Greenhouse Gases Emissions Trading and Carbon Tax Scheme in the Republic of Korea

In "Economic Instruments to Combat Climate Change in Asian countries: Choice between Emission Trading Scheme and Carbon Tax."

he Republic of Korea (hereinafter referred as Korea) was the world’s seventh largest CO2 emitter in 2010. Its greenhouse gases (GHG) emissions have greatly accelerated since 1990 and this upward trend are far more significant than in other OECD countries (OEDC: Organisation for Economic Cooperation and Development). Korea entered the United Nations Framework on Climate Change (UNFCCC) in December 1993 and was classified as a non-Annex I country without GHG reduction obligations under the Kyoto Protocol (2008–2012).
Major outcomes of the UNFCCC Bali meeting in 2007 include a commitment by developing countries to incorporate mitigation plans, dependent on developed-country actions, in the next global climate agreement. Further, in December 2011 the parties of the UNFCCC adopted the ‘Durban Platform for Enhanced Action’, which set the stage for a new round of negotiations for all parties to achieve a future legally-enforceable international agreement to reduce GHG emissions. In response to it, Korea pledged its own GHG emission reduction targets and has consequently adopted various climate change countermeasures.
In 2008, the Lee Myung-bak Government (2008–2012) declared a national vision of ‘Low Carbon Green Growth’, spearheaded by a nationwide GHG emission trading scheme (ETS) as a tool to realize the country’s 2020 GHG reduction target. As a preparatory programme for ETS, the ‘GHG and Energy Target Management Scheme (TMS)’ , a mandatory regulation to limit energy consumption and GHG emissions of large energy-consuming entities and business sites, was initiated in 2011. The scheme set out to establish a GHG emissions inventory and management procedures for the monitoring, reporting, and verification (MRV) of GHG emissions, paving the way for full-blown introduction of ETS in Korea. Following on from TMS, the ‘Act on Allocation and Trading of Greenhouse Gas Emission Allowances’ was approved in May 2012, which enables the launch of domestic ETS at the beginning of 2015. Subsequent thereto, on January 2014, the ‘National GHG Emission Reduction Roadmap 2020’ and ‘GHG ETS Basic Plan’ were issued, and Korean Government appointed Korea Exchange (KRX) as the marketplace for trading GHG emissions permits. The allowance allocation plan as a follow-up document was drafted in May 2014 to enable practical ETS operations and clarifies the total amount of GHG emissions permits.
Discussions have also emerged on a carbon tax levied on fossil fuel carbon content. A three-year project ending in 2010 was initiated to explore energy taxation reform for a ‘climate friendly’ financial system with options for carbon tax introduction in Korea, and resulted in two carbon tax proposals being submitted to the National Assembly. However, due to strong resistance from industry and the ETS-based focus of current climate policies, discussions on carbon tax introduction are currently on ice. Government plans drafted in lieu of a carbon tax and designed to directly tax car owners for their CO2 emissions from January 2015, as well as incentivize the purchase of cleaner cars, also met opposition – from domestic carmakers – and have been postponed until 2021.
In order to clarify carbon pricing policies in Korea, this chapter overviews the country’s energy and climate laws, as well as policies related to carbon pricing, and provides details of scheme design and discussions surrounding ETS and the carbon tax. The rest of the paper is arranged as follows. Section §3.02 below overviews climate change policies related to ETS in Korea. As the core component of this chapter, section §3.03 details the history of ETS proposals and the scheme design as well as related institutions and rules needed to manage and operate the scheme, methods of determining emission allowances and current allocation plans and envisaged policy effects. Section §3.04 chronologically overviews progress in carbon tax policy and the proposals under discussion. Section §3.05 discusses the challenges for implementing ETS in Korea and section §3.06 concludes the paper.