1.

Background of Proposed Amendment

The Ministry of Environment (“MOE”) re-announced a proposed partial amendment to the Enforcement Decree of the Act on the Allocation and Trading of Greenhouse Gas Emission Permits (the “Emissions Trading Act”), which was previously published for public comments between September 4, 2024 and October 14, 2024 (the “Bill”). This time, the public comment period lasts from November 4, 2024 to December 16, 2024.

The Emissions Trading Act, which was partially amended on February 6, 2024 and will take effect on February 7, 2025, provides for (i) the expanded scope of participants in the emissions trading system; (ii) the establishment of the principle and criteria for paid/free allocation; (iii) the establishment of grounds for additional allocation for, and cancellation of, erroneous allocation of emission permits; (iv) the provision on a list of participants for the emission permits market and establishment of cap on how much emission permits can be possessed; (v) the compliance obligations of emission permits exchange and grounds for revocation of designation of the emission permits exchange; and (vi) the establishment of new regulations on emissions trading brokers (see our previous newsletter dated March 8, 2024, Link). Please see below for the key details of the Bill, which provides for the matters authorized under the amended Emissions Trading Act:
 

2.

Key Details of Bill
 

A.

Business entities eligible for voluntary participation in allocation of emission permits

The Bill specifies the criteria for the participants eligible for voluntary participation in the allocation of emission permits under the Emissions Trading Act (Article 9, Paragraph 4 of the Bill).
 

B.

Additional allocation of emission permits

A basis for additional allocation has been established for the situation where the value of emission permits allocated to companies increases upon the re-assessment of emission permits as a result of litigation (Articles 27 and 28 of the Bill).
 

C.

Cancellation of allocated emission permits

(i) If the emission amount decreases by 15% or more due to a facility shutdown, etc., it would be possible to cancel allocation to minimize companies’ windfall profits that are unrelated to their efforts to reduce emissions, while setting differentiated amounts of cancellation based on the emission reduction ranges; and (ii) A basis for cancellation of the allocation has been established for the situation where the value of emission permits allocated to companies decreases upon the re-assessment of emission permits as a result of litigation (Article 29, Paragraphs 3 through 5 of the Bill).
 

D.

Expanded scope of participants in the emission permits market

To revitalize the emissions trading market, the scope of market participants, such as collective investment companies, banks, insurance companies, fund managers, etc., has been expanded (Article 31 of the Bill).
 

E.

Brokerage transactions, registration of accounts, and reporting of emission permits

(i) To ensure the stable operation of the emission permits market, certain market participants are required to trade emission permits via emission permit trading brokers (Article 31-2 of the Bill). (ii) When an emission permit trading broker files an application for registration of a trading account, it needs to specify the purpose of trading. Moreover, if an emission permit trading broker registers the trading account in the emission permits register on behalf of its customer, the customer shall be deemed to have registered the trading account (Article 32 of the Bill); and (iii) If an emission exchange notifies the head of the Greenhouse Gas Inventory & Research Center of the details of emissions trading, or if an emission permit trading broker does so,^[1] the trader or the customer in the emission exchange would be deemed to have filed the notification on the emissions trading (Article 33 of the Bill).
 

F.

Business affairs, supervision, etc., of emission exchange

The Bill adds tasks to be performed by emission exchange and stipulates the matters to be complied with (e.g., criteria for rendering administrative dispositions such as revocation of designation, suspension of business, etc., of emission exchange, prohibition of divulgence of business secrets by officers and employees, and prevention of conflicts of interest of full-time officers and employees (Articles 34 and 35 of the Bill).
 

G.

Registration and cancellation of registration of, and matters to be observed by, emission permit trading brokers

The Bill sets forth (i) the facility standards that emission permit trading brokers are required to meet; (ii) detailed requirements for administrative dispositions authorized under the Emissions Trading Act, such as suspension of business and revocation of registration of emission permit trading brokers, and procedures for disposition of emission permits of emission permit trading brokers whose registration has been revoked; and (iii) detailed standards and regulations on the matters to be complied with by emission permit trading brokers as set forth by the Emissions Trading Act (e.g., obligation of good faith, establishment of internal control standards for management of conflicts of interest, notification of details of market participants, prohibition of unsound business activities, compensation for losses and profit guarantee, etc.) (Article 36 of the Bill, etc.).
 

H.

Supervision of market participants

The Bill provides that the Minister of Environment may inspect market participants with the cooperation of the Financial Supervisory Service for the fair and transparent operation of the emissions trading system (Article 36-13 of the Bill).
 

I.

Designation of emission permit market makers and revocation of such designation

The Bill sets forth detailed standards for designation (and revocation) of emission permit market makers, procedures for disposition of emission permits by market makers whose designation has been revoked, etc. (Article 37-2 of the Bill).
 

J.

Extension of effective period of, reporting, submission, carrying over/borrowing, offset emission permits, etc.

The Bill extends (i) the reporting period for any change in the emission statements from 15 days to 30 days; and (ii) the effective period of, submission of emission permits, application for carrying over/borrowing and validity of offset emission permits from six months to eight months from the end of the year when such measures are taken (Article 39, Paragraph 2 and Article 44 of the Bill).
 

K.

Delegation and entrustment of authority or duties

The Bill (i) authorizes the head of the Greenhouse Gas Inventory & Research Center to take charge of registration of market participants’ emissions trading accounts; (ii) authorizes the Korea Environment Corporation to take charge of registration, revocation of registration, management, supervision of emission permit trading brokers,^[2] as well as the work of processing conformity assessment system, and supporting activities; and (iii) entrusts the Korea Verification Association of Greenhouse Gas with any work related to refresher training among a various types of trainings set forth in the work standards for verifiers (Article 57 of the Bill).
 

3.

Key Changes of Bill Preliminarily Announced Again

The Bill contains, among other things, the provision strengthening the criteria for cancelling allocation of emission permits so that the allocation of emission permits can be cancelled if the emission permits allocated to each business place were reduced by more than 15% (Section 2.C above). However, as the Bill now specifies that such criteria would become applicable to the emission permits for the compliance year 2025, companies are advised to thoroughly review the Bill and analyze its potential impacts, thereby preparing for the implementation of the amended emissions trading system.