Korea’s Emission Trading System: An Attempt of a Non-Annex I Country

to Reduce GHG Emissions Voluntarily

Hyungna Oh * and Junwon Hyon **

Abstract

In this study, we aim to describe the background for design characteristics of Korea’s Emission

Trading System (KETS) and derive policy implications for developing economies or non-Annex I

countries that are considering adoption of a cap-and-trade scheme. A non-Annex I country may face

unique hardships such as fierce opposition from carbon-intensive industry sectors, the presence of a

power imbalance between the Ministry of Environment (MOE) and ministries that are in charge of

supporting economic growth and regional development, and the absence or incomplete development

of financial markets and auctioning mechanisms. To overcome these hardships, the government

legislated laws that defined timelines for every stage of KETS development, established a strategic

governance architecture to make up the weak position of the MOE, offered strong market-stabilizing

measures focused on maintaining the allowance price below a certain level, and provided support

packages to make low-carbon-transition easy by compensating for losses caused by KETS. These

policy instruments that made it easier to adopt KETS can be obstacles to making KETS efficient.

There is a need for collective efforts to make a self-regulating ETS market, instead of adding

regulations and government intervention to control the allowance price at a low level. Of course, there

should exist a consensus among civil participants that global warming is real and there are new

growth opportunities in low-carbon productions and technologies.

*Associate Professor and a member of the Allocation Committee, College of International Studies, Kyung Hee

University, 1732 Deogyoung-daero, Giheung-gu, Yongin-si, Gyeonggi-do, Korea, Phone: 82-31-201-2160,

Fax: 82-31-201-2281, Email: h.oh@khu.ac.kr .

**Fellow, Korea Legislation Research Institute, 1934 Hannuri-daero, Sejong-si, Korea, Phone: 82 -44-861-0300

Fax.82-44-868-9913, Email: hyon@klri.re.kr

mailto:Email:%20h.oh@khu.ac.kr

1. Introduction

As the trading of carbon emission rights became available on January 1st 2015, South Korea

(henceforth, Korea) launched a national emission trading system, Korea’s ETS, or KETS, with a cap

of 573 MtCO2e for 2015. Covering roughly two-thirds of the country’s total emissions, KETS is the

world’s second largest carbon market after the EU ETS, and the second nationwide “cap-and-trade”

scheme in operation after that for Kazakhstan in Asia. Under KETS, 525 business entities in 23 sub-

sectors of 5 sectors have been designated as covered entities and given a fixed amount of emission

permits. The cap for the first commitment period (2015-2017) is 1,687 million tons of CO2e.

KETS was a tough sell in Korea. It has been considered the principal policy instrument to keep

the government’s pledge submitted to the Copenhagen Accord in 2010, a reduction in greenhouse gas

emissions of 30 percent below the business-as-usual (BAU) level by the year 2020. When the

government announced the plan to implement the scheme in Korea, it faced strong opposition from

the business sector. For instance, the Korean Chamber of Commerce claimed that Korea’s target of a

30 percent emissions cut is too ambitious and that adopting KETS will most likely slow down

economic growth. Resistance was so strong that the introduction was rescheduled from January 2013

to 2015.

Since the adoption was not discarded but delayed, the course of legislation associated with it

proceeded steadily. The Act on the Allocation and Trading of Greenhouse Gas Emission Permits

(henceforth, the ETS Act) and its Enforcement Decree were legislated in 2012. At the same time, its

institutional framework was established in sequence. In January 2014, the government designated the

Korea Exchange (KRX) as the sole carbon emissions trading market and the Ministry of Strategy and

Finance (MOSF) released the first Master Plan, a legal step toward the delivery of the Allocation Plan

for the first commitment period.

Five months later, in June 2014, the Ministry of Environment (MOE) laid out the “National

Emissions Permit Allocation Plan” (henceforth, the Allocation Plan), as part of a follow-up. This plan

was intended to elaborate on details for the operation of KETS for the period of 2015 to 2017,

including the total number of emissions allowances (cap) in circulation, and allocation methods. As

the Allocation Plan was released, the Korea Chamber of Commerce and the Federation of Korean

Industries requested a full-scale reconsideration of KETS and a further postponement of the launch

date to 2020. This request again provoked harsh debates, and the apex of opposition was seen in the

summer of 2014, six months prior to the second scheduled launch.

Against this backdrop, the first meeting of the Emission Permits Allocation Committee

(henceforth, the Allocation Committee) chaired by the Minister of the MOSF, was delayed several

times. According to the ETS Act, the implementation of KETS becomes effective only after the

Allocation Plan is finalized. The Allocation Plan, drafted by the MOE, has to be reviewed and

approved by the Allocation Committee, and then finalized by the Green Growth Committee (GGC)

and through the Cabinet meeting. In other words, delaying the first meeting of the Allocation

Committee held up the legal process for launching KETS.

The media reported a growing likelihood of cancellation due to the appointment of Kyung-Hwan

Choi as the new minister of the MOSF and designated chair of the Allocation Committee meetings,

who was to convene the first meeting to ratify the Allocation Plan, just as the date for the first meeting

was being fixed. He had opposed the adoption of KETS when serving as a minister of the Ministry of

Trade, Industry and Energy (MOTIE), an authority responsible for trade, industrial output growth and

energy policies. Whether or not this concern was justified, the MOSF delayed the first meeting and

monitored the tide of public opinion concerning KETS.

In late August, the government finally decided to launch KETS as scheduled. This decision was

mainly driven by two factors. One was concerns about the nation’s credibility and dignity associated

with a possible second delay when the KETS had inspired a considerable amount of praise from the

international community and was considered an important part of a green growth framework. It was

also practically impossible to cancel or delay the KETS just four months prior to its launch on 1st

January 2015. In order to soothe the business sector, the government modified the Allocation Plan,

adjusting the cap slightly upward and inserting a clause in the Allocation Plan describing policies and

procedures for high allowance prices. Finally, the first Allocation Committee meeting was held in

September 2014 and the revised Allocation Plan was approved, followed by approval the GGC and

the Cabinet meeting on 11th September 2014. Implementation became official on January 1st 2015.

There are many papers that describe how a cap and trade system has been prepared in Annex I

countries and compare differences in systems between Annex I and non-Annex I countries (Newell,

Pizer and Raimi, 2013; Cantala, McKnight and Sempere, 2013; Zhang, 2014). However, few studies

have explained unique hardships that a non-Annex I country may face in the process of adopting the

system, and reasons that a cap and trade system in non-Annex I country is different from that of

Annex I countries. With the present study, we attempt to fill this gap by describing the background for

salient characteristics of KETS and derive policy implications for non-Annex I countries that are

considering adoption of a cap-and-trade scheme.

The rest of this paper is organized as follows: Section II reviews the government’ efforts to make

up for KETS’ weak base, including legal preparations, the strategic institutional framework adoption

and clearly stated enhanced policy measures to make it less incumbent on participants, Section III

illustrates key contents such as the scope, the cap, allocation methods and policy measures to stabilize

allowance prices and minimize carbon-leakage, and compares KETS with the EU ETS. Section IV

summarizes this study.

II. Institutional Framework for KETS

In 2010, then president Lee Myung-bak, announced a national emission reduction target of 30

percent by 2020 under the BAU scenario at the Copenhagen meeting. This commitment was based on

both external and internal motives. The external motive was outside pressure to reduce GHG

emissions. In spite of increasing trends in both GHG emissions and GDP shown in Figure 1, Korea, as

a non-Annex I party country under the Kyoto Protocol, was excluded from the emissions abatement

obligation. However, Korea’s GDP and emissions rankings (16th and 7th in terms of size, respectively)

have placed the nation under growing pressure to join global efforts to tackle climate change by

limiting GHG emissions.

Figure 1. GDP and GHG Emissions

GDP CO2 emissions

Source: Economic Statistics System(http://ecos.bok.or.kr/flex/EasySearch_e.jsp), Bank of Korea.

This pledge was also motivated by two internal motives: it would function as a tool to promote

the creation of new growth engines, and as a symbol of Korea standing at the forefront of green

growth initiatives. The green growth strategy, first announced in August 2008, was regarded as a

central piece of the Lee Administration. Lee proposed green growth as an alternative growth path for

Korea, amidst concerns about Korea’s slowdown in economic growth and extremely high dependence

on imported energy. Lee argued that Korea’s growth rate could be 7 percent annually if the current

energy-and-CO2 intensive economy would be transformed into a low carbon green economy. Korea’s

pledge to cut back GHG emissions in line with the BAU baseline of 30 percent by 2020 was, thus, one

of the national mid-term targets associated with green growth, and the creation of an ETS scheme was

regarded as the most important step in promoting green investment and green growth.

