South Korea Seeking CO2 Cuts at Home Before Allowing Offsets

South Korea is asking its largest emitters to make cuts at home before giving them credit for overseas spending to reduce greenhouse gases.

The nation, which agreed earlier this year to start a cap- and-trade system in 2015 to rein in the fastest-growing emissions in the developed world, won’t allow so-called global offsets until after 2020, according to a statement posted this week on the prime minister’s website. More than 400 companies participating in the program will be able to use offsets for as much as 50 percent of their required emissions reductions starting in 2021, the government said.

“We hope to use the system in an initial stage to support the government pledges for reduction,” Nam Kwang Hee, director- general of the Presidential Committee on Green Growth, said by phone. “As companies focus on cutting domestic emissions, it will help the country meet planned reduction targets.”

South Korea, which pledged to reduce greenhouse-gas emissions by 30 percent from forecast levels, follows the European Union, Australia and New Zealand in allowing emitters to meet at least some of their pollution-abatement targets by paying for overseas rather than domestic clean-ups. With the price of credits in the United Nation’s Clean Development Mechanism trading near record lows, offsets can reduce compliance costs for emitters subject to carbon limits.

Australia’s carbon-pricing system, which started July 1 and is set to convert to cap and trade in 2015, allows companies to achieve as much as 50 percent of their compliance using UN Certified Emission Reductions. New Zealand’s carbon market, which began in 2008, permits factories to achieve all their compliance using CERs.

Record Low Prices

CERs for December declined to a record low of 2.82 euros ($3.40) a metric ton on July 19 and opened today at 3.03 euros on the ICE Futures Europe exchange in London. CERs and allowances in the European Union, which runs the world’s biggest cap-and-trade system, are oversupplied until at least 2020 because the recession and debt crisis reduced economic output and demand for emission credits, according to Bloomberg New Energy Finance.

“The CDM market won’t be able to rely on another source of demand for its credits,” said Milo Sjardin, the Singapore-based head of Asia-Pacific analysis at Bloomberg New Energy Finance. “Korea therefore won’t be able to help alleviate the large oversupply of CERs in the market.”

Offsets won’t be permitted in the first phase of South Korea’s emissions trading, scheduled to run from 2015 to 2017. They will also be banned in the second phase, which covers 2018 to 2020, according to the government’s preliminary guidelines.

Direct Opposite

“The fact that the Korean government has chosen not to allow international offsets before 2020 means that all of the abatement necessary in the first five years of the program will need to be achieved at home,” Sjardin said. This is the direct opposite of what the EU ETS has done and will likely result in higher domestic carbon prices than what would have been the case otherwise. Korean companies will now be faced with finding sufficient abatement options that can be achieved in the first few years at reasonable costs.”

South Korea will hold a public hearing in August with experts in companies and academia to finalize rules on the cap- on-trade system by Nov. 15, the statement said. The government also proposed giving emitters their allowances for free from 2015 through 2017, it said.

‘Relieving Cost Burdens’

“We are seeking to ease in the new system by relieving cost burdens on companies at the start,” the prime minister’s office said in the statement. “We will expand the requirement to pay for emission allocations gradually.”

Companies will get as much as 97 percent of their emission allowances for free between 2018 and 2020, and 90 percent after 2021, the statement said.

Companies that emit more than 125,000 metric tons of carbon dioxide a year, or worksites emitting more than 25,000 tons, will be subject to reduction targets. The Ministry of Environment will be in charge of the program.

Four state financial companies, including Korea Development Bank and Industrial Bank of Korea, will be designated to trade carbon offsets with companies in the initial stages.

The largest market for carbon offsets is the European Union, where installations may use about 1.7 billion UN CERS by 2020 along with EU emissions permits. As of yesterday, the CDM had generated 971 million credits, according to its website, each one representing a saving of 1 ton of carbon dioxide.

Other carbon markets, including the Regional Greenhouse Gas Initiative in the U.S. Northeast and California’s cap-and-trade system, which starts next year, have offset standards that are not interchangeable with the UN system.

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

To contact the editor responsible for this story: Mike Anderson at manderson34@bloomberg.net

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