Development Bank, Industrial Bank of Korea, Korea EXIM Bank and Korea Finance Corporation.

9 The exchange rate provided is for the date of 29 January 2016, where 1000 KRW equals 0.76 Euros.

10 Some consider the EU ETS a multi-level governance structure where the EU Commission took the initiative for the EU ETS, and the Commission and the European Parliament shaped the scheme, with input from non-state actors at the EU level (Birger & Wettestad, 2008/2015).

Additional information

Funding

This work was supported by Kyung Hee University research grant [20150643].