Korean Emissions Trading Scheme Research Articles

Lessons from the Pilot Project of Korean ETS on the Local Landscape of Economy

For a sustainable landscape of local economies, many researchers have emphasized the importance of field-oriented differentiation in government policies. In particular, the Paris Agreement, based on the bottom-up approach, aims to maximize the participation of all economic agents, in contrast to the top-down approach of the Tokyo Protocol. In response to these global paradigm shifts in the local landscape, local governments in Korea have made significant efforts to adapt to sustainable development during the pilot phase of emission trading scheme (ETS), during the period from 2015 to 2020. This study evaluates the performance of these local government policies in the transition to a carbon-zero economy. Using the general non-radial directional distance function (GNDDF), we found that Gyeongsang Province demonstrated enhanced environmental total factor productivity (TFP) during the pilot project, whereas the Seoul metropolitan area lagged behind due to a lack of governance. As the economic center of Korea, Seoul showed poor environmental performance because of the arbitrary elimination of green belt areas and unchecked land development, resulting in environmental degradation, a trend common in many developing countries facing climate adaptation challenges. To address these urbanization issues, this study concludes that a balanced approach combining stricter regulations with market-oriented promotional incentives is essential for optimizing the transition of local economies to a sustainable landscape.

Efficiency in the Early Stages of Carbon Markets: The Case of the Korean Emissions Trading Scheme

ABSTRACT The Korean Emissions Trading Scheme (K-ETS) in its initial stages experiences low market liquidity driven by sellers’ supply shortages. We empirically investigate for the first time the informational market efficiency of the K-ETS, specifically how the efficiency varies over time with policy measures taken to increase liquidity, such as individually constrained banking. Our findings indicate that temporary measures taken to improve liquidity in the K-ETS do not ensure informational market efficiency. We also find after the COVID-19 onset, inefficiency does not disappear even with a large surplus of allowances under pre-scheduled constrained banking. This study provides valuable implications for emerging carbon markets, which move forward toward more stringent caps.

한국 배출권거래제와 EU 배출권거래제 연계

The world has put various efforts to reduce greenhouse gas emissions to respond to the threat of climate change. Recently, the EU announced to introduce the 'Carbon Border Adjustment Mechanism (CBAM)' which imposes a sort of tariff to the import products from the countries which do not impose the proper level of carbon reduction cost. Korea, as a major exporter to the EC, should respond to the CBAM to reduce the damage. Linking the Korean Emission Trading Scheme with the EU counterpart would be one way. For such a linkage, it is necessary to consider not only technical, administrative, and economic conditions, but also political and popular factors. This study seek several considerations and a proper method for the linkage.

Environmental policy and R&D productivity: A case study from the Korean Emissions Trading Scheme

AbstractThis study investigates the relationship between emissions trading schemes and Research and Development (R&D) productivity based on data from manufacturing industries participating in the Korean Emissions Trading Scheme (KETS). First, this study estimates the total factor R&D productivity by industry, and it is confirmed that changes in R&D productivity vary across industries. The total factor R&D productivity in Korea has been decreasing, but the annual growth trend has been increasing rapidly due to the introduction of the KETS. Based on the estimated R&D productivity, panel data model estimation is executed to reveal the effect of environmental policy on R&D productivity. Empirical results confirm that environmental policy plays a vital role in promoting R&D productivity, and policy stringency affects R&D performance. The results also find that the environmental policy encourages enterprises to participate in KETS for improving R&D productivity.

