South Korea’s Ministry of Environment is about to be stripped of its responsibility for the nation’s emissions trading scheme, sources told Carbon Pulse, with regulatory responsibility set to be handed over to the Ministry of Strategy and Finance.

Several sources with knowledge of the matter said the shift has already been decided, but a Ministry of Environment official speaking to Carbon Pulse on the sidelines of the UN climate talks in Paris said “it has not been finalised yet”.

South Korea launched the world’s second biggest carbon market in January this year, but the market has been paralysed by a lack of liquidity and what emitters perceive as serious under-allocation has caused several industry lobby groups to sue the government, asking for more allowances.

“The environment ministry has mismanaged the market, they have been too strict. They have only been thinking about the cap, not about the trading aspect,” one source said.

Only 280,000 allowances have traded in the market since the January launch – a tiny fraction of the 573 million allowances issued for 2015. Some 100,000 of those units traded on Wednesday, at 11,600 won ($9.82) each.

INCREASED ALLOCATION?

The anonymous source said it would be reasonable to expect that the Ministry of Strategy and Finance will seek to increase allowance allocation to emitters because the scarcity in permits is part of the motivation behind the power shift, which the source believed was likely to originate from the Prime Minister’s office.

Should the new market regulator choose to raise the allocation, industry groups might agree to drop the ongoing lawsuits, which otherwise would be likely to hamper market certainty for years as they make their way to the Supreme Court.

“Strategy and Finance has no capability to handle this issue, so I expect they will have to rely a lot on help and assistance from the Ministry of Energy,” the source said.

The Ministry of Trade, Industry and Energy (MOTIE) was involved in drawing up the rules for the ETS and was advocating a more generous amount of allowances to be handed out, but was overruled by the environment ministry.

South Korea aims to keep its 2020 GHG emissions 30% below BAU levels, and allocation under the ETS was carried out with that target in mind.

But a number of analysts claim that the environment ministry’s BAU calculation was too low, resulting in fewer ETS permits.

MOTIE also opposed the environment ministry position to rule out use of international offsets from the scheme until after 2020.

Traders and project developers have in recent weeks told Carbon Pulse that there is growing pressure on the government from industry to change the market rules.

Manufacturers want to gain access to the international market before the end of the decade to keep the cost of the scheme down, partly as a result of a perceived scarce potential for doing carbon-cutting projects domestically.

By Stian Reklev – stian@carbon-pulse.com

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