🚨 Carbon Emission Rights

Today Korean Social News for Beginners | 2025.07.28

0️⃣ Climate Change Response Policy and Greenhouse Gas Reduction Trading System

📌 President Lee Jae-myung Announces "Carbon Emission Rights Strengthening"...Will Company Costs Increase?

💬 President Lee Jae-myung mentioned strengthening the carbon emission trading system, making system reforms more likely. The government is considering plans to greatly increase the paid allocation ratio for carbon emission rights, which are currently 99% free. The government announced it will "significantly increase" the paid allocation ratio for the power sector through the 4th Emission Trading System Basic Plan. Experts point out that emission rights prices are currently too low at around 9,000 won per ton, providing insufficient incentive for companies to reduce greenhouse gases. If the system is strengthened, company costs will increase, which could lead to higher prices and raise concerns about economic ripple effects.

Summary

• Carbon emission rights are permits to emit a certain amount of greenhouse gases, and can be traded between companies.
• Currently 99% are freely allocated, creating insufficient incentive for companies to reduce greenhouse gas emissions.
• The government's plan to expand paid allocation is expected to increase company costs and create economic ripple effects.

1️⃣ Definition

Carbon emission rights are permits that allow companies to emit a certain amount of greenhouse gases. These are allowances for carbon dioxide and other greenhouse gas emissions that the government allocates to companies or organizations, allowing them to emit greenhouse gases within their allocated limits.

This system is a policy tool that uses market principles to encourage greenhouse gas reduction. Companies with leftover emission rights can sell them, while companies that need more can buy them, aiming to achieve efficient overall greenhouse gas reduction.

💡 Why is this important?

• It's a key policy tool for responding to climate change.
• It uses market functions to encourage efficient greenhouse gas reduction.
• It promotes companies' voluntary development of eco-friendly technology.
• It's an important tool for achieving national greenhouse gas reduction goals.

2️⃣ Structure and Current Status of Carbon Emission Trading System

📕 Basic Principles of Emission Trading System

• The emission trading system operates on a 'cap-and-trade' method. The main structure is as follows:

  • The government sets total national greenhouse gas emissions and allocates them to individual companies.
  • Companies can emit greenhouse gases within their allocated emission rights.
  • Companies with leftover emission rights can sell them to other companies.
  • Companies that need more emission rights must buy them in the market or increase their reduction efforts.
  • Overall emissions are managed to stay within the set total limits.

• Allocation methods include free allocation and paid allocation. Key features are as follows:

  • Free allocation provides emission rights to companies at no cost.
  • Paid allocation requires companies to purchase emission rights through auctions.
  • Currently, Korea has a very high free allocation rate of 99%.
  • The higher the paid allocation ratio, the greater the incentive for companies to reduce emissions.
  • The 4th planning period (2026-2030) plans to greatly increase the paid allocation ratio.

📕 Current Problems with the Emission Rights Market

• Emission rights prices are too low, providing insufficient reduction incentive. Main problems include:

  • The average price of emission rights from January to August 2024 was around 9,000 won per ton, down from the previous year.
  • Buying emission rights is much cheaper than investing in reduction technology.
  • 6 out of 10 companies choose to buy emission rights rather than invest in technology.
  • Low prices prevent the emission rights market from functioning properly.

• Excessive free allocation hinders market function. Current status includes:

  • 99% of emission rights allocated to companies in 2023 were free allocation.
  • Paid allocation was only 5.9 million tons, just 1% of the total.
  • This falls far short of the target 10% paid allocation ratio.
  • Companies can adequately respond with free emission rights, reducing pressure to cut emissions.
  • Supply and demand imbalances in the market prevent price signals from working properly.

Major Issues in Carbon Emission Trading System

1. Expanding paid allocation: Finding balance between increased company costs and stronger reduction incentives
2. Price stability: Concerns about business uncertainty due to sudden price changes
3. Industrial competitiveness: Risks of reduced international competitiveness and carbon leakage
4. Fairness issues: Need for fair allocation standards considering different industries and companies
5. Policy consistency: Need for long-term and consistent policy signals

3️⃣ Government's System Strengthening Direction and Impact

✅ Lee Jae-myung Government's Policy Direction

• Strengthening the carbon emission trading system is the core policy. Main directions include:

  • The Lee Jae-myung government plans to strengthen price signals in the market to increase private companies' incentives for greenhouse gas reduction.
  • It's shifting from administrative-centered reduction policies to policies that use market principles.
  • The system will be reformed to encourage companies' voluntary carbon reduction.
  • It's being used as a key tool to achieve the 2030 National Greenhouse Gas Reduction Goal (NDC).

• A significant expansion of paid allocation ratios is expected. Main plans include:

  • The 4th Emission Trading System Basic Plan will significantly increase paid allocation ratios for the power sector.
  • Experts suggest an appropriate paid allocation ratio of around 25% for the power sector.
  • Non-power sectors will also be gradually expanded considering industry competitiveness and technology commercialization timing.
  • Specific ratios will be reflected in the 4th allocation plan starting in 2026.

