"Electricity Rates Bound to Rise"...What’s Behind the Emissions Allocation Plan [Digging Energy]

Specialist Report
Government to Announce Allocation Plan by End of Month
Rapid Changes Ahead for Emissions Trading Scheme Over Next Five Years
to Achieve 2030 NDC Target
Effective Reduction in Total Emission Cap
Paid Allocation for Power Ge

"Achieving greenhouse gas reduction targets will inevitably lead to higher electricity rates. We must proactively inform the public and seek their understanding and consent." This was the statement made by President Lee Jaemyung while presiding over a meeting of senior aides on August 14. The meeting primarily focused on climate crisis measures and energy policy. Experts commonly interpret President Lee's remarks about "raising electricity rates" as being made with the emissions trading scheme in mind.

The government announced the 4th Basic Plan for the Emissions Trading Scheme in December last year and, based on this, plans to release the draft national emissions allowance allocation plan for the 4th planning period (2026-2030) within this month. Prior to this, the Ministry of Environment held a public hearing on September 12, where it unveiled the framework of the allocation plan. However, it did not disclose specific details such as the total amount of emissions allowances, the volume of market stabilization reserves, or the proportion of paid allocations, which have attracted significant market attention.

This 4th emissions allocation plan is drawing attention because it coincides with the end date of the national greenhouse gas reduction target (NDC) for 2030. The NDC sets a target of reducing Korea's greenhouse gas emissions by 40% by 2030 compared to 2018 levels.

The NDC outlines a steep reduction path as 2030 approaches. To meet this target, the total allowable emissions during the 4th planning period must be significantly reduced. The proportion of paid emissions allowances must also be increased to incentivize companies to cut their greenhouse gas emissions. This series of measures will inevitably lead to higher electricity rates and increased burdens on the industrial sector. This is why the power generation and industrial sectors are paying close attention to the 4th allocation plan.

Lower Emissions Allowance Prices Than China

The greenhouse gas emissions trading scheme is a system that allows companies to buy and sell rights to emit greenhouse gases. Korea has implemented this system since 2015. The government allocates annual emissions allowances, either for a fee or free of charge, to facilities that emit more than a certain amount of greenhouse gases, and only emissions within those allowances are permitted. Companies that emit less than their allocated amount can sell surplus allowances on the market, while those that exceed their allocation must purchase additional allowances.

Despite implementing the emissions trading scheme over three phases, the general assessment is that it has not been effective. As of the first half of this year, Korea's emissions allowance price was around 8,000 won, which is lower than the European Union (65 dollars as of March 2024), California in the United States (40 dollars), and even China (10 dollars).

Because the price of emissions allowances is low, companies have little incentive to reduce their greenhouse gas emissions. Instead of investing in emissions reduction facilities or technologies, companies participating in the emissions trading scheme preferred to purchase cheap allowances.

There are various reasons for this. To ensure a smooth introduction of the system, the government initially issued an excess of allowances and set a low proportion of paid allocations compared to the EU and other countries. During the third phase, only 10% of allowances were paid, and industries with high greenhouse gas emissions, such as steel and petrochemicals, received 100% of their allowances for free. As of 2024, the EU allocates 100% of allowances for a fee in the power generation sector, and 70% in the industrial sector.

The emissions trading market itself did not function properly. In the early stages, participating companies tended to hold onto their allowances rather than trade them, in order to avoid risk. In response, the government restricted the carryover of allowances from 2017 onwards. When companies could no longer use allowances in the following year, there was no reason to purchase additional allowances, causing prices to drop sharply. There were also insufficient institutional mechanisms for the government to adjust supply and demand when allowance prices fluctuated.

Reducing Allowable Emissions and Expanding Paid Allocations

The 4th Basic Plan for the Emissions Trading Scheme introduces a range of measures to address these issues. First, the total amount of emissions allowances allocated to participating companies has effectively been reduced.

Previously, there was a separate reserve for market stabilization in addition to the total allowable emissions, but for the 4th planning period, the reserve for market stabilization is included within the total allowable emissions. This means that the number of allowances allocated to participating companies will be reduced accordingly.

