An Overview of the Emission Trading Scheme of Korea

Transcription

1 An Overview of the Emission Trading Scheme of Korea Suh-Yong Chung *) Chris Salatiello **) Bora Youn ***) Abstract In the last few years, the deadlock at the international climate negotiations has been evident and countries with a realization that top-down approach to climate change is almost impossible to achieve are considering various domestic measures to address climate change. The emissions trading scheme is one of many market mechanisms that countries are implementing after the EU, Australia and New Zealand. With the passing of legislation for a national emissions trading scheme on May 2, 2012, Korea chose an emissions trading scheme as the main mitigation policy in achieving its voluntary mid-term reduction target of 30% below business-as-usual (BAU) levels by Korea announced its voluntary mid-term reduction target under the President Lee Myung-bak s Low Carbon Green Growth vision. Now, with the emissions trading scheme to take effect in 2015, Korea is setting precedents as the first among developing countries and also in Asia to set voluntary reduction target and implement the emissions trading scheme. The legislation, the Act on the Allocation and Trading of Greenhouse Gas Emissions Allowances, lays out a general framework of the scheme. Based on the legislation, more specifics on the scheme are determined through a Presidential Decree. On November 15, *) Associate Professor, Division of International Studies of Korea University, Anam-dong Seongbuk-gu, Seoul , Korea, mahlerchung@gmail.com **) Assistant Professor, Ajou Law School, San 5, Woncheon-dong, Yeongtong-gu, Suwon , Korea, csalatiello@yahoo.com ***) Researcher, Center for Climate and Stainable Development Law and Policy (CSDLAP), Sajik Apt. #31, 1-8 Sajik-dong, Jongno-gu, Seoul , Korea, bora.youn110@gmail. com An Overview of the Emission Trading Scheme of Korea 7

2 2012, the Enforcement Decree of the Emissions Trading Scheme was approved by the Cabinet. In this paper, the specifics of Korea s emissions trading scheme will be introduced. Keywords: Emissions Trading Scheme( ETS), Low Carbon Green Growth, Target Management System 8 ASIAN JOURNAL OF CLIMATE CHANGE AND SUSTAINABLE DEVELOPMENT: Law, Economics and Politics October 2012 Volume 1 Number 2

3 Introduction On May 2, 2012, legislation for a national emissions trading scheme (ETS) passed Korea s National Assembly with bipartisan support. The scheme, which will be implemented in 2015, will be the main mitigation policy in achieving Korea s voluntary mid-term reduction target (30% below business-as-usual (BAU) levels by 2020). Among developing countries, Korea is the first to implement a nation-wide market mechanism to reduce emissions. Despite public fears that such mechanism would hurt the Korean economy, Korea implemented the ETS because of long-term benefits Korea could gain from taking early action. With the introduction of the ETS, Korea plans to create markets for green business ahead of other countries. The legislation, the Act on the Allocation and Trading of Greenhouse Gas Emissions Allowances (hereinafter Emissions Trading Act ), is not as specific on the policy design of the ETS compared to legislation of other emissions trading schemes, such as the EU ETS or the Waxman-Markey bill in the United States. Instead, the Government planned to establish the specifics of the emissions trading scheme through a Presidential Decree. On November 15, 2012, six months after the Emissions Trading Act was passed, the Enforcement Decree of the Emissions Trading Act was approved by the Cabinet. In this paper, the details of Korea s national emissions trading scheme will be introduced. Background of Emissions Trading Scheme On the occasion of the 60th anniversary of the founding of the Republic of Korea on August 15, 2008, President Lee Myung-bak proclaimed Low Carbon Green Growth as a national vision that will take Korea into the next 60 years. In order to oversee all Green Growth initiatives, the Presidential Committee on Green Growth was established on February 16, The Committee consists of relevant ministers, distinguished experts and stakeholders from the private sector. An Overview of the Emission Trading Scheme of Korea 9

