On March 24, 2020, the government promulgated partial amendments to the Act on the Allocation and Trading of Greenhouse-Gas Emission Permits (the “Act”) to improve certain limitations identified during the implementation of the Greenhouse-Gas (“GHG”) Emission Permit System (e.g., allocation of emission permits, management of emission permits in reserve and designation of parties to establish the emission permit trading market).  The amendments took effect on June 1, 2020, and draft amendments to the lower regulations were published for public comments on April 23, 2020.

The most noticeable amendments are (i) a change in the unit of allocation of emission permits from facility to workplace, and (ii) the expanded scope of allocation of emission permits.  Previously, even if a company has multiple places of business, the company was subject to the allocation of emission permits only as to its place of business that emits a certain level of GHGs.  However, under the recent amendment, the company would be subject to the allocation of emission permits for all of its places of business as long as there is at least one place of business that emits a certain level of GHGs.  

We summarize below key provisions of the amendments to the Act and draft amendments to the lower regulations:

1.   Supplemented Grounds for Designating Entities Subject to Allocation and Cancellation (Article 8)

Under Article 8 of the former Act, (i) entities that produced an average total amount of GHG emissions of not less than 125,000 tons of comparable CO₂ equivalents (“tCO₂-eq”) during the past three years and (ii) entities with a place of business that have produced 25,000 tCO₂-eq during the past three years were subject to allocation of emission permits.  

The amendments clarified the scope of designation of entities subject to allocation by changing the scope to (i) entities subject to the allocation for the preceding commitment period and (ii) “controlled entities” as defined in Article 42 of the Framework Act on Low Carbon and Greed Growth [Paragraph 1].

Furthermore, the amendments provide a legal basis to cancel the designation in the event that the entity subject to allocation is closed, dissolved or divided, or its place of business is transferred [Paragraph 2].

 
2.    Codification of Transfer of Rights and Obligations of Entities Subject to Allocation (Article 8-2)

Under the amended Act, an entity subject to allocation must report a partial or entire transfer of its rights and obligations to the relevant government authority within 15 days from the date of the transfer.  In the event that the transferring entity no longer exists after the transfer, the transferred entity would instead be required to report the transfer [Paragraph 2].  Moreover, upon learning that a right or obligation of the entity subject to allocation is transferred, the relevant government authority, in its sole discretion, may transfer or cancel the corresponding emission permits [Paragraph 4].

3.    Improved Regulations on Application of Emission Permit Allocation, Additional Allocation or Cancellation of Allocation (Articles 13, 16, and 17)

To facilitate intra-company efforts to reduce emission levels (e.g., through connection between different facilities), the amended Act allows the entities subject to allocation to apply for emission permit allocation, additional allocation or cancellation of allocation for each place of business.  This means that emission permits would be allocated in the unit of “place of business” as opposed to “facility,” the unit to which emission permits were allocated under the former Act.  Therefore, businesses would need to submit an allocation application as well as an emission estimation plan that includes how to gather and evaluate emission data for all places of business [Article 13].

While allocated emission permits could be adjusted in the case of, among other things, change in the types of products or revision to business plans under the former Act, these grounds for adjustment of allocation have been eliminated by the amendments [Article 16].  In addition, the grounds for cancelling allocation are further clarified (e.g., cancellation may be allowed, among other things, if designation as the entity subject to allocation of emission permits is revoked, or such entity’s emission is reduced under a certain threshold due to suspended operation) [Article 17].

4.    Change in the Standards for Exclusion of Businesses from Paid Allocation (Article 19 (1) of the draft Enforcement Decree)

Under the draft Enforcement Decree, international trade intensity and production cost incurrence rate are no longer considered separately in determining which businesses would be excluded from paid allocation.  Instead, if international trade intensity multiplied by production cost incurrence rate is 0.3% or greater, those businesses would be excluded from paid allocation. 

5.    Expansion of Who Can Engage in Emissions Trading (Article 36 of the draft Enforcement Decree)

Previously, only the entities that are subject to allocation of emission permits, and the market controllers (e.g., Korea Development Bank and Export-Import Bank of Korea) were allowed to engage in emissions trading.  However, under the draft Enforcement Decree, brokerage firms for emission rights are permitted to register an account for trading emission permits and to trade emission permits within the emission permit exchange, starting from the Third Planning Period (note that brokerage firms for emission rights would not be permitted to trade emission permits outside the emissions right exchange).