Korea’s reduction target by 2020 was the highest reduction level recommended by the IPCC for

non-Annex I party countries (UNEP 2010). Therefore, Korea has been seen by the international

community as a country at the forefront of green growth initiatives. This helped Korea to host the

headquarters of the Global Climate Fund in 2012. The international community hailed Korea’s efforts

to attain the national reduction target and a decision of adopting KETS with headlines trumpeting “the

highest reduction target among developing countries” and “adoption of a nationwide ETS, the first-

ever among developing countries.” When the final decision to launch KETS was made in 2014, most

green growth policies, including green financing, were downsizing or had been cancelled by President

Park Geun-hye, who tried to distance herself from her unpopular predecessor1. Her decisions were

supported by citizens’ skepticism concerning the validity of green growth as a new path to enable

high growth rates. At the same time, there were pessimistic views about the likelihood of reaching a

legally binding deal on GHG emissions, internationally. This caused the first two motives, complying

with the international pressure and implementing a policy in pursuit of green growth, to fade out. On

the other hand, the third motive, being at the forefront of green growth, was strong enough to

encourage the Park Administration to maintain the announced national reduction target and initial

schedule for the KETS. It was accepted as a fact that its reversal would undermine Korea’s standing

in the international community, and that this would be more damaging than the negative impacts of

KETS. In addition, Park, who took on her duties in 2013, had received a lot of praise during the

president’s overseas trips because of green growth and the plan for KETS. This might have

discouraged her from canceling or putting off its adoption.

Thus, Korea’s commitment to limit GHG emissions and launch KETS, not mandated by the

Kyoto Protocol but set voluntarily, was welcomed by the international community. However, this

voluntary action was not based on a nationwide consensus. This left the entire designing process and

detailed contents of KETS vulnerable to the consistent counter-attacks. Moreover, environmental

ministries often have smaller budgets and weaker political voices than those that directly work with

business sectors or determine growth policies. As noted in Patrinos and Bamzai (2005), this is

particularly true in developing countries like Korea. The MOE has less ministerial power than the

1 John Burton, What happened to green growth, The Korea Times, 2013-07-17

(http://www.koreatimes.co.kr/www/news/opinon/2013/07/197_139423.html)

MOTIE, and the capacity of the MOE was not enough to carry out core actions associated with KETS,

alone. A comprehensive and strategic approach was taken by the government in order to make up for

the KETS’ weak base. This approach consisted of three complementary elements: strong legal bases,

a strategic governance framework and a comprehensive policy package to compensate for loss

associated with KETS and ease opposition to it.

2.1. A Need for Solid Legal Bases

The Framework Act on Low Carbon, Green Growth (2010)

Once the policy decision on emissions reduction was made, the Lee Administration made it an

incontestable fact by signing it into a law. The first and highest legal base for green growth and

implementation of KETS was the Framework Act on Low Carbon, Green Growth (Framework Act).

It was established in 2010 with the aim of achieving the national emissions reduction target set a year

earlier and then submitted to the Copenhagen Accord in 2010. As shown in Table 1, various policy

tools were stipulated in the Framework Act, and the implementation of the ETS was one of them.

Table 1. Abatement Policies Stipulated in the Framework Act (2010)

Policy Means Article Framework

Act Target management system 42

Emission Trading System 46

Basic energy plan 39, 41

Environment-friendly taxation system (carbon tax included) 30

Other

policies · Supportive

policies

Promotion of environment-friendly agriculture and fisheries and

expansion of carbon sinks 55

Transportation: Management of GHG emissions in transportation sector

47

Establishment of low-carbon traffic systems 53

Management of GHG emissions in building sector 54

Water management 52

Reporting on quantity of GHGs emitted and establishment of

integrated information management system for GHGs 44, 45

Supportive policies

- Technical support for green innovation 31, 32

- Development of clusters and complexes for green technology and

industries 34

- Support for SMEs that are engaged in green technology and

business 33

- Creation of green jobs and green industries 35

- Financial support for green growth 28

Regulation and countermeasures for international norms 36, 37, 61

Promotion of green life style 49, 56~59

Greening land-management 51

Source: Framework Act on Low Carbon, Green Growth (2010).

The following provision, “the government may utilize market functions in accomplishing the

national GHG reduction target and operate a cap-and-trade scheme,” in Article 46 of the Framework

Act, gave the ETS a solid legal ground for implementation. Based on this provision, the Emission

Trading Act and its Enforcement Decree were established in 2012 (see Figure 2). These two laws

stipulated important steps and timelines for KETS. Once they were legislated by the National

Assembly, the cancellation of KETS became very difficult, since it would require a series of legal

procedures which would involve significant time and effort. With these two laws, institutional

infrastructure for KETS was established: the Korea Energy Management Corporation (KEMCO) and

the Korea Environment Corporation (KECO) are responsible for supervising measurement, reporting,

and verification (MRV) of emission data; and the Korea Exchange (KRX) was designated as the sole

market for carbon emissions trading.

Figure 2. Legal Procedure for the Korea Emission Trading System

*Full name: the Act on Allocation and Trading of Greenhouse Gas Emissions Allowances

Source: The Framework Act on Low Carbon, Green Growth (2010).

As Article 44 of the Framework Act mandates that large emitters report quantities of GHGs

produced, the Greenhouse Gas Inventory & Research Center of Korea (GIR) was established to

manage emission data and relevant research. Article 44 is critical in operating KETS since it enables

collection and registry of micro-level emissions data.

2009

A reduction target

announced (GHG

emissions cut of 30%

by 2020 under the

BAU scenario)

2010

Establishment of

“Framework Act” and

its Enforcement

Decree

A comprehensive plan

to achieve reduction

targets

January 2014

“1st Master plan” for the ETS finalized

2011

Emission forecasts

and reduction targets

of major emission

sectors announced.

September 2014

“1st Allocation Plan” for the ETS finalized

2012

Establishment of

Emission Trading Act*

and its Enforcement

Decree (2012)

Legal bases for the

implementation of the

ETS

Pursuant to Article 42 of the Framework Act, the Target Management Scheme (TMS) was

initiated in 2012. Under the TMS, companies and facilities with high GHG emissions and energy

consumption are designated as Controlled Entities and subject to government control. Controlled

entities are obligated to submit reports on their emissions levels to the managing authorities and set

their emissions targets with the corresponding authority; then, their targets are reviewed by the MOE

(in fact, the GIR) to detect double counting or omissions. If the amount of emissions exceeds the

target level, the entity will be charged a lump sum penalty regardless of the excess amount. However,

if emissions are below the allowance amount, the entity will not be incentivized. As discussed in

Section III, the TMS serves as a stepping stone to KETS in that it enables the collection of verified

emissions data and the MRV process of Controlled Entities, which have become important

components of KETS.

As the energy sector is a major source of GHG emissions and, the national emission reduction

goal is very unlikely to be achieved without greening the energy sector, Article 41 of the Framework

Act stipulates that the Basic Energy Plan should be created to reflect the intention of low-carbonizing

the power sector.

The Emission Trading Act and its Enforcement Decree (2012)

While the Framework Act addressed only the legal basis for the introduction of a cap-and-trade

scheme, in Article 46(4) (Figure 2), details will be further laid out in a separate act. The Emission

Trading Act and its Enforcement Decree ratified by the National Assembly in 2012 as the legal

procedures for implementation of KETS were finalized.

As summarized in Tables 2, 3 and 4, the Act on Allocation and Trading of Greenhouse Gas

Emissions Allowances (hereafter, the Emission Trading Act) and its Enforcement Decree stipulated

government actions, institutions, timelines and other key issues associated with the adoption of KETS.

In this regard, a failure to keep any of these should become a legal violation.

However, as seen in Table 2, details of KETS, such as the ETS cap, its distribution, allocation

formula and a list of covered entities were not defined in the Emission Trading Act, nor was its

Enforcement Decree. In Korea’s legal context, it seems reasonable to define these details by legal

provisions. However, details of KETS were written in a master plan and an implementation plan

rather than legal provisions (see Table 3). This decision reflected the nature of the scheme. Since

participating entities and their emissions levels change over time, the cap and the allocated allowances

need to be adjusted accordingly. However, it is impractical and highly unusual to revise a law in the

current legislative culture of Korea. Defining key contents of KETS through a law causes inflexibility.

