Impacts of Emissions Trading on EII and Industrial Restructuring-Korea

Lessons Learned from the EU ETS for South Korea

Project duration: April – November 2013

Project’s Funder: Korea Environment Institute

Project Rationale and Objectives

One of the 20 largest economies in the world, South Korea has experienced rapid growth largely through reliance on exports of manufactured goods. Due to its large industrial base, Korea is also the tenth largest electricity consumer, with more than two thirds of its electricity generated from fossil fuels. As a result, the country has a substantial carbon footprint, prompting the Korean government to adopt an ambitious policy framework to catalyse a low carbon, green growth trajectory.

As part of this framework, Korea has stated its commitment to reducing greenhouse gas emissions by 30 per cent below projected business-as-usual level emissions in 2020, and adopted an emissions trading system as a central tool for its achievement. Passed by the National Assembly in 2012 after protracted negotiations, this economy-wide system is set to begin in 2015 and will build on the currently operational Greenhouse Gas and Energy Target Management System (TMS). Significant resistance from the private sector and concern about industrial competitiveness have necessitated inclusion of a number of flexibility and cost control provisions, along with free allowance allocation for industries exposed to trade.

In the European Union, the introduction of an emissions trading system (EU ETS) nearly a decade ago also faced opposition from a number of sectors, citing the risk of carbon leakage and loss of competitiveness on global markets as reasons against their inclusion in the scheme, or calling for preferential treatment. After two trading phases, the European experience provides useful insights on the actual incidence of carbon leakage and loss of competitiveness, but also on policies to limit negative impacts, as well as processes to engage affected stakeholders and improve the understanding and acceptance of this new policy instrument. Such lessons from Europe can also help strengthen the implementation of the Korean emissions trading system, and inform preparations for its impending launch.

The purpose of this research project is to assess policy options to address issues, such as carbon leakage and competitiveness concerns after adopting the EU ETS, and evaluate lessons from Europe from the perspective of their relevance for Korea.

The Challenge

With no overarching climate change agreement currently in force, the carbon market remains fragmented and is limited to a small number of jurisdictions (mostly the European Union, some sub-federal states and provinces in North America, New Zealand, with further systems planned in some countries and regions). As a result, the level playing field for competing enterprises across jurisdictions is no longer safeguarded.

From the perspective of industries operating under one carbon control jurisdiction (such as the European Union Emissions Trading System, or EU ETS), the most promising remedy for this fragmented landscape is a global climate agreement defining comparable efforts for all major emitting nations. However, as of 2013, it seems politically unlikely that such an agreement can be reached, at least in the near future.

EIIs in the EU have complained that the EU ETS may force them to relocate their production outside the EU or threaten their business viability and continued existence. After nearly a decade since the EU ETS was implemented, an important question thus poses itself: were the complaints justified, and indeed what impact has an ETS had on industry? Is there a real risk of industrial restructuring in a fragmented carbon market, and if so, what measures can be taken to mitigate that risk? These questions are critical to countries currently designing their own ETS, such as the Republic of Korea (ROK).

Project leader: Michael Mehling