Korea Emissions Trading System Update COFC Special Roundtable Series I

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Paulina Beasley
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2 K-ETS Key Capping Features Issue Coverage Indirect Emissions (e.g., electricity usage) Phases / Allocation Phase I ( ) Phase II ( ) Phase III ( ) Sectoral Caps Feature Approximately 67% of national emissions (around five hundred twenty entities) Covered (because of low electricity prices) 100% free allocation 97% free allocation Less than 90% free allocation Practically, different emission reduction factors per sector, which was main reason of Phase I allocation lawsuits 2

3 K-ETS Key Trading Features Issue Parties eligible for trade Banking Borrowing Offsets / CDM Feature Only regulated companies + three government owned banks (Industrial Bank of Korea, Korea Development Bank and Korea Export Import Bank) are allowed to trade Unlimited banking of credits (no expiry) restrictions on banking to be introduced Intra-phase borrowing up to10% (20% for Phase I) of credits for certain compliance year Korea domestic CDM credits can be converted to K-ETS credits (up to 10%, except for adipic acid and HFC projects) Offsets from foreign projects by Korean companies to be allowed in K-ETS, beginning in Phase II (2018~) 3

4 K-ETS Year One Emissions Status (excluding Offsets) Responsible Ministry MOLIT MAFRA MOTIE (Seventeen Sectors) Ministry of Environment Sector (Twenty-three) No. of Initial Allocations Companies (A) Cancellations (B) Additional Allocations (C) Certified Emissions (D) Surplus (A-B+C-D) Total ,414,437 5,028,836 6,367, ,650,908-2,897,646 Building 40 4,038,957 45,445-3,911,698 81,814 Aviation 5 1,281, ,465, ,844 Food & Beverages 22 2,626,421 8,578 35,688 2,482, ,719 Wood 7 384,053 1, ,905 48,376 Energy / Power ,524,382 2,491,964 4,362, ,147,589-1,753,022 Generation Steel ,845,389 1,317,872 40, ,850, ,799 Oil Refining 5 19,068,731 17, ,456 18,718, ,628 Paper 42 7,520, ,760 95,198 7,156, ,578 Glass 24 6,093,962 5,330 16,871 5,972, ,138 Fiber 15 4,564,213 68, ,146, ,006 Automotive 26 4,264,325 10,057 29,097 4,063, ,972 Electronics / Electricity 21 3,371, ,076 10,701 2,963, ,426 Shipbuilding 8 2,662,493 14,547-2,529, ,574 Machinery 19 1,359,234 8, ,270,840 80,196 Mining 2 200, ,526 15,689 Petrochem 86 47,907, , ,409 49,369,130-1,537,509 Cement 23 43,541,192 14,787 81,135 44,547, ,494 Semiconductor 20 10,570,609 23, ,824 11,729, ,891 Display 5 10,042,789 18,502 20,757 10,315, ,843 Non-ferrous Metal 24 6,800,781 5,298 4,254 7,616, ,114 Telecommunications 6 3,091,063 8,229-3,127,543-44,709 Waterworks 3 770,296 51, ,605-25,791 Waste 44 8,884,584 36,906 27,209 9,002, ,344 (Unit: tco 2 e) 4

5 Credit Prices and Trade Volume Trade Volume (tco2 e ) Closing Prices (KRW) May July Sept. Nov. Jan. Mar. (Source: Money Today, ews/mwview.php?no= &type=4&code=w0302&mc1 Lack of liquidity contributed to high credit prices, despite overall long market Trade volume was only 2.3% of total allocations during year one, due to lack of liquidity (in year one of the EU ETS, trade volume was 34.4% of total allocations) Offsets led market (84% of trade volume during Year I) 5

6 Issue I Introduction of seven new coal power plants put 2020 Target / Phase II Cap up in the air 900 2GW 2GW 3GW ETS Phase I ETS Phase II Contemplated new reduction trajectory 2030 domestic emission target 2030 emission target, reflecting int l offsets % by int l offsets (96MtCO2e) 37% reduction from 2030 BAU BAU (announced in Jan. 2014) BAU (announced in Jun. 2015) Target Emissions (announced in Jan. 2014) 2030 Emission Target (Domestic) 2030 Emission Target (inc. Intl' Offsets) Fate of 2020 target (543Mt, announced in 2009) at stake, due to coal additions 2030 GHG emissions target (536 Mt) - NDC 6

7 Issue II Compensation scheme undermining role of carbon price in power sector Pursuant to the Korea Power Exchange s Power Market Operation Rules, Emission Trading Costs for most power plants are compensated at a Standard Price, which roughly means the annual average credit price The 2015 KAU Standard Price was KRW 16,309/tCO 2 e, while the 2015 Offset Standard Price was KRW 14,466/tCO 2 e Funds for compensation (i.e., carbon credit prices) come from KEPCO, and are not directly or immediately shifted to consumer power prices Compensation schemeis undermining role of carbon price, as power generation companies lack strong motivation to reduce emissions Introduction of compensation scheme also reveals how the current power market structure proliferates coal power i.e., KEPCO group monopoly / dominance over power market and Korea Power Exchange (power market operator / rulemaker) allows such kind of rules to be introduced KEPCO subsidiaries generate 85% of power in Korea (mostly coal and nuclear) KEPCO subsidiaries collectively hold more than 85% voting right in Korea Power Exchange (power market operator / rulemaker) governing body 7

8 Issue III Liquidity Shortage / Conclusion Surge in credit prices, mainly attributable to lack of liquidity, lead to implementation of market stability measure in June 2016 Main reasons of liquidity shortage : (i) not allowing third party market makers;; (ii) unrestricted banking Restrictions on banking will begin soon, during Phase I However, during Phase I or Phase II, no clear plans to allow third party market makers, other than three government owned banks Conclusion Despite the issues described, the K-ETS is one of the most well working Korean climate policies, as it has set a price on carbon. The main problem of Korean environmental / climate policy is the absence of a price on air pollution, not a carbon price. 8

Abatement under the EU ETS? Evidence from selected sectors

ÖSTERREICHISCHES INSTITUT FÜR WIRTSCHAFTSFORSCHUNG AUSTRIAN INSTITUT OF ECONOMIC RESEARCH Abatement under the EU ETS? Evidence from selected sectors, Daniela Kletzan-Slamanig, Angela Koeppl 32 nd International