Cap-and-trade market shows loopholes to plug

By Cho Jin-seo

On a website for commuters by bicycle, one recently wrote a provoking post. “The central and local government should purchase carbon allowances from us, the bike commuters!” He added, “The government needs to offer monetary incentives to people who travel by bike, just like they are subsidizing public transportation and even taxis.”

The post received strong support from fellow cyclists on the Internet community, which has some 380,000 registered members. What they can do next is send a formal request to the Prime Minister’s Office (PMO) by Dec. 7, so the opinion can be reflected when it submits Korea’s first yet ambitious carbon trade bill to the National Assembly.

The remaining six weeks of 2010 is so crucial for Korea’s environmental policies that the basics of the carbon trade scheme will be carved out in this period, said Lee Young-joo, an official of the Presidential Committee for Green Growth.

On Nov. 17, the committee and the PMO made a joint announcement regarding the general idea of the scheme, and said they would receive opinions over the next 20 days. Public hearing sessions are also planned, starting this Friday in Seoul.

The committee’s idea is to take all big companies into a cap-and-trade system on the emission of greenhouse gases, such as carbon dioxide, from 2013. That means that the companies will have to trade the allowance on greenhouse gas emissions, by ton measurements, among themselves in a market place like the stock exchange.

The plan is a follow-up of the mandate from President Lee Myung-bak, the committee official says.

“The President declared in November 2009 that Korea would voluntarily reduce greenhouse gas emissions. The government wants to keep its promise,” he said.

The cap-and-trade system is one of many ways that countries can choose to reduce the greenhouse effect ― the earth getting warmer as carbon dioxide and other gases prevent heat from escaping from the atmosphere. In the initial stage, the government will hand out most of the allowance free of charge. The size of the cap will vary by company and by industry.

Then from 2013, the factories will have to keep their gas emissions below the cap, or they will have to buy quotas from other firms who have an allowance excess. The price will be naturally decided by supply and demand in the market. From 2020, the government may auction all additional permissible amounts.

By then, firms may be able to trade internationally. In the Kyoto Protocol of 1997, countries with advanced economies agreed to reduce their carbon emissions. The European Union is gradually implementing the cap-and-trade system, and New Zealand is working on it as well. Australia, China and Japan also have made some progress in designing carbon trade schemes to apply to domestic businesses.

But the United States, the largest polluter on earth, did not even sign the Kyoto treaty. The recent victory of a conservative party in the local elections means that the chance is becoming slimmer for carbon trading to become mandatory, according to local news reports.

Unlike rich countries, Korea is not subject to the Kyoto Protocol because it was not included in the list of advanced economies then. But regardless, it has been trying to do its share in cooling down the earth. Apart from the European-style carbon trading scheme, the Korean government has already started one-on-one consulting on controlling greenhouse gas emissions and the energy consumption of big companies.

A total of 470 firms are designated for this separate initiative. They have to get approval on their annual emission targets, and have to pay hefty fines if they fail to meet the goal.

Carbon conflict

Because of this reason, many businesses complain that they are being subjected to overlapping regulations and too much government intervention. Reflecting this voice, the Federation of Korean Industries, the largest business lobby, has deliberately scheduled an opposition forum on Friday morning, only hours before the public hearing of the Presidential Committee takes place.

Some suspect a rift is developing between government departments as well. The Committee and the Ministry of Environment are pushing for the bill, while the Ministry of Knowledge Economy, which oversees general industrial policies, is allegedly reluctant to share the power of supervision.

Such a conflict of interest between different government bodies is supposed to be dealt with by the President, or by the PMO. “We have the responsibility to reconcile the two sides. So far, we are just monitoring progress made on the issue,” said an official at the PMO said on Tuesday.

Even if the dispute is settled and the bill is submitted to the National Assembly in late December as planned, obstacles for successful implementation remain. First, there is little historical evidence that the cap-and-trade system works efficiently, and Europe’s case is too weak to convince Korean officials who doubt the similarity of the two economies.

Second, the carbon trading market is likely to become another complex financial monster. Speculative bankers and traders will invent clever derivatives products, which then will require additional scrutiny and expense from the government.

The third reason to worry is more fundamental. Can the system work by market principle, or is it a planned economy in disguise of market capitalism? How can the government measure and control the amount of gas emission, while it is not very successful in clamping down on illegal water polluters along the big rivers? A high level of bureaucracy is bound to be involved in the carbon market.

According to the Presidential Committee of Green Growth’s draft announced last week, the scheme will need another special committee named the “Emission Rights Allocation Committee.” It has 20 or fewer board members who are either vice ministers of related government departments or “people with academic knowledge and experience” whom they will designate.

The fourth question is the distortions over the carbon market’s borders. Like the members of the bike commuters’ community, many think that it is not enough and inefficient to target private corporations only, while public organizations and individuals are excluded. For example, a car running on gasoline will have to pay for exhaust gas if it belongs to a corporation, but not when it is owned by an individual. Thus, the scheme is likely to encourage big firms to shift their emission sources to smaller firms or individuals who are not subject to the rule.

To the dismay of the 380,000-strong bike commuters’ group, Lee of the Presidential Committee announced that there is no plan to expand the carbon market beyond the 470 firms, at least for the time being. But the bikers’ message is clear ― clean air and a cool earth are not just the subject of business, politics or financial derivatives. Everyone should play a part in this.