Thus, plans established by government ministries were designated to define the detailed contents of

KETS. In short, the Emission Trading Act and its Enforcement Decree only provide the legal basis for

the delegation of authority (the MOE), thereby letting the Allocation Plan define further details

concerning allocation (see Tables 2, 3 and 4). In addition to the Allocation Plan, the Emission Trading

Act requested the establishment of the Master Plan to provide medium-and-long-term visions (i.e., 10

year visions) of KETS and coordinate it with other policies, and designated the MOSF the responsible

authority for the Master Plan (see Table 2).

Table 2. Legal Basis related to the Roles of Authorities from the Emission Trading Act

Roles Authority Legal basis

- Establishment of the Master Plan (1 year prior to the beginning

of each commitment period)

- Public hearings

MOSF Article 4

- Establishment of the Allocation Plan (six months prior to the

beginning of each commitment period) - Public hearings and meetings with business representatives and

environmental NGOs and other interest groups

Competent authority (MOE,

stipulated by the following

Enforcement Decree)

Article 5

- Ratifying and finalizing the Allocation Plan Allocation Committee →

PCGG → the Cabinet

meeting

Article 5

- Establishment of the Emission Permits Allocation Committee

(including matters concerning the establishment of the Allocation

Plan, market stabilization measures, policy coordination and

support related to certification and offset, and deliberation in

relation to the international link and cooperation; the Allocation

Committee shall be comprised of vice-ministerial level

government officials and experts.

Chairman of the Emission

Permits Allocation

Committee: MOSF Minister,

Secretary: MOE

Article 6

(Establishment)

Article 7

(Organization

and Operation)

- Designation of business entities eligible for allocation (five

months prior to the beginning of each commitment period).

Designation of new entrants (due to establishment of a new

facility or the alteration or expansion of a facility) as business

entities eligible for allocation

Competent authority (MOE) Article 8~10

- Establishment and operation of the Emission Permits Register

(GIR) Article 11

- Emission permits: allocation, application for allocation and

notice of allocation Article 12~14

- Recognition of outcomes of earlier reduction, adjustments to and

revocation of allocated emission permits Article 15~17

- Emission permits in reserve Article 18

- Exchange and trading of emission permits Article 19~22

- Stabilization of markets for trading emission permits Implemented by the competent authority after the

deliberation by the Allocation

Committee

Article 23

- Reporting, verification and certification of amounts of emissions,

Emissions Certification Committee Competent authority (MOE) Article 24~26

- Surrender, carryover, borrowing, offset, and termination of

emission permits, offset register Article 27~31

- Banking, borrowing and offsetting Article 28~30

- Termination of emission permits Article 32

- Penalty surcharges Article 33

Source: Act on the Allocation and Trading of Greenhouse-Gas Emission Permits

Two Principal Plans: The Master Plan and the Allocation Plan (2014)

Under the Emission Trading Act, the MOSF is expected to establish a Master Plan no later than

one year prior to the launching of each commitment period, and before the Allocation Plan for the

same period. The Master Plan is a ten-year plan to provide medium-and-long-term visions for KETS.

Since other countries’ ETSs do not have separate plans on the sidelines of their allocation plans,

Korea’s Master Plan seems to be atypical. However in Korea, it is required that two separate plans, a

master plan and an action plan, must be set up in the process of adopting a national policy. In the case

of KETS, the former is the Master Plan, and the latter the Allocation Plan. While the Allocation Plan

focuses on practical operations, the Master Plan provides a blueprint and guides the design of KETS

in order to harmonize it with other policies. As listed in Table 3, the Master Plan must contain eight

components defined by Article 4 of the Emission Trading Act. These include a close description of

the economic climate and international policy architecture for the Post-Kyoto Era, principles and

directions on how to operate the KETS for the coming ten years, related manpower and fiscal policies,

and a support policy package to compensate for losses caused by KETS. In this regard, Korea’s

Master Plan is similar to Germany’s Macro Plan, which was included in its National Allocation Plan.

The Minister of the MOSF is in charge of establishing the Master Plan by reflecting

heterogeneous opinions from government agencies, business sectors and citizens. It is notable that the

MOSF Minister is the designated chair of the Allocation Committee and Deputy Prime Minister who

is responsible for economic policies and policy-coordination.

The first Master Plan, spanning a decade from 2015 to 2024, encompasses three commitment

periods, excluding the last year of the third period. The Master Plan was drafted by the MOSF and

announced through a public hearing. Then, it was ratified by the GGC (Green Growth Committee, the

former PCGG), and then through the Cabinet meeting in January 2014, eight months ahead of the

Allocation Plan.

According to the fourth item of the Master Plan, in Table 3, the Master Plan should evaluate the

appropriateness of the national GHG reduction target and the cap. In order to evaluate the cap, both

BAU emission levels and reduction targets need to be provided prior to the Master Plan. Both were

intended to be set by the National GHG Emissions Reduction Roadmap (hereafter, the Roadmap). The

Roadmap was not finalized until the end of December 2013—in line with the legal timeline for the

formulation of the first Master Plan. With this time constraint, the Master Plan could not evaluate the

appropriateness of the national emissions target. Meanwhile, the cap for each commitment period will

be defined by the Allocation Plan.

The Allocation Plan is essential to KETS since it defines its key contents. The Emission Trading

Act states that the Allocation Plan shall be provided, at the latest, six months prior to the beginning of

each commitment period and it should address the eleven issues presented in Table 3. The Allocation

Plan shall be made in compliance with the national GHG reduction target (Article 5 of the Emission

Trading Act and Article 3 of the Enforcement Decree) and take into account the business status of

covered sectors and their international competitiveness (Article 5 of the Act). Then, Article 6 (1) of

the Enforcement Decree identifies the MOE as the authority responsible for establishing or modifying

the Allocation Plan. However, the approval of the Allocation Committee must be obtained in order to

put it and changes to it into practice.

The Allocation Plan ratified in September 2014 defines the following aspects of KETS: KETS

caps for the corresponding commitment period and each compliance year; its scope (sectors and

entities covered by it), allocation standards and the amount of allowances allocated to sectors, sub-

sectors and business entities; methods for free allocation and non-free allocation, criteria for

recognition of earlier actions; rules and operation guidelines for banking, borrowing and offsets; the

amount of reserves, its distribution and operation rules; key timelines.

Table 4 summarizes when and how key information in regard to KETS was announced. Under

the initial version of the Allocation Plan, participating firms were first informed of the most important

and sensitive figures, the target emission levels for each compliance year (caps) and their distribution

among covered entities, in June 2014. This was only six months ahead of the scheduled launch date

for KETS. Since the Allocation Plan was established by laws, a series of legal actions were also

needed to abolish it, which could not be accomplished within six months.

Table 3. Contents of the Master and the Allocation Plan (defined by the Emission Trading Act)

Eight components that the Master Plan shall address (defined by Article 4 of the Emission

Trading Act):

1. State the current and future domestic and international conditions associated with the emission trading system including projections on international policy architecture for the

Post-Kyoto Era, carbon markets and other ETS schemes;

2. Provide basic directions on how to operate KETS; 3. Offer operation principles of KETS for corresponding commitment periods in

consideration of the national GHG reduction target

4. Predict GHG emissions by sectors in consideration of growth and investment across sectors;

5. Estimate economic impacts of KETS on inflation, energy prices, employment and other economic variables;

6. Propose policy measures for supporting domestic industries, considering trade and carbon intensities;

7. Provide preparations and plans for linking up KETS with other carbon markets and for international cooperation;

8. Other issues related to efficient operation of KETS: constructions of fiscal plans, human resource policies, public service systems about education and information for KETS.

