Standoff continues in South Korea's new carbon markets

With no trading of allowances since mid-January, businesses regulated by South Korea’s cap-and-trade program have made their dislike of the carbon markets well known. That stand-off will likely end next year, as the first compliance deadline approaches, but analysts warn that a scarce supply of offsets may increase the costs for companies then. Kelley Hamrick reports.

The last-minute passage of South Korea’s cap-and-trade bill made headlines back in 2012, when it set the stage for the world’s second largest emissions trading system (ETS).

A year later, as details of the ETS emerged, the program once again made the news – this time for the dubious honor of the world’s most (potentially) expensive carbon market.

Under the country’s penalty scheme, non-compliant companies can be fined at three times the average price of allowances for that compliance year, with a cap at KRW 100,000 (USD $90) per tonne.

Since the initial allocation of allowances and launch of the market, there has been growing talk of an allowance shortage.

Sungwoo Kim, an official advisor to the government through consulting firm KPMG, gave greater insight during a panel at the Climate Action Reserve’s Navigating the Amiercan Carbon World conference in Los Angeles last month.

He estimated there will be a 57 million tonnes of carbon dioxide equivalent (MtCO2e) shortage during the first phase of the ETS (2015-2017) – which could increase the costs for covered entities to meet their requirements.

Despite the expensive consequences, companies have shown little interest in trading allowances since the program’s launch at the beginning of January. The last trade registered in mid-January, and companies have given no indication that will change soon.

The carbon stakes are high

While the penalty is high for non-compliance, most companies are placing an even bigger bet: that the government will distribute additional allowances.

Several industry associations have sued the government over the allocation of permits in an effort to increase the total amount of allocations. Emitters allege the government has under-allocated by up to 20 per cent, but so far government officials have remained unmoved.

The largest opponent has been perhaps the Federation of Korean Industries (FKI), an economic organization in Korea for members earning annual sales of 50 billion won or more. FKI recently released its annual economic outlook survey, which found that – behind a drop in domestic demand – the cap-and-trade program remains the next largest concern for businesses.

In reality, though, the program mainly affects the country’s largest corporations, with 10 companies responsible for an estimated 76 per cent of emissions covered under the ETS.

These organizations have the most to lose from penalties. As a result, many companies (or rather the companies’ membership organizations) have taken the fight to the courts over allowance volumes. The grievance specifically revolves around the way allocations were determined because the Korean government averaged entities’ emissions from 2011 to 2013.

For organizations that saw a decrease in emissions during those three years, it is likely that they will remain beneath their allocation while the opposite is true for companies with a higher emissions trend.

The rest of this story can be read here.

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