Carbon Cash: What Is Emissions Trading; How South Korea's Major Polluters Reap Profits From It?

A total of 475 billion won ($357 million) has been generated by South Korea's most polluting companies through the sale of unused carbon emissions permits in the initial eight years of the nation's program, as reported by an activist group.

According to Plan 1.5, a Seoul-based climate advocacy group, the 10 largest emitters in South Korea sold nearly 22 million tons of excess credits from 2015 to 2022.

What Is Emissions Trading?

Emissions trading, also known as "cap and trade" or "allowance trading," is an approach to pollution reduction that has been successfully used to safeguard human health and the environment. Emissions trading programs consist of two main components: a limit (or cap) on pollution and tradable allowances equivalent to the limit, which authorize allowance holders to emit a specific quantity (e.g., one ton) of the pollutant, according to the United States Environment Protection Agency.

This limit ensures the achievement of the environmental objective, while the tradable allowances offer flexibility for individual emissions sources to determine their compliance strategy. These programs are often referred to as "market-based" because allowances can be bought and sold in an allowance market.

Effectively designed emissions trading programs provide:

• Environmental certainty, established by the overall pollution limit.
• Flexibility for individual emissions sources to tailor their compliance path to their needs.
• Incentives for efficiency and innovation that lower implementation costs.
• Incentive for early pollution reductions as a result of the ability to bank surplus allowances.
• Low administrative costs.
• Accountability for reducing, tracking, and reporting emissions.
• Emissions trading programs are best implemented when:

The environment and/or public health concerns occur over a relatively large geographic area. A significant number of sources are responsible for the pollution problem. Emissions can be consistently and accurately measured. Under the right circumstances, emissions trading programs have proven to be extremely effective.

They can achieve substantial reductions in pollution while providing accountability and transparency by making the data available through systems such as EPA's Clean Air Markets Program Data (CAMPD)."

South Korea's Major Polluters Profit from Emissions Trading

This figure was unveiled in an analysis by the group, revealing that the nation's cap-and-trade system, encompassing nearly 700 companies, experienced a surplus of 39.2 million tons in the combined years of 2021 and 2022. This surplus is equivalent to approximately 6% of Korea's total emissions in 2022.

Although South Korea was among the first Asian nations to implement an emissions-trading system, it has struggled to effectively incentivize industrial polluters to reduce pollution due to the oversupply of allocations, a significant portion of which were provided free of charge, as reported by Bloomberg.

The findings of the analysis exert additional pressure on the government to enhance the program, which serves as a crucial component of the nation's commitment to reducing greenhouse gas emissions by 40% from 2018 levels by 2030. Kwon Kyungrak, a program director at Plan 1.5, expressed in an interview, "South Korea's emissions trading scheme has failed to serve its main purpose, which is to make carbon-intensive companies pay for their pollution. The total amount of allocations in 2030 should be reduced by about 30% from the current level, otherwise, the scheme will continue to be a money-making tool for these companies," as reported by Bloomberg.

In October, the government announced plans to bolster the establishment of total emission allowances to enhance the incentive for companies to mitigate pollution, following consultations with stakeholders. Posco, South Korea's largest emitter, disclosed having unused carbon permits in 2022 due to disruptions in its steel production caused by a typhoon, leading to reduced emissions.

The company stated that it earned 31.1 billion won from selling permits that year but had purchased allowances worth 21.3 billion won in 2021. South Korean permits have witnessed a decline of approximately 43% over the past year, reaching 9,130 won per ton, a fraction of those in the European Union, which hosts the world's largest cap-and-trade system, as reported by Bloomberg.

Carbon trading encountered challenges in the 27-nation bloc, with permits plummeting more than 90% following the 2008 financial crisis, which impacted the industry and contributed to a surplus.