South Korea goes it alone with the world’s most aggressive carbon market

Quartz

With a belligerent, nuclear-armed neighbor led by a messianic millennial on its border, you’d think that reducing greenhouse gas emissions would rank low on South Korea’s to-do list. Yet the country plans to launch the world’s most ambitious carbon-trading market in a bid to cut its planet-warming spew 30% by 2020.

The world will be watching not only to see if South Korea can fix the flaws that have plagued the European Union’s Emissions Trading Scheme but also avoid hurting the industrial conglomerates, or chaebols, that supply the planet with computer chips, flat-screens and smartphones. (Samsung, for instance, is responsible for 2% of South Korea’s greenhouse gas emissions subject to the carbon regulations.)

“Such ambitious levels of abatement will come at a high price,” wrote Bloomberg New Energy Finance (BNEF) analyst Richard Chatterton in a detailed analysis of the carbon market, which is set to go live on Jan. 1, 2015. “If the target is retained, it may place a high cost burden on South Korea relative to other countries.”

That’s because South Korea has closed many of the loopholes that led to carbon price crashes in Europe and allowed polluting industries to weasel their way out of taking the hard steps to reduce their emissions.

For one thing, South Korea plans to restrict the use of so-called offsets. An offset is essentially a license to pollute by paying someone else to reduce emissions on your behalf. Industrial companies can buy offsets from international organizations that run climate-friendly projects such as planting trees or capturing methane emissions from landfills. South Korean companies, however, will be able to purchase carbon credits only from domestic projects and only until 2021; after that year they can purchase international carbon credits. But offsets of any stripe can be used to meet no more than 10% of their emissions-reduction targets.

However, there aren’t enough domestic offsetting projects to go around, according to BNEF—unlike in the European carbon market, where an oversupply of offsets has sent carbon prices plummeting. With South Korean carbon prices likely to remain high, companies will be forced to pay for expensive emissions allowances or take costly measures to reduce their carbon pollution. That’s good for the environment, but could make South Korean goods more expensive and hamper the economy.

Adding to the cost of a carbon market is the fact that South Korean industries like steel-making are already pretty efficient. They have to be because of the country’s high electricity prices. It will be easier for electronics companies, like Samsung, to bring their emissions down by capturing fluorinated gases that are emitted in the production of semiconductors and video screens; so-called F-gases are 23,000 times more potent than carbon dioxide. The impact on overseas buyers of Korean smartphones will probably be minimal, says Sungwoo Kim, KPMG’s regional head of climate change and sustainability in Seoul, because most of the burden to cut emissions will fall on electricity producers and steel makers.

Moreover, says BNEF’s Chatterton, carbon trading could open up new opportunities for the country. “South Korea is looking for new export growth markets and clean tech is an area that government and the chaebols are looking to as a possible driver of future economic growth,” he told Quartz in an email.

Where political will trumped industrial opposition

But why is South Korea embarking on such an ambitious carbon market when so many other countries—hello, America!—treat such efforts as political poison? The short answer is, because it can.

Unlike the divisive partisan fights that doomed carbon market proposals in other countries or resulted in watered-down schemes—g’day, Australia!—South Korea’s political parties united to pass the carbon market proposal by a 148-3 vote in 2012. In doing so they steamrollered opposition from the country’s powerful chaebols.

“Politically, South Korea has shown that it is eager to be seen as a leader in the development of global climate change policy, so it has taken on a strong target to justify this,” said Chatterton. Some of the biggest emitters, he noted, are power companies that are government-owned.  ”The other biggest players (chaebols) are likely to have strong government links and therefore don’t need to shout loudly to be heard.”

Still, many unknowns remain. The final shape of South Korea’s market and emission targets has not yet been decided. It’s also not clear if the government will allow the South Korean carbon market to be linked to markets in Australia, California, Europe and New Zealand.

If it does, that could bring carbon prices down quite a bit, as South Korean companies would be able to buy cheaper credits from those markets. Australia, for example, is facing a crash in its carbon prices in 2015 due to its decision to link its carbon market to Europe’s. The Australian government’s budget projections are in disarray as it was counting on a carbon price of $29.50 a tonne. The EU price is $3.60.

The lesson: Sometimes it’s better to go it alone.



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