Abstract
The purpose of this study is to test whether Korea’s emission trading scheme (KETS) was effective in curbing GHG emissions in the three major emitting sectors during the first commitment period (2015–2017). The merged dataset, which contains GHG emissions, the amount of free allowances, fuel use and sales at the firm level, and market price information for fuels and Korea’s allowance units (KAU), was used for the empirical exercise in this paper. Our research show that the adoption of the KETS was effective in improving the carbon intensity of KETS-regulated entities in the manufacturing and building sectors, but not in the power sector. The reduction burden, defined as the proportion of the expected emission level to the amount of free allowances allocated before the complying year starts, was shown to be critical in altering CO2 emission characteristics of covered entities in the manufacturing and building sectors. This paper’s empirical findings also suggest that the development of a pricing scheme reflects carbon costs in electricity prices, In addition to the stringency in free allowances allocated to large emitters, is necessary to mitigate CO2 emissions in the power sector.
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Change history
15 June 2021
A Correction to this paper has been published: https://doi.org/10.1007/s10018-021-00315-9
Notes
The global ranking of CO2 emission was 11th in 2019 (National Green House Gas Inventory Report, 2019).
Unlike the first two commitment periods, with three years allocated to each, the KETS is running on a 5-year cycle.
Data from GHG inventory Database provided by the GIR and sales data from the financial statement database provided by Kis-Value are employed in the study. Please refer to Sect. 3 for details.
Unlike the first two commitment periods, with three years allocated to each, the KETS is running on a 5-year cycle.
According to Market Stabilization Mechanism, the government made the reserve allowances available in the allowance market. These reserve allowances were sold by auction.
It should be noticed that the primary goal of the first phase of the KETS was to establish the KETS as a solid and persistent climate policy instrument. In this sense, the GHG reduction performance should be a secondary consideration, although it is still important.
The rating period for KAU17 and KCU17 was from July 1, 2017 to June 30, 2018.
Stiglitz et al. (2017) reported that the explicit carbon-price level consistent with achieving the Paris temperature target is at least $40-$80/tCO2.
The prior-allocation is the size of emissions granted free of charge before the year adjustment.
The first difference of a variable eliminates unobserved firm-specific characteristics and, consequently, the possible endogeneity bias can be reduced. (Keilbach 1995).
Korea’s GHG emissions increased by about 140% during 1990–2016. The contribution of fuel combustion to this rapid increase in GHG emissions was the largest, at more than 85 percent, and that of the manufacturing sector was the second largest.
A change in relative prices of fuels can cause firms to switch their fuel mix and then their CO2 emissions but it can be the result of changes in firms’ output level, followed by changes in CO2 emissions. Given the high dependency on imported fuels in Korea, we assumed that fuel prices should be exogenous, and specific to individual firms.
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Funding
This work was supported by a grant from Kyung Hee University in 2015 (KHU-20150643).
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Jun, SH., Kim, J.Y. & Oh, H. Evaluating the impact of the KETS on GHG reduction in the first phase. Environ Econ Policy Stud 23, 613–638 (2021). https://doi.org/10.1007/s10018-021-00302-0
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DOI: https://doi.org/10.1007/s10018-021-00302-0