Eleven issues that the Allocation Plan shall address (defined by Article 5 of the Emission

Trading Act)

1. KETS cap; 2. The number of permits for the pertinent commitment period and for each compliance year; 3. Scope of KETS (sectors and sub-sectors covered by KETS); 4. Allocation method and the number of allowances for covered sectors (and sub-sectors); 5. Allocation method and the number of allowances allocated for each compliance year; 6. Standards to determine covered entities and the allocation method for them; 7. Non-free allocation method if it is needed; 8. Criteria for recognition of early (abatement) actions; 9. The amount of reserves and its distribution rules; 10. Standards and operation guides for banking and borrowing of allowances, and those for

offsets;

11. Others that might be addressed by a presidential decree. Source: The Emission Trading Act (the version of 2013-03-23, available at http://www.law.go.kr)

Table 4. Important Steps and Timelines Defined by Laws

Adoption Procedures1)

(year, lead authority)

Legal

Time

line2)

Nationwide

GHG reduction target3)

KETS

Total Sector

level

Entity

level

Target

rate

(%)

BAU

2009

BAU

2013 Cap

Design

-ation

/Alloc-

ation

Design

-ation

/Alloc-

ation

Pledge at the Copenhagen meeting

(2010, President) - ◯ ◯

Framework Act

(2010, PCGG) - ◯

Emission Trading Act and its

Enforcement Decree (2012, PCGG) - ◯

Roadmap (January 2014, Multiple

authorities with the MOE’s lead) 2013 ◯ ◯

Master Plan (January 2014, MOSF) Jan 1,

2014 ◯ ◯ ◯ △4)/◯

Allocation Plan (September 2014,

MOE)

Jul 1,

2014 ◯ ◯ ◯ ◯/◯5)

Allocation Approval Committee

(November 2014, MOE)

Sep.,

2014 ◯ ◯ ◯ ◯/◯5) ◯/◯5)

Note: 1) The Framework Act stipulates adoption of the ETS. In pursuant to the Framework Act, the Emission

Trading Act and its Enforcement Decree were legislated. Then, following the Enforcement Decree, the

MOSF and MOE drafted the Master Plan and the Allocation Plan, respectively. 2) Timelines are stipulated

by the Enforcement Decree. 3) BAU2013 is the same as BAU2009. 4) Drafts of the scope and coverage

were announced. 5) When news of the matter was announced, business sectors registered strong

opposition to it.

2.2. Strategic Governance Architecture

The second device to supplement the weak base of the KETS was the strategic formation of a

governance framework. Every economy experiences a trade-off between economic growth and CO2

reductions. Ideally, all government agencies should have a common perspective on policies, and

engage in a process of appropriate dispute resolution when interests of stake-holders conflict. In

reality, a government agency develops its own views for a policy issue under consideration. Since

GHG emissions are highly correlated with output growth, policy conflicts are likely to arise at any

time between the MOE and growth-oriented authorities, such as the MOTIE that has developed a

deeper understanding of the concerns that its civilian counterparts (i.e., firms and investors) may have.

As represented by the size of the diagram in Figure 3, the MOE has had less ministerial power than

the MOTIE in Korea. This is common in developing countries, where the influence of environmental

ministries is usually weak (Patrinos and Bamzai 2005). In short, the capacity of the MOE was not

enough to carry out the core actions associated with KETS by itself. Even if the MOE were strong, it

might be difficult for a single ministry to lead the entire process on its own, since KETS involves

conflicting interests of various stakeholders and government agencies.

To compensate for this, KETS’ governance structure was formed with multiple-government

authorities, all of which have played important roles in developing KETS. As depicted in Figure 3, the

division of labor among them is as follows: the Presidential Committee on Green Growth (PCGG)

was responsible for developing legislation, rules and procedures associated with KETS; the MOSF

coordinates KETS policies with other policies, drafts Master Plans, operates the Allocation

Committee and provides support packages for industrial sectors’ potential losses associated with

KETS; the MOE becomes a responsible authority for operating and administering KETS.

Both the PCGG’s lead and the MOSF’s engagement contributed to easing the opposition from

business sectors: the involvement of the PCGG was understood as a strong signal that the government

truly intended to implement KETS, and that of the MOSF alleviated the concerns of business sectors,

as the MOSF was allowed to chair the Allocation Committee and coordinate joint operations between

the MOE and other related ministries.

Figure 3. Governance Architecture of the KETS

Growth/Employment

Note: The size of diagrams represents authority power. Boundaries with a solid line imply that the

authority took a significant function in the development or operation of KETS.

Presidential Committee on Green Growth (PCGG): Legislation

In Korea, the process of a new legislation is generally handled by a single ministry, and the

Presidential Committee on Green Growth (PCGG) handled KETS (see Figure 3 and Tables 5 and 6).

Until the PCGG was transformed downward into a committee headed by the Prime Minister’s Office

in 2013, it worked as an advisory body for the President concerned with promoting the national

agenda on green growth. It is co-chaired by the Prime Minister and a private-sector representative,

Environment/Abatement

MOSF

▷Coordination

▷Chair of the EPAC(Allocation

Committee)

▷Drafting Master Plans

▷Support package to compensate losses

associated with

KETS

Alleviating

oppositions of the

business sector

▷Responsible for

trade, industry and

energy policies

▷Engaged in the Roadmap, EPAC

and Allocation

PCGG→ GGC

▷Leading green growth policies

(i.e., KETS)

▷Ratifying Plans associated with

KETS

▷Legislation

▷Coordination

MOE

▷Responsible authority of KETS

▷Drafting Allocation Plans

▷Chair of the Allocation Approval

Committee

▷Operating KETS

▷Providing guidelines associated with

KETS

MOTIE

and its members consist of government officials from different ministries. Its strong position as the

Presidential Advisory Committee and the diversity of member composition have allowed the PCGG

to coordinate conflicts of interest among ministries and stakeholders.

On May 14th 2012, the Emission Trading Act drafted by the PCGG was ratified by the National

Assembly. This legislative procedure was very unusual. In Korea, a special committee such as the

PCGG does not have the authority to draft legislation. Normally, a legislative bill submitted to the

National Assembly is brought to the concerned standing committee (such as the Environment and

Labor Committee) for deliberation before the regular session of the National Assembly. However, the

Emission Trading Act was treated as an exception. Considering possible conflicts of interests among

members of the standing committee and ministries in the drafting process of the Emission Trading Act,

the newly established Special Committee on Climate Change submitted the draft written by the PCGG

for deliberation to the National Assembly. The Enforcement Decree of the Emission Trading Act was

legislated in the same way by the PCGG and enacted on November 15th 2012.

When the PCGG wrote the bill, the MOSF also proposed ideas concerning the contents of KETS

to the PCGG in 2011. This was based on the fact that the MOSF was designated by the draft of the

Emission Trading Act to serve as the chairman of the Allocation Committee and officially came into

being as the second authority, next to the PCGG, involved in the adoption of KETS. Under the

Enforcement Decree, the MOE was made the responsible authority in charge of operating KETS.

In making the PCGG the responsible authority for the Emission Trading Act and its Enforcement

Decree, the government intended to avoid potential conflicts that would arise during the adoption

process of KETS by a single authority. However, by the time (2013-2014) the national GHG

emissions reduction road map and the ETS’ two principal plans—the Master Plan and the Allocation

Plan, were being made, the status of the PCGG in charge of the Framework Act and climate policies

weakened due to the policy regime change from Lee to current president Park. Finally, the PCGG was

reorganized as a deputy-level committee of the Office of the Prime Minister, the Green Growth

Committee (GGC). Thereafter, the coordinating function of the PCGG was transferred to the MOSF,

which is the conventional responsible authority for economic matters and policy coordination.

Although the MOSF is the most powerful ministry in Korea, it cannot replace a presidential

committee such as the PCGG. Since that time, more emphasis has been placed on industrial and

economic growth in the implementation process of KETS, and the national emissions reduction target

engraved in the Framework Act as a top policy priority has not been realized.

Table 5. Major Decision Makers and Their Roles in the KETS

Decision making authority Responsible Bureau

or Division

Affiliated

Institution of the

KETS ETS Functions

Central

government

agency

Presidential

Committee/OPM

PCGG or GGC

(Climate Change

Bureau)

- Legislation (the Framework

Act and the ETS Act)

- Approval of Master Plans and

Allocation Plans

MOSF (initially) Policy

Coordination

Bureau → (now)

Future and Social

Policy Bureau

- Policy coordination associated

with KETS

- Drafting Master Plans

- Operating Allocation

Committee meetings

MOE ETS TF

(ETS Task Force)

- Responsible authority for

KETS

- Drafting Allocation Plans

- Operating Allocation Approval

Committee meetings

GIR - Registry - Research

KECO/KEMCO - MRV

Public

institution KRX - Operates the centralized market

for permit trading

- Reports market outcomes

4 financial

institutions

- 3rd-party market participants

- Assists the MOE in stabilizing

the ETS market

Covered entity

Firms &

Facilities

- Complies with KETS

regulations * OPM = Office of the Prime Minister, GGC = Green Growth Committee, MOSF = Ministry of Strategy and Finance, MOE

= Ministry of Environment, ETS TF = ETS Task Force, GIR = GHG Inventory and Research Center of Korea, KECO =

Korea Environment Cooperation, KRX = Korea Exchange, 4 (public) Financial institutions = Industrial Bank of Korea,

Korea Development Bank, Korea Exim Bank, Korea Financial Cooperation

Table 6. Key Decision-making Agencies Associated with KETS

Decision-Making

Institution (Lead Authority) Functions, Chair and Members

Green Growth

Committee & the

Cabinet Meeting*

GGC (within the

office of the Prime

Minister)

▷Function: approve Master Plans drafted by the MOSF and

Allocation Plans drafted by the MOE

▷The GCC was initially a Presidential Committee but became a

committee under the Office of the Prime Minister when the

Master Plan was made.

