Emission Trading Prices Soar Annually... Industry Appeals for "Speed Control"

47% of Companies Dissatisfied with Emissions Trading System
Main Reasons: Lack of New Technologies, Insufficient Reduction Capacity
Facility Investment Burden... 10% Increase in Paid Allocation Ratio

[Image source=Yonhap News]

[Asia Economy Reporters Kim Bo-kyung, Moon Chae-seok, Hwang Yoon-joo] As the government’s decarbonization policies reduce the greenhouse gas emission allowances granted to companies, the adverse effect of rising emission trading prices is hitting the business sector hard. With the prolonged COVID-19 pandemic weakening corporate finances and clouding sales prospects, the 'carbon risk' is increasing.

According to the '2018 Emission Trading Scheme Operation Results Report' from the Ministry of Environment’s Greenhouse Gas Integrated Information Center on the 30th, the average trading price of emission allowances both on and off the market rose from 11,013 KRW per ton in 2015 to 17,256 KRW in 2016, 20,951 KRW in 2017, 22,118 KRW in 2018, and 27,648 KRW in 2019, marking year-on-year increases of 56.7%, 21.4%, 5.6%, and 25%, respectively. According to a survey conducted by the Ministry of Environment targeting 230 allocated companies, 47% of all companies expressed dissatisfaction with the emission trading system. The main reasons for dissatisfaction included lack of reduction capacity, increased burden of purchasing emission allowances, absence of new technologies, and instability of the emission allowance market. Responses indicating that the emission trading system negatively affects corporate competitiveness reached 40.8%, while only 20.4% believed it would have no impact.

When asked whether the 'Revised Roadmap for Achieving the 2030 National Greenhouse Gas Reduction Target,' which aims to reduce greenhouse gas emissions from 709 million tons in 2017 to 536 million tons by 2030, is achievable, 64.3% answered it is impossible. Responses indicating that the roadmap would impose a burden on companies were high at 88.7%. Professor Jung Yong-hoon of KAIST’s Department of Nuclear and Quantum Engineering predicted, "If price volatility becomes too great, companies will tend to buy emission allowances to solve the problem in the short term rather than actively developing carbon reduction device technologies. In this case, emission allowance prices could continue to rise."

◆ Burden of Purchasing Paid Allocation Emission Allowances = The rise in emission trading prices is expected to be inevitable during the '3rd Phase of the Greenhouse Gas Emission Trading Scheme,' which will be implemented over the next five years starting next year. The paid allocation ratio for 41 paid allocation sectors jumped from 3% in the 2nd phase (2018?2020) to 10%. Paid allocation sectors receive a separate paid allocation account from the government annually and must purchase paid allocation emission allowances through auctions held on the second Wednesday of each month.

For example, even if the annual emission allocation is set at a maximum of 100 tons, Company A in a free allocation sector does not need to buy additional emission allowances from the market if it emits only 100 tons. However, Company B in a paid allocation sector, emitting only 90 tons, must purchase the remaining 10 tons by paying for them, adding an extra burden. If a company emits more greenhouse gases than its allocation and fails to purchase emission allowances, it must pay a fine up to three times the previous year’s average market price according to the 'Act on Allocation and Trading of Greenhouse Gas Emission Permits.' While the policy logic that 'carbon-intensive companies should bear more burden' may apply, there are complaints that the government has not carefully considered how much financial damage the cost burden of equipping green hydrogen and CCUS (Carbon Capture, Utilization, and Storage) facilities will cause. Domestic CCUS technology is still in its infancy, only just beginning demonstration projects.

◆ Industry: "Emission allowance prices are 50% of product price... Too Burdensome" = Recently, there have been forecasts that emission trading prices will fluctuate even more if the government’s 2050 carbon neutrality policy raises carbon reduction targets. Complaints have emerged that the government’s demand level has risen sharply in a short period, making facility investment burdensome. The speed of the government’s greenhouse gas allocation reduction and the rise in paid allocation ratios are also criticized as too rapid.

A cement industry official said, "We are an industry where the emission allowance price is about 50% compared to the product sales price (around 60,000 KRW per ton)." He added, "This '50%' is among the highest levels in the industry, meaning there is a significant possibility of product cost increases due to rising emission allowance prices." He lamented, "If emission allowance prices continue to rise, there is a possibility that we will inevitably have to reduce production of core products in the future." Professor Kim Min-sung of Chung-Ang University’s Department of Energy Systems Engineering said, "While it is true that companies that reduce emissions benefit when emission allowance prices are high, since the government plans to continuously reduce the total emission allowances, ultimately the rise in emission allowance prices will become a financial burden for companies."

Experts argue that it is necessary to ▲ include large corporations in national R&D support for carbon reduction new technologies such as hydrogen reduction steelmaking technology ▲ ease the speed of individual company greenhouse gas allocation reductions ▲ provide indirect support for increased energy costs due to electricity rate restructuring. Some suggest a plan to convert the purchase of low-carbon energy sources such as nuclear power into emission allowances that can be sold on the market to reduce greenhouse gases.

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