Dynamics of innovation activity and carbon emission: an empirical analysis from Korean manufacturing industries

ABSTRACT This study investigates the causal relationship between technology innovation and carbon emissions based on data from firms participating in the Korean Emission Trading Scheme (KETS). It is considered that the dynamics of firm innovation and environmental performance vary by industry group because each industry utilizes a different production process and carbon reduction ability. Therefore, in this study, the causal relationships between innovation and emissions are analyzed and compared by industry based on the panel vector error correction model (VECM) and the fully modified OLS procedures (FMOLS). The results show that innovation activities play an important role in promoting the environmental performance of firms at the 5% significance level in the long -run. On the other hand, a firm’s sales that represent production activities increase carbon emissions both in the long and short-run. Comparative analysis between industries confirms that the dynamics vary by industry. R&D investments have a significant effect on carbon emissions reduction in the energy industry in the short run, but in the high technology industries such as semiconductors and electronics, environmental regulation plays an important role in inducing technological progress in the short run.

Risk of Carbon Leakage and Border Carbon Adjustments under the Korean Emissions Trading Scheme

Purpose – This paper examines South Korea’s potential status as a carbon leakage country, and the level of risk posed by the Korean emissions trading scheme (ETS) for Korean industries. The economic effects of border carbon adjustments (BCAs) to protect energy-intensive Korean industries in the process of achieving the carbon reduction target by 2030 through the Korean ETS are also analyzed. Design/methodology – First, using the Korean Input–Output (IO) table, this paper calculates the balance of emissions embodied in trade (BEET) and the pollution terms of trade (PTT) to determine Korean industries’ carbon leakage status. Analyses of the risk level posed by carbon reduction policy implementation in international trade are conducted for some sectors by applying the EU criteria. Second, using a computable general equilibrium (CGE) model, three BCA scenarios, exemption regulations (EXE), reimbursement (REB), and tariff reduction (TAR) to protect the energy-intensive industries under the Korean ETS are addressed. Compared to the baseline scenario of achieving carbon reduction targets by 2030, the effects of BCAs on welfare, carbon leakage, outputs, and trading are analyzed. Findings – As Korea’s industrial structure has been transitioning from a carbon importing to a carbon leaking country. The results indicate that some industrial sectors could face the risk of losing international competitiveness due to the Korean ETS. South Korea’s industries are basically exposed to risk of carbon leakage because most industries have a trade intensity higher than 30%. This could be interpreted as disproving vulnerability to carbon leakage. Although the petroleum and coal sector is not in carbon leakage, according to BEET and PTT, the Korean ETS exposes this sector to a high risk of carbon leakage. Non-metallic minerals and iron and steel sectors are also exposed to a high risk of carbon leakage due to the increased burden of carbon reduction costs embodied in the Korean ETS, despite relatively low levels of trade intensity. BCAs are demonstrated to have an influential role in protecting energy-intensive industries while achieving the carbon reduction target by 2030. The EXE scenario has the greatest impact on mitigation of welfare losses and carbon leakage, and the TAF scenario causes a disturbance in the international trade market because of the pricing adjustment system. In reality, the EXE scenario, which implies completely exempting energy-intensive industries, could be difficult to implement due to various practical constraints, such as equity and reduction targets and other industries; therefore, the REB scenario presents the most realistic approach and appears to have an effect that could compensate for the burden of economic activities and emissions regulations in these industries. Originality/value – This paper confirms the vulnerability of the Korean industrial the risk of carbon leakage, demonstrating that some industrial sectors could be exposed to losing international competitiveness by implementing carbon reduction policies such as the Korean ETS. The contribution of this paper is the identification of proposed approaches to protect Korean industries in the process of achieving the 2030 reduction target by analyzing the effects of BCA scenarios using a CGE model.

Do environmental policy and innovation improve carbon productivity? Evidence from the Korean Emission Trading Scheme

This study investigates the relationship among technology innovation, emission trading schemes, and carbon productivity based on data from firms participating in the Korean Emission Trading Scheme. First, the total factor carbon productivity based on stochastic frontier analysis is estimated by industry and it is confirmed that changes in carbon productivity vary by industry. Based on the estimated carbon productivity, panel data analysis is conducted to determine the effects of innovation and environmental policy on carbon productivity. The results show that R&D investment and environmental policy play an important role in promoting carbon productivity. In this study, the factors affecting carbon productivity are also analyzed by industry. Comparative analysis across industries confirms that factors affecting environmental performance vary by industry. Innovation does not significantly affect carbon productivity in assembling industries, but in the process industry, R&D investment plays an important role in increasing environmental performance.

