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South Korean Parliament Approves Carbon Trading System

South Korea approved a cap-and-trade system to cut carbon emissions as President Lee Myung Bak seeks support from factories and power plants in the fastest-growing producer of greenhouse gases among industrialized democracies.

The National Assembly passed a bill to establish a cap-and- trade system in the country by 2015 with the backing of both ruling and opposition parties, according to the assembly’s webcast of the main session today.

“The bill is needed to cope with global climate change and, domestically to reduce emissions of greenhouse gas efficiently,” Kim Jae Kyung, a member of the ruling New Frontier Party, said in the assembly’s plenary session before voting. The bill was passed in a 148-0 vote, with 3 abstentions.

President Lee Myung Bak is struggling to sell the plan at home after pledging in December 2009 at the United Nations climate summit in Copenhagen to cut carbon emissions by 30 percent from forecast levels by 2020. The country’s largest companies said the plan will hurt competitiveness.

Korea’s decision follows an agreement at climate talks in December among about 200 countries including the U.S. and China to wait until 2015 to sign a global accord on emission reductions that would take effect as late as 2020.

“Korea becomes an early adopter in Asia” of a cap-and- trade program, Kang Hee Chan, a senior researcher at the Korea Environment Institute, said by phone. “Korea joins Australia and China, which plan to introduce the program in 2015.”

Fastest-Growing

South Korea is the world’s eighth-largest carbon emitter, based on 2009 figures from the International Energy Agency. The country’s greenhouse-gas emissions jumped to about 640 million metric tons in 2011 from 350 million tons in 1990, making it the fastest-growing emissions source among 34 nations in the Organization for Economic Cooperation and Development, Bloomberg New Energy Finance said in a Feb. 9 report.

Australia voted last year to start a cap-and-trade system in 2015. New Zealand started emissions trading in 2009, and the European Union has operated the world’s biggest emissions market since 2005.

South Korea imposed reduction goals in October 2011 on 458 polluters starting this year. They range from factories, buildings and livestock farms that produce at least 25,000 tons of carbon dioxide a year.

Unsettled Business

The Federation of Korean Industries and the Korea Chamber of Commerce & Industry, the nation’s top two business lobbies, asked the government to delay introducing the plan, saying it will increase costs and make industry less competitive against countries that don’t impose charges on emissions.

Companies may face an additional 5.6 trillion won ($5 billion) of costs if a carbon market is implemented, according to data from state-owned Korea Energy Management Corp., which handles emissions reductions and promoting renewable energy.

“It might be challenging for Korea to cut carbon emissions as requested by the government,” Kang said. “Its major industries, by nature, are emitting lots of the gas.” Korea largely depends on heavy industries such as steelmaking and petrochemicals, he said.

The government is already providing tax and financial incentives to encourage companies to cut their discharges, including a supplementary payment, or feed-in tariff, for renewable energy generated from 2002 until 2011.

Free Permits

These tariffs were replaced with a 2 percent renewable portfolio standard, starting this year. The country’s 14 power generators and other energy producers are required to derive a fixed quota of their energy output from renewable sources, including solar and wind. The mandatory cap will be raised to 10 percent by 2022.

The Korean government may give companies more than 95 percent of their permits for free for three to six years, according to the bill. Companies would get 100 percent of their permits for free depending on their contribution to the country’s trade, according to an e-mailed statement from the Knowledge Economy Ministry today. The government has yet to announce any rules governing compliance, such as how many so- called international offsets would be allowed in the program.

“It needs a lot of studies about the bill’s impact on citizens’ living when mapping out details,” Yim Jong Yong, minister of the Prime Minister’s Office, told lawmakers in Seoul today. “The government will try to determine details linking to impacts.”

742 Million Tons

South Korea would emit 742 million tons in 2020 without a program to cut emissions, Andrea Du Rietz, a London-based analyst at New Energy Finance, said in the note on Feb. 9.

The penalty for non-compliance is set at three times the prevailing market price with a maximum of 100,000 won ($89.17) per ton. The government raised the free allocation from original 90 percent, and lowered the upper limit on penalties five times during consultations with industries. The bill will take effect within six months, according to the statement from the ministry.

“The approved South Korean ETS could provide price support for CERs in the long run and contribute to the longevity of the global carbon market,” Du Rietz said in an e-mail today. “Any links with the UN offset market are highly uncertain, but we currently assume that approximately 20 percent of abatement needed out to 2020 could be met by about 130 million CERs over the six years.”

To contact the reporter on this story: Sangim Han in Seoul at sihan@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

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