Korea releases reforms for ETS phase III

On 21 October 2019 the Republic of Korea announced reforms for phase III of the Korean Emissions Trading Scheme (KETS), including a tighter cap and changes to allocation.  

The changes were announced as part of the Second Framework for Response to Climate Change and signal increased ambition during phase III of the KETS, which will run for a five-year period starting 2021. Foremost, Korea announced a stricter emissions cap in line with its overall 2030 GHG emissions target of 536 MtCO₂e (compared to 709 Mt in 2017 and 37% below business as usual in the absence of ETS). The annual cap trajectory has not been decided.

Korea will furthermore introduce changes to allocation and increased auction shares starting in 2021. Since January 2019, entities covered by the KETS that are not considered vulnerable to carbon leakage are obliged to acquire 3% of their allowances for compliance at auctions. This share will increase to over 10% during 2021-2025, with further increases envisaged after phase III.

The role of grandfathering is set to decline over phase III. The Korean government has indicated that free allocation based on sector-specific benchmarks will rise to at least 70% over 2021-2025. This continues a shift toward benchmarking that is expected to reach 50% by 2020. The benchmark values under phase III are still to be decided.

In order to boost liquidity, Korea is likely to expand the market maker system during phase III and potentially open the secondary market to non-compliance entities. Korea has faced steadily rising allowance prices and concerns about liquidity and undersupply. This has prompted the government to enact limits on allowance banking.

Forestry and international offsets will continue to play a role providing flexibility for compliance.