K-ETS Progress & Operational Status

22 October 2018

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1. Carbon Pricing Mechanism in Korea

2011-2014

2011GHGs: 125kt,Energy: 500TJs

2015

Approx. 592 Companies(`17)(GHG Emission over 125kt)

2017

1st Stage Allocation Plan for Phase II(2018) established

2018

2nd Stage Allocation Plan for Phase II(2018-2020) established

2021-

5 yrs for each Phase from Phase III

2012-13GHGs: 87.5kt,Energy: 350TJs

2014 ~GHGs: 50kt,Energy: 200TJs

Allow 3rd party participation

Link to other ETS

* TMS : GHG Emission & Energy Consumption Target Management System

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1. Target Management System

Features- Command and control

- Target setting through consultation with assigned companies

- Companies emitting over 50kt of GHG and consuming 200TJs of energy / Facilities over 15kt, 80TJs

Governance- MOE oversees operation of TMS (Rule-setting, Monitoring each ministry)

- Each ministry regulates their designated sectors

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1. Target Management System

Process cycle of TMS

Year T

• Assignment( ~ 30 Jun.)

Year T+1

• Statement report( ~ 30 Mar.)

• Target setting( ~ 30 Sep.)

• Implementation plan report( ~ 31 Dec.)

Year T+2

• Implementation(1 Jan. ~ 31 Dec.)

Year T+3

• Implementation result report( ~ 30 Mar.)

• Verification(1 Apr. ~ )

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2. Preparatory stage for ETS

Development of MRV for individual companies

- Establish and consolidate MRV system before the start of ETS

- Make the Government and companies better understand MRV system

Information Collection

- Understand individual, sectoral and general GHG emission status through the reports

- Identify potential subject entities of ETS

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Comparison of K-ETS and TMS

Type Type

RegulationRegulation

Regulated gasesRegulated gases

Threshold

Period

Allocation

MRV

Early actionoffsets

Banking/Borrowing)

Trading

Penalty

AllocationAllocation

Market Mechanism (Pricing) Market Mechanism (Pricing)

6 GHGs6 GHGs

Emitters of 25KtCO2-eq or more Voluntary participantsEmitters of 25KtCO2-eq or more Voluntary participants

3~5 years3~5 years

Operational guidelines, 3rd party verificationOperational guidelines, 3rd party verification

Free allocation + auctioning(1st phase(`15~`17): free allocation)

Considering total amount of permit, 10%Considering total amount of permit, 10%

AllowedAllowed

AllowedAllowed

Penalty to emissions non-compliancePenalty to emissions non-compliance

6 GHGs, energy consumption6 GHGs, energy consumption>25ktCO2 (~’11.12.31)>20ktCO2 (‘11.1~)>15ktCO2 (‘14.,1~)

>25ktCO2 (~’11.12.31)>20ktCO2 (‘11.1~)>15ktCO2 (‘14.,1~)1 year1 year

Free allocation(Grandfathering, Benchmarking) Free allocation(Grandfathering, Benchmarking) Operational guidelines, 3rd party verificationOperational guidelines, 3rd party verification

Determined by contribution factor, no guidelines Determined by contribution factor, no guidelines

Not allowedNot allowed

Not allowed Not allowed

Penalty under KRW 10mnPenalty under KRW 10mn

Command and ControlCommand and Control

RegulationRegulation

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1. Scope

Types of GHGs- Carbon dioxide(CO2), Methane(CH4), Nitrous Oxide(N2O), Hydrofluorocarbons(HFCs),

Perfluorinated Chemicals(PFCs), Sulfur Hexafluoride(SF6)

Types of emissions : Direct emissions- GHGs emissions by combusting fuel or using F gas, etc.

Types of emissions : Indirect emissions- GHGs emissions by using electricity or steam supplied by others

K-ETS includes Scope 1 + Scope 2

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2. Sectors

Industry sector as basic coverage

- More than 70% of the entities in K-ETS system is in industry sector

Building sector

- Building and communications are included in this sector, to mitigate emissions from buildings and

communications industry

K-ETS covers various sectors including industry, building, transport, energy sectorspublic

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2. Sectors

Transport sector

- Aviation industry is included in transport sector

Energy sector

- To include emissions from power generation, power and energy entities are subject to K-ETS

Public and waste sector

- Public services such as water supply, waste and wastewater treatment has carbon costs

- So public and waste sectors are subject to K-ETS too, to internalize those carbon costs and

enhance efficiency by mitigating GHG emissions

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1. Allocation

100% free allocation- As it was 1st time introducing the ETS in Korea, 100% free allocation was intended to:

- stabilize K-ETS and build experiences

- ensure compliance of entities and related players

Allocation methodologies- GF methodology was applied to most of the sectors

- BM-based methodology applied to refinery, aviation and cement industries

100% free allocation through GF and BM methodologies

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2. Coverage

5 sectors, 23 subsectors, from 525 entities in 2015 to 592 entities in 2017

Sector Industry Building Transport Energy Public & Waste

Subsector

MineralFood&beverage

TextileWoodPulp

RefineryPetro-chemicalGlass&ceramics

CementSteel

Non-ferrousMetals

MachinerySemi-

conductorsDisplay

ElectronicsAutomobilesShip-building

BuildingCommunications Aviation Power & Energy Water supply

Waste

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1. Allocation results

1,608 million tons of initial allocation, 1,685 million tons in total

Categories 2015 2016 2017 SUM

Initial allocation 543,107 535,858 529,648 1,608,613

Change of allocation

Additional allocation 9,091 16,105 26,326 51,492

Cancellation 13,351 20,615 10,620 44,586

Early action - 29,412 21,980 51,392

Change of plan - - 18,643 18,643

Total allowances 538,847 560,760 585,977 1,685,584

Unit : kt

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2. Reserved allowances

89,438kts compiled – 75,581kts(84.5%) used

Categories Market stability Other purpose Early action Total

Allowances Compiled 14,316 23,730 51,392 89,438

Allowances Used(Used/Compiled)

4,938(34.5%)

19,450(81.9%)

51,392(100%)

75,780(84.7%)

Allowances Left 9,378 4,280 0.2 13,658

Unit : kt

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3. Operational status of offset mechanism

252 methodologies registered, 139 projects approved, 22.4 million tons accredited

Methodologies

- Total 252 methodologies - 211 CDM (83.7%), 41 domestic(16.3%) - registered

Project approval

- Total 139 projects(90 CDM, 49 domestic) approved

- 47 renewable energy, 24 N₂O reduction, 22 fuel conversion, 17 waste heat recovery, 10 landfill gas

utilization, 10 SF₆ reduction, 9 other projects

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3. Operational status of offset mechanism

Accredited Credits

- Total 22.4 mn tons from 82 projects accredited

- 9.6 mn from N₂O reduction , 5.8 mn from landfill gas utilization , 4.5 mn from SF₆ reduction,

2.1 mn from renewable energy, 0.2 mn from fuel conversion

KCUs (Korean Credit Units) Issued

- 15.3 mn tons(68.5%) from 22.4 mn tons of accredited credits converted to KCUs and used

for transaction or compliance

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4. Compliance results

1,669 mn tons emitted, 16.6 mn tons (0.98%) of surplus allowances

Unit : million t

Categories 2015 2016 2017 Total

Number of entities 524 562 592 -

Total Allowances 538.8 560.8 586.0 1,685.6

Amount of Emission 542.7 554.3 572.0 1,669

Surplus/Shortage -3.9(0.7%) 6.5(1.15%) 14.0(2.39%) 16.6(0.98%)

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4. Compliance results

Status by entities

- 402 entities (67.9%) had surplus out of 592 entities (2017)

- 190 entities (32.1%) had shortage

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5. Traded volume & price

85.1 mn tons, 1,712 bn KRW traded

Categories 2015 2016 2017 2018 ( ~ 9 Aug.) Total

Traded volume (Mt) 5.73 11.9 26.26 41.26 85.15

Total traded amount (bn KRW) 63.1 200.7 544.7 903.5 1,712

Avg. Price (KRW)12,028 17,367 21,131

20,374

- Traded volume, aggregate turnover : KAU+KCU+KOC, in and out of KRX system- Price : Price of KAU traded each year in KRX system

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5. Traded volume & price

Volume Price

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1. Allocation

Launch of auctioning

- 3% of the allowances would allocated through auctioning in Phase II

- 100% free allocation is applied for some of the industries considering international

competitiveness or carbon leakage

- Trade intensity and additional cost increase are considered to determine such industries for 100%

free allocation

Launch of auctioning and wider application of BM-based methodology

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1. Allocation

Wider application of BM methodology- To promote investment for emission reduction and innovation

- BM based methodology applied to 4 more industries (power, group energy, industrial complex,

waste) along with 3 initial industries (refinery, cement, aviation)

Total allocation- 1,796,133,085t of allowances are allocated for Phase II (1,642,980,666t of initial allocation)

- Reserved allowances are 153,152,419t

Launch of auctioning and wider application of BM based methodology

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2. Introduction of market maker (planned)

Market maker- Invite public financial institutions as market maker

- With actions to be taken by market maker, risk of low market liquidity could be reduced

- Policy details such as type and level of incentives for market maker, institution, timing of

introduction are now being considered

Allowances for market maker

- 5,000kt of allowances from 153,152,419 of reserved allowances are allocated for market maker

Introducing market maker from 2019 is now in consideration

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3. Emission reductions from abroad

Progress- Initially, reductions from overseas mitigation projects with direct participation were initially

planned to be counted as offset credits from 2021- With related regulations amended in 2018, the timing was brought forward to 2018

Expected Impact

- Promotion and spillover of mitigation techniques

- Development of mitigation potentials in developing countries

- Contribution to implementation of 2030 roadmap and NDC

Emission reductions from CDM projects abroad with direct participation of domestic(Korean) entities are accepted as offset credits (2018 ~ )

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1. Participation of 3rd Party

Accepting participation of 3rd parties is planned for Phase III- Preparation of policy measures to prevent market abuse or interference

- Maximize the benefit of market functions

2. ETS linkage

Link with other ETS systems would be necessary, and also planned for Phase III

- Promote international cooperation on MRV to guarantee equivalence of each credit

- Regulation-setting

- Contribution to implementation of 2030 roadmap and NDC