Korean manufacturers that need to secure excess carbon credits are in trouble as the trading volume of carbon emission has plummeted amid skyrocketing emission permit prices.
The market price of the carbon emission permit hit an all-time high at 26,500 won (US$23.31) per ton on March 26. The average price in 2015 when the market opened was 11,007 won (US$9.68) per ton but the figure has been increasing by 106 percent to 156 percent on-year every year since then. It has also risen by more than 4,000 won (US$3.52) per ton this year.
The problem is that the trading volume is on the decrease. As no carbon emission permits have been put up for sale for a while despite high prices, there has been no emission permit transaction in the market. As a result, companies which have failed to secure carbon credits are facing a crisis. They want to buy emission permits even with high prices, but they cannot get them and are facing a fine.
A company official said, “The government asks us to reduce carbon emissions by ourselves with an investment in environment-friendly facilities but it requires an enormous amount of money and time. The carbon emissions trading system will increase the cost burden on companies and lead to a rise in product prices in the end.”
The government started implementing the carbon emissions trading system in 2015. Under the program, the government designates some companies as a large emitter of greenhouse gases and imposes emissions caps on them. When the emitters have an excessive amount of emissions, they are required to buy carbon credits in the trading market. This came after the Lee Myung-bak Government in 2007 enacted the Framework Act on Green Growth and promoted the low carbon policy, spearheaded by a national vision of “Low Carbon Green Growth.”
However, the emissions credit trading market now faces a cliff in transactions. Experts say it was an expected outcome. The Lee Myung-bak Government’s green growth strategy was based on an idea of foreign consulting firms. The Kyoto Protocol in 2008 has already become null and void and South Korea and New Zealand are the only countries that operate the carbon emissions trading system at the national level after the Paris Climate Conference in 2015. The government’s excessive greed for policy has led to the burden on companies after all.
The market price of carbon credits stood at 8,640 won (US$7.60) per ton on Jan. 12, 2015, the first day of the market opening, but it more than tripled to 26,500 won (US$23.31) as of March 26. The price surged as the supply cannot meet the demand.
It is no wonder, then, that companies which have failed to secure carbon credits are frustrated by the current situation. For one thing, they cannot purchase carbon emissions permits, though they are willing to pay higher prices. If they cannot get the permits, they have to pay a penalty which is three times higher than the average market price of carbon credits. For instance, a company which emitted an excess amount of 500,000 tons will be imposed a fine of 13.30 billion won (US$11.70 million) if they fail to get the credits. The figure equals 500,000 tons times 26,500 won (US$23.31), the market price on March 26, excluding a weighted average. The penalty is imposed once in a three-year plan term but companies have to buy an additional amount of carbon emissions permits and submit them to the government at the end of May every year. They can fill a shortage the next year but they are not sure whether they can secure the supply.
An official from the industry said, “Power generation, steel, petrochemical and cement producers which consume lots of energy are major companies that participate in the carbon emissions trading system but they are basic manufacturers connected to the upstream industry. The cost burden from carbon credits can lead to a chain reaction of product price hikes and lower global price competitiveness. In a nutshell, the cost burden of power companies can lead to an increase in electric charges, while the burden on steel producers can lead to a rise in prices of cars and home appliances.”
Companies are calling for a more flexible government policy. An official from a company said, “We agree on the need for the reduction of greenhouse gas emissions but we face a heavy burden if the government suggests too much emission reductions at the early stage. The emissions credit trading market also needs to make adjustments considering the stance of companies.”