▷The Cabinet meeting is the highest body for policy deliberation

and resolution in the executive branch of Korea.

↓

Allocation

Committee MOSF

(the Ministry of

Strategy and Finance)

▷Functions: approves National Allocation Plans (NAPs*) drafted

by the MOE and makes the final decision on market

stabilization measures. * NAPs includes the ETS cap, sectoral caps, the new entrant

reserve (NER), allocation methods, operation rules for

offset, early action, emission banking and borrowing and

etc.

▷Chaired by the minister of the MOSF

▷Committee members - 12 vice-ministers of relevant government

authorities and 8 exterior experts

↓

Allocation Approval

Committee MOE

(the Ministry of

Environment)

▷Function: approves entity-level allocations prepared by the

▷Allocation Working Group*

* The Allocation Working Group is chaired by the president of

the GIR and consists of exterior members. The GIR is a

branch of the MOE.

▷Chaired by the vice-minister of the MOE

▷Committee members - director generals of relevant government

authorities and exterior experts

Source: Modified from “Korean Emission Trading Scheme: Scheme Design and the Road Ahead (ETS

Task Force of the Ministry of Environment, 2013).”

The Ministry of Strategy and Finance (MOSF): Coordinating Disputes and Developing Policy

Measures to Make KETS Less Cumbersome to Participants.

Given the high degree of interdependence among GHG emissions, energy use and industrial

outcomes, it was obvious that furious discrepancies among government agencies would arise in regard

to not only details of KETS (i.e., caps, allocations and support packages) but also the adoption, itself.

To handle this, the function of coordinating discrepancies and resolving disputes related to KETS was

given to the MOSF. The MOSF is a government agency responsible for overall economic growth,

inflation and fiscal policies, rather than policies for environmental soundness. At the same time, it has

historically played the key role in coordinating and resolving discrepancies associated with policies

and plans that central government agencies carried forward for implementation. Similar other

economies, the MOSF is known as the most powerful government branch in Korea.

Given the weak base for KETS, fierce resistance from business sectors and power imbalance

between the MOE and MOTIE, the MOSF’s role was particularly critical in the early adoption stages.

To reconcile resistance from industrial sectors and vulnerable social groups, the MOSF also proposed

support packages to make low-carbon-transition easy by compensating for losses caused by KETS. As

the MOSF has led the introduction, business sectors were less concerned about negative economic

impacts than if the MOE had done so. MOSF activities for introducing KETS included the following:

combining efforts with the PCGG to draft the Enforcement Decree, establishing the Master Plan,

providing plans for KETS-related fiscal and human resources, operating and chairing the Allocation

Committee (EPAC) and alleviating business sector opposition by providing a support package to

compensate for losses (see Figure 3 and Tables 5 and 6).

The Ministry of Environment (MOE): An Authority Responsible for KETS

As illustrated in Tables 5 and 6, the MOE is the competent authority that shall formulate

Allocation Plans, operate KETS and assume responsibility for its details. This is stipulated by the

Enforcement Decree. Interestingly, before the enactment of the Enforcement Decree, the MOE did not

appear in the governance architecture. As noted above, the PCGG, with strong cross-ministerial

power, played a leading role in legislating laws for implementing KETS, and the MOSF coordinated

policies associated with KETS and chaired the Allocation Committee (EPAC). In other words, two

strong government authorities, the PCGG and MOSF, rather than the MOE had impetus in the early

development stages. This governance framework reflects a strong will to purse a policy of “GHG

reduction” set by the President of Korea and fortifies the weak position of the MOE in adopting KETS.

Suggestions made by the MOE are still subject to approval by the Allocation Committee (EPAC)

chaired by the MOSF minister, first, and then the upper governance bodies, the GGC (formerly, the

KCGG) and the Cabinet Meeting, to be finalized.

For KETS, the functions of the MOE are multi-faceted: 1) the establishment of Allocation Plans

and revision of relevant laws or legislations; 2) the actual operation of KETS, which includes

decisions, notice and verification of allocation, monitoring of trading markets, promotion of market-

stabilizing measures and operation and management of the emission permits register; 3) hearing

opinions from industries, experts and civic groups (through the Allocation Deliberation Committee,

Certification Committee and public hearings), and taking these into account in operating KETS; 4)

evaluating accomplishments and improving KETS.

Some of these overlap with functions of the GIR (Greenhouse Gas Inventory and Research

Center of Korea), a government center under the auspices of the MOE in accordance with the

Enforcement Decree, Article 36 of the Framework Act. To implement KETS efficiently, the MOE

linked some of its divisions to counterparts of the GIR, as shown in Figure 4. It is notable that the

MOE built the ETS Task Force team which functioned as a headquarters in preparing the entire

adoption process. After the KETS began in 2015, the ETS Task Force team became the Climate

Change Mitigation Division under the Environmental Policy Office of the MOE. At the same time,

the GIR, which had been heavily involved in the preparation of KETS, became focused on the

national GHG emission budget management and its designing works associated with KETS became a

minor part of the GIR.

Figure 4. KETS Governance within the Ministry of Environment (MOE)

: MOE and GIR (GHG Inventory & Research Center)

Source: Lee and ETS Task Force of the Ministry of Environment (2013).

III. Salient Features of KETS

3.1. Inheritance from a Precursor, the GHG and Energy Target Management System (TMS)

Before KETS was adopted, several attempts were made to reduce GHG emissions and total

energy use. In 2010, the government launched a pilot project of mandatory negotiated agreements on

energy use. This project reduced energy use by 3.7% (relative to the average of 2007-09) between

2010 and 2012, which was greater than the 3% cut that they originally proposed (OECD 2011). In

2012, this was replaced by the GHG and Energy Target Management System (henceforth, TMS), a

mandatory negotiated agreement system aiming at curtailing energy use and GHG emissions, as well.

Under this system, 468 entities in power generation, manufacturing, building, agriculture, livestock,

waste management and transport negotiated targets with their relevant government agencies, and this

covered more than 60 percent of total national GHG emissions. They are also subject to penalties2 in

case of failure to meet the targets. The TMS enabled the collection of verified emissions data and

training the MRV process of TMS entities, which had become important components of KETS.

UNEP (2010) addresses the point that it is important to design a new system to work in

harmonious ways with existing ones. Following this, KETS was designed to be harmonized with the

previous scheme (in other words, the TMS) and the TMS passed its characteristics down to KETS. As

a consequence, there are several similarities between the TMS and KETS (see Table 7). Both attempt

to manage emissions from large emitters, set reduction targets based on emission records for the last

three years, and have sector reduction target rates in addition to the national reduction target rate. As

indirect emissions of covered entities, in addition to direct emissions, are included in the TMS, KETS

used the same practice: taking indirect emissions into account in setting an entire cap, sector caps,

base emission levels (or BAUs) of covered entities and allocation across them. Inclusion of indirect

emissions emerged as a critical issue when KETS was adopted.

While KETS covers a facility whose annual GHG emissions exceeded 25,000 tons of CO2e, the

TMS uses a low emission threshold, 15,000 tons of CO2e, in 2015. Thus, the TMS served as a

stepping stone for emitting facilities (or firms) for KETS (see Table 8). According to the 1st Master

Plan, the proportion of emissions controlled by the TMS at the national level was approximately 85%,

and 80% of emissions that had been managed by the TMS has become the scope of KETS in 2015.

Considerable differences also exist between the two (see Table 7). While KETS designates a

covered entity based on its GHG emissions level, the TMS considers the amount of energy use in

addition to its emissions level. Unlike KETS, however, the TMS does not allow covered entities to

trade surpluses or shortages with each other, and penalties for non-compliance do not increase with

the size of shortages.

