Analysis of basic methodologies of the Korea cap-and-trade system for GHG emissions prepared by IETA evokes the impression that Korean lawmakers thoroughly studied all misfortunes, the European ETS has been through, and equipped the regulators of their scheme with the necessary instruments to react to a multitude of unknown today, but potentially destabilising events.
The above regulatory measures, many of them absent in other cap-and-trades, particularly EU ETS, include:
1. South Korea's ETS gives the government the ability to increase the supply of allowances if prices rise too high.
2. Yearly allocations may be modified within phases.
3. The government has the power to hold an early auction(s) for up to 25% of reserve permits in order to contain prices.
4. An allowance reserve of a yet to be determined amount will be built to both contain prices and distribute to new entrants.
5. In addition, if there is a need to stabilize the market (in the circumstances specified - see further), the Ministry of Environment may:
- set minimum and maximum emissions permit possession limits;
- limit the amount of banking and borrowing;
- limit the amount of offset emissions permit submissions, and
- set price ceilings and floors.
Three specified cases that would require price stabilization measures are:
- price climb: greater than threefold increase from the average price;
- demand climb: the average price increases more than two-fold due to a more than two-fold increase in trade volume from the average in a one month period; and
- price crash: the price decreases more than 60% of the average in a one month period.
The above-mentioned abundance of regulatory measures notwithstanding, there are also simmiliarities between Korea carbon pricing mechanism and other emission trading schemes, EU ETS including.
Under the Korea cap-and-trade there will be a national cap for emissions, and allowance allocation standards will be phase-, industry-, and sector-specific.
Resembling the EU ETS the annual linear reduction factor 1.74 % in the third trading period, Korea's cap is also set to tighten over time, while the percentage of auctioned allowances is to increase over time.
The above-cited IETA analysis underlines that during the first phase of the Korean ETS 100% of allowances will be freely allocated. Later, up to 97% of allowances will be freely allocated in Phase II, and up to 90% of allowances will be freely allocated in Phase III. As a result, at least 3% of allowances will be auctioned in Phase II and at least 10% will be auctioned in Phase III.
Companies in sectors that are considered energy-intensive and trade-exposed (EITE) will receive 100% of their allowances free of cost.
Business sectors are considered EITE if they experience: (1) production cost increases over 5% and trade intensity increases over 10%; (2) production cost increases over 30%, or (3) trade intensity increases over 30%.
Use of domestic and international offsets
IETA recalls the fact that to meet the national cap goals, emissions reductions from voluntary ETSs will be included under Korean scheme, but it has yet to be determined whether credits from voluntary markets will be allowed to be bought and traded. The Ministry of Knowledge Economy issues Korean Certified Emissions Reductions (KCERs) to uncapped industries that verifiably produce additional emissions reductions, but, at present, these KCERs are not allowed to be traded. Offsets will be limited to a maximum of 10% of allowance obligations.
Offsets from international sources will be excluded from the first two phases of the Korean ETS, and, post-2020, international units will be allowed to be used to meet up to 10% of an entity's surrender obligations and the volume must not exceed the number of domestic offsets used for each compliance year.
Links with the UN offset market, however, have been described as highly uncertain.
Banking and borrowing
Banking is allowed (between years and phases) within one year of the following compliance period.
Borrowing between phases is forbidden, but allowances can be borrowed between years within each trading phase for up to 10% of emissions.
In conclusion, the visible carefull design of multiple regulatory measures making-up the Korean emission trading scheme tends to preliminary assessment that the first Asian cap-and-trade is more fine-tuned to be fit-for-purpose than current arrangements of the EU ETS.