The 2015 Paris Agreement on Climate Change has prompted countries to consider stronger policies to achieve de-carbonization. One of the most efficient ways to reduce GHG emissions is the carbon pricing policy instruments. In this regard Asia is rapidly establishing itself as new Emission Trading Scheme (“ETS”) hub. To help speed industries’ transition away from emissions-intensive production, Asian countries are increasingly exploring carbon pricing policies. Some of the recent encouraging developments include China official - even though soft - launch of its nationwide ETS in December 2017, South Korea reforms in the ETS and its Government’s approval of ETS’s Phase 2 on July 2018, With both South Korea and China having a nationwide ETS, there is tremendous political pressure on Japan to enact a policy to impose a carbon market and price across its whole economy in light of positive results its sub-national ETSs have achieved. While the countries’ experiences with ETS, national or sub-national, will no doubt be helpful for potential linkages between themselves or other countries in the future, their differences in ETS’s architectures present significant challenges. This paper first walks through the design of China’s new nationwide ETS and contrasts it with the ones of Japan and South Korea. In the next section, and even though China, Japan, and Korea have no near term plans to link their ETSs, we catalog and compare some of the most important three countries’ ETS technical features to highlight potentialities for linkage. Some barriers are particularly relevant in the Northeast Asian context, while others apply more generally.
Section 1 – China, Japan and South Korea ETSs
There are two types of ETSs, national and sub-national.
Source: International Carbon Action Partnerships
§ 1 - National ETSs
i) South Korea ETS
On January 1st, 2015, Korea launched its national ETS (“KETS”), the first nation-wide Cap-and-Trade program in operation in East Asia. The KETS covers approximately 525 of the country’s largest emitters, which account for around 68% of national GHG emissions. Expectedly, the performance of the KETS in the first year of its operation was quite disappointing with the total traded permits were only 0.8% of the total quantity of pre-allocated allowances, for a total of 543 million tons. The lack of trading liquidity occurred because it was the first year for compliance. A company tends to observe how the ETS works and waits to determine whether to trade their permits. Similarly, EU companies did not actively participate in ETS during the first year of implementation. During the first phase (2015–2017) of the KETS, there was a shortage of emission permits in the power generation and energy sector, whereas the steel industry had a relatively sufficient number of emission permits.
In 2016, efforts were made to increase the supply of allowances in to ease the pressure on market participants.
Since the start of trading, carbon prices in the ETS have been following an upward trend.
Overall, the total value of units traded between January 2015 and June 2016 was KRW 1,781 billion (EUR 1.4 billion). Trading activity was highest during the first half of 2016, when a significant share of the total transactions took place (80% of KAU trades and 60% of KCU trades). Therefore, the average price of units over this period is close to the final price on 30 June 2016, and the difference between them was relatively small. On 11 July 2018, the Korean government released the Allocation Plan for the second phase of its ETS.
ii) China ETS
Over past decades, China heavily relied on subsidy programs as the primary policy tools for low carbon development. The Ministry of Finance stopped the energy efficiency subsidy program in 2013 and the Chinese government has been attaching increasing importance to market-based policies to achieve its environmental goals. This involved a long debate on whether China should introduce an ETS or a carbon tax. In its 12th Five-year plan (FYP12 – from 2011 to 2015) the State Council announced for the first time, a national carbon intensity reduction target. Chapter 21 of the FYP12 calls for the implementation of market-based mechanisms such as ETSs to implement goals of the Plan. In October 2011 the National Development and Reform Commission (“NDRC”)  published a Notice that assigned the task of establishing ETS pilot programs to five cities (Beijing, Chongqing, Shanghai, Shenzhen and Tianjin) and two provinces (Guangdong and Hubei). The main objective of the establishment of pilot ETS programs was to learn lessons through experiences and to facilitate the development of a national ETS. The seven pilots each started their operations between June 2013 and June 2014.
The 7 provinces and cities were carefully selected based on two main factors (i) willingness of provincial leaders to have an ETS pilot (ii) need to represent a variety of Chinese economic, social, and geographic criteria. Together, the 7 locations represent about 25% of the country’s annual GDP. Leaders have emerged among the pilots, helping to establish best practices for the national market. Guangdong and Hubei have experimented with auctioning allowances, the allocation approach the national market intends to eventually transition to after an initial period of free allocation. The Beijing market has maintained the highest and most stable carbon price. The NDRC guidelines help structure the overall design of the pilot programs by requiring that the two provinces and five cities. On December 19, 2017 China officially and softly launched its national ETS. However, it will take until around 2020 before seeing actual monetary transactions in the ETS. China has bought time for laying a solid groundwork needed for market operation. A number of uncertainties remain around the scheme, including concerns over data quality, and measuring, verification and reporting systems in many of the Chinese provinces. When fully implemented, the ETS could more than double the volume of worldwide carbon dioxide emissions covered by either tax or tradable permit policy. China now has over a decade of policy experience with, the implementation of seven ETS pilots. Hubei and Shanghai have been selected to lead preparatory work in two vital aspects of the nationwide ETS. Hubei will take charge of setting up and maintaining the national carbon registry while Shanghai is responsible for getting the trading platform ready. According to the policy document released, China’s national ETS construction will involve three phases. The first phase (“infrastructure construction”) (“system test”) (“development and improvement”). Many elements are not detailed in the document, particularly the allowance allocation protocol. In the remainder of this section we describe the expected design based partly on the recent document and partly on experience with an allowance allocation trial.