4 To realize a low carbon economy, Korea undertook a study on its mitigation capabilities and announced its voluntary mid-term reduction target 30% below BAU levels by This target was also announced at the United Nations climate summit in Copenhagen. Korea became the first non-annex I country of the UNFCCC to set the maximum recommended reduction target voluntarily. On April 14, 2010, the Framework Act on Low Carbon, Green Growth (hereinafter Framework Act ) entered into force. The Framework Act establishes the national legal basis for Korea s Low Carbon, Green Growth policy by creating the legislative framework for mid-term and long-term reduction targets, with an ultimate goal of meeting Korea s non-binding pledge of a 30% reduction compared to the businessas-usual baseline. The Framework Act did not by itself establish an ETS, but set the groundwork for further legislation to create an ETS. Specifically, Article 46 of the Framework Act allowed the Government to establish market mechanisms in order to meet the national greenhouse gas emission reduction targets. 1) With the introduction of the Emissions Trading Act in 2012, Korea established a policy mechanism to reduce greenhouse gas emissions. In the lead up to a mandatory ETS, the Korean Government established a Greenhouse Gas and Energy Target Management System (hereinafter Target Management System ) in ) Based on the Framework Act, the Target Management System is subject to the public sector including central administrative 1) Article 46 (Introduction of Cap and Trade System) The Government may operate a system for trading emissions of greenhouse gases by utilizing market functions in order to accomplish its target of reduction of greenhouse gases. The system under paragraph (1) shall include a system for setting a limit on emission of greenhouse gases and for trading emissions and other internationally recognized trading system. The Government shall, whenever it implements the systems under paragraph (2), consider international negotiations related to climate change and shall take necessary measures in relation to controlled entities under Article 42 (5), if the State s international competitiveness will be greatly affected. The methods of allocation of the allowable quantity of emission, of registration and management, and of establishment and operation of an exchange for implementing the system under paragraph (2) shall be provided by another Act separately. 2) Refer to the website of Greenhouse Gas Inventory & Research Center of Korea, eng/main.do?language=en_us, for more information regarding Target Management System. 10 ASIAN JOURNAL OF CLIMATE CHANGE AND SUSTAINABLE DEVELOPMENT: Law, Economics and Politics October 2012 Volume 1 Number 2

5 agencies, local governments, public institutions, local public corporations, public universities and public university hospitals with emissions above the 25,000 ton threshold (the threshold will be adjusted to 20,000 ton starting from 2012 and 15,000 from 2014). The subjects, which account for more than 60% of national greenhouse gas emissions, are required to set greenhouse gas reduction targets and meet the manually comparing with the average annual greenhouse gas emission from 2007 to The Target Management System does not include credits or trading of emissions.. Covered entities that exceed their annual cap are simply required to pay a one-off penalty. The supervising agency for the Target Management System is the Ministry of Environment, which cooperates with and receives support from other relevant ministries, such as the Ministry of Knowledge Economy, the Ministry of Food, Agriculture, Forestry and Fisheries, and the Ministry of Land, Transport and Maritime Affairs. In 2011, 470 entities participated in the Target Management System. This number is expected to increase for the year of 2012 to approximately 580 due to the lower threshold. According to the Emissions Trading Act, business facilities that emit more than 25,000 tons of greenhouse gas annually are required to participate in the emissions trading scheme. 3) In other words, most entities that are subject to the current Target Management System would also have to participate in the emissions trading scheme starting from 2015.To avoid imposing both programs on entities at the same time, those entities that are covered under the ETS will be opted out of the Target Management System. This means that 470 entities that participated in the Target Management System in 2011 will be only subject to the ETS starting from Entities that emit less than 25,000 tons of greenhouse gas will only participate in the Target Management System even after the ETS is implemented. The Target Management System will enable a much smoother transition for corporations and public entities leading up to the enforcement of the emissions trading scheme because of accumulated data and knowhow in reporting, monitoring and achieving reduction targets. In addition, government 3) Article 8 of the Emissions Trading Act An Overview of the Emission Trading Scheme of Korea 11

