Korean move boosts prospect for global carbon trading hub

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(Getty Images)

(Getty Images)

On May 2, the South Korean National Assembly passed a law introducing a national carbon trading scheme by 2015. 

This is a truly significant moment not only in terms of Korea’s national efforts to tackle climate change, but also because it underlines the emergence of a nascent Asian Pacific carbon trading emissions hub with the potential to be a tipping point in the global fight against climate change.

So why is Korea’s move so important when the country is responsible for fewer than 2 percent of global emissions?

The answer is that it helps to unblock what until now has been a major political barrier to progressing the development of an Asian response to climate change: namely, competitiveness concerns in the manufacturing heart of the global economy.

Korea’s economy is, in numerous ways, in direct competition with China and Japan and there were many voices within Seoul pressing the government to drop its plans for an emissions trading system until Beijing and Tokyo followed suit. 

Despite flirting with emissions trading themselves, both China and Japan have, until now, voiced competitiveness concerns, vis-a-vis their neighbours, as an argument not to press ahead with their own schemes.

Korea’s move is, therefore, a very bold one.  But it is not as economically risky as it may seem.  The decision to press ahead, made after months of deliberations, has not been made in isolation.

Seoul knows that Beijing, although not wanting to lead on emissions trading, has been making preparations to implement its own scheme.  China’s motivations are various and complex.

First, Beijing recognises that, in order to maintain social cohesion its growth must be sustainable. As the country grows wealthier, environmental concerns are rising and China is vulnerable to some of the worse impacts of climate change.

The 12th Five Year Plan was the greenest ever seen and there is a genuine commitment to adopting a different development path than in the West, one based on cleaner more sustainable technologies and fuels.

Secondly, China knows that the command and control policies they have used to date do not stimulate innovation or encourage enterprise.

Emissions trading on the other hand has the benefit of a regulatory underpinning combined with the flexibility of a market which encourages new enterprise. China has learned from its experiences in the Clean Development Mechanism that markets can uncover low cost emissions savings and stimulate the creation of new businesses.

Finally, as agreed in the Durban conference last year, from 2020 China is expected to agree to take part in an international agreement to cut global emissions. The existence of a domestic emissions trading policy will be a great asset in terms of enabling China to sign up to targets confident that it can meet them at least cost.

China’s 12th Five Year Plan, which runs from 2011 to 2015, contains specific mention of carbon trading as a mechanism that could help the country reach its national target of reducing by 2020 the carbon intensity of GDP by between 40 percent and 45 percent from 2005 levels. 

It announced in 2011 that pilot carbon trading schemes would be introduced in the cities and municipalities of Beijing, Chongqing, Shanghai, Shenzhen and Tianjin with province-wide schemes being trialled in Guangdong and Hubei.

These are not token efforts; the combined GDP of these Chinese cities, municipalities and provinces is equivalent to the whole of Canada and, if successful, there is an expectation that the pilots will be precursors to a national scheme, possibly as early as 2016. 

Korea’s decision will embolden these efforts.

Another major regional economy - Australia - passed a Clean Energy Act in November 2011 which will result in the introduction of a national carbon trading scheme by 2015. With New Zealand already operating its own scheme, it is clear that a major regional hub of carbon trading is emerging.

There is a growing realisation in Asia-Pacific that carbon trading is the most economically efficient way to reduce emissions of greenhouse gases.

By setting a cap on emissions, environmental certainty is assured but industry is given flexibility to meet the target, either by individual firms reducing emissions or, if it is too costly to do so, by buying reductions from other companies who find it easier and cheaper.

For those companies that find it cheap to reduce emissions, there is an incentive to sell as many surplus permits as possible on the market to those counterparts who find it more expensive.

The larger the Asia-Pacific emissions market that ultimately emerges, the more efficient its operation, the more solutions will be found and the lower the cost.

In time, this nascent regional scheme could be linked in with the largest existing carbon trading system in the world in the EU - worth an estimated €90bn in 2010.

From there, it is not too much of a leap to see a truly global market by 2020 involving the State-level schemes operating in California and on the east coast of the US, perhaps covering as much as 50% of global emissions.

Such a development would be a huge step-change in the global fight against climate change. Moreover, as the costs of reducing emissions are revealed to be lower than first feared, and the benefits are progressively realised in terms of greater resource efficiency, competitive advantage in clean energy technologies and strengthened energy security, governments are likely to commit further in the formal UN negotiations.

The ultimate goal here is as urgent as it is complex:  to design and agree an international regime for the post-2020 period with the necessary ambition to limit global average temperature rise to 2 degrees Celsius. South Korea’s latest move could prove a major catalyst to making this a reality.

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