EU and South Korea target closer cooperation on climate, carbon markets

25 September 2015

Leaders from the EU and South Korea reaffirmed their intentions to advocate for an “ambitious” and “effective” UN climate agreement at the end of this year during a bilateral summit held in Seoul, Republic of Korea on 15 September.

“Climate change may put at risk not only the environment, but also prosperity, or even more broadly stability and security,” said Donald Tusk, the European Council President, in a press briefing following the conference. Cecilia Malmström, European Commissioner for Trade, joined Tusk for the talks, while Republic of South Korea (ROK) was represented by President Geun-hye Park.

The two parties discussed cooperation on climate change in addition to a number of other bilateral and global issues including among others multilateral trade, energy, biodiversity, climate finance, and the post-2015 development agenda, according to a joint statement released after the meet.

In a bid to further increase climate efforts, the leaders confirmed that they would launch an initiative next year to increase technical cooperation on their emissions trading schemes. This collaboration will be funded through an “EU Partnership Instrument,” which is designed to advance the bloc’s strategic international aims, and some experts have begun to speculate that this could potentially lay the foundation towards an eventual linkage between the two carbon markets. 

The two economic powers are also linked by a Framework Agreement signed in 2010, aimed at bolstering engagement on key international issues, as well as a Free Trade Agreement (FTA) inked in 2011.

Climate action, finance

The meeting’s joint statement underscores that a new climate agreement under the auspices of the United Nations Framework Convention on Climate Change (UNFCCC) must support the inclusion of adequate provisions on transparency and accountability for all parties; reflect the principle of common but differentiated responsibilities (CBDR) and respective capabilities in light of different national circumstances; and put the world on a trajectory of an average temperature rise of no more than two-degree Celsius above pre-industrial levels.

The two economies also call for the agreement to address adaptation and provide access to climate finance, with a specific push to make a Green Climate Fund (GCF) operational this year. Established by a UNFCCC decision in 2011, the GCF is a financing mechanism intended to provide developing countries with the means to both slash emissions and adapt to the consequences of climate change.

As of July some 35 governments have pledged to the GCF, including eight from developing countries. Out of the US$10.2 billion pledged, however, only US$5.8 billion has been converted to a real monetary contribution.

Moreover, unless pledges and contributions increase rapidly in the near future, the current funding falls far short of a promise made by developed countries in the Copenhagen Accord in 2009 to provide US$100 billion a year to developing countries starting in 2020. Many countries and analysts involved in the UN process have said that meeting this finance pledge will be a crucial element to achieving a successful climate agreement.

Since the EU-South Korea bilateral meeting the former has also agreed to a common position for the pivotal UN climate meet in December where UNFCCC parties are hoping to sign the new agreement. (See BioRes, 24 September 2015)

Carbon market cooperation

The effort to bolster technical cooperation on carbon markets will be closely watched by a number of governments and analysts alike.

South Korea’s ETS is the currently the world’s second largest carbon market behind the EU’s Emissions Trading System (ETS) and covers roughly two-thirds of the country’s total greenhouse gas (GHG) emissions. While plans for South Korea’s ETS were initialised in 2012, trading did not commence until January of this year, partly owing to concerns from industry. (See BioRes, 20 January 2015

Several experts have identified multiple benefits for the linking of these two schemes, because of the expected higher carbon price in South Korea due to limited cost-effective mitigation measures in certain high-emitting sectors. Linking with the EU ETS could reduce the cost of carbon allowances in South Korea while at the same time boosting the low carbon price in the EU.

However, the large size of the ROK ETS could pose a risk to the EU, as it would make the EU ETS more exposed to economic developments in South Korea, a possibility currently not as prevalent in current linking negotiations between Switzerland and the EU as the former ETS is relatively small.

Similarities and differences

While research from the International Centre for Trade and Sustainable Development (ICTSD) has identified some similarities between the European and Asian-based carbon markets, there are also some specific elements that would require harmonisation before linking could occur. [Editor’s note, ICTSD is the publisher of Bridges Trade BioRes]

On the one hand, both schemes utilise absolute emissions targets, which according to some experts, lessens concerns related to competitiveness and cap integrity. In addition, there is overlap between the two schemes on key issues related to monitoring, reporting, and verification (MRV) methods and banking rules.

On the other hand, price and supply controls and recognition of carbon offsets could pose barriers to linking. For example, the South Korean government has the ability to increase the supply of allowances if carbon prices rise too high, an issue that is likely to concern the EU.

The EU, meanwhile, recently established a Market Stability Reserve (MSR) that will automatically adjust the supply of allowances based on pre-defined rules, without direct involvement from the government. (See BioRes, 20 July 2015)

Another barrier relates to the rules regarding international carbon offsets. As it currently stands, the South Korean ETS will allow the use of international carbon offsets starting in 2021, while the EU does not intend to use international offsets to achieve domestic mitigation commitments beyond the end of the decade. This is problematic, as the linking of the European ETS with the ROK carbon market would make these offsets automatically available for use in the EU.

There are also differences between the two schemes relating to the distribution of free allowances and coverage, although some experts do not think these differences will pose significant impediments to linking.

Many observers are not expecting linkage between these two schemes before 2025, however, as the EU will most likely wait for the South Korean market to mature and move beyond its pilot phases before beginning negotiations.

Carbon market mechanisms worldwide

The use of market mechanisms as a way to reduce emissions has been gaining momentum as some 60 national and sub-national jurisdictions have or plan to set up carbon pricing mechanisms covering some 25 percent of global emissions.  

Meanwhile, the reference to, the use, or extent of international market mechanisms such as the UNFCCC's Clean Development Mechanism offsetting programme or “Joint Implementation” for offsetting between developed countries in the new climate architecture is still uncertain. Also unclear is whether and how the deal would sanction international emissions trading. (See BioRes, 18 September 2015)

Several UNFCCC parties mention they will use or support market-based mechanisms in their “intended nationally determined contributions” (INDCs) – which are the individual building blocks of the UN climate deal – to reach domestic targets. However, some analysts warn that the absence of international carbon credits in the EU ETS post-2020, and no agreement on multilateral rules governing international emissions could result in a more fragmented global carbon trade or offset regime.

“Looking at INDCs, a lot of countries say they will use or support markets, but if you look at who will buy any UN credits, the list is incredibly short: New Zealand, Switzerland, potentially Norway, and there it stops,” a carbon market analyst recently told Carbon Pulse. 

South Korea’s INDC calls for a 37 percent reduction in emissions below business-as-usual levels by 2030 and this will include the use of international market mechanisms.

According to some analysts, South Korea’s potential international demand would be around 100 million tonnes in the year 2030, however, government officials have not specified if this demand will be met through linking with other carbon markets, or through the purchase of foreign offsets.

ICTSD reporting; “Launch of Korean ETS underlines the need for linking safeguards,” CARBON MARKET WATCH, 15 January 2015; “South Korea vows to use international carbon market to meet steeper climate target,” CARBON PULSE; “Carbon market linking on back burner as governments stay at home,” CARBON PULSE.

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