The ETS, for now, will only be run in the power sector, due to better data quality and reliability when comparing to other sectors, covering coal-fired and gas-fired power plants, including those that produce both power and heat. Even so, this makes up a third of China’s total carbon emissions.
§2 - Sub-national ETSs
i) Mandatory ETSs
While the Japanese Global Warming Tax (“JGWT”), J-Credit Scheme, and the international Joint Crediting Mechanism (“JCM”) are currently operational, cap-and-trade has not yet found its way into national level climate policy. However, Japan’s capital runs the local Tokyo Metropolitan Government Emissions Trading Scheme (“TMGETS”), which is directly linked to a prefectural-level ETS in neighboring Saitama (“SETS”).
The TMGETS, launched in April 2010, is Japan’s first mandatory sub-national ETS. In FY2014, emissions by covered entities reduced by 25% compared to base year emissions. It amounts to approximately 14 million tons reduction in the first compliance period.Views differ in Japan on the role of carbon pricing in Japan. ETS is viewed with caution in Japan, because of concerns about price volatility and the risk of speculation. Some analysts have concluded that Japan already has one of the world’s highest carbon prices and therefore cannot raise its carbon price without harming its economy while others point to the need for industrial restructuring to increase value added per ton of carbon emissions in the Japanese economy.
In terms of linkage with other ETSs, Japan can make an important contribution to international mitigation efforts, by providing public and private support for emissions-reduction activities in other countries especially in South East Asia where many Japanese companies’ factories are established.. TMGETS and SETS are connected with each other as Japan sometimes considers a national scheme. The coverage of STES is basically the same as TMGETS. It covers large-scale facilities (buildings and factories) with total consumption of fuels, heat and electricity of 1,500 kiloliters or more per year in crude oil-equivalent. Approximately 600 facilities are covered.
Saitama Prefecture revised its global warming strategy action plan—Stop Global Warming Saitama Navigation 2050—in 2015 and set a target greenhouse gas reduction of 21 % below 2005 levels by 2020. Excess Credits from Tokyo Metropolitan Government's emissions trading system and Small and Midsize Facility Credits issued by Tokyo Metropolitan Government are officially eligible as offset credits. Credits from excess emission reductions and Small- and Mid-size Facility Credits are eligible for trade between the two ETSs. During the first compliance period, 14 credit transfers took place between the Saitama Prefecture and Tokyo (8 cases from Tokyo to Saitama, 6 cases from Saitama to Tokyo).
Overall, the stance of Japan’s government has been to carefully consider ETS, evaluating its burden on Japanese industry, associated impacts on employment, developments and effects of emissions trading schemes in other countries, and global warming countermeasures that are already implemented in Japan (e.g., voluntary actions by industry).
Tokyo aims to become the city with the lowest environmental impact in the world. The end of September 2016 was the deadline for meeting the obligations of the first compliance period. Over the first five years of operation (FY2010–FY2014), TMGETS led to a remarkable drop in emissions from covered facilities in Tokyo. Total emissions for FY2014, the last year of the first compliance period, were 25% lower than base-year emissions.
ii) Voluntary ETS
The Kyoto Prefecture has a "Kyoto Verified Emission Reduction" scheme managed by the "Kyoto CO2 Reduction Bank,”. it does not impose any reduction obligation on facilities in Kyoto.
Section 2 – Assessing potentialities for inking China, Japan and Korea ETSs
China, Japan, and Korea together account for approximately 30 % of global GHG. Emissions have been increasing significantly in the region, especially in China, which is the world’s largest emitter. In order to address global climate change effectively, China, Japan and Korea may take full advantage of the international cooperation scheme under Article 6.2 of the Paris Agreement. These extraterritorial emissions reductions may be less costly to achieve than domestic mitigation opportunities. Barriers that may slow down or even stop the process of carbon market integration through linking come in various forms. The table below compares some of the key features of the three countries’ ETSs systems.
Following the adoption of the Paris Agreement expectations have been growing regarding international cooperation in the field of climate change, including ETSs. Putting aside political readiness of China, Japan and Korea, and looking at technical readiness of those countries’ ETSs only it can be concluded from this study that they share in common some of the vital ETSs’ elements and approaches making the potential linkage between their ETS less hypothetical than it first appears. In the next few months, the development of China nationwide ETS will either enhance the chances of linkage with Korea and Japan or not.
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