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Carbon Market

South Korea to launch world’s most ambitious emissions trading scheme – report

South Korea is set to introduce its emissions trading scheme which could be the most ambitious in the world, concluded a key report of Bloomberg New Energy Finance, in collaboration with Ernst & Young.

The impending cap and trade system is set to be implemented about 18 months from now and will see carbon prices potentially reaching as high as $90 per ton to cap around 70 percent of the country’s emissions.

However, the report warned that the government has yet to make necessary changes in the design of the scheme to avoid strain on companies.

“If the government implements the scheme without any changes, it will have major implications for Korean companies,” said Richard Chatterton, lead analyst for carbon markets at B.N.E.F. “A carbon price will lead to higher power prices and impose additional costs on industrial firms. The government is mitigating the impact for covered entities by handing out most allowances for free, but costs could still rise quickly.”

The report found that South Korea’s national target of 30 percent below business-as-usual emissions in 2020 is way too aggressive and sticking with it would require the trading scheme to cut emissions by 836 million tons between 2015 and 2020.

It stressed that the “need to reduce emissions will exceed the options available within industrial companies and from the country’s current fleet of gas fired power stations.” Further emissions reductions would need the replacement of existing coal power stations with new gas plants, renewable energy such as solar and wind, or implementing carbon capture and storage systems, options which cost significantly higher than the cost of coal-to-gas fuel switching.

Consequently, the $90 per ton penalty for large-emitting companies is most likely to be implemented while the reduction target is still unlikely to be met.

The B.N.E.F. report suggested the government carefully consider revisions in the scheme’s design including bringing down the reduction target, allowing greater use of international offset credits before 2020, increasing the overall offset limit, and linking its system with other carbon markets to provide a wider range of lower cost emissions reduction options.

“The challenge is to put in place a carbon price high enough to impact investment decisions, but low enough to transition smoothly towards a carbon-constrained economy,” said Milo Sjardin, head of Asia research for B.N.E.F.

“With the proposed design, demand and supply within the E.T.S. are not well-matched and will lead to unnecessarily high carbon prices. Policy-makers will need to look at cost containment measures closely while not compromising the ambitions of the scheme,” he stressed.

While the schedule of the new regulation is not yet definite and political uncertainties are going on, Yoon Joo-Hoon, senior manager at Ernst & Young, said liable entities still need to prepare for the emissions trading scheme opting for evaluation of mitigation options, assessment of carbon assets and the development of plans that will work for the E.T.S. – C. Dominguez

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