SEOUL -- South Korea is making sweeping efforts to reduce greenhouse gas emissions by 30% before 2020. In January, it launched Asia's first nationwide carbon emissions trading scheme.
The start of the world's second-largest cap-and-trade system, after the European Union's program, created a lot of excitement around the world. Locally, however, complaints are mounting about the lack of trading and the government's top-down approach. Critics question whether the country can possibly meet its ambitious reduction target.
Carbon trading systems place prices on emissions. South Korea's program sets an official cap on the total amount of greenhouse gases that companies are allowed to emit and the allocation of carbon credits, or allowances. These credits can be bought and sold like commodities, with companies that have gone over their limit paying those that have managed to rein in their emissions. The government will gradually lower the emissions cap over time, thus raising the amount companies have to pay for carbon credits unless they turn greener.
Since the Korean market opened on Jan. 12, trading volume has been minimal. More than half of the 525 companies that were given allowances have filed complaints; some companies have filed lawsuits against the government for "unfair" carbon-credit allocations.
South Korea is the world's seventh-largest greenhouse gas emitter. It is also the fastest growing emissions source among Organization for Economic Cooperation and Development members.
Government stands firm
Asia's fourth-largest economy set its 2020 emissions target in 2009, when it signed the Copenhagen Accord. So far, the government has dealt with industry complaints firmly in order to stick to its pledge.
"We believe the amount of permits was appropriately made," said Lee Hyung-sup, senior deputy director of the Environment Ministry's climate change mitigation division. "It is in the nature of the emissions market that the government takes a mandatory top-down approach, as it sets the national target and makes the allocations accordingly."
In total, 1.64 billion tons of carbon dioxide equivalent, or tCO2e, of allowances are allocated to companies in the first stage of 2015-2017. The amount will be cut gradually over the next 10 years. There are 525 companies that emit more than 125,000 tons of carbon dioxide equivalent annually. Factories and buildings with more than 25,000 tons in emissions were selected for the first phase. Sectors producing the most greenhouse gas include the energy, steel, chemical and cement.
The Federation of Korean Industries, the main critic of the program, reckons its first phase has cost listed companies an estimated 600 billion won (about $547 million).
"Korea's carbon market is very thin ... with volume risks and uncertainties," said Noh Jong-whan, an accountant and author of a book titled "An uncomfortable talk about climate change." He lambasted the government's policy as ill-prepared and questioned the effectiveness of the cap-and-trade strategy.
The government should invest in green technology instead and give incentives to companies that cut emissions voluntarily, Noh said. "The cap-and-trade system is not a zero-sum game but a negative-sum," he said. "Everyone has to spend money, and some more than others."
Others say the government has not done enough consensus-building.
"The EU trading system was launched after years and years of discussion between authorities and industry leaders until they were able to come close to a compromise," said Jang Hyun-suk, a research chief at the Korea International Trade Association. "In Korea, we didn't go through enough of that process together. Companies expect the government to be more open about processes for target setting and credit allocation."
Another concern is price volatility, which discourages companies from trading.
International experts say that it is natural for a young market. Wild price fluctuations also occurred in the early days of the EU carbon market, where the import of international carbon credits resulted in a surplus and prices even fell to near zero when the economic crisis hit. To alleviate the problems, the EU has been "back-loading" or postponing the auctioning of permits to allow prices to pick up.
"As cap-and-trade programs are first introduced, it takes time for companies to familiarize themselves with the mechanics of trading and this could explain the low trading volumes we have seen," said Anthony Mansell, a fellow at the Washington-based Center for Climate and Energy Solutions. "Long-term policy stability is important for companies to plan their compliance years ahead of time."
"Governments may decide to intervene in extreme circumstances, as we have seen in Europe with the back-loading of allowances, but too much intervention could cause confusion and erode confidence in the market," Mansell said.
The South Korean government is allowing some flexibility in light of all the complaints coming from the private sector. Companies with excess credit can "bank" it for the next phase and those with a shortage are allowed to borrow credit on a limited basis.
Another tool to ease the cost burden is what are called "offsets," alternative ways to create supplies that are cheaper for companies than buying carbon permits. That may include projects to use clean energy technologies or improve fuel efficiency. In South Korea, offsets can lower a company's emissions bill by up to 10%.
Experts say in the longer run, the cap-and-trade system will boost the use of green technology and the renewable energy market.
"At the start of the second phase in 2018, the emissions trading scheme's impact on industry will grow and thus the companies with the capability to lower emissions will get a leg up in the market," said Han Byung-hwa, an analyst at Seoul-based Eugene Investment & Securities.
The environment minister insists companies must recognize that they have to comply.
"International pressure on emissions reductions is growing, and our industries need to ready themselves to respond," said Yoon Seong-kyu, the minister, in an interview with Yonhap News Agency.
"We have no choice but to adopt low-carbon industries into our system," he said. "Companies simply have to recognize this."