South Korea May Launch World’s Most Ambitious Cap And Trade Market

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With roughly 18 months until launch, South Korea appears ready to create the world’s most ambitious cap and trade market, with the highest global price on carbon.

South Korea historical and forecast emissions
South Korea historical and forecast emissions image via BNEF

These findings jump from a Bloomberg New Energy Finance (BNEF) white paper analyzing how potential market designs could affect the nation’s carbon price and market efficiency, and are a reminder that global cap and trade could still be integral to combating climate change.

South Korea’s government is finalizing system design, set to launch in January 2015, but BNEF predicts it could ultimately cover 70% of national emissions and reach $90 per ton of carbon.

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Ambitious Goals Would Force Tough Cuts

Criticism of the EU emissions trading scheme (ETS) centers on if it actually forces industry to cut pollution, but that won’t be the case in South Korea. “If the government implements the scheme without any changes, it will have major implications for Korean companies,” said Richard Chatterton of BNEF.

Over 450 entities participate in the country’s existing greenhouse gas inventory, covering more than 60% of South Korea’s emissions. These entities are all large-scale emitters, and submit annual emissions and energy consumption data to the government, which then sets reduction targets for the subsequent year.

BNEF’s projections assume the same entities would be covered by the ETS, and are based on South Korea’s emissions reductions target of 30% below current trends by 2020. This goal will require a 19% reduction from 2010 levels, and compared to Australia’s 14% and the EU’s 5% reduction target, make the Korean system without equal.

South Korea emissions abatement forecast
South Korea emissions abatement forecast image via BNEF

In order to meet its goal, BNEF predicts South Korea would need to cut its emissions by 836 million tons (Mt) of carbon relative to business-as-usual between 2015 and 2020.

Demand for emission reductions would thus rise to 200 million metric tons per year (Mt/yr) by 2020 – almost double demand projected for the EU ETS, even though South Korea’s program is only 20% its size.

But Reducing Those Emissions Won’t Be Easy

However, BNEF expects South Korea will face challenges meeting these goals. The proposed system design restricts the use of carbon offsets to 28% of reduction requirements up to 2020, and starting in 2021 only offsets from domestic projects would be eligible for polluters.

South Korea emissions abatement demand forecast
South Korea emissions abatement demand forecast image via BNEF

This tight offset market means South Korea’s ETS could be painful for the country’s industrial sector as they’re forced to buy permits or cut emissions. 598Mt of emissions reductions – nearly 75% of total cuts – will need to come from the industrial and power sector, meaning the cost of electricity and manufactured goods would rise.

Further complicating matters, South Korea’s industrial sector is already fairly energy efficient as a result of historically high energy prices, exposure to international fuel price shocks, and national investment in energy efficiency programs.

Clean Energy Is A Clear Solution…But Not Short-Term

So if offsets are going to be at a premium, and much of the country’s energy efficiency potential has already been realized, where will South Korea’s emissions reductions come from? The clearest solution, as in most cases, is cutting coal-fired electricity generation.

BNEF sees the power sector offering the most abatement opportunities both short and long term. Short-term, the white paper estimates South Korea could reduce emissions in 2020 by up to 64Mt/yr by substituting natural gas for coal-fired power. This assumes natural gas generation utilization capacity rises from current projections of 27% in 2020 to 70%

South Korea has traditionally relied upon imported liquefied natural gas (LNG), but tight supply and volatile price swings lead BNEF to predict electricity generation will shift toward higher-efficiency fossil fuel or renewable generation, and overall energy efficiency measures will rise outside of the industrial sector.

In fact, BNEF predicts the ETS will feed into South Korea’s renewable portfolio standard to expand demand and boost renewable generation to 55 gigawatt-hours (GWh) in 2020 – a 700% increase from 2010.

Toward A Global Carbon Market Via South Korea

But the best way for South Korean polluters to comply with the ambitious reduction goals may not be within its borders – BNEF recommends linking to other functional carbon markets with an abundance of low-cost abatement options.

Two other mature markets will be operating in 2015 when South Korea’s system launches: the EU-Australian, and California-Quebec linked programs. BNEF predicts EU-Australian allowance prices will be below $40 per ton, and California-Quebec around $50 per ton in 2020.

Global cap and trade allocation demand
Global cap and trade allocation demand forecast image via BNEF

Linking to these two systems would benefit all parties. South Korea’s ETS will create demand four times greater than California’s system, and 60% higher than the EU-Australia scheme. Thus, South Korea reduces abatement prices by accessing cheaper permits from other systems, while boosting demand and whittling away surplus permit supply in other carbon markets.

Perhaps most promising in this equation, BNEF’s estimates don’t even consider China’s fledgling market. Seven regional pilot programs began rolling out this year, and they will cover up to 1 billion tons of emissions by 2015 before the country launches its own national system in 2020. Remember China is by far the planet’s biggest emitter of carbon.

Oh Wait, Industry May Have Its Day

Of course, these rosy scenarios hinge on the ETS unfolding as originally proposed, and that’s far from a certainty. South Korea’s government is consulting with large emitters this month, and they have called for many revisions to loosen the strict allowance, offset, and reduction policies.

South Korea cap and trade timeline
South Korea cap and trade timeline image via BNEF

The ETS “Master Plan” is due to be published in December 2013, and it will provide the legal basis for emissions reductions until 2018.

So South Korea, it’s decision time. Stay on your ambitious path, and cut emissions 30% while helping create a truly global carbon market. Or, water down the system proposal, and watch your national emissions climb 28% by 2020, according to BNEF – no pressure.

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