Ministry of Economy and Finance's Rosy Calculation of Greenhouse Gas Emission Permits, 180 Billion KRW Climate Fund Restructuring

Chimney of Shin Incheon Combined Cycle Power Plant in Seo-gu, Incheon. Photo is unrelated to the article content.

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Concerns have been raised that the government’s optimistic calculation of greenhouse gas emission permit revenues could disrupt the Climate Response Fund projects. Considering recent sales volumes and prices of emission permits, it is pointed out that it will be difficult to gather sufficient funds next year. To fundamentally resolve the issue, there are calls for institutional improvements to revitalize the emission permit market.

According to the National Assembly Budget Office on the 18th, a report titled “Evaluation of the Climate Response Fund” focusing on these issues was recently published.

The Climate Response Fund was established in 2022 under the “Carbon Neutrality and Green Growth Basic Act for Climate Crisis Response (Carbon Neutrality Basic Act).” The operating budget is 2.4914 trillion won this year, managed by the Ministry of Economy and Finance. The fund is raised by collecting money from the sale of greenhouse gas emission permits and other sources. The government expected revenue of 348.7 billion won from the sale of greenhouse gas emission permits next year, but the National Assembly Budget Office’s analysis suggests this estimate may be overly optimistic.

The reason lies in the low sales volume. The Ministry of Economy and Finance estimated that about 20 million tons of greenhouse gas emission permits would be sold next year. However, since 2020, emission permits have never been sold in quantities exceeding 20 million tons. In fact, sales peaked at 13.64 million tons in 2022 and have been declining since. Last year, sales sharply dropped to 7.89 million tons. This year, as of January to August, only 2.44 million tons have been sold, marking the lowest level ever for the same period.

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The National Assembly Budget Office also pointed out issues with the price. When calculating next year’s greenhouse gas sales revenue, the Ministry of Economy and Finance set the price at 16,958 won per ton, based on the average auction winning price from 2022 to 2023. However, since last year, the highest winning bid price for greenhouse gas emission permits was 13,200 won per ton. This year, prices have hovered around 10,000 won, even dropping to the 9,000 won range in September.

The phenomenon of lower-than-expected emission permit revenues has been recurring for several years. In 2021, the Ministry of Economy and Finance projected 550.9 billion won in revenue from greenhouse gas emission permit sales, but only about 60% of that, 306.7 billion won, was collected. In 2022, when the Climate Response Fund was first established, 730.6 billion won was planned, but only 318.8 billion won was earned. Last year, the expected revenue was lowered to 400.9 billion won, but only 85.2 billion won, or 21.3%, was collected.

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In the process of addressing this, the operation plan for the Climate Response Fund changed, causing disruptions to projects. The National Assembly Budget Office analyzed that measures such as expenditure restructuring, unused funds without resources, and increased deposits were implemented to cope with the fund’s revenue shortfall. In 2022, expenditure restructuring reduced 28 projects by a total of 96.2 billion won, and last year, the same method cut 44 projects by a total of 179.9 billion won.

The National Assembly Budget Office urged efforts to normalize the emission permit market as the Climate Response Fund’s revenue decreases due to low sales volume and prices. Currently, the total allowable greenhouse gas emissions are 3.048 billion tons, which many evaluate as excessively high. Some companies earn additional profits without much effort because they have surplus emission permits.

Free emission permits, which are distributed without charge, account for 90% of the total emissions. Considering special institutions like schools and hospitals that receive 100% free allocation, companies actually purchase only about 4% of the emission permits. The market is structured in a way that makes it difficult to activate because most permits are given away for free.

The Ministry of Economy and Finance has expressed its willingness to solve the problem. Kim Beom-seok, the first vice minister of the Ministry of Economy and Finance, said at the 46th Economic Relations Vice Ministers’ Meeting and Price Relations Vice Ministers’ Meeting last month, “We will support companies’ free operation of emission permits by expanding the carryover limit from three times to five times the net sales volume.” Vice Minister Kim added, “While continuously expanding the scale of the Climate Response Fund, we will strengthen its role so that the resources generated through the operation of the emission permit market can be used more effectively.”

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