South Korea on Friday announced a raft of climate policy changes, including abandoning its GHG emissions target for 2020, stripping the Ministry of Environment of its responsibility for the emissions trading scheme, and lifting a cap on Early Action Credits that observers say could boost the market’s supply by more than 40 million tonnes.
Former President Lee Myung-bak won international praise at the UN climate conference in Copenhagen in 2009 when he pledged to keep South Korea’s 2020 emissions at 30% below business-as-usual levels, a goal that was considered very ambitious by many.
But under the current administration led by President Park Geun-hye, Lee’s green growth strategy has faded into the background and the construction of a number of new coal-fired power plants have sparked concerns about whether the 2020 target can be achieved.
“The introduction of (planned) new coal plants after 2016 will represent a more than 65% increase in coal capacity, compared to Korea’s current levels,” Joo-jin Kim, a lawyer with consultancy ELPS, told Carbon Pulse.
South Korea’s Green Growth Act will be updated and the 2020 target will be replaced with Korea’s Paris pledge to keep 2030 emissions 37% below BAU levels and 2050 ambitions, a government press release said.
In effect, Korea’s emissions can continue to grow as more coal enters the generation mix without any domestic laws being broken.
“While a clear roadmap for emission reductions in 2050 is helpful for companies to make investment decisions to transition to a low-carbon future, short-term targets must be retained to urge action now,” said Thomas Winklehner, a trader with Korea Carbon.
“Shifting the focus away from a 2020 reduction target to 2030 and 2050 targets risks engaging industry proactively in achieving emission reductions. Companies should both be encouraged to achieve short-term targets while having the certainty that long-term targets provide for making investment decisions,” he added.
NEW ETS REGULATOR, NEW TARGET?
The annual CO2 cap for the 525 companies covered by Korea’s emissions trading scheme was set to keep the country on the path to meeting the 2020 target.
Friday’s statement made no specific mention of potential changes to the ETS cap, which industry said is 10-20% too low.
But South Korea finally confirmed that responsibility over the ETS will be shifted to the business-friendly Ministry of Strategy and Finance, as reported by Carbon Pulse in December, away from the Ministry of Environment, which had so far resisted calls from lobby groups to weaken the CO2 target.
Local media ET News reported that the Prime Minister’s Office would also begin taking a more active approach to the carbon market in order to find solutions to the ETS crisis.
Observers said those changes increase the chances of allocation levels being adjusted upwards as there would be no point restricting emission levels to an abandoned target, especially as the Korean economy is struggling with low growth rates.
Over 40 lawsuits have been filed against the government by industry groups and companies demanding more allowances, and since its inception the market has been harrowed by a severe lack of supply.
Only 322,000 allowances have traded since the market opened in Jan. 2015, with prices currently hovering at record highs of 16,000 won ($12.94).
FLOOD OF EARLY CREDITS?
One change that could make a significant difference to supply levels without fiddling with the scheme cap is adjusting the rules for Early Action Credits.
In draft documents outlining new provisions for the Green Growth Act, seen by Carbon Pulse, the government has proposed to remove the 3% limit on Early Action Credits that can be issued to scheme participants.
Instead, it simply says that the number of credits to be issued will be decided “considering the total volume of allowances” that are allocated.
Under the Korean ETS, companies that can prove they cut their carbon emissions before the scheme started can apply for Early Action Credits, which they can then use to meet their targets under the system.
The 3% limit currently in place restricts the amount of such credits that can be issued in the first trading phase, running from 2015 through 2017, to around 41.4 million.
The government has not released data on how many Early Action Credits companies have applied for, but several market participants have said it is at least twice as many as the cap allows.
Under the new provisions the new ETS administrators could approve all applications, potentially increasing market supply by 40 million allowances or more.
“While early action should be rewarded, providing additional supply of carbon credits from projects that have already been implemented will reduce the need to invest in additional projects to drive additional emission reductions and could therefore slow the progress to a low-carbon economy,” said Korea Carbon’s Winklehner.
The statement also mentioned that the government would consider once again whether to accept foreign offsets, such as CERs, into the scheme ahead of 2020.
Industry has touted opening up to UN carbon credits as an easy fix for the market’s supply drought.
“Right now, industry is optimistic that market stability actions will be taken ahead of June 30 deadline for 2015 compliance,” one broker told Carbon Pulse.
“They also now expect more offset credits will flow into the market sooner than the current (post-2020) time schedule under current rules,” he added.
By Stian Reklev – firstname.lastname@example.org