Table 7. Comparison between KETS and the TMS Category KETS Target Management System (TMS)

Reduction

method Market-based tool No market-function (trading is not allowed)

Competent

authority MOE (competent

authority/establishment of the

Allocation Plan)

MOSF (Chairman of the Allocation

MOE (competent authority of the TMS)

Authorities which deal with controlled

entities (Ministry of Trade, Industry and

Energy; Ministry of Environment; Ministry

2 Ceiling on fine is KRW10,000,000 (approximately US$10,000).

Committee/establishment of the

Master Plan) of Land, Infrastructure and Transport;

Ministry of Agriculture, Food and Rural

Affairs)

Eligible entities All facilities in 5 sectors that have emitted 25,000 tons or more of GHGs

or companies that have emitted

125,000 tons of CO2e per year during

the preceding three years

All facilities (in all sectors) whose GHG

emissions level or energy use exceeds a pre-

defined threshold, which are scheduled to

reduce over time. TMS’s threshold level for

the GHG emissions is lower than that of

KETS Covered GHGs Six greenhouse gases

Direct and indirect emissions

Six greenhouse gases

Direct and indirect emissions Establishment

of emission

reduction targets

Defined by the Allocation Plan

Should reflect the national GHG

emission reduction targets

Emissions target determined in collaboration

with competent authorities in each sector

(MOAFRA, MOTIE, MOLIT and MOE)

Covered entities Determination of entities eligible for the commitment period (3-5 years)

Eligible entities selected for each pertinent

year Excess reduction Transactions (sale) or banking Terminated at the end of the compliance

year (no incentive) Treatments when

emissions level

was less than the

emissions certified

Transaction (purchase) or

borrowing/offsetting Recognition of GHG reductions from an

external project (green credit)

Failure to comply

with rules Penalty of not more than three-fold of

the market price of 100,000 won per

ton

Fine for negligence (max. 10 million won)

Table 8. Criteria for Designation of the TMS' Controlled Entities

2010-2011 2012-2013 Beginning 2014 Company Facility Company Facility Company Facility GHG emission

(CO2-eq ton)

125,000

or higher

25,000

or higher

87,500

or higher

20,000

or higher

50,000

or higher

15,000

or higher Energy consumption

(Tera Joule)

500

or higher

100

or higher

350

or higher

90

or higher

200

or higher

80

or higher Source: GIR(http://www.gir.go.kr).

As shown in Figure 5, the TMS has a more de-centralized institutional architecture than KETS. In

the case of KETS, the MOE is exclusively responsible for implementing the system and manages

emissions from all covered entities. On the other hand, each controlled entity of the TMS is assigned

to a GHG reduction and energy savings goal, and its fulfillment is managed by the government. As the

managing agencies of each sector, the Ministry of Agriculture, Food and Rural Affairs (MOAFRA:

agriculture, forestry, and livestock), Ministry of Trade, Industry and Energy (MOTIE: industry and

power generation), Ministry of Environment (waste), and Ministry of Land, Infrastructure and

Transport (MOLIT: buildings and traffic) designate controlled entities, set goals for each, and directly

manage implementation by each entity by checking implementation performance and statements. As

these managing agencies set their own sector reduction goals in favor of their civilian counterparts

(Ben-Gera, 2009), reduction targets of the TMS have been quite marginal.

http://www.gir.go.kr/

Figure 5. Operation of the Target Management System

Source: Ministry of Environment, Republic of Korea (http://eng.me.go.kr/eng/web/index.do?menuId=207)

3.2. Inclusion of Direct and Indirect Emissions

In general, either direct or indirect emissions can be subjects of the ETS, but not both

simultaneously. Most countries do not account for indirect emissions in the calculation of the cap or

reduction target because of the following reasons: 1) where the power sector is included in the

calculation of the cap or reduction target rates, the inclusion of indirect emissions is contrary to the

economic principle of being charged only once for each action; 2) in particular, if the power sector

shifts the burden of buying emissions permits toward the electricity rate, large electricity-consuming

businesses will be double-burdened, contrary to the principle of fairness; 3) the quantity of emissions

is double-calculated, making calculation of BAU and reduction amounts more complicated, hence

damaging the simplicity of the system.

In this sense, it is unique for KETS to include both direct and indirect emissions associated with

the power sector. Rational grounds for this are as follows. First, since the proportion of indirect

emissions in Korea is high (above 20%) compared to other countries, KETS should develop a tool to

reduce indirect emissions. Second, since the electricity price in Korea is low and does not reflect

changes in costs, covered entities might not reduce their electricity consumption if only direct

emissions are covered, and could even consume more electricity, since price competitiveness

improves for electricity as prices of other fuels increase due to KETS. Given that CO2 intensity is

Ministry of Trade,

Industry and Energy

(industry and power

generation)

management and

supervision)

Ministry of Land,

Infrastructure and

Transport

(buildings, traffic)

and power

generation)

management and

supervision)

Ministry of

Agriculture, Food

and Rural Affairs

(food)

Ministry of

Environment

(waste)

GHG Information

(statements, implementation plans, implementation performances, etc.)

Controlled entities

Verification Institution (3rd party verification)

Ministry of Environment

Managing Agencies

(general management and supervision)

GHG

Inventory

and Research

Center

http://eng.me.go.kr/eng/web/index.do?menuId=207

highest for electricity production, regulators at the MOE felt pressure to do something to cut indirect

emissions associated with power generations. Reflecting this, the Framework Act stipulated inclusion

of indirect emissions, so that the scope of the TMS covers direct emissions as well as indirect

emissions, following the Framework Act.

However, this has caused controversy regarding double burden on a single release of emissions—

along with opposition from industrial sectors. Nevertheless, the MOE did not discard indirect

emissions. See Kim and Lim (2014) for details on the basis for the inclusion of indirect emissions and

the reflection of indirect emissions on the cap. As expected, in fall 2014, the industrial sector showed

strong opposition to the Allocation Plan and criticized the inclusion of indirect emissions in the scope

of KETS. Responding to this opposition, the MOE lowered the reduction rate for indirect emissions

and, therefore, the cap level finalized in September 2014 was increased compared to the previous

level released in June.

3.3. Cap-setting based on BAU Scenarios

The cap, the upper limit of an aggregate GHG allowance budget on covered entities in a scheme,

is an essential component of a scheme. In Korea, setting a cap became an extremely difficult task and

triggered a lengthy and fierce dispute. The KETS cap for the first commitment period was derived

through the following steps: calculating target emission levels for 2020 drawing a grand map for

2020 to curb nation’s emissions setting the KETS cap for the first commitment period covering the

2015-2017 period.

National emission target for 2020

In Annex 1 countries, national target emission levels were set in relation to historical emissions,

often referred to as a base year. As noted above, Korea’s national reduction target for 2020 was set in

relation to a projected future emission level in 2020 (e.g., against a business-as-usual scenario). In fact,

a national reduction target in the BAU scenario reflects a difficult position faced by the Korean

government. Given Korea’s high CO2-intensity, it was almost impossible for regulators to set a

national target that both the international community and citizens could agree on. Difficulties were

encountered in presenting a reduction target lower than those of other developing countries, which

promised reduction cuts of 30~40 percent by 2020. A series of discussions were held among

government experts and business representatives, and various reduction scenarios were considered.

Then, regulators chose “4% of 2005 GHG emissions” as the national reduction target, taking into

account the domestic industrial structure and international economic trends. The target of 4 percent,

however, was lower than that for other countries—the EU announced a reduction target of 6 percent

of 1990 GHG emissions. Strongly motivated by a desire to present to the international community

with a formidable figure, the Korean government eventually adopted the concept, “business as usual,”

to its pledge. Under this concept, a reduction of 4 percent of 2005 emissions by 2020 is actually

equivalent to the reduction of 30 percent of projected 2020 emissions. The two-digit figure was

effective in asserting Korea’s active commitment. In addition, the target level declared by Korea was

among the highest of the IPCC recommendations for Non-Annex I economies—a decrease of 15~30

percent of GHG emissions, and likely to be accepted without difficulty by the international

community. It is worth noting that this national reduction target was stipulated in Article 25(1) of the

Enforcement Decree of the Framework Act and, therefore, the target became solidified in 2010.

This pledge to utilize the concept of BAU, however, has invited many problems. Although a

reduction target in relation to a historical level (“4% of 2005 GHG emissions”) was the base for

Korea’s pledge in relation to a projected level (“30 percent reduction by 2020 under the BAU

scenario”), a national target emissions level is viewed as a figure that can be updated as a new

projection becomes available, instead of a fixed number. As predictions of future emission levels

largely depend on forecasting methods and data used, it is unavoidable to have disputes on the figure

related to setting caps for KETS as well as the INDC (intended nationally determined contributions)

of Korea.

Roadmap to curve national GHG emissions

Although the Framework Act stipulated a 30 percent reduction compared to the BAU scenario,

the BAU emissions level itself remained incomplete by late 2013. In fact, an initial version of the

BAU level had been estimated in 2009 at 7.76 billion tons of CO2e when Korea’s pledge for the

Copenhagen Meeting had been prepared. However, as the year 2015 approached, the industrial sector

requested to use the latest data and to re-estimate the BAU level as of 2013, and their request was

accepted. Accordingly, the government was expected to release a revised 2020 emissions forecast

under a BAU scenario in 2013, prior to the release of the Master Plan in December 2013.

