Following the establishment of the Emissions Trading Scheme Advancement Committee (“Committee”), the Ministry of Environment (“MOE”) held the first meeting on August 16 to proceed with the improvement of the Emissions Trading Scheme. As reported to the President back in July, the MOE plans to reform the Emissions Trading Scheme by, for example, increasing the proportion of benchmark-based allocation (“BM Allocation”) and expanding the paid allocation, so that Korean companies can overcome carbon trade barriers. The key aspects of the contemplated improvements are as follows:
1. Committee’s Operational Direction
Various Ministries, representative corporations/associations for relevant industries, organizations, experts, etc. will participate in the Committee’s activities under the MOE’s lead. The Committee will convene once a month until the end of the year, and agendas will be reviewed and discussed in three separate divisions: (i) System Improvement Division, (ii) Paid Allocation Division, and (iii) BM Allocation Division.
2. System Improvement Division
The System Improvement Division will review regulatory improvements proposed by relevant industries, encourage companies to make efforts to reduce GHG emissions, and discover tasks to ease unreasonable administrative burdens. At the same time, the Division will also develop measures to vitalize the market through participation of third parties, expand support for allotted companies by utilizing revenues from paid allocation, and diversify support projects, such as the Carbon Contracts for Difference (a program to promote industrial investment in reducing GHG emissions via governmental guarantee on carbon prices).
3. Paid Allocation Division
The Paid Allocation Division will have specific discussions on how to expand paid allocation, which is being implemented as a national agenda. For your information, the proportion of paid allocation and the industries subject to paid allocation are set at 10% and 41 industries, respectively, for the 3rd Planning Period (2021-2025). In this regard, the Division will devise measures to expand the paid allocation ratio and the scope of paid allocation.
4. BM Allocation Division
The BM Allocation Division will discuss ways to expand the scope of businesses eligible for BM Allocation, a method that allocates GHG emissions permits based on the average emission unit for each industry. This will allow companies, which are better at reducing GHG emissions, to receive more emission permits.
This effort to improve the GHG Emissions Trading Scheme is (i) aimed at preemptively responding to international carbon trade barriers, such as the introduction of the European Union’s Carbon Border Adjustment Mechanism, and (ii) intended to encourage industries with heavy GHG emissions to enhance their efforts to reduce GHG emissions. In addition, the issues related to the paid/BM allocation are expected to be reflected in the establishment of the basic plan and allocation plan for the next Emissions Trading Scheme from a mid-to-long-term perspective, while certain improvements will be completed through administrative amendments by the end of this year. Additional allocation and reduction credit rationalization will be also discussed.
It would be advisable for relevant companies to closely monitor the Committee’s discussion and actively participate in the Committee’s activities by providing their opinions on the issues that are unreasonable or require further improvement.