확률프론티어분석을 이용한 R&D 생산성 추정: 배출권거래제 참여 기업을 대상으로

Korea’s R&D intensity was 4.64% in 2019, the second-highest among OECD member countries after Israel (4.90%). R&D investment can enhance the productivity of firms by promoting technological progress and innovation. In Korea, R&D investment has continuously increased, but there are various opinions on the effectiveness of R&D investment because the productivity of R&D investment differs on how R&D productivity is defined and the measurement index used. In addition, literature related to productivity changes and R&D investment effects at the firm level is sparse. Therefore, in this study, R&D productivity was estimated using stochastic frontier analysis and the Malmquist productivity index based on firms participating in the Korean emissions trading scheme (KETS). From the empirical results, it is concluded that R&D productivity has been steadily declining compared to previous years. The factor most strongly influencing fluctuations in R&D productivity is efficiency change. In addition, estimated total factor R&D productivity is increasing and the increased value is statistically significant after the introduction of the KETS. On comparative analysis across industries, industries with the highest total factor R&D productivity among the 12 industries were petrochemical, machinery, and semiconductor industries. Textile, power generation/energy, and non-ferrous metal industries had low R&D productivity.

How does Voluntary Carbon Disclosure (VCD) Induce Changes in Carbon Performance? With the Role of Management Capability

While there a growing interest in Voluntary Carbon Disclosure (VCD), comparatively little is discussed whether the improved quality of voluntary carbon disclosure can lead to subsequent changes in a company’s carbon reduction performance. Drawing on companies under the Korean Emission Trading Scheme (ETS) with the contents analysis of their sustainable reports, the present research seeks to address the existing knowledge gaps in the current literature on environmental disclosure. Findings empirically show that an increase in the voluntary carbon disclosure score is positively transformed into changes in carbon performance and further develop that the effect of voluntary carbon disclosure on carbon performance varies depending on changes in management capability with the moderation effect.

Determinants of firm-level energy productivity – Evidence from the Korean emission trading scheme

With increasing global pressure on transition to carbon neutrality, various technical and policy efforts such as emission trading scheme and carbon tax are being made to improve energy productivity. Yet, there are not many literatures that analyze determinants of firm-level energy productivity, which is an important issue as energy use in industry accounts for one fourth of global carbon emission. This study investigates factors affecting energy productivity such as technology innovation, environmental policy and energy price based on firm-level data from the Korean Emission Trading Scheme (KETS). The total factor energy productivity is estimated by industry based on stochastic frontier analysis (SFA) and panel data analysis is performed to identify determinants of firm-level energy productivity. The results show that energy productivity in Korea has been improved since 2016, and technical progress and environmental policy play an important role in promoting energy productivity. In addition, analysis identifying industry-specific characteristics is performed as their production process and energy consumptions structures vary. The result shows that innovation activity does not significantly affect energy productivity in process industries, but it does in the assembling and high technology industries. This paper implies that policy design reflecting industry-specific characteristics is important to improve energy efficiency more effectively.

혁신 활동 및 환경 정책이 탄소 생산성에 미치는 영향: 배출권 거래제 참여 기업들을 대상으로

In December 2020, the Korean government announced the “2050 Carbon Neutral Promotion Strategy.” For the paradigm shift to a carbon-neutral society, it is necessary to examine factors affecting carbon productivity considering the two goals of carbon reductions and economic growth. This study investigates the potential factors affecting carbon productivity of firms participating in the Korean Emission Trading Scheme (KETS) and examines the relationship between innovation activity such as R&D investment and environmental policy with carbon productivity. In this study, carbon productivity is defined as the total output divided by total carbon emissions. It also considers innovation effect on environmental performance of firms by industry because each industry has a different production process and carbon reduction ability. The results show that carbon productivity has been influenced by innovation activity such as R&D investment and introduction of first and second phases of KETS. In addiotion, technological progress and environmental policy effects on environmental performance vary across industries. Thus, in this study, determinants of carbon productivity are analyzed and compared by industry. The results show that innovation activities have a positive relationship with carbon productivity by all industries at the 5% significance level. On the other hand, it is confirmed that the effect of environmental policy varies by industry.

