The Korean Emissions Trading Scheme (K-ETS) covers 73% of South Korea’s emissions and is critical to achieving its climate targets, including a 40% reduction in greenhouse gas emissions from 2018 levels by 2030. Despite its importance as a climate policy tool, the effectiveness of the K-ETS is dogged with concerns about lax emissions ceilings, low allowance prices, and reliance on international carbon credits.
This report evaluates the role of international credits in compliance carbon markets, focusing on the European Union Emissions Trading System (EU ETS) as a benchmark, and provides policy recommendations for K-ETS’s next phase.
Chapter one examines the integration of international credits in the EU ETS, the world’s first large-scale cap-and-trade system. While international credits from such mechanisms as the Kyoto Protocol’s Clean Development Mechanism (CDM) initially played a significant role, they led to oversupply, depressed carbon prices, and delayed domestic decarbonisation efforts. By 2021, the EU had excluded the use of international credits, focusing on domestic emission reductions, improving the environmental integrity of the targets. The chapter also discusses the Carbon Border Adjustment Mechanism (CBAM), which prevents the use of international credits while incentivising global decarbonisation through border tariffs on carbon-intensive imports.
Chapter two shifts focus to the quality of the international credits under the K-ETS, particularly from cookstove, hydropower, and gas leak reduction projects. These credits, many originating from the CDM, have been associated with significant over-crediting. Our analysis of the cookstove projects — the largest source of credits in the K-ETS — finds that they overestimate by a factor of 18.3 emission reductions due to faulty assumptions about project baselines, stove use, and other reasons. Hydropower and gas leakage projects face challenges in demonstrating additional benefits that would not have otherwise occurred (i.e. additionality) and accurately measuring emissions reductions, undermining their credibility.
Chapter three provides policy recommendations for the fourth planning period of K-ETS. It emphasises the need to strengthen caps, maintain the current 5% limit on international credits, and avoid increasing reliance on the questionable practice of offsetting. The chapter recommends that South Korea ban international credits from its ETS. In addition, the Korean government plans to actively utilise the Article 6 mechanism of the Paris Agreement to achieve its 2030 nationally determined contribution (NDC). In relation to this, it is necessary to establish standards that can strictly verify the quality of international credits.
In summary, the report calls for a phased reduction in international credit use within K-ETS, increased focus on domestic emission reductions, and alignment with best practices from systems like the EU ETS. Strengthening the environmental integrity of K-ETS is essential to achieving South Korea’s climate goals and ensuring the global credibility of the country’s climate action by putting in place and implementing robust and effective policies.
