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Carbon Trading Scheme and Carbon Market

Carbon Trading Scheme and Carbon Market

KANG Hee-Chan

May 11, 2009


Welcome to our video program. I'm Hee-Chan Kang from the Public Policy Research Development Department.

When we talk about low carbon green growth, the carbon emission allowance market will be one of the key parts of this new economy. This is a critical issue as it can be linked to corporate profits or costs. Today, we will talk about the current carbon credits trading system, the emissions market, and the most effective responses for Korean companies.

First, let's define what the carbon credits trading system is and how it can be introduced. In 1997 leaders of major countries gathered in Kyoto Japan and came to a common understanding that greenhouse gas emissions are a major cause of climate change. In this meeting, they agreed to assign each country and company a mandatory curb on greenhouse gas emissions. To effectively meet mandatory reduction quotas, an emission allowances trading system was initiated in 2008. Under this system, companies or countries are granted emissions allowances for every 1 ton of reduced greenhouse gas, and this emissions allowances can be traded on a market.

Carbon emission rights are a kind of certificate traded on the market which entitles a buyer to emit 1 ton of CO2. Sellers of emissions allowances are electricity generators, steel, petrochemicals and cement companies who are responsible for a large amount of carbon emissions and are assigned to meet mandatory reduction of carbon emissions under the Kyoto agreement. However, the problem with this is that reducing carbon emissions is not an easy job for some companies. Even with the same amount of investment, some companies cannot reduce emissions as easily as other companies. This is where the emissions trading system comes in. Companies which can't meet mandatory amounts on carbon emissions buy surplus emission rights from companies which can reduce their emissions above the assigned mandatory cutback. For example, a company which can easily reduce emissions 20 tons over the assigned reduction amount can then sell the emission credits for its surplus to another company which has fallen short of meeting its quota.

Currently, the most representative emission trading system is the EU-ETS (European Union Emission Trading Scheme). There are about 10 emission exchanges around the world where emission rights are traded in the current greenhouse gas emission trading scheme. Among these 10 exchanges, the most active is the European Climate Exchange (ECX) based in Amsterdam. In 2008, this exchange handled almost 90% of the trade of emissions credits taking place in Europe.

The carbon emission trading market has grown to US$118 billion as of 2008, almost doubling the market size of US$64 billion in 2007. In 2009, the market size is expected to grow into a market worth US$150 billion despite the current global economic crisis.

What about Korea? Fortunately, Korea, grappling with the currency crisis, was excluded from the Annex I countries in 1998 to meet the mandatory emission cuts. When the Kyoto protocol expires in 2012, however, Korea is highly likely to become an Annex I country to the post-Kyoto protocol in light of its carbon emission amount, the world's tenth largest, and its emission growth. There will be a conference of parties to the Kyoto Protocol in December 2009 in Copenhagen Denmark to draw a final agreement regarding the post-Kyoto protocol. Korea will then know whether it will become one of the Annex I countries to the post-Kyoto protocol in 2013.

In line with this, the Korean government is eager to respond proactively to its potential designation as an Annex I country to the post-Kyoto protocol. From 2009, it has attempted to introduce the carbon emission rights trading system on a small scale, and speed up the development of carbon-related financial products.

How can Korean companies prepare themselves for the introduction of a carbon emission credits trading system? Some electricity generators and energy-intensive companies have already set up strategies and are seeking ways to cut back on greenhouse gases and to prepare for emission credits trading. However, the problem is that most companies remain only passive spectators without taking any concrete action. Companies need to establish concrete plans immediately as they will need three to four years of preparation for the emissions trading system.

First of all, companies need to assess how much they emit greenhouse gas in their business, and how much they can feasibly reduce it. Companies can reduce greenhouse gases by improving energy efficiency, expanding renewable energy, and most importantly, following through on their initial efforts. In addition, they should actively participate in government projects like greenhouse gas reduction registration and pilot emission trading systems. Based on their trading experience and expertise in these pilot projects, they should effectively respond to the global emission trading system which will take effect in 2013.

Thank you for watching. I'm Hee-Chan Kang.

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