Contribution The race for greener economic prosperity
Chung Soo-jeong is a consultant at the A&A ESG Group, Deloitte Korea. Courtesy of Deloitte Korea
By Chung Soo-jeong
More than 70 countries, including South Korea, have come together to make a pledge for carbon neutrality. Carbon neutrality refers to achieving net zero carbon emissions, by offsetting more carbon emissions compared to the amount produced by each economy.
Achieving carbon neutrality is not an easy job, and it definitely requires huge investments. However, it also means a huge upside for the economy. According to United Nations Framework Convention on Climate Change Standing Committee on Finance (UNFCCC SCF) transformation of physical assets to achieve net-zero is estimated about $127 trillion by 2050, or $2.6~4.8 trillion of investments per year.
Nonetheless, companies will not simply take over these costs. They would need to do cost-benefit analysis before installing sustainable facilities. If the cost of installing carbon-reduction facilities exceeds the purchase price of carbon credits traded on the carbon market, then companies will not pursue the reduction aims. It is cheaper to buy carbon credits than to invest in facilities.
To overcome cost-related barriers, we need to create new and advanced cutting-edge technological solutions that help reduce costs when producing at large scales and guarantee comparability in terms of economic viability. Therefore, we must strengthen innovation policies that encourage low-carbon technology adoption, with the ultimate objective of allowing comprehensive climate policies to stimulate technological implementation.
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Nowadays, the government allows a certain amount of carbon emissions within a given period of time by handing out carbon credits, which can be traded on the emission trading system (K-ETS). However, K-ETS does not directly incentivize companies to transform. It also holds risks coming from carbon price fluctuations, which forces companies to not rely solely on ETS.
Therefore, to foster greener economic prosperity, governments are considering the introduction of the Carbon Contracts for Difference (CCfD) program, which aims to help companies reduce carbon emissions by converting their production to environment-friendly production.
Under the CCfD, the Korean government covers the price difference between the market price and the fixed price, which is set between the company and the government prior to the project. In other words, CCfD can be used as a way to cover additional costs to reduce carbon emissions while removing the risks coming from price fluctuation. By doing this, CCfD provides a long-term security mechanism for investors in an unpredictable new market.
Where do the financial resources come from for CCfD funds? The fund will use the revenue coming from carbon credit auctions on K-ETS, created to support mitigation equipment, low-carbon innovation and technology development for small and mid-sized companies.
With Korea being one of the biggest carbon emitters in the world (per person), the required amount for sustainable finance is in the range of $1.4 to 1.9 trillion by 2050 ($44 to 63 billion per year) according to Korea Capital Market institute. However, in 2022, the total revenue of K-ETS was $ 245.4 million. Thus, the amount of revenue is considerably low in order to encourage industrial decarbonization.
However, as the Korean government starts reducing free carbon allowances while gradually increasing the proportion of the carbon credit auction, there is room for a growing CCfD fund to stimulate companies to invest in and implement climate technologies. Revenue from the K-ETS auction will be transferred to the CCfD fund and it will support large-scale projects to develop climate technologies, thereby enhancing the competitiveness of climate technologies across industries.
Carbon-intensive companies that fail to achieve the low carbon transition will be more responsible for emissions, which will lead to the growth of K-ETS' revenue. Through increased revenue, the government can leverage CCfD to support the large-scale projects to develop climate technologies, thereby enhancing the competitiveness of climate technologies across industries. It will bring a fundamental transformation regarding net zero transition to Korea and lead to the country's economic prosperity by securing technological competitiveness.
Tackling the sustainability challenge requires significant investment going far beyond the current level. Thus, governments should stimulate more private involvement in R&D by implementing appropriate policies and mechanisms while fostering a lower risk investment environment.
Gaining competitive edge in climate technologies is crucial to open new market opportunities for Korean companies. In this regard, CCfD adoption is crucial to bring a fundamental transformation concerning the net zero transition to Korea and lead to the country's economic prosperity by securing technological competitiveness as well as unlocking the full potential of sustainable finance.
The writer is a consultant at the A&A ESG Group, Deloitte Korea.