Domestic Carbon pricing in Korea: Carbon market linkage and companies' response

Commissioned Report

Under the Paris Agreement in 2015, the Korean government pledged to reduce greenhouse gas emissions 37 percent below business-as-usual (BAU) level by 2030, a goal that is considered ambitious compared to other countries’ commitments in their Intended Nationally Determined Contribution (INDC). Alongside the 2030 national target, the government has announced a number of climate policy changes which will have direct or indirect impacts on the Korean Emissions Trading Scheme (K-ETS).
The K-ETS, which is the main pillar of the Korea’s climate policy started on January 1, 2015 and now in its last compliance year of the first Phase. Although the K-ETS is still in its early phase, there are several important issues which need to be addressed in an urgent manner for improving itself in achieving the policy goal. First, carbon price under the K-ETS has soared and as of February 2017, the price reached at KRW 24,000 (EUR 20) which is very high compared to prices in other major economies including, and consequently concerns about carbon leakages have been growing. Second, the K-ETS is experiencing liquidity problems with high demand and low supply. And third, frequent market intervention by the government has raised concerns about increasing the market uncertainties and consequently undermining the market credibility.
According to the survey of the K-ETS, we find that many regulated companies under the K-ETS are getting used to price on carbon. They are now realizing that reducing emissions save money. However, due to the high uncertainty of the policy changes and market volatility companies are reluctant to take actions. In order to response to the K-ETS, companies need to understand the ETS demand and supply fundamentals, possible price scenario and the impact on their business
To address challenges facing the K-ETS market - high carbon price and low market liquidity, linking to other ETSs could be considered as one of the attractive options. EU and China seems to be recognized as the potential strategic linking partners. However linkage comes with many critical issues, including distributional issues and a loss of regulatory control. It needs to be carefully reviewed and discussed further whether or not to link, moreover the role that the linkage of ETSs can play in the Korean climate policy context.