6 agencies will have also accumulated enough experience in dealing with covered entities and cooperating with each other to efficiently implement and manage the ETS. Emissions Trading Scheme The Emissions Trading Act sets down important guidelines and principles the Government must follow in designing the ETS system. First, the Government must comply with the principles of the United Nations Framework Convention on Climate Change (UNFCCC) and any subsidiary agreement. This includes not only the Kyoto Protocol but any agreements that come out of the twotrack negotiations currently underway in the UNFCCC. Second, the Government must consider the impact the ETS will have on the international competitiveness of Korean industries. This could be both negative and positive impacts the impact on increasing costs for certain sectors, and the positive impact the ETS will have on other sectors, such as renewable energy or climate finance. Third, the Government must ensure the emission allowances are traded in a fair and transparent manner. Finally, the Government must design the ETS and implement other policies with an eye towards linking Korea s ETS with other international carbon markets, including those of the UNFCCC, national/regional markets such as New Zealand s emission trading scheme or the European Union s emission trading scheme, or non-national emission trading schemes, such as the Regional Greenhouse Gas Initiative or the State of California s emissions trading scheme. In regards to establishing the specifics of the emissions trading scheme, the Government decided to draw up the Enforcement Decree of the Emissions Trading Act. The Enforcement Decree was approved by the Cabinet on November 15, The overall process of the ETS is presented below 12 ASIAN JOURNAL OF CLIMATE CHANGE AND SUSTAINABLE DEVELOPMENT: Law, Economics and Politics October 2012 Volume 1 Number 2

7 [Source: Ministry of Environment, 2012.] Plans Chapters 2 and 3 of the Emissions Trading Act and the Enforcement Decree are dedicated to establishing two more plans to implement the emissions trading scheme. The first is the Master Plan for the Emissions Trading System (hereinafter Master Plan ), which is scheduled to be implemented by December, The second plan is called the Plan for Allocation of National Emissions Allowances (hereinafter An Overview of the Emission Trading Scheme of Korea 13

8 Commitment Period Plan ). It will be established by the Ministry of Environment by June, a. The Master Plan for the Emissions Trading System ( Master Plan ) The Master Plan will cover the long and medium-term objectives and the management of the ETS in ten-year increments. 4) Every five years, a new Master Plan will be created. In other words, the existing policy in the previous Master Plan will be reviewed every five years and then additional policy for the five years after that will be incorporated into the new Master Plan. The Master Plan will also review the current status and projections of domestic and international emission trading markets, the basic goals of the ETS, the operation of specific commitment periods, changes in Korea s economy, the volatility of the ETS and commodities markets, support for exposed sectors, and the potential for linking with other emission trading schemes. The Master Plan is reviewed and approved by the Presidential Committee on Green Growth. b. Plan for Allocation of National Emissions Allowances ( Commitment Period Plan ) In addition, the Government will formulate a plan for the allocation of emission allowances for each commitment period ( Commitment Period ), which is then approved by both the Presidential Committee on Green Growth and the Cabinet meeting. 5) The first and second commitment periods will run for three years each. The first commitment period is scheduled to begin on January 1, These two commitment periods will act as the learning-by-doing phases of developing Korea s ETS, and allowing the Government to adjust the policy. Thereafter, commitment periods will be for five years. Each Commitment Period Plan will include: 4) Article 4 of the Emissions Trading Act 5) Article 5 of the Emissions Trading Act 14 ASIAN JOURNAL OF CLIMATE CHANGE AND SUSTAINABLE DEVELOPMENT: Law, Economics and Politics October 2012 Volume 1 Number 2

9 total emission allowances for the Commitment Period and for each Compliance Year within that Commitment Period; what industrial sectors will be included in the ETS; procedures and standards for allocating emission allowances for each sector and type of business; methodology for recognizing early reductions; reserve allowances; carry-over and borrowing of emission allowances; guidelines for offsets. The Government also has the ability to revise a Commitment Period Plan due to sudden changes in circumstances in Korea s economy or in the global economy, or in significant advances in new technology. Prior to any revision of a Commitment Period Plan, the Government must hold a public hearing. The first and second Commitment Periods are established by the Act. The first Commitment Period will begin on January 1, 2015 and end December 31, The second Commitment Period will run from January 1, 2018 to December 31, From 2021, Commitment will be every five years. Covered Business Entities The Competent Authority 6) will designate the specific entities or businesses to be included in the ETS for each Commitment Period five months before that Commitment Period is to begin. Covered entities will be: a business entity that had a total amount of greenhouse gas emissions exceeding a three-year average of 125,000 tons of CO2-eq; a business facility that produced a three-year average of at least 25,000 tons of CO2-eq; 6) According to Article 8 of the Emissions Trading Act, Competent Authority refers to the head of the central administrative agency specified by Presidential Decree. In the Enforcement Decree, the Ministry of Environment has been assigned as the Competent Authority by Article 6. An Overview of the Emission Trading Scheme of Korea 15

