The Republic of Korea has continuously expressed its commitment to reduce greenhouse gas emissions, as evidenced by raising its 2030 national greenhouse gas reduction target in 2021. Accordingly, the role of the emissions trading system as a means to achieve carbon neutrality and reduce greenhouse gas emissions is becoming more important. Under such circumstances, two separate partial amendment bills to the Act on the Allocation and Trading of Greenhouse Gas Emission Permits (the “Emissions Trading Act”) proposed in December 2022 and June 2023, respectively, which intend to make greenhouse gas emissions trading more convenient and reduce price volatility, were integrated into a single amendment bill (the “Bill”). The Bill was reviewed by the Environment and Labor Committee and was passed by the plenary session of the National Assembly on January 9, 2024.
The most noteworthy parts of the Bill include the following:
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Expansion of the Scope of Participants in the Emissions Trading System
The existing Emissions Trading Act defines those who have no legal obligation but are eligible to participate in the greenhouse gas emissions trading system as “business entities subject to the target management system.” The Bill enables all business entities regardless of size to participate in the emissions trading system (Article 8 of the Bill).
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Establishment of Principles and Standards for Free or Paid Allocation
The Bill stipulates that emission permits will be allocated for a fee in principle and provides more concrete standards for free allocation. The maximum ratio of free allocation will be prescribed by Presidential Decree. When making free allocations, the impact on international competitiveness, trends in the international carbon pricing system, and reduction conditions by sector/industry are expected to be taken into consideration (Article 12 of the Bill).
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Provision for Additional Allocation or Cancellation of Allocation When Emission Permits are Under or Over-Allocated
The Bill provides a legal basis for additional allocation or cancellation of emission permits when emission permits are under-allocated or over-allocated in violation of the standards for allocating emission permits or standards for additional allocation. Specific requirements for additional allocation or cancellation of allocation will be prescribed by Presidential Decree (Articles 16 and 17 of the Bill).
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Defining the Scope of Participants in the Emissions Trading Market and Imposing a Cap on Emission Permits
The Bill states the scope of persons who can participate in the emissions trading market as follows: (i) business entities eligible for allocation; (ii) emission market creators; (iii) emission trading brokers; and (iv) other persons prescribed by Presidential Decree. The cap on emissions permits that a participant in the emissions trading market can hold is currently set in the Ministry of Environment’s National Greenhouse Gas Emission Permit Allocation Plan. However, the Bill provides a legal basis to set the above cap in the Emission Trading Act itself (Articles 19 and 20 of the Bill).
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Addition of Obligation of Emissions Exchanges and Reasons for Cancellation of Designation
The Bill imposes an obligation on emissions exchanges not to engage in activities that disrupt the market order. Currently, subordinate laws and regulations of the Emissions Trading Act stipulate matters related to the management/supervision of emissions exchanges, including canceling the designation as an emissions exchange or issuing an order to suspend business, even though such matters limit rights or obligations of emissions exchanges. The Bill brings the above matters to be regulated directly under the Emissions Trading Act (Article 22 of the Bill).
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Establishment of Regulations Applicable to Emissions Trading Brokers
Under the existing Emissions Trading Act, matters related to the qualifications of emissions trading brokers entrusted with the trading of emissions permits are stipulated in subordinate laws and regulations of the Emissions Trading Act, such as Presidential Decree and public notices. However, considering that the above matters affect the rights or obligations of emissions trading brokers, matters related to the scope of work, registration requirements, and cancellation of registration will be directly regulated under the Emissions Trading Act (Article 22-3 of the Bill).
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Implications
With the Bill, the scope of participants in the emissions trading market will be expanded and the Emissions Trading Act will explicitly provide a legal basis for such expansion, ultimately contributing to reducing price volatility in the emissions trading market and promoting emissions trading. The ratio of paid allocation in the Korean emissions trading market is lower than that in the emissions trading markets in Europe and other countries, raising concerns that it is difficult to operate the emissions trading system effectively. As the amended Emissions Trading Act explicitly states that emissions permits are allocated for a fee in principle and provide more concrete standards for free allocation, such changes will further encourage businesses to reduce greenhouse gas emissions.
Companies should closely monitor the legislative process of subordinate laws and regulations, which will further elaborate on the amendments introduced above, so that they can quickly respond and adapt to changes in the legal system.
[Korean Version]