Technological innovation and its impact on carbon emissions: evidence from Korea manufacturing firms participating emission trading scheme

ABSTRACT To cope with the ever-increasing environmental regulations, high-emitting countries have established strategies to reduce greenhouse gases. Among these methods, the emission trading scheme (ETS) has been highlighted as a cost-effective reduction tool based on a market mechanism. In order to operate the ETS efficiently and reduce the marginal abatement cost of firms, it is essential to analyse the main factors affecting carbon emissions and design valid policies for industries. This study investigates the potential factors affecting carbon emissions and examines the relationship between innovation activities such as patents and R&D investment and emissions based on firm-level data participating in the Korean Emission Trading Scheme (KETS). It considers that innovation’s effect on the environmental performance of firms varies by industries because each industry has a different production process and carbon reduction ability. Thus, in this study, the effects of innovations on greenhouse gases are analysed and compared by industry. The results show that innovation activities have a negative relationship with carbon emissions at the 5% significance level. The comparative analysis between industries indicate that the innovation’s effect varies by industry. Process industries are not affected by patents, while in the semiconductor industry, patents play an important role in reducing greenhouse gases.

온실가스 배출권 이월제한이 배출권가격에 미친 효과

온실가스 배출권 이월제한이 배출권가격에 미친 효과

Development of a Decision Support Model Based on Machine Learning for Applying Greenhouse Gas Reduction Technology

Multiple nations have implemented policies for greenhouse gas (GHG) reduction since the 21st Conference of Parties (COP 21) at the United Nations Framework Convention on Climate Change (UNFCCC) in 2015. In this convention, participants voluntarily agreed to a new climate regime that aimed to decrease GHG emissions. Subsequently, a reduction in GHG emissions with specific reduction technologies (renewable energy) to decrease energy consumption has become a necessity and not a choice. With the launch of the Korean Emissions Trading Scheme (K-ETS) in 2015, Korea has certified and financed GHG reduction projects to decrease emissions. To help the user make informed decisions for economic and environmental benefits from the use of renewable energy, an assessment model was developed. This study establishes a simple assessment method (SAM), an assessment database (DB) of 1199 GHG reduction technologies implemented in Korea, and a machine learning-based GHG reduction technology assessment model (GRTM). Additionally, we make suggestions on how to evaluate economic benefits, which can be obtained in conjunction with the environmental benefits of GHG reduction technology. Finally, we validate the applicability of the assessment model on a public building in Korea.

Climate-entrepreneurship in response to climate change

PurposeThis study aims to explore South Korean firms’ reactions to climate change issues and the Korean emissions trading scheme (ETS) from the perspective of proactive climate-entrepreneurship. Differences in attitude toward the Korean ETS, implementation of carbon management practices and performance regarding operations, market and emission reductions are also investigated.Design/methodology/approachA research model was developed to investigate the differences in corporate perception of climate change. Using a cluster analysis and analysis of variance with 94 South Korean companies subject to the Korean ETS, the study identified carbon strategies and examined differences in characteristics among the strategies. This study undertook a robustness test by comparing the results from a large sample (n = 261) with those of the original sample (n = 94).FindingsThe study identifies four different carbon strategies based on climate-entrepreneurial proactivity: the “explorer,” “hesitator,” “attempter” and “laggard.” The “explorer” cluster is likely to have a proactive stance toward the Korean ETS regulation, while the “laggard” cluster shows resistance to this new climate policy. Entrepreneurial proactivity in carbon strategies is related to the actual adoption, implementation and effectiveness of carbon management practices.Originality/valueThis research is one of the few studies to explore differences in corporate response to climate change from the perspective of entrepreneurship. The study provides a theoretical foundation for extending the literature on the strategic management of climate change issues.