10 any other business or facility that is under the oversight regulation of the Framework Act and opts-in to the ETS. 7) During the middle of a commitment period, the Competent Authority may designate business entities as new entrants based upon new facilities opening or changes or expansion of existing facilities. Facilities or businesses that are designated as new entrants start participation in the ETS the year following their designation. Among covered entities, trade-intensive industries and industries where the production price significantly increases from the implementation of the ETS will be given free allocations. Further, the Government may provide direct financial support, tax incentives, or assistance for the installation of emission reduction equipment at facilities covered by the ETS. Preference is given to projects implemented by small or medium-sized enterprises. Part of the financing for the direct assistance will come from sale/auction of allowances and penalties paid. Allocation During the drafting of the Emissions Trading Act, the allocation rate of free allowances was the most controversial issue. Most industries, fearing increased costs due to the extra carbon price, argued for smaller portion of allowances to be auctioned. In response to this, for trade-intensive industries or industries where the price of production significantly increases, the Government will allocate free allowances. 8) Based on the Enforcement Decree, the Government decided on 100% free allocation to eligible industries for the first Commitment Period and 97% for the second Commitment Period. From 2021, the allocation rate of free allowances will be decided through the Presidential Decree and is expected to be around 90%. 9) a. Allocation Committee 7) Article 8 of the Emissions Trading Act 8) Article 12 of the Emissions Trading Act 9) Article 13 of the Enforcement Decree 16 ASIAN JOURNAL OF CLIMATE CHANGE AND SUSTAINABLE DEVELOPMENT: Law, Economics and Politics October 2012 Volume 1 Number 2

11 An Emissions Allowances Allocation Committee ( Allocation Committee ) will be established within the Ministry of Strategy and Finance and chaired by the Finance Minister.10)The Allocation Committee will consist of approximately 20 committee members from all relevant ministries and experts that get appointed by the Finance Minister. The Allocation Committee will be responsible for creating plans for the allocation of allowances, measures for market stabilization, measuring, reporting, and verifying of emissions, linking with other carbon markets, or any other necessary and related issue. b. Application for Allocation of Emissions Allowances The Competent Authority shall allocate all emissions allowances to each business entity for the entire commitment period in accordance to the allocation plan. For new entrants, allowances are allocated from the Compliance Year immediately after the year the new entrant was designated. Allocation of allowances will be done in consideration of the business s demand, any early reductions, the trade intensity or energy intensity of the business sector, the level of technology and international competitiveness of the business sector, the expectation of a specific business s contribution to national greenhouse gas reduction targets, and overall fairness. The Government can either sell or auction allowances, or give them away for free or some combination thereof. The ratio of free to purchased/auctioned allowances will be determined based on the following four factors: international competitiveness of relevant industries; changes in the international climate change regime; impacts on the national economy; evaluations of the previous commitment period. Based on the above factors, the Government chose the following business sectors 10) Article 7 of the Emissions Trading Act An Overview of the Emission Trading Scheme of Korea 17

