South Korea Restricts Carbon Offsets, Sets Rules for Giveaways

South Korea asked its largest emitters to make cutbacks at home before giving them credit for overseas spending to reduce greenhouse gases, and it will begin charging for about 3 percent of pollution allowances in 2018.

The nation won’t allow so-called global carbon offsets until after 2020, according to an e-mailed statement today from the prime minister’s office and other government agencies. South Korea agreed in May to start a cap-and-trade system in 2015 to rein in the fastest-growing emissions in the developed world.

The trading system will “provide economic motivations to emitters for cutting greenhouse gases and bolster their developments of green technologies,” the prime minister’s office said in the statement.

The government will give emitters all their allowances for free from 2015 until 2017, rejecting requests for giveaways through 2020, according to the statement. The nation announced guidelines today for awarding as much as 97 percent of firms’ emission allowances for free between 2018 and 2020. They stand to get 90 percent free after 2021 under rules designed to favor emitters with overseas competition and the highest carbon costs.

“We hope the government will grant exceptions to export contributors,” Kim Tae Yoon, head of the strategic industries team at the Federation of Korean Industries, a business lobby group with about 500 members, including Samsung Electronics Co., Posco, and Hyundai Motor Co. (005380) “The exceptions should be given to boost their global competitiveness.”

30% Reduction

South Korea, which pledged to reduce greenhouse-gas emissions by 30 percent from forecast levels in 2020, is following a more restrictive policy with regard to offsets. These global credits allow emitters subject to cap and trade to pay for overseas abatement as a less-expensive alternative to domestic reductions.

The European Union, which runs the world’s biggest emissions market, has allowed emitters to turn in offers under the United Nation’s programs since 2005. Australia is set to allow polluters to use UN credits for as much as 12.5 percent of their compliance starting in 2015, while New Zealand allows unlimited use of offsets.

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

“Korea’s decision to not allow international credits into its program will ensure a higher carbon price than would have otherwise been the case,” said Milo Sjardin, the Singapore- based head of Asia-Pacific analysis at Bloomberg New Energy Finance. “However, the fact that the government intends to provide most allowances for free until 2020 indicates that the actual compliance cost for industrials and power generators will be mitigated.”

Cheaper Offsets

UN Certified Emission Reductions for December rose 9.4 percent yesterday on London’s ICE Futures Europe exchange, closing above 1 euro ($1.27) a ton for the first time since Nov. 6. The offsets are down 85 percent from a year ago and sell for less than EU permits, which rose 9 percent yesterday to settle at 9.08 euros.

South Korea’s cabinet passed the cap-and-trade enforcement system today after finalizing details in hearings with industrial and academic leaders over the past few months.

While the government didn’t clarify which sectors will get free permits, it announced guidelines for awarding allowances based on trade exposure and emission costs. Beneficiaries of free allowances include emitters who export more than 30 percent of a sum of annual revenues and import amounts.

The Ministry of Environment, which will govern the trading system, will create or designate a carbon-trading exchange depending on negotiations with related organizations, according to the statement.

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

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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