✅ Impact on Companies and the Economy

• Company cost burdens are expected to increase significantly. Main impacts include:

  • Expanded paid allocation will require companies to pay more for purchasing emission rights.
  • Industries that emit large amounts of greenhouse gases, such as power, steel, and petrochemicals, are expected to face particularly heavy burdens.
  • Companies must choose optimal strategies by comparing emission rights purchase costs with reduction investment costs.
  • Long-term increases in investment in eco-friendly technology development and energy efficiency improvements are expected.

• There may be ripple effects throughout the economy. Main concerns include:

  • Increased company production costs could lead to higher product prices, affecting inflation.
  • There are concerns about weakened international competitiveness in energy-intensive industries.
  • Some companies might move production bases overseas to countries with looser carbon regulations.
  • However, this could create new opportunities for eco-friendly technology and renewable energy industries.
  • Long-term effects are expected to accelerate the transition to a low-carbon economy.

4️⃣ Related Term Explanations

🔎 Greenhouse Gases

• Greenhouse gases are atmospheric gases that cause global warming.
  • Greenhouse gases are gases that allow light energy from the sun to pass through but absorb heat energy leaving Earth for space, raising Earth's temperature. They're called greenhouse gases because they act like greenhouse glass.
  • Major greenhouse gases include: First, carbon dioxide (CO2) accounts for about 76% of all greenhouse gases and is most important. Second, methane (CH4) accounts for about 16% and mainly comes from livestock and agriculture. Third, nitrous oxide (N2O) accounts for about 6% and comes from fertilizer use. Fourth, fluorinated gases have small proportions but very strong greenhouse effects.
  • Greenhouse gases mainly come from burning fossil fuels (coal, oil, natural gas), industrial processes, agriculture, and waste treatment. The emission trading system manages these greenhouse gas emissions by converting them to carbon dioxide equivalent (tCO2-eq).

🔎 Nationally Determined Contributions (NDC)

• NDC is the greenhouse gas reduction target set by each country.
  • NDC (Nationally Determined Contributions) refers to greenhouse gas reduction targets and implementation plans that each country voluntarily sets and submits to the international community under the Paris Agreement. They must be updated and submitted every 5 years, with higher targets than before.
  • Korea's NDC main content includes: First, the goal is to reduce greenhouse gas emissions by 40% by 2030 compared to 2018. Second, sector-specific plans include 44.4% reduction in conversion (power generation), 14.5% in industry, 32.8% in buildings, and 37.8% in transportation. Third, achieving carbon neutrality by 2050 is the final goal.
  • Achieving NDC requires various policy tools including emission trading systems, carbon taxes, renewable energy expansion, and energy efficiency improvements. The emission trading system is particularly used as a key system to encourage reduction in the industrial sector.

🔎 Carbon Neutrality

• Carbon neutrality is a state where greenhouse gas emissions and absorption are balanced.
  • Carbon Neutrality means minimizing greenhouse gas emissions from human activities and achieving a net emission of '0' by absorbing and removing remaining emissions through forest creation and carbon capture and storage technology. It's also called Net-Zero.
  • Methods to achieve carbon neutrality include: First, emission reduction is most important, requiring renewable energy expansion, energy efficiency improvements, and eco-friendly technology adoption. Second, natural absorption through forest conservation and creation absorbs carbon dioxide. Third, technological removal methods use carbon capture, utilization, and storage (CCUS) technology.
  • Over 120 countries worldwide have set carbon neutrality goals for 2050 or 2060. Korea also declared 2050 carbon neutrality in 2020 and enacted related laws for nationwide efforts. The emission trading system is one important policy tool for achieving carbon neutrality.

5️⃣ Frequently Asked Questions (FAQ)

Q: If carbon emission rights prices rise, will electricity rates also rise?

A: The impact of rising carbon emission rights prices on electricity rates is complex. Directly, power companies' costs increase, which could create upward pressure on electricity rates. Especially coal or gas power plants that emit large amounts of greenhouse gases face heavy emission rights cost burdens. However, Korea's electricity rates are government-regulated, so emission rights price changes aren't immediately reflected in rates. Instead, power companies can take two strategies to respond to cost increases. First, they can accelerate the transition to eco-friendly power sources. Solar and wind renewable energy generation emit almost no greenhouse gases, so they don't incur emission rights costs. Second, they can invest in technology that improves generation efficiency to reduce greenhouse gas emissions per unit. Long-term, these changes could promote eco-friendly power systems and even reduce generation costs. However, temporary cost increases may be unavoidable during the transition, requiring careful government policy coordination.

Q: How do other countries operate carbon emission rights?

A: Various forms of carbon emission rights systems operate worldwide, with different countries adopting different methods based on their economic structures and policy goals. The European Union's Emission Trading System (EU ETS) is the world's oldest and largest system, operating since 2005. The EU has high paid allocation ratios and emission rights prices of 60-80 euros per ton (about 80,000-100,000 won), much higher than Korea. California has operated an emission trading system since 2013, allocating almost all emission rights through paid auctions. China started a national emission trading system in 2021, the world's largest system. However, it still mostly uses free allocation, similar to Korea's situation. Canada operates a national carbon pricing system through cooperation between federal and provincial governments, using both emission trading systems and carbon taxes. Japan operates regional systems in Tokyo and Saitama Prefecture and is considering introducing a national system. The common point among these countries is the tendency to increase paid allocation ratios over time and set stricter reduction targets.