12 to be eligible to receive free allocation of allowances: 11) industries with trade intensity 12) higher than 30%; industries with the rate of production cost 13) higher than 30%; industries with trade intensity higher than 10% and a rate of production cost higher than 5%. Specific sectors that will be eligible for free allocation are to be announced in 2014 when the Commitment Period Plan is finalized. The steel and electronics industries are most likely to be included. For each Compliance Period, each covered business must file an application for allocation of allowances within four months from the beginning of each Commitment Period. The application must include the following: total number of allowances for the entire Commitment Period; total allowances for each Compliance Year; verified emission data for the preceding three years; plans for any expansion of changes to facilities during the entire Commitment Period; plans for any consumption of raw fuel or raw materials; plans for introducing new facilities and technologies to reduce greenhouse gas emissions, along with the estimated reductions as a result. Business entities that reduced emissions before entering the ETS may receive credit for early emission reductions. The early reduction of emissions must be verified by 11) Article 14 of the Enforcement Decree 12) Trade intensity = (annual average exports within the base period+ annual average imports within the base period) / (annual average sales within the base period + annual average imports within the base period) 13) The rate of production cost = (annual average greenhouse gas emissions within the base period + price of allowances within the base period) / annual average value-added production output within the base period * base period: 3-year period that starts 5 years before every Commitment Period * The price of allowances within the base period will be decided in the Commitment Period Plan considering domestic/foreign carbon prices and marginal abatement cost of reducing emissions. 18 ASIAN JOURNAL OF CLIMATE CHANGE AND SUSTAINABLE DEVELOPMENT: Law, Economics and Politics October 2012 Volume 1 Number 2

13 an independent, specialized third party. The reductions can either be reflected in the allocation plan or in the allowances allocated for each Compliance period. The number of early reduction allowances will be limited by a ratio in proportion to that entity s total allowances. The Government may, on its own initiative or in response to an application by a business entity, adjust allocations to a business entity either when total emission allowances increase as a result of revisions to the Allocation Plan or when changes in business conditions warrant an adjustment. This includes when a business closes or opens facilities, changes its business plans for the commitment period, changes in the emission intensity of new products, or other factors. Conversely, the Government may also revoke allowances when they are obtained by fraud or other criminal means. c. Allowance Reserve The Competent Authority will also maintain a reserve of allowance sat a certain ratio of total allowances for the commitment period. The size of the allowance reserve is yet to be decided. Allowances in the reserve will be given to new entrants or can be released to the general allowance trading market for market stabilization. Trading In order for covered business entities to trade emission permits, entities must apply for an electronic trade account in the Emissions Allowance Register. 14) All transactions will be carried out electronically. When the Competent Authority receives the application, it should register the applicant s trade account to the Emissions Allowance Register. Once any trade activities take place, entities must submit a trade declaration form 14) Article 24 of the Enforcement Decree An Overview of the Emission Trading Scheme of Korea 19

14 electronically. 15) In the trade declaration form, the contents should include: type and amount of emissions permits traded; notarized trade agreement between transferor and transferee. The Competent Authority will check two things: 1) whether the parties involved in the trade according to the trade declaration form have trade accounts in the emissions allowances register and 2) maximum and minimum balance of allowances that needs to be maintained in trade accounts. Emission Allowances Exchange The Competent Authority will either select or create an emissions allowances exchange in order to promote a fairer price for emissions allowances and greater stability and efficiency in trading allowances. 16) The exchange will act as a quasigovernmental entity and prepare its own regulations for the exchange. For any matters that are essential to the ETS program, the organization will also have to get prior approval from the Competent Authority, including for: membership to the exchange; methods of trading; clearing trades and transactions; disclosure of information; monitoring of markets; mediation of disputes. The exchange will be governed by existing securities and trading laws and regulations related to market manipulation, fraudulent market transactions, and insider information. Civil and criminal penalties can apply to individuals and corporations that are convicted in engaging in illegal market activities. The emissions allowances exchange is unlikely to be created from scratch. 15) Article 25 of the Enforcement Decree 16) Article 26, 27 of the Enforcement Decree 20 ASIAN JOURNAL OF CLIMATE CHANGE AND SUSTAINABLE DEVELOPMENT: Law, Economics and Politics October 2012 Volume 1 Number 2