The Policy Coherence of the Korean Emission Trading Scheme in the Era of Climate Change

본 연구는 기후변화에 대응하기 위한 시장유인적 규제제도로써의 배출권거래제에 대한 정책정합성을 평가하는 연구이다. 배출권거래제도의 정책정합성을 평가하기 위해 정책적 차원, 행정적 차원에서의 정합성을 조합하여 4가지 차원을 구성하였다. 이러한 4가지 차원의 정책정합성 조합에 대해 각각 맥락적 정합성, 규범적 정합성 측면으로 구분하여 총 8가지 측면의 정책정합성의 정도를 평가하였다. 평가 결과 각 사분면의 맥락적 정합성은 외부적-수직적 차원, 내부적-수평적 차원에서는 높은 수준이었으나, 외부적-수평적 차원에서는 중간수준으로 나타났으며, 내부적-수직적 차원에서는 낮은 수준을 지닌 것으로 평가되었다. 각 사분면의 규범적 정합성에 대해서는 절대적인 수준에서 모든 차원의 규범적 정합성이 70%이상인 것으로 평가되었다. 그러나 규범적 정합성 간의 상대적 순위를 본다면 내부적-수직적 차원에서의 규범적 정합성이 가장 낮은 수준이었다. 분석결과를 종합해보건대 향후 배출권거래제의 정비 과정에서는 내부적-수직적 차원의 정책정합성 제고가 가장 시급하며, 외부적-수평적 정책정합성 제고를 위한 개선책이 마련되어야 한다.The purpose of this study is to analyze the policy coherence of the Korean Emission Trading Scheme in the era of climate change. In order to evaluate the policy coherence, four dimensions were constructed by combining policy and administrative dimensions. These four levels of policy coherence combinations were evaluated for contextual coherence and normative coherence, which are eventually divided into eight dimensions. The results showed that the contextual coherence at each quadrant was high both in the external- vertical and internal-horizontal dimension, intermediate in the external-horizontal dimension and low in the internal-vertical dimension. The normative coherence of all dimensions was evaluated to be over 70% at an absolute level. However, if we look at the precedence of each dimension, the normative coherence at the internal-vertical dimension is the lowest, while the normative coherence at the internal-horizontal dimension is the highest. Overall, this study emphasizes the importance of the policy coherence of K-ETS at both internal-vertical and external-horizontal dimensions.

Development of a CO2 emission benchmark for achieving the national CO2 emission reduction target by 2030

To achieve the national CO2 emission reduction target (CERT) in the building sector established together with the launching of POST-2020, various countries are introducing the emission trading scheme (ETS), which is considered to have a considerable effect on CO2 emission reduction. Towards this end, it is important to establish a reasonable CO2 emission benchmark for the effective allocation of CO2 emission allowances. As the previous CO2 emission benchmark, however, was focused on the industry sector (e.g., power generation sector, manufacturing sector, etc.), it is difficult to apply to the building sector. To solve this problem, this study aimed to develop a CO2 emission benchmark for allocating CO2 emission allowances in multi-family housing complexes (MFHCs). This study was conducted in three steps: (i) establishment of the database; (ii) formation of clusters using a decision tree (DT); and (iii) development of the CO2 emission benchmark for MFHCs. The nine CO2 emission benchmarks (i.e., 0.03116-0.06667 tCO2/m2year) for MFHCs were developed using a DT based on the heating type and the elapsed years, and were validated using the Kruskal-Wallis test and t-test. It was shown that using the developed CO2 emission benchmark for MFHCs to calculate the national CO2 emission reduction in MFHCs satisfied the national CERT (18.1%). On the other hand, when the CO2 emission benchmarks for MFHCs calculated based on the South Korean ETS and the EU ETS, which were applied to the industry sector, were used, the national CO2 emission reduction was −5.29 and 45.55%, respectively. The proposed CO2 emission benchmark for MFHCs may be useful for policymaking for determining the allocation of CO2 emission allowances for achieving the national CERT.