During the 4th planning period, a Korean-style market stabilization mechanism (K-MSR) will be introduced. The core of this system is to strengthen market control by increasing the reserve for market stabilization. If emissions increase, paid allowances will be transferred to the auction market; conversely, if emissions drop sharply, paid auction volumes will be shifted to the reserve to adjust prices. The specific details of the K-MSR system will be announced by June 2026.

The industrial sector has no objection to including the market stabilization reserve in the total allowable emissions, but there are concerns about a sharp increase in the reserve. At the "4th Emissions Trading Scheme Allocation Plan Forum" hosted by the Korea Chamber of Commerce and Industry on September 9, Jung Eunmi, Senior Research Fellow at the Korea Institute for Industrial Economics & Trade, stated, "With the recent sharp increase in domestic manufacturing costs, if companies are further burdened by the cost of emissions allowances, they may have to consider reducing production operations. The reserve should be set at an appropriate level, taking into account corporate competitiveness."

During the 4th planning period, participating companies will be divided into power generation and non-power generation sectors for differentiated allocation. In the 3rd phase, sectors were divided into conversion, business, waste, transportation, buildings, and public/other.

The proportion of paid allocations in the power generation sector has been significantly increased. The Ministry of Environment stated, "Taking into account overseas cases and the availability of clear reduction measures (such as renewable energy), we are considering a significant increase in paid allocations for the power generation sector, with a gradual increase from 10% in 2025 to 50% in 2030 to alleviate the burden on companies." After the 4th planning period, the government is also considering implementing 100% paid allocations in the emissions sector.

For non-power generation sectors, the government aims to raise the current proportion from 10% to 15%. However, carbon leakage sectors will continue to receive 100% free allocations. Carbon leakage sectors are those that emit large amounts of carbon but have a high proportion of export-oriented business, making them likely to relocate overseas if required to purchase allowances. These include steel, non-ferrous metals, petrochemicals, cement, refining, semiconductors, displays, and paper. Local governments, schools, hospitals, and public transportation are also eligible for free allocations.

"Rate Hikes Unavoidable...Countermeasures Needed"

With a significant increase in paid allocations for the power generation sector, the burden on power companies will grow, which is widely expected to lead to higher electricity rates. In particular, the industrial sector, which has already seen electricity rates rise by more than 70% over the past three years, will face even greater pressure.

According to a report titled "The Impact of the Emissions Trading Scheme on Electricity Rate Increases," commissioned by the Federation of Korean Industries and authored by Shin Donghyun, Research Fellow at the Korea Energy Economics Institute, if 50% of allowances for the power generation sector are paid and the price of allowances is assumed to be 30,000 won, manufacturing sector electricity rates are projected to rise by 2.5 trillion won per year.

At the public hearing on September 12, Lee Sihyung, Manager at the Korea Chamber of Commerce and Industry, pointed out, "A sharp increase in paid allocations for the power generation sector will inevitably impact electricity rates. The industrial sector is already under considerable pressure from indirect emissions and electricity rate burdens." He added, "In Europe, where 100% paid allocations have been implemented in the power generation sector for over a decade, subsidies are provided to both industrial and residential sectors. We must also anticipate electricity rate increases and prepare countermeasures."

Park Sungje, General Manager at Korea South-East Power, explained, "Simulation results estimate that the power generation sector will face a shortfall of 38 million tons of allowances from 2026 to 2030. Applying the previous day's closing price of 10,650 won per allowance, this amounts to a total of 4 trillion won." Park pointed out, "If the financial burden on the power generation sector increases, there will be less capacity to invest in renewable energy. Support measures are needed."

On the other hand, environmental groups are arguing that the proportion of paid allocations for the power generation sector should be further increased. Choi Changmin, attorney at Plan 1.5, argued, "The impact of the emissions trading scheme on electricity rate increases has been exaggerated," and insisted, "From the 4th planning period, the paid allocation ratio for the power generation sector should be raised to 100%, or at least 50% from the initial stage."

Meanwhile, 774 companies are subject to the 4th planning period. The Ministry of Environment will prepare a government proposal within this month and hold a briefing session. After review by the Carbon Neutrality and Green Growth Commission and the Cabinet, the 4th allocation plan will be finalized within the year.

This content was produced with the assistance of AI translation services.