15 Instead, there are two major exchanges, Korea Exchange (KRX) and Korea Power Exchange (KPX), competing to be selected as the national emissions allowances exchange. 17) Korea Exchange (KRX) has emphasized its know-how in market operation (trading marketable securities and derivatives) and established infrastructure as its strengths. With this know-how, KRX will be able to allow fair and transparent trade of emission allowances. However, there is a high chance of speculation when emissions allowances are traded based on methodology used for financial transactions. KRX also lacks insight in measuring/monitoring greenhouse gas emissions and commodities market. On the other hand, Korea Power Exchange (KPX) argues that it has the ability to measure and verify greenhouse gas emissions. Since the power sector is responsible for most of national greenhouse gas emissions, KPX emphasizes the importance of linkage between the Emission Allowances Exchange and the power sector. In this sense, KPX has advantages because it has the capacity to monitor greenhouse gas emissions of each power company real time. However, KPX is under competitive disadvantage when it comes to know-how in market operation and infrastructures. KRX, headquartered in Busan, is supported by the Financial Services Commission and the city of Busan. After Busan was designated as a center for financial derivative market by the Korean Government, the city of Busan submitted a development plan in 2008 that included the hosting of the Emission Allowances Exchange. In February, 2009, the Presidential Committee on Green Growth suggested Busan as a hosting city of the Emission Allowances Exchange. Since emission allowances are mostly traded in the form of derivatives (futures and options), the city of Busan argues that it makes sense for KRX, which already has know-how and infrastructure, to host the Emission Allowances Exchange. KPX is supported by the Ministry of Knowledge Economy and the city of Kwangju. KPX is planning to relocate to Kwangju, Jeollanamdo Joint Innovation City. 17) Samsung Economic Research Institute (SERI). The implications and challenges of the establishment of Emission Allowances Exchange. SERI Economic Focus No An Overview of the Emission Trading Scheme of Korea 21

16 The province of Jeollanamdo, including Kwangju, emits the most greenhouse gases in Korea, but also is a region where renewable energy generation is the highest. The city of Kwangju forecasts that 60-70% of tradable emission allowances will most likely be generated from the power sector. With this in mind, the city of Kwangju strongly argues that KPX, which has electricity market operation system, skilled personnel, and infrastructure, should be selected as the Emission Allowances Exchange. The selection of the Emission Allowances Exchange is planned to be decided by the end of When the Emissions Trading Act was passed, the main supervising government agency was not decided so competition between KRX and KPX was quite heated. 18) However, ever since the Ministry of Environment was appointed to be the main supervising government agency of the ETS, many experts believe that KRX has competitive advantage over KPX. 19) Measures for Market Stabilization The Government may take action to stabilize the markets in the following three circumstances: the price of allowances for six consecutive months exceeds the average price during the preceding two years by three times; trading volume within a month increases by more than twice the volume of the same month in the last two years and the price of allowances within a month either more than doubles or decreases by 60% compared to the price of the same month in the last two years; any other reason or event established by the Presidential Decree to cause market volatility. 20) Decisions to take action under the above scenarios are made by the Allocation 18) A heated competition between KRX and KPX over carbon market, MK News, news.mk.co.kr/newsread.php?year=2012&no= (in Korean) 19) Ministry of Environment selected as the main supervising government agency of the ETS, Green Daily, (in Korean) 20) Article 30 of the Enforcement Decree 22 ASIAN JOURNAL OF CLIMATE CHANGE AND SUSTAINABLE DEVELOPMENT: Law, Economics and Politics October 2012 Volume 1 Number 2

17 Committee. When any of the above scenarios arises, the Allocation Committee can take up to three response measures: allocate additional allowances from the allowance reserve, up to 25% of allowances in the reserve; set or change the maximum (less than 150% of allowances allocated in the corresponding Compliance year) or minimum (more than 70% of allowances allocated in the corresponding Compliance year) amount of allowances that can be held by one entity or person; use any other internationally accepted method designated by the Presidential Decree to reduce market volatility, including changing limits on borrowing, offset usage, and setting temporary maximum or minimum price of allowances. Once the market is stabilized, the Competent Authority should terminate all market stabilization measures after getting the approval from the Allocation Committee. Surrender of Allowances Business entities must surrender allowances equal to their certified emissions within six months of the end of each Compliance Year. In the declaration form, entities must include: the registration number of its emissions allowances register; the amount of certified emission allowances according to Article 25 of the Emissions Trade Act; the amount of certified emission allowances borrowed according to Article 28 of the Emissions Trade Act; the amount of offset to be surrendered according to Article 29 of the Emissions Trade Act. 21) Banking and Borrowing of Allowances 21) Article 35 of the Enforcement Decree An Overview of the Emission Trading Scheme of Korea 23

