Not Working Properly
It has been pointed out that the prices of carbon credits that companies with excessive greenhouse gas emissions must purchase have dropped significantly, making the system less effective. In other countries, such as the European Union (EU), their prices are on the uptick due to the strengthening of environmental regulations; only Korea is bucking the trend.
Yoon Yeo-chang, a research fellow at the Korea Development Institute (KDI), said in a report on how to improve the market function of the emission trading scheme published on July 18, “Korea’s greenhouse gas reduction targets have been significantly strengthened, but the prices of carbon credits have hit the skids. If the price mechanism does not work smoothly, it may hinder the efficient achievement of reduction targets through the market.”
The emissions trading system, introduced and implemented in Korea in 2015, is a system in which the Korean government sets the total amount of greenhouse gas emissions and issues emission permits, and companies must purchase emission permits in the market and submit them to the Korean government. Companies that emit more greenhouse gases than their paid or free allocation through auctions must purchase and submit credits for their excess emissions. Failure to do so will result in fines and penalties.
However, the prices of domestic carbon credits have been plummeting since 2020. This contrasts with those in the European Union and New Zealand, where such prices have more than doubled or tripled as companies seek to comply with tighter emissions regulations and greenhouse gas reduction targets are revised upward globally. In Korea, the price of carbon credits for one ton of emissions in December last year was US$11.84, down 66.6 percent from US$35.43 in December 2019. In contrast, their prices in the European Union surged 238.8 percent, from US$26.97 to US$91.38, during the same period.
“If the prices of carbon credits remain low, companies will choose to purchase carbon credits rather than invest in GHG reduction facilities or technologies,” Yoon said. “The fact that the prices of carbon credits are declining when GHG reduction targets have been raised to a high level indicates that the price function of the cap-and-trade system is not working properly.”
Yoon blamed the decline in domestic emissions prices on the Carryforward Restriction System. To prevent companies from hoarding emission allowances, the system limits the amount of carbon credits that can be carried over from one year to the next, with companies allowed to carry over up to twice the amount of net sales of carbon credits this year and the amount next year. The regulation lowers companies’ demand to buy carbon credits and increases the amount of carbon credits sold in the year, driving down the prices of carbon credits.