Korea should lead on international carbon trade policies

by The Korean Times | 09 February 2023 | In The News

By Pieter E. Stek

Korea has always responded quickly to emerging economic trends, and the European Union’s recent introduction of a carbon import tax (CBAM) is no exception.

The Korean government has started negotiations and announced improvements to the domestic carbon trading system (K-ETS). Korean businesses have announced plans for green technological upgrading.

Meanwhile, the United States is planning a similar tax under its Clean Competition Act.

While a “rapid response” to these measures is important, Korean policymakers should not lose sight of the bigger picture. Korea is well-positioned to shape ― and benefit from ― the emerging “green” economic order and Korea can change its role from “rapid responder” to international policy leader.

The challenges that Korea is facing over taxes like CBAM are shared by every export-dependent economy in Asia. However, unlike Korea, most countries in Southeast Asia have yet to introduce domestic carbon trading or a carbon tax. Therefore Korea is often seen as a model for carbon trading in Asia, having established K-ETS in 2015.

From a Korean perspective, carbon taxes are an economic negative. But for many emerging economies in Southeast Asia, they also offer a large upside. According to research by the Boston Consulting Group, Southeast Asia is home to 30 percent of the world’s potential nature-based carbon offset solutions, with Indonesia, Cambodia, Malaysia and the Philippines holding the greatest potential.

For these countries, carbon credits can provide a powerful incentive for conservation. The sale of carbon credits can help raise revenue which can offset the revenue from licenses for logging, mining and other environmentally harmful activities. Carbon credits can also be used to finance the region’s sustainable energy transition.

Thus, while Southeast Asian economies may “lose” from a carbon tax, they can potentially “gain” from the international trade in carbon credits. Unfortunately, the international regulatory system needed for this is still being developed. Although an international trade in voluntary carbon credits exists, the value of these credits is usually much lower than credits traded on domestic carbon markets like the K-ETS.

This creates a dilemma for Southeast Asian and other developing nations: even if they set up a credible domestic emissions trading system, they cannot benefit from the international trade in carbon credits.

In response to these international challenges, Korea should implement two policies: introduce a carbon import tax and at the same time, internationalize its carbon market under Article 6 of the Paris Agreement.

Imposing a carbon import tax is inevitable in the long term, and the World Bank projects a rapid increase in carbon prices during the coming years. Introducing a tax early, when Korean domestic carbon prices are still low, limits the harm to Korea’s trade partners and the political cost.

An internationalized carbon emissions market allows Korea’s trading partners to benefit from carbon pricing, while Korean industry can also benefit from less expensive carbon offsets and increased demand for green technology and expertise exports.

Korea already has much of the regulatory infrastructure in place to execute such an approach. One of the organizations most active in promoting international carbon credit trading under Article 6 of the Paris Agreement is the Seoul-based Global Green Growth Institute (GGGI). The GGGI has an ambitious goal of facilitating 50 million tons of CO2 transactions by 2030, and it is actively supporting many emerging countries to develop the necessary regulations and capacity for this.

Aside from environmental and economic benefits, the internationalization of the Korean carbon market would also increase Korea’s leverage with large trading partners such as the EU. An approach of “carbon tax” with “carbon trade” would provide an alternative economic policy model for fighting climate change, and one that will likely gain broad support from many emerging countries, as well as other large Asian exporters, such as China and Japan.

Dr. Pieter E. Stek is a postdoctoral scholar at the Center for Technology, Strategy and Sustainability (CTSS) at the Asia School of Business in Kuala Lumpur.

Originally published by The Korean Times