18 Allowances can be freely carried over from Compliance Year to Compliance Year within the same Commitment Period. For carrying over allowances from one Commitment Period to a subsequent Commitment Period, prior approval from the Competent Authority is required. Business entities may also borrow allowances from future Compliance Years within the same Commitment Period upon approval from the Competent Authority, and only if the business needs to do so in order to surrender emission allowances to meet its surrender obligations. The maximum amount of allowances that can be borrowed is 10% of surrender obligations. 22) Emission allowances for a Compliance Year that are not surrendered or carried over to the next Compliance year are invalidated six months after the end of the Compliance Year. Offsets Offsets can be used indirectly for compliance purposes of the ETS. Although offsets themselves cannot be submitted for compliance obligations, offsets generated from external projects can be exchanged for special emission allowances called offset emission allowances. Offset emission allowances can be submitted for compliance purposes up to 10% of surrender obligations. 23) To encourage domestic reduction efforts, the offsets that were generated from foreign offset projects should not exceed 50% of offsets being surrendered. Further, foreign offsets are banned for the first two Commitment Periods. In addition, the Government can set time restrictions on the validity of offset emission allowances, after which they will expire automatically. Offset projects, whether domestic or foreign, must be implemented using international standards for measuring, reporting, and verifying emission reductions. Offsets created by the UNFCCC, Kyoto Protocol, or future climate agreements 22) Article 36 of the Enforcement Decree 23) Article 38 of the Enforcement Decree 24 ASIAN JOURNAL OF CLIMATE CHANGE AND SUSTAINABLE DEVELOPMENT: Law, Economics and Politics October 2012 Volume 1 Number 2

19 automatically qualify. 24) Other offsets must be certified by the Competent Authority in order to be eligible to be traded in the emissions allowances register, under a special offsets register. Offsets will be traded independently of emission allowances and cannot be used for compliance purposes unless converted to offset emission allowances. Measuring, Reporting, Verification ( MRV ) Covered business entities must submit a statement of their emissions for the Compliance Year within three months of the end of the Compliance Year. Emissions must be reported in a measurable, reportable, and verifiable manner. In a statement of emissions for the Compliance Year, the following should be included. 25) size of facility, amount of fuel used in production and processing, production level ; type and amount of greenhouse gas emissions per facility, type/size/amount/ operation ratio of an emitting facility(includes new, extended, and shut down facilities); type and amount of energy used/produced/sold, composition of fuel used, type/ size/amount/operation ratio of a facility, which uses or produces energy; type/size/amount of greenhouse gas emissions measured by production process, production facility, and emission activity; amount of greenhouse gas emissions and energy usage measured by process, and product (applied only when benchmark method is used to allocate allowances to a relevant facility); type and amount of captured greenhouse gases; measurement and calculation methodology of greenhouse gas emissions by sector; quality control procedure of a statement of emissions; actual amount of captured or removed greenhouse gas emissions; monitoring plan for collecting activity data and deciding parameter; 24) Article 30 of the Emissions Trading Act 25) Article 31 of the Enforcement Decree An Overview of the Emission Trading Scheme of Korea 25

20 total sales of an entity of a facility; With a statement of emissions, covered business entities must also make an electronic submission of a verification report issued by a third party verifier. If the Competent Authority finds the statement of emissions incomplete or unclear, it can ask the entity for revision. The Competent Authority will be obligated to manage all submitted documents by including them in the emissions allowances register. Once a statement of emissions is certified, the Competent Authority can disclose essential information including but not limited to total greenhouse gas emissions by entities. However, when the entity requests for nondisclosure of its emissions data due to reasons of possible infringement of rights or confidentiality, the Competent Authority will make a decision based on evaluation done by a public review committee. A third party verifier should be an institution equipped with skilled personnel and necessary resources to conduct professional verification and it requires certification from the Competent Authority to verify emissions. 26) A verifier has an obligation to purchase liability insurance of a value up to one billion won regarding greenhouse gas emissions verification. The Competent Authority will certify the emissions or if the report is not submitted or certified, the Competent Authority can conduct a fact-finding survey to measure the actual emissions of the entity. 27) There shall be an Emissions Certification Committee under the authority of the Competent Authority to determine technical matters for measuring, reporting, and verifying emissions. The Emissions Certification Committee will consist of a chair, which will be the Vice Minister of Environment, and fifteen committee members from relevant ministries and experts that get appointed by the Vice Minister of Environment. 28) Certified emissions will be reported in the register within five months from the end of the Compliance Year. 26) Article 32 of the Enforcement Decree 27) Article 33 of the Enforcement Decree 28) Article 34 of the Enforcement Decree 26 ASIAN JOURNAL OF CLIMATE CHANGE AND SUSTAINABLE DEVELOPMENT: Law, Economics and Politics October 2012 Volume 1 Number 2

