The recent enactment of the emissions trading scheme (ie. ETS) legislation in South Korea has been widely praised in Australia by prominent public figures such as Greg Combet and Christine Milne. However, how does the South Korean ETS compare with the Australian carbon tax (also known as carbon pricing scheme)? Also, will Australia’s subsequent repeal of its carbon pricing scheme have implications for the South Korean ETS? This article will answer these questions with an analysis of both countries’ schemes.
The South Korean National Assembly passed the Act on the Allocation and Trade of Greenhouse Gas Emissions Rights (Alternative) on 2 May 2012 with 148 in favour and 3 abstentions, showing remarkable political consensus compared to Australia. Under this legislation, the ETS will commence on 1 January 2015 in South Korea.
South Korea already has a Target Management Scheme in place under the Framework Act on Low Carbon, Green Growth to assist businesses to transition into the ETS. Under this scheme, the government is to establish and manage greenhouse gas emissions reductions targets for certain entities whose emissions and/or energy use are over a certain threshold.
The relevant thresholds are summarised in the table below.
Each entity covered by the scheme must observe the reductions targets set by the government and report the entity’s performance in achieving the targets. The entity is potentially liable for a small fine if it fails to abide by the reductions targets.
This scheme is somewhat similar to Australia’s National Greenhouse and Energy Reporting Scheme (“NGERS”) which was (somewhat belatedly) introduced by the Howard government in 2007 to require certain entities to report their greenhouse gas emissions. The NGERS was introduced to effect a smooth transition into a full-blown ETS (as noted by Malcolm Turnbull in his Second Reading Speech as the Coalition Minister for the Environment and Water Resources).
As we all know, the transition into an ETS, carbon pricing scheme, carbon tax or TOXIC TAX (depending on your political inclination) has been anything but smooth in Australia. Also, a recent survey has found that 42 percent of small to medium business operators are confused about the carbon tax. This confusion has been manifest in the first week of the carbon pricing scheme, with two businesses already in trouble for making misleading claims about the impact of the carbon price on electricity prices).
The South Korean Target Management Scheme is however more substantial than the NGERS. That is, unlike the NGERS, the South Korean scheme potentially involves a fine for failing to achieve a particular emissions reduction target. It remains to be seen whether this will mean a smoother transition into the ETS in South Korea by 2015.
Similarities and differences between the Australian and Korean ETSs
The biggest distinction between the Australian and South Korean ETSs is in how the price for emitting greenhouse gases is determined. Under the Australian scheme, the price of carbon units is fixed for the first three years of the scheme at the following prices — $23 per tCO2-e in 2012/13, $24.15 per tCO2-e in 2013/14 and $25.40 per tCO2-e in 2014/15.5 The price will then be floated possibly (but increasingly less likely) with the floor price of $15 per ton.
In contrast, the price of emissions units in South Korea will be floated right from the commencement of the scheme. The units price therefore will be determined by auction or by some other mechanism prescribed in the Presidential Decree.
Otherwise, the South Korean and Australian ETSs look quite similar. For instance, both schemes have similar emissions thresholds for mandatory participation in the ETS (ie. 25,000 tonnes CO2-e for a facility) and both will provide for a limited recognition of certain eligible international emissions units.
Industry assistance regimes under the Korean ETS are yet to be set out. The Presidential Decree will determine the industry assistance regimes, taking into account the relevant industry’s impact on national competitiveness, international treaties and trend in relation to climate change, and any effect the ETS may have on the cost of living and the national economy. Free emissions units issued under the industry assistance regimes from 1 January 2015 to 31 December 2020 will offset at least 95% of the covered industries’ emissions liabilities, with this percentage decreasing in the subsequent periods.
The Korean industry assistance regimes may end up looking quite similar to Australia’s Jobs and Competitiveness Program (“JCP”). Under the JCP, certain emissions-intensive trade-exposed activities receive assistance to cover 94.5% of industry average carbon costs in the first year of the carbon price, with this percentage gradually decreasing as the time goes by.
Strengths and weaknesses of the South Korean ETS
It is still early to judge the strength or weakness of the South Korean ETS compared to the Australian carbon pricing scheme given that a lot of the key details in relation to the Korean ETS are yet to be determined — eg. the industry assistance regimes (which may offset up to 100% of Korean businesses’ emissions liabilities). Also, many elements of the South Korean ETS are quite similar to the Australian carbon pricing scheme anyway.
Nevertheless, one obvious strength of the South Korean ETS is that it has received bipartisan support and is therefore much less likely to be repealed than the Australian one. Tony Abbott has recently released a somewhat detailed plan (which can be seen here) to abolish the carbon pricing scheme (or carbon tax) as soon as the Coalition wins government.
A possible weakness in the South Korean ETS compared to the Australian one is that the South Korean scheme will see the emissions units prices floated right from the scheme’s commencement. Coupled with the possibility of a large number of free emissions units issued under the industry assistance regime, this is potentially a deal-breaker in the South Korean ETS. It is basic market economics that an excessive allocation of free emissions units will reduce the market price of emissions units to such a low level that there is virtually no incentive for businesses to reduce their greenhouse gas emissions. The floating of the emissions units prices from the commencement of the scheme is therefore a potentially
severe weakness in the South Korean scheme.
What Australia can do to make the South Korean ETS stronger
The South Korean ETS legislation requires the government to consider international trend in relation to climate change when it determines the amount of free emissions units to be handed out. Australia’s carbon pricing scheme (along with the ETSs in the EU and New Zealand) is explicitly mentioned on the South Korean Prime Minister’s Office website (note: this website is in Korean) as an evidence of an international trend in favour of an ETS – a South Korean Prime Minister is more or less an equivalent of a Vice President in the US.
Therefore, whether the Australian carbon pricing scheme survives may have a direct impact on the effectiveness of the Korean ETS. If Australia’s carbon pricing scheme is repealed, the South Korean government may decide that the international trend is against any market-based response to climate change. As a result of this decision, the Korean government may allocate enough free emissions units to effectively render the ETS redundant. On the other hand, if Australia’s carbon pricing scheme does survive, South Korea’s allocation of free emissions units is less likely to be large enough to severely damage the integrity of the ETS.
The South Korean ETS is quite similar to the Australian carbon pricing scheme. However, many key details of the South Korean ETS (such as the industry assistance regimes) which may determine its strength or weakness are yet to be set out. Also, it is a potential concern that the South Korean scheme will see the emissions units prices floated from the commencement of the scheme.
The possible ramifications of repealing the Australian carbon pricing scheme (apart from Australia continuing its exuberant contribution to global warming) include setting an international trend against an ETS. Since international trend is one of the factors the South Korean government must consider in determining how many free emissions units to hand out, the repealing of Australia’s carbon pricing scheme may induce South Korea to give out enough free units to severely damage Korea’s own ETS. Good news for climate change sceptics. A terrifying possibility for climate change believers.
Albert Yu is a law graduate at Allens. He lived in South Korea until 2001. All opinions contained in this article are his own and not on behalf of anyone including his employer.