In order to complete this mission, the government formed an inter-ministerial expert working

group led by the MOE in 2013. The mission of the working group was not only to re-estimate the

BAU level but also to draw the “National Greenhouse Gas Emissions Reduction Roadmap 2020

(henceforth, the Roadmap).” The Roadmap is the national action plan reducing GHG emissions to the

target emissions level in 2020 and identifying reduction capacity and abatement methods by emission

sectors. Due to data limitation and insoluble conflicts among stakeholders, it was next to impossible to

fix total national BAU levels as well as sector BAUs with strong empirical evidence. At last, the draft

of the Roadmap was finalized in November 2013, and the final version in January 2014.

According to the Roadmap, compared to the BAU estimates in 2009, the amount of anticipated

emissions from the industrial sector decreased, while a large increase was seen from power generation.

In spite of these changes in the distribution of emissions, a gap in the aggregate between old and new

estimates was minute, approximately 3 percent. The government concluded that the benefits of

updating would not be significant enough to compensate for the burden of altering the BAU estimate

and adjusting Korea’s pledge to the international community. Thus, the government decided to abide

by the BAU estimate for 2020 that was estimated in 2009 (7.76 billion tons of CO2). The Roadmap

also projected BAU estimates and national emissions targets for the first commitment period (2015-

2017), as shown in Table 9. These national emissions targets became bases of KETS caps.

One of the salient features of Korea’s emissions reduction targets and KETS is that it defines

emissions reduction targets by sectors and industries. After the announcement of the nation’s

reduction in 2010, the government organized groups of experts consisting of industry specialists,

economists and mitigation scientists and predicted 2020 BAU emission levels and mitigation capacity

for each sector. Table 10 summarizes the results of this work. For example, industrial sectors

contributed 53.7 percent of the nation’s GHG emissions in 2014 and its target emission level in 2020

is 434.6 million tons of CO2e (56 percent of the national BAU of 2020, 776.1 million tons of CO2e).

To achieve the target emission level in 2020, industrial sectors should reduce GHG emissions by 18.5

percent below the BAU level by the year 2020. In 2011, the government announced these figures,

sector BAU projections and sector GHG target reduction rates (see appendix tables, Table A1 and

A2)3. Since then, these figures have been used as references for abatement policies such as the TMS

and KETS.

In 2013 when the total 2020 BAU level was re-estimated, sector levels of 2020 BAU emissions

were also re-calculated and founded to be largely different from those estimated in 2011. However, as

the initial estimate of 2010 for the national BAU emission level of 2020 was maintained, no updates

were made for sector target emission levels and target reduction rates. This partitioning of the national

BAU as well as target emissions into sector BAUs and emission targets is also applied in the cap

setting scheme for KETS. The KETS cap is divided into sector caps which sector-specific emission

targets, and reduction rates determined in 2010 were applied.

3 As in Table 8, transportation and building were identified as sectors which had large potential to reduce GHG

emissions while reduction potentials of agriculture, forestry and fishing and waste management were pretty limited.

Table 9. National BAU level, Emissions Targets and the KETS Cap for the First Commitment Period

Category (unit) / year 2014 2015 2016 2017 2020

National BAU

(1 million tons of CO2e) 694.5 709.0 720.8 733.4 776.1

National reduction rate

(% to BAU) 5.1 10.0 13.8 16.2 30.0

National emissions target

(1 million tons of CO2e) 659.1 637.8 621.2 614.3 569.0

Yearly reduction rate

(%) - 3.2 2.6 1.1

Cap*

(1 million tons of CO2e) - 573.5 562.2 550.9 -

Note: * The KETS cap includes the amount of indirect emissions, while others do not. Source: The Allocation Plan (2014).

Table 10. The Distribution of GHG Emissions in 2020 across Sectors and Target Reduction Rates

Category Industry* Transportation Building

Agriculture,

Forestry

and Fishing

Waste

Management

Public

Sector Total

Proportion of each

sector to the total BAU

of 2020 (BAU) (%)

56.0 13.2 22.0 3.6 1.7 2.3 100

Sector reduction rate

compared to the BAU

estimate of 2020 (%)

18.5 34.3 26.9 5.2 12.3 25.0 30.0**

Proportion of each

sector to the total BAU

of 2014 (BAU) (%)

53.7 13.7 22.2 4.3 2.1 2.5 100

Note: *The reduction target for industrial energy is 7.1%. ** The national reduction rate was calculated by

adding the reduction amount (68.19 million tons) from conversion (power sector) to the reduction rate of each

sector. Source: National GHG Emissions Reduction Roadmap; Press release by MOE (28th January 2014).

This creates a number of fairness concerns. Suppose that there are ten entities in a sector and,

according to predictions in 2010, its sector cap was set at 10 million tons of CO2e each year during

2015-17. However, predictions in 2010 are incorrect and its sector BAU during 2015-17 is much

lower than predicted and there are only 2 entities in that sector. Under this situation, 5 million tons of

CO2e will be allocated to two entities and they can enjoy over-allocation.

Previously, a study for drafting the 1st Master Plan raised concerns about drawing clear lines of

demarcation between sectors since such is likely to result in inefficiency and inflexibility in the

operation of KETS. In 2015, elimination of sector caps has become one of major improvement points

for the second phase of KETS.

The KETS Cap for the first Commitment Period

There are several references related to cap-setting of KETS. First, the Enforcement Decree stated

that the KETS cap and sector caps shall be set by taking into account sector-specific GHG reduction

rates and proportions of sector emissions to national emissions, which were determined in 2010

(Article 5-4-1). Second, the Enforcement Decree stated that the Master Plan shall provide cap-setting

principles to the Allocation Plan, considering the national GHG reduction goal, economic growth and

competitiveness of industrial sectors in international markets. Key principles suggested by the first

Master Plan are as follows: the formula to set the cap should be simple and accountable; a linear

reduction schedule should be considered; the principle of fairness should be applied, which implies

that emitters should have the same burden in achieving the national GHG reduction goal, regardless of

inclusion in KETS. This was interpreted by the Allocation Plan to mean that the proportion of sector

emission cap for sector J in the KETS shall be equal to that of sector target emissions for sector J in

the national target for emission. With minor modifications, this was reflected when total cap and

sector caps for the first commitment period were determined.

Method ① shown in Table 11 is close to the original formula suggested by laws. The cap for

sector J in the first commitment period is calculated as follows: 1) the emissions target for 2020 is

calculated by applying the pre-determined reduction rate by sector ( ) to the estimate of 2020 BAU

emissions in sector J addressed in the Roadmap, 2) in compliance with a linearity reduction rule

proposed by the Master Plan, the annual linear reduction factor ( ) between 2015-2020 is computed,

3) target emissions or the sector cap for sector J in year t, , is obtained as a product of

and sector J’s emission level in 2015, , 4) by adding indirect emissions for

sector J in year t, the cap of sector J is computed. Once the sector cap is calculated, the amount of

allowances allocated to a covered entity x of sector J in year t can be computed as the modified target

emissions of sector J (i.e., the sector cap, ) in year t and , the proportion of x’s average

emissions to the average total emissions of sector J during base years (i.e., 2011-2013).

In this approach, the calculation of needs the sector growth rate until 2020 and a target

reduction rate ( ) is based on the mitigation capacity of sector J. Since these parameters (i.e., sector

J’s growth rate and the mitigation capacity until 2020) are not conclusive but estimates, there are

uncertainties associated with the calculation. While the sum of BAU estimates, , does

not vary across researchers, there are notable differences in sector estimates. Several industrial groups

including the Korean Association of Steel Manufacturers are planning to sue the Korean government

by challenging the current Allocation Plan specifically regarding the appropriateness of calculations

of the sector BAU and cap.