21 Penalties Business entities that fail to submit sufficient allowances for total emissions of a Compliance Year will be given a chance to submit their opinion within ten days when they are notified of the penalty imposed. 29) If the entity provides no satisfactory reason within that time frame, it will face a penalty of three times the average market price for that year, up to a maximum of 100,000 won per ton. If the entity fails to pay the penalty an additional penalty can be incurred. Ultimately, the Government can force payment by seizing the funds via the national tax law on delinquent taxes. Civil and criminal penalties can also be assessed against individuals and corporations for fraud, market manipulation, insider trading, or negligent failure to comply with the Emissions Trading Act. International Linkage The Government can seek to link the Korean ETS with other emissions trading schemes or international carbon markets. In the case of linking to another emissions trading scheme, the Government must ensure that the linkage protects business trade secrets. The Government may establish an institution to do specialized research in linking carbon markets. Currently, California s cap-and-trade program is on track to be linked to Quebec s scheme starting from Also, Australia s carbon pricing scheme is planned to be linked to the EU ETS under an interim link starting July 1, A full two-way link between the two schemes will start no later than July 1, Some experts believe that linking of the Korean ETS and EU ETS might not be possible before ) 29) Article 42 of the Enforcement Decree 30) South Korea approves carbon trading scheme, Reuters, article/2012/05/02/us-carbon-korea-idusbre8410tn An Overview of the Emission Trading Scheme of Korea 27

22 Conclusion The Korean Government is showing strong political will in achieving a low carbon economy. As a developing country, Korea proclaimed Low Carbon, Green Growth as a national vision and adopted the highest recommended reduction target of 30% compared to BAU level by 2020 voluntarily. To achieve this goal, the Framework Act was enacted and various policies, such as the Target Management System and the ETS, have been implemented or are planned to be implemented. There are still many specifics of the ETS that need to be finalized in the Plans Master Plan and Commitment Period Plan to be developed in the following two years. However, Korea has laid out a relatively clear outline of the ETS despite oppositions from industries. It is significant that Korea took careful consideration of other schemes, such as the EU ETS, the Australian Carbon Pricing, New Zealand s ETS, and regional initiatives (RGGI, WCI), in designing its own scheme. Korea has adopted many factors from the EU ETS for smoother linkage in the future but still needs to consider the domestic conditions and results from international negotiations to finalize the ultimate design of the ETS. 28 ASIAN JOURNAL OF CLIMATE CHANGE AND SUSTAINABLE DEVELOPMENT: Law, Economics and Politics October 2012 Volume 1 Number 2

23 References Act on the Allocation and Trading of Greenhouse Gas Emissions Allowances (English Version) Enforcement Decree of the Emissions Trading Scheme (Korean Version) Greenhouse Gas Inventory & Research Center of Korea, Target Management System, (visited on November 10, 2012) Meeyoung Cho, South Korea approves carbon trading scheme. Reuters, May 2, (in Korean) Samsung Economic Research Institute (SERI). The implications and challenges of the establishment of Emission Allowances Exchange. SERI Economic Focus No Sun-il Yu, Ministry of Environment selected as the main supervising government agency of the ETS. Green Daily, July 23, news/articleview.html?idxno=20742 (in Korean) Taewook Seo, A heated competition between KRX and KPX over carbon market. MK News, May 25, php?year=2012&no= (in Korean) An Overview of the Emission Trading Scheme of Korea 29

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