Carbon Market Watch

For fair and effective climate protection.

Launch of Korean ETS underlines the need for linking safeguards

15 Jan 2015

South Korea flag_cutThis month, South Korea became the second Asian country after Kazakhstan to officially start a national carbon market. The first carbon allowances that were traded on the Korea Exchange were sold at a similar price to that in Europe’s emissions trading system (EU ETS). South Korea’s ETS could therefore be a good candidate for linking with EU’s carbon market now that the EU is looking at linking as replacement for the barred use of international offsets. While linking can have significant consequences for the integrity of the EU ETS, the European Parliament is currently not in a position to scrutinize the linking negotiation process.

Currently, negotiations to link carbon markets are ongoing between Switzerland and the European Union. The EU ETS is 350 times larger than the Swiss ETS in terms of emissions covered, so linking the two markets will have little (if any) impact on the European carbon market. South Korea’s carbon market is however much larger than the Swiss ETS. Covering 570 million CO2 emissions, the South Korean ETS is almost a third of the EU ETS, which means that linking the two markets could have a significant impact on the European carbon price.

Moreover, there are different standards in place: While the South Korean carbon market allows for the use of international offsets after 2020, the EU ETS will not allow this in the future. Allowances and offsets are interchangeable and if a carbon market that is linked to the EU ETS accepts international offsets, these credits become available indirectly in the EU ETS as well. Linking the South Korean and EU ETS after 2020 would mean that international offsets could still enter the European carbon market, even though the EU restricted their use.

The European Commission has announced on various occasions that it sees linking of the EU ETS with other ‘mature and robust’ carbon markets as the main tool to reduce global carbon emissions.  This could in the future also include linking with the South Korean carbon market, possibly boosting the low carbon price in the EU. However, such linking can only enhance the effectiveness of the overall system if there is sufficient environmental integrity in all linked carbon markets. If not, loopholes in either system could be exploited, damaging the cost-effectiveness and environmental integrity of the full set of linked carbon policies.

With such large implications, it is surprising how little influence elected politicians have on the linking negotiations. It took years for European policymakers to agree to a proposal that simply shifted the volumes of auctioned allowances over time (“backloading”). But when it comes to linking with foreign carbon markets, the European Commission receives a mandate to negotiate from the European Council over which the European Parliament has no say.

Meanwhile, linking could have significant consequences because it could alter the ambition level, the use of international offset and the supply measures of the EU ETS. It is hence surprising that members of the European Parliament are not even informed of the linking negotiation mandate, but are only allowed to vote on the agreement when the negotiations have already been finalized.

Safeguards are therefore needed to ensure that linking enhances the integrity of carbon pricing policies. At the same time, elected policymakers should have a say on the linking negotiations when politically sensitive issues are at stake. In a world where the creation of a global carbon market through linking is gaining more momentum, there is a need for enhanced transparency and a bigger role for the European Parliament in the process leading up to these linkages.

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