Table 11. Calculation Methods for the First Commitment Period for ETS cap

Formula reflecting Framework Act

and the ETS Act (Method ①)

Formula used in the Allocation Plan

(Method ②)

Nation

-wide

BAU in 2000

= Estimated Estimated

BAU in 2015

= Estimated Estimated

National reduction rate

= Announced in 2010 Announced in 2010

Target emissions in 2020

=

Annual reduction rate

= Target emissions in year t

=

Modified target emissions

in year t =

Historical (base year)

emissions =

Observed

(including indirect emissions)

Sector

J in

KETS

①

BAU in 2020

= Estimated Estimated

BAU in 2015

= Estimated Estimated

Reduction rate

= Announced in 2011 Announced in 2011

Target emissions in 2020

=

Annual reduction rate

=

Target emissions in year t

=

Modified target emissions

in year t =

KETS①

KETS②

Historical (base year)

emissions = Observed

(including indirect emissions)

Proportion of the KETS

= r

/

Total cap in year t

=

Sector

J in

KETS

②

Historical (base year)

emissions = Observed

(including indirect emissions)

Observed

(including indirect emissions)

ETS Cap for Sector J in

year t = ] ]

Note: Estimates and targets in the shaded areas had been determined before the Allocation Plan was made. They

are determined in 2010 and 2011, and re-addressed by the Roadmap. denotes the nation’s

annual average amount of modified emissions in 2011~2013.

Source: Authors summarized the cap setting process and allocation formula of the 1st Allocation Plan.

To reduce the degree of uncertainty and possible conflicts associated with ambiguity in the

allocation formula, a different method, Method ②, was employed in the Allocation Plan. In this

approach, uncertainty is less reflected. As shown in Table 11, the KETS entire cap and sector caps are

calculated as follows: 1) the proportion of total emissions covered by KETS to national emissions, r,

is computed based on a base three year average of historical emissions of all covered entities in KETS

and that of the nation, / , 2) Then, the total cap of KETS in year t, , is

computed as a product of r and the modified national target emissions level, . Here, is defined

in the Roadmap and computed as , where is the predicted BAU

emissions level in 2015 and is the national reduction target rate to achieve Korea’s pledge

submitted to the Copenhagen Accord in 2010, a reduction of 30 percent of greenhouse gas emissions

below the business-as-usual (BAU) level by the year 2020, 3) The cap of Sector J in year t, , is

obtained as a product of and the proportion of emissions produced by covered entities in Sector

J to the total emissions of all covered entities during the 3 base years, . The

amount of allowances allocated to a covered entity x of sector J in year t is the same as that of Method

①, a product of and .

With the KETS cap for the first three years of KETS (2015~17), the Allocation Plan can adjust

yearly targets, taking into consideration burdens on the industrial sector, while clarifying that the

principle of medium-to-long-term linear reduction should be met. Final outcomes of the BAU and

sector caps are shown in Table A3, at the end of this paper.

3.3. Other Components of KETS

Other key contents of KETS are summarized and compared with those of the EU ETS in Table

12. In Table 12, similarities between the EU ETS and KETS are easily found. KETS has been

designed to be suitable for domestic situations as well as to be compatible with international standards.

Since the EU ETS is generally considered as an explicit reference, details of the EU ETS were studied

carefully by Korean policy makers and scholars who conducted a series of studies on designing KETS.

In fact, benchmarking the EU ETS provides several advantages, avoiding mistakes and disagreements

that may arise in the process of creating a new policy, saving costs and architectural details of a policy,

and learning lessons from an existing scheme in practice.

Coverage and Scope

According to Article 42(5) of the Framework Act, an entity previously controlled by the TMS

becomes a subject of KETS. This implies that 23 sub-sectors in 5 sectors controlled by the TMS come

under the scope of the KETS.

Unlike the EU ETS, which uses an installation as its compliance unit, the compliance unit for

KETS is either a firm or a facility. In Act 8 of the Emission Trading Act, two criteria to designate

covered entities for allocation are listed: a firm that releases not less than 125,000 tonnes of CO2e on

an annual basis and a facility that releases not less than 25,000 tonnes of CO2e on an annual basis.

This has triggered several questions; for instance, a business entity operating several facilities, some

of which release not less than 25,000 tonnes of CO2e on an annual basis, but all of which release not

more than 125,000 tonnes of CO2e. Should each be treated as a single business unit, or should all be

treated as one business entity? In the Act, “a business entity with a facility” that has produced 25,000

tonnes of CO2 equivalents (CO2e) is regarded as a business entity eligible for allocation, implying

that the unit is “a business entity.” In this sense, it should be understood that in the case of a business

entity with a facility that has produced 25,000 tonnes of CO2e per year, no matter how many facilities

it has, the business entity shall be treated as a single unit.

Another question arises in the case of a business entity with one facility whose annual emission

amount is not less than 25,000 tonnes of CO2e and another whose annual emission amount is slightly

less than 25,000 tonnes of CO2e. When the Act is applied, the former would be subject to KETS, and

the latter would be subject to the TMS, even though both belong to a single business entity (a firm). In

this case, should the business entity fall under KETS and TMS, respectively? Or, should all facilities

of a firm be taken under the coverage of the KETS so that the business entity would be responsible

only for the regulations under KETS? There would be, of course, no problem at all if the entity is

willing to implement both KETS and the TMS, respectively, according to the amount of emissions

released by its places of business. However, an entity that finds this cumbersome could turn its place

of business, whose emissions do not exceed 25,000 tonnes of CO2e, into a voluntary participant under

Article 8 (1) 2 of the Emission Trading Act by filing an application for designation as a business

entity eligible for allocation. In doing so, the business entity could make both of its places of business

eligible for KETS; hence operational problems do not exist.

However, even if the compliance unit is either a firm or a facility, the statement (a report on the

amount of GHG emissions produced) needs to be reformed in terms of the unit of installation or

product, as in the case of the EU ETS. Otherwise, an output-based free allocation scheme, such as

benchmarks, is difficult to adopt. It is well recognized that investment in low-carbon technologies or

dynamic efficiency of the ETS increases as the allocation method changes from grandfathering-based

free allocation to benchmarking-based free allocation and, again, to auction. With the presence of a

limit of auctioned allowances, the first Master Plan required extensive use of benchmarks in the 2nd

commitment period. To make benchmarks work, the reporting of emissions and activity level should

be made at the product level. Thus, the current format of statements reported at either a firm or facility

level should be changed, which seems to an administrative burden for the near future.

Phases or Commitment Periods

As stated in Article 46(1) of the Framework Act, the implementation of KETS was already under

consideration at the time of the enactment of the Framework Act in 2010. Details were scheduled to

be defined in a separate law, since preparation for its implementation was expected to take time.

Accordingly, the government initially planned for KETS to commence on January 1st 2013, based on

the belief that three years would be sufficient to prepare KETS. Industrial sectors, on the other hand,

opposed the schedule for reasons of delayed preparation and the necessity of reviewing international

cases concerning implementation. The government, as well, considered it partly necessary to postpone

the launch so that it would be able to gather more reliable information on GHG emissions through the

TMS. Consequently, a two-year postponement from 2013 was agreed on by the government as and

industrial sectors. This decision was stipulated in Article 2 of the Emission Trading Act.

According to the Enforcement Decree, KETS is being implemented in three phases: the first

commitment period (2015–2017), the second commitment period (2018-2020) and a five- year

commitment period (2021–2025). Similar to the pilot period and a general commitment period of the

EU ETS, KETS allotted 3 years for the first two commitment periods and 5 years for every

commitment periods after the first two phases. The second commitment period covers 3 years in order

to match the 2020 timeline associated with the government’s pledge submitted to the Copenhagen

Accord. The first Master Plan covering the first three commitment periods was intended to set period-

specific goals and primary focuses. As summarized in Table 13, the most important goal in each

commitment period is slightly different: soft landing of KETS for the first; full-scale GHG reductions

for the second and the third. By reflecting these main goals, generous treatments of covered entities

are proposed for the first commitment period, while accurate and strict application of MRV practices

and decreases in the ratio of allowances distributed free of charge are planned for subsequent periods.

Plan for the Ratio of Allowances Distributed Free of Charge

The ratio of free allocated allowances originally envisioned by the government was 90 percent of

the total allowances in the first commitment period (2015~2017) and then zero percent in the third

commitment period, starting in 2021. This plan was considered quite radical compared to the EU plan,

which intends the same (zero free allocation) starting in 2027. Hence, opposition from covered

entities was so strong that a schedule of applying auctions slowed down (in other words, the

proportion of free allocated allowances decreased). After a series of revisions, the ratio of free

allocated allowances is set to be 100 percent and 97 percent for the first and the second commitment

periods, respectively, with the percentage to be determined by the Allocation Plan but not higher than

90 percent of total emission permits in subsequent periods.

When a sector qualifies as a vulnerable sector with the threat of losing international price

competitiveness due to KETS, all entities within the sector will receive free allowances continuously

equivalent to their target emission levels. As with the EU ETS, vulnerability of a sector is assessed by

the MOE based on the sector’s carbon costs and exposure to international trade. A sector is considered

to have a serious disadvantages due to the adoption of KETS if it satisfies any of the following

criteria: 1) carbon cost criterion -