Incentive-Based Environmental Policies in Korea

1. Incentive-Based Environmental Policies in Korea 2003. 8. Mr. Seung Jick Yoo Korea Energy Economics Institute

2. Content • Environmental Situation in Korea • Energy Consumption in Korea • Trends in Environmental Policies • Incentive Based Environmental Regulation • Emission Trading • Conclusion

3. Mixed Feature in Ambient Air Pollution Successful in SO2 and TSP SO2: 0.094 (1980) to 0.005(2001) Due to mandatory use of low sulfur fuels and LNG Industrial Sector : Major source, but decreasing in Emission Transportation Sector : Increasing in Emission (0.06%/year) Improvement needed in NO2 and O3 NO2 : 0.029(1984) to 0.037(2001) Rapid Increase in Transportation Environment in Korea (I)

4. Environment in Korea (II) • Improvement of Water Quality Since 1995, but Increase in BOD Recently • Continuous Increase in the Total Disposal of Domestic and Industrial Waste • Domestic Waste: -2%/year • Industrial Waste: 11.5%/year

5. Primary Energy Consumption in Retrospect • Rapid Increase in Energy Consumption • 8.2%/year since 1960 • 7.6%/year since 1990 vs. 5.8%/year in GDP • Oil : Major source in Primary Energy Consumption • Share : decreasing, but still > 50% ranging from 63% (in 1994) to 52% (in 1990 and 2000) • Sustained by increase in demand from Industrial Sector and Transportation sector • LNG : Most remarkable growth since 1987 • Almost 20%/year

6. Projection of Energy Consumption

7. Environmental Policies in Retrospect (I) • ~mid 1970’s: Very Basic Environmental Regulation • Minimum Regulation to Protect the Public Health • Environmental Problems in Few Industrial Complex • Regulate only these polluting sources • Very Ineffective Enforcement of Pollution Prevention Measures • mid 1970’s~early 1980’s: Early Stage of Environmental Regulation • Environmental Regulation to Control Pollution Activities • Spread of Local “Hot Spots” from Urbanization, Industrialization and Heavy Use of Pesticides • More Stringent Environmental Standards • Setting Standards on Major Pollutants • Introduction of Emission Charges and Environmental Impact Assessment

8. Environmental Policies in Retrospect (II) • early 1980’s~ late 1980’s: Foundation of Environmental Policies • Focused on the Regulation of Pollutions from Industrial Sources and Local Hot Spots • Efforts Made to improve the Effectiveness of Environmental Regulation • More Projects Subject to Environmental Impact Analysis • Stricter Environmental Standards and More Pollutants Regulated • Designation of Special Measure Areas with Heavy Pollutions • Basic Emission Charge and Some Incentives for the Pollution Abatement Investments • 1990’s: Effective Implementation of Environmental Regulation • Extension of the Coverage of Environmental Regulation from Local to Regional and National Environmental Issues • Establishment of Ministry of Environment in 1994 • Harmonizing Economic Development with Environment • More Emphases on Incentive Based Policies and Measures • Charges, Deposit-Refund System, Subsidy • Improving the Effectiveness of Environmental Regulation • Separate Laws for Different Pollution Issues under the Basic Environment Policy Law

9. Environmental Policies in Present • Dominance of Command and Control Regulation • Emission Standards: Emission Rate per unit of Period, Emission Concentration, Total Emission • Need to Regulate the Total Emission Amount • Technology Regulation • Mandatory Use of Low Sulfur Fuel in Certain Designated Areas • Towards More Incentive Based Regulation Measures • Increase at Block Decreasing Rate of Excess Emission or Clean-up Charges as Excess Emission and More Frequent Excess Emissions Increases • Improving the Infrastructure of Monitoring the Pollution • Standardization of Measuring Methods • Monitoring Stations Nationwide: 279 stations (2002) • Telemetry System in Polluting Sources : 148 facilities (2001) • SOx, NOx, TSP, NH3, HCI, HF, CO • Large and medium size facilities in air pollution special measure area • Large size facilities in air pollution regulated area

10. Incentive Based Measures Source: Chung, Hei-Sung (2002), Environmental Regulatory Reform Toward a Sustainable Society in Korea, KEEI.

