Korea's carbon trading lessons for Australia

In Australia hope for bipartisan support over a carbon price appears forlorn, so how did South Korea manage to get both sides of politics on the same page?

In April the Korean Parliament passed legislation to establish a carbon emissions trading system starting on January 1, 2015. 

Unlike in Australia, there was almost no public debate about the reform.  Although the main business group, the Korean Federation of Industry, opposed it, lawmakers on all sides of the legislature combined to vote for it – 151 ‘yes’ votes and three abstentions.  Why is this story so different from Australia’s torturous route to a carbon price?

Basically, it’s down to good political management and the integration of the carbon emissions trading concept into a much broader industrial policy. Here is how it happened.

On August 18, 2008 – the 60th anniversary of South Korea's independence as a nation – President Lee Myung-bak declared "Low Carbon, Green Growth" as the core of the country's new vision for the coming 60 years. South Korea's economic development from one of the poorest nations on earth at the end of the Korean War – often referred to as the Miracle on the Han River – has been impressive. 

Korea is now the 13th largest economy in the world – just behind Australia – and the only nation to have transformed from an aid recipient to a donor country in a single generation. It would be a brave commentator who predicts that they cannot reach their new economic goals.

Korea’s National Strategy for Green Growth is based on integrating mitigation of climate change with improvement of energy independence (Korea has no indigenous fossil fuels), creation of new growth engines for the 21st century, improvement in the quality of life and enhancement of Korea’s international standing. These are clearly stated goals that the Korean public can understand and accept.

The country took a number of steps in pursuit of these aims in recent years. In Copenhagen in 2009, it adopted a voluntary national emissions reduction target – the equivalent of 4 per cent reduction a 2005 baseline by 2020. Domestically, it plans to invest 2 per cent of GDP annually in green growth. In terms of exports, it has identified a goal of capturing 20 per cent of the green industry market. The vast majority of its financial stimulus during the global crisis was aimed at green investment. It hosted the G20 Seoul Summit in 2010, with a theme of green growth.  Also in 2010, it launched the Global Green Growth Institute, establishing an alliance in 2011 with Denmark and the Global Green Growth Forum. But probably the most ambitious of Korea's green growth initiatives is the establishment of an economy wide carbon emissions trading system – the first Asian nation to take this step.

With the legislation now in place, the enabling work for the system is underway. Part of the transition plan is the Target Management System (now operating), which captures almost 500 entities representing 68 per cent of greenhouse gas emissions in Korea. 

These entities emit over 25,000 tpa of CO2e in 2012; in 2013 the threshold will reduce to 20,000 tpa of CO2e and in 2014 to 15,000 tpa, to bring more entities into the system. Liable entities are set targets for reductions based on the average of their last three years emissions records. 

They must submit an implementation plan to government and will pay a small penalty if their targets are not met. In effect, the TMS is conditioning industry for carbon emissions trading, and its real value is in establishing a solid database of emissions for monitoring, reporting and verification purposes.

In 2015, the emissions trading scheme will begin with two key aims: reducing greenhouse gas emissions cost effectively, and developing low carbon and high efficiency technologies. The first two phases of the ETS will run for three years each, and over 95 per cent of carbon permits will be allocated free. After that, phases will be five years long and allocation plans will be determined by Presidential decree.

The threshold for mandatory participation in the ETS will be the same as Australia’s: installations emitting over 25,000 tpa of CO2e, or entities emitting over 125,000 tpa in total, but entities below these thresholds may participate voluntarily. If emissions targets are not reached, entities will be liable for penalties of up to three times the average market price, capped at US$113/tonne.

A National Reserve of carbon permits will be used to promote market stability. Use of offset credits conforming to international standards will be permitted, though to what extent has yet to be determined. Other details such as financial support for competitive disadvantage, whether there will be any carbon price floor or cap, and establishment of an Emissions Trading Market Authority also remain to be worked out. 

The Presidential Decree on these matters will be finalised after consultation with stakeholders by November 2012, before the upcoming Presidential elections. However, given the extent of bipartisan support for carbon trading, it is unlikely to be revoked by any new government.

This is a very different story from Australia.

Korea is implementing its emissions trading scheme as a key part of its national industrial policy, with a clear vision of transforming its economy into one of green growth and making it a role model for the world.

Admittedly, this sort of industry policy is easier to construct in an export-oriented economy than in a resource-based economy. But our leaders could learn something from their Korean counterparts on how to steal an advantage in the new industrial revolution.