The economy impacts of Korean ETS with an emphasis on sectoral coverage based on a CGE approach

South Korea initiated an emissions trading scheme (ETS) on January 1, 2015. Based on this environmental policy, at the 21st Conference of Parties (COP) meeting, the Korean government announced that it would decrease carbon emissions 37% from business as usual (BAU) levels by 2030. Since this target is too ambitious for the Korean economy, a number of studies have analyzed the economic impacts of emissions trading in Korea, but few have distinguished between industries covered and not covered by the ETS, notwithstanding the lack of industry-level data on quotas and emissions. This study overcomes such shortcomings by converting a dataset of 525 firms covered by the South Korea ETS (SK-ETS) into a 28-sector database consistent with the Global Trade Analysis Project (GTAP) classifications. We implement a simulation of the SK-ETS with a computational general equilibrium (CGE) model. Simulation results suggest that while SK-ETS has significant abatement effects (−2.56% from the base case), it only has mild negative impacts on GDP (0.41%) and household consumption (0.11%). Industry output on average falls by 0.54%, with the gas and air transport sectors most adversely affected. The most noticeable price changes are from the electricity sector, whose output price goes up by 3.75%. It is noteworthy that because of the export-oriented economy, many global business leaders and politicians have argued that the ETS will disadvantage exporting companies, while the simulation results showed a higher trade surplus based on enhanced competitiveness.

Are Emissions Trading Policies Sustainable? A Study of the Petrochemical Industry in Korea

In 2015, Korea inaugurated an emissions trading scheme (ETS). In this regard, many studies have considered the sustainable performance and efficiency of industries that emit carbon; however, few have examined ETS at company level. This paper focuses on companies’ data related to Korean ETS in the petrochemical industry. Based on the non-radial, nonparametric directional distance function (DDF), the paper evaluates the governance factors related to ETS policies and sustainable performance in terms of carbon technical efficiency (CTE), the shadow price of carbon emissions, and Morishima elasticity between the input and undesirable output of carbon emissions. Using a dual model, the paper shows that Korean ETS has huge potential for participating companies to improve CTE. If all companies consider the production possibility frontier, they could potentially improve efficiency by 52.8%. Further, Morishima elasticity shows strong substitutability between capital and energy, implying that green technology investment should bring a higher degree of energy-saving performance. Unfortunately, however, the market price of carbon emissions is far too low compared with its shadow price, suggesting that the Korean government’s price-oriented market intervention has resulted in the ETS producing poor sustainable performance. As the title suggests, ETS of Korea is not sustainable at the current stage, but with more efforts on the transition period, all the developing countries should support the governance factors of the ETS in terms of the more effective green investment with easier access to the green technology.

Efficiency versus Equality: Comparing Design Options for Indirect Emissions Accounting in the Korean Emissions Trading Scheme

The Korean emissions trading scheme (ETS) has one special characteristic that makes it different from other schemes, such as the EU ETS. While the other schemes consider only direct emissions from fossil fuels, the Korean ETS also regulates indirect emissions arising from the consumption of electricity. The problem of double counting arises under this setting, in which emissions from the power sector can be accounted for twice, when electricity is produced and consumed. This study aims to compare design options on indirect emissions accounting for the Korean ETS using a computable general equilibrium model. Four scenarios are generated for options accounting for direct and/or indirect emissions and are evaluated in terms of efficiency and equality. The result shows that the ETS operates most efficiently when only direct emissions are considered. However, the option that includes both direct and indirect emissions produces a competent result in terms of equality by spreading the economic burden of emissions reduction among industries. We conclude that this option can be an alternative to meet the key purposes of the Korean ETS.