11. Characteristics Incentive Based Measures • Structure of Current Charges • Based upon the Clean-up Cost • Different Use of Revenue • Differentiated based upon the emission standards (emission amount, area specific) • Complementary Role to the Emission Standards • Providing disincentive to the increase in excessive discharges and frequent violation • Limitations • Strong Incentive to Lower the Concentration of Pollutants, but Weak Incentive to Lower the Total Quantity • Limitation in Preventing Negative Impacts from the Accumulation of Emitted Pollutions • Not Based upon the Continuous Monitoring of the Emission • Equity Issues • Only Selected Pollutants (SO2, TSP) • Separation of the Payers of the Charges from the Recipients of the Revenue • Economically not Optimal • Charge Rate: MB mismatches MD due to Limited Information • Manu Cost: Inflexibilities in Retrofitting the Rate

12. New Directions of Environmental Policies • Stricter Standards, but More Flexibilities to the Regulated • Emission Standards: Emission Rate per unit of Period, Emission Concentration, Total Emission • Need to Regulate the Total Emission Amount • Technology Regulation • Mandatory Use of Low Sulfur Fuel in Certain Designated Areas • From End-of-Pipe Regulation To Preventive Measure • Meeting the Public Demand for the Improve Environmental Quality and the Minimum Burden on the Regulated • Development of Environmental Technologies • Providing Incentives

13. Emission Trading Systems • Potentials to Achieve Environmental Goals with Minimum Burdens • Actively Considered As an Effective Complementary Measure of Controlling Regional and Global Pollutants in Korea • Recycling the Revenue • Need Significant Infrastructure • Monitoring • Prevention of Emission Market Failure • Equity Issues • Allocation of Emission Permits • Differential Impact among Targeted Industries • Adversely Affects Small Size Firms

14. Emission Trading in Seoul Metropolitan Areas (I) • Special Measure to Improve Air Quality in Seoul Metropolitan Area(2002) • Imposing Restriction on Total Emission Quantity of Some Firms Exceeding Certain Emission Level • SOx, NOx, PM, and VOC (70% Reduction of BAU Emission in 2012) • Pilot Quantity Regulation of SOx, NOx, PM in 2004 • Introduction of Emission Trading • Exemption from Emission Charges and from Sulfur Contents of Fuels • Stricter Regulation on the Mobile Sources

15. Emission Trading in Seoul Metropolitan Areas (II) • Proposed Emission Trading (Han, 2002) • Generation of Tradable Permits • Baseline and Credit Cap and Trade • Emission Reduction Target • Fixed Target and Dynamic Target Depending Upon the Regulated Polluting Sources • Tradable Pollutants • SOx, NOx • Targeted Sources • Large and Medium Size Sources • Fixed Sources • Opt-in Program • Permit Allocation • Based Upon the Emission initially • Hybrid: Grandfathering and Auction • Limit on the Trading of Permit, Allowing Banking but no Borrowing • Subsidy to Setting-up Continuous Emission Monitoring System

16. Emission Trading for CO2 Emission Reduction (I) • Pilot CO2 Emission Permit Trading in 2005 (Yoo, 2003) • Participants • Electric Power Company and Extend to the Energy Intensive Industry • CO2 Emission From Electricity Generation: 29.8% in 2001 • Voluntary Participation with Incentive • Equal Treatment New Participants with Existing Participants • Trading GHGs: CO2 only • Early Credits since 2005 • Exemption from Emission Charges and from Sulfur Contents of Fuels • National Registry System Available by the end of 2004 • First Compliance Period : 2005-2007

17. Emission Trading for CO2 Emission Reduction (II) • Proposed Emission Trading • Generation of Tradable Permits • Baseline and Credits • Base Year: 2002 • Baseline (tCO2/MWh): 5%(2005), 7%(2006), 10%(2008) • Permit Allocation • Participants Decides the Reduction Amount • Incentive Auction: Descending Clock Auction • Discount on the Banked Permit • Penalty for the Non-compliance: • 2*average trading price* the excess emission

18. Emission Trading for CO2 Emission Reduction (III) • Some Results from Simulation of Emission Trading • Emission Trading Peaks in the Middle of Compliance Periods • Price of Permit: Lowest in the Last Year due to No-Banking • Lower Trading when the Emission Reduction Targets Set by Participants than Set by Government • The ratio of Selling Orders/Buying Orders is higher • The Reduction Rate is higher • Generally the Participants with Higher MAC Plays a role of buyer • Observed mismatch between MAC and seller/buyer • Errors in Trading and Misjudgment of the Players • Emission Trading does not always lower the emission reduction cost of the Participants • Errors in Expectation of the Markets, or Strategies of the Other Participants • Lack of Experiences in Trading: Learning Process or More Information is needed • Monitoring and Verification Methodologies Needed to Be Developed

19. Concluding Remarks • Command and Control as the Major Environmental Policy Tools • Economic Incentive Policy tools as Complementary • Needs to Control the Total Amount of Emission as well as the Concentration of the Pollutants • Great Potentials of Emission Trading System • Needs to Design the Trading System as well as Monitoring System • Develop the Infrastructure • Needs to Solve the Equity Issues as well as Minimizing the Burden of the Regulated • Differentiation of Emission Trading System Between Local Pollutants and Global Pollutant • Emission Trading as A Supplementary Environmental Policy Tool