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South Korean Parliament Approves Carbon Trading System

South Korea approved a cap-and-trade system to cut greenhouse gases as President Lee Myung Bak seeks support for new restrictions on factories and power plants in the fastest-growing emitter among industrialized democracies.

The National Assembly passed a bill to establish cap-and- trade, a market-based program that requires companies exceeding their emission quotas to buy permits from those that discharge less, with the backing of ruling and opposition parties, according to the assembly’s webcast of yesterday’s session. The bill, which calls for emissions trading to start in 2015, was passed in a 148-0 vote, with 3 abstentions.

“This is a truly significant moment, not only in terms of Korea’s national efforts to tackle climate change, but also because it underlines the emergence of a nascent Asian-Pacific carbon trading emissions hub with the potential to be a tipping point in the global fight against climate change,” said Terry Townshend, the Beijing-based director of policy for the Global Legislators Organization, a group known as Globe whose members include Bryony Worthington of the U.K. House of Lords.

Carbon markets in Korea, Australia and China may be linked with Europe’s emissions-trading system as early as 2020, according to Globe. Before that can happen, Korea’s president will have to sell the plan to domestic manufacturers who claim it will hurt their competitiveness in global markets. Lee pledged at the United Nations climate summit in 2009 to cut greenhouse by 30 percent from forecast levels by 2020.

‘Early Adopter’

At least year’s meeting of about 200 nations in Durban, South Africa, countries including the U.S. and China said they will wait until 2015 to sign a global accord on emission reductions that would take effect as late as 2020. Australia voted last year to start a cap-and-trade system in 2015. New Zealand started emissions trading in 2009, and the European Union started the world’s biggest emissions market in 2005.

“Korea becomes an early adopter in Asia,” Kang Hee Chan, a senior researcher at the Korea Environment Institute, said by phone.

Foosung Co. and Huchems Fine Chemical Corp., companies that sell carbon credits, rose after South Korea’s emissions bill was passed. Foosung climbed as much as 5.3 percent on the Korea Exchange, its biggest intra-day gain since April 26, and closed 0.6 percent higher at 6,300 won today. Huchems rose 0.9 percent to 22,700 won, the highest close since March 20. The benchmark Kospi index fell 0.2 percent.

Selling in Europe

Companies that emit 125,000 metric tons or more of carbon dioxide a year will be subject to Korea’s cap-and-trade system, along with factories, buildings and livestock farms that produce at least 25,000 tons of the gas annually, according to the bill. The government is scheduled to announce rules governing compliance within six months.

“Foosung is among a handful of companies at home that are already selling carbon credits in Europe,” Song Dong Heon, an analyst at Hyundai Securities Co., said by telephone today. “Stocks in the sector are strong on expectations that the companies will benefit from the legislation.”

South Korea is a “natural” partner for cooperating with Europe’s emissions-trading system, known as an ETS, according to EU Climate Commissioner Connie Hedegaard. “Welcome, South Korea, world’s 12th-largest economy, to the growing ETS family,” she said via her Twitter account.

Even so, emission markets overseen by the EU and United Nations weren’t lifted by yesterday’s announcement. Carbon permits in the EU dropped as much as 1.8 percent today, extending yesterday’s decline of 4.6 percent on London’s ICE Futures Europe Exchange. EU allowances are down 60 percent from a year ago as Europe struggles with a debt crisis that has exacerbated an oversupply of permits.

Fastest-Growing

So-called offset credits under the UN’s Clean Development Mechanism also fell. They dropped as much at 4.7 percent today on ICE, extending yesterday’s decline of 1.5 percent.

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.

“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 yesterday’s vote.

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.

Kim Tae Yoon, head of the strategic industries team at the federation, which has about 500 members including steelmaker Posco (005490) and Samsung Electronics Co., said companies remain opposed to any implementation of carbon trading that’s done faster than rival countries.

“Our position remains the same,” Kim said by phone today. “We are worried about the impact on our competitiveness and are committed to finding a compromise in consultation with the government.”

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.

Free Permits

“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 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.

The government has yet to announce any rules governing compliance, such as how many Certified Emission Reductions under the UN program would be allowed in the program.

The government needs to see a lot of studies about the bill’s impact on people, Yim Jong Yong, minister of the Prime Minister’s Office, told lawmakers in Seoul before the vote.

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 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 yesterday. “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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