How South Korea Can Improve Its Carbon Market: the Importance of Economic Incentives and International Cooperation in the Fight Against Climate Change

• Citation: Vol. 35 No. 3
• Publication year: 2021
• topic: Environmental Law

How South Korea Can Improve Its Carbon Market: The Importance of Economic Incentives and International Cooperation in the Fight Against Climate Change

Seo Jung Park

HOW SOUTH KOREA CAN IMPROVE ITS CARBON MARKET: THE IMPORTANCE OF ECONOMIC INCENTIVES AND INTERNATIONAL COOPERATION IN THE FIGHT AGAINST CLIMATE CHANGE

Introduction

Many countries across the globe have been endeavoring to mitigate the impacts of global warming. The key to achieving this goal is to reduce the emission of carbon dioxide, the main driver of global warming.¹ Thus far, a wide variety of policies have been developed and implemented in an effort to reduce carbon emissions, and these policies can be classified into two broad categories: non-market-based approaches and market-based approaches.² Command-and-control regulation, reporting requirements, and promotion of research on renewable technology with subsidies are a few examples of non-market-based approaches.³ These approaches can be fairly described as direct regulation of pollution-producing activities.⁴ For instance, command-and-control regulation involves setting a standard to govern performance; specific examples could include prohibiting the use of energy-inefficient technology or prohibiting a party from emitting carbon dioxide beyond a predefined limit.⁵

Market-based approaches differ in that they involve indirect regulation of parties' behavior by modifying their economic incentives.⁶ As opposed to directly regulating parties' behavior, market-based approaches let the parties themselves decide whether to adjust their behavior in response to the modified economic incentives.⁷ Two prominent examples of market-based approaches are the carbon tax and emission trading scheme (ETS), the latter being a term that is often referred to as cap-and-trade.⁸ These two approaches are similar in that they both put a price on carbon emissions, clearly indicating that they involve a

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market system.⁹ In addition, both approaches have been supported by economists who argue that adopting at least one approach would be an ideal solution for governments seeking to mitigate the problems of global warming at the lowest possible cost.¹⁰ The argument for a market-based solution, which has been voiced by many economists, has led many governments around the world to consider implementing either one or both of these approaches.¹¹

Regardless of scholarly debates over which market-based approach is better suited to accomplishing the goal of cutting emissions, this Comment focuses on cap-and-trade because it is the policy choice that makes international collaboration feasible. As opposed to implementing a carbon tax which is solely determined by the sovereign power of a state, implementing a cap-and-trade program would, by virtue of possible linkage between cap-and-trade programs of different countries, involve joint efforts between members of an international community. South Korea has been operating the second-biggest carbon market in the world.¹² However, this market possesses several inherent flaws that relate to its cap-and-trade program.

In Section I, this Comment explains how the two market-based approaches—carbon tax and cap-and-trade—help reduce carbon emissions. In Section II, this Comment provides information about how countries such as the United States, the nations of the European Union, China, India, and South Korea have thus far implemented cap-and-trade. Next, in Section III, this Comment looks at the three most important international agreements with regard to global warming, agreements that were established by recognizing the importance of international cooperation in combating climate change. Lastly, because it is often difficult for the international community to speak with one voice, this Comment proposes two viable solutions for countries where building a consensus is problematic. Section IV of this Comment will pay special attention to South Korea, proposing that South Korea should link its cap-and-trade programs with the cap-and-trade programs of other countries. In addition, South

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Korea should provide non-participating countries with financial assistance so that they, too, can develop viable cap-and-trade programs of their own; in so doing, South Korea can effectively counteract negative impacts imposed by non-cooperating countries and therefore, contribute to the global response to climate change.

I. Market-Based Approaches in Reducing Carbon Emissions: Carbon Tax and Cap-And-Trade

A. Carbon Tax

A carbon tax, one of the two prevailing market-based approaches, is an added cost imposed by the government on each metric ton of carbon dioxide (CO₂) emitted.¹³ Because it creates an additional tax burden for emitting carbon dioxide, businesses will most likely seek ways to reduce their carbon emissions in order to avoid paying the additional cost.¹⁴ As a result of a carbon tax, businesses may switch to cleaner and more environment-friendly technology that emits less carbon dioxide, or alternatively, may simply decide to emit less carbon dioxide to save money.¹⁵ One advantage of implementing a carbon tax is that governments can raise revenue by imposing prices on carbon emissions.¹⁶ The revenue can then be invested in developing environment-friendly technologies or policies to further reduce carbon emissions.¹⁷ In addition, because a carbon tax is a fixed cost determined by the government, it provides polluting entities with certainty as to costs that they will incur as a result of emitting a certain amount of carbon dioxide.¹⁸ Knowing the costs in advance will help the polluting entities better plan their carbon emission reduction strategies.¹⁹

However, there are two main disadvantages of a carbon tax. Although a carbon tax provides certainty as to the price imposed on carbon emissions, it is less likely than cap-and-trade to achieve emission cuts, which will be covered in

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the next Section, I.B.²⁰ This is because the tax does not directly regulate the amount of carbon dioxide emitted by polluting entities.²¹ It is true that the carbon tax disincentivizes polluting entities from emitting carbon dioxide by making them pay extra costs for doing so; however, because the carbon tax is not a "quantity-based approach[,]" it is not clear how effectively it would reduce carbon emissions.²² Instead, the carbon tax is more similar to a price-based approach.²³ Even with the carbon tax, polluting entities can still emit as much carbon dioxide as they want provided that they pay for it. In addition, a general animosity towards taxes in the business community is another disadvantage of the carbon tax.²⁴ Because businesses generally dislike paying taxes, there would likely be more resistance to any implementation of the carbon tax scheme—unlike cap-and-trade, as mentioned in Section I.B.²⁵

B. Cap-and-Trade

In contrast with a carbon tax, cap-and-trade is a "quantity-based approach" to lowering carbon emissions.²⁶ The system of cap-and-trade entails a cap, or the maximum amount of carbon that can be emitted, and trade, which is related to the buying and selling of carbon emission permits.²⁷ As opposed to a carbon tax, cap-and-trade is more closely correlated with the market economy in determining the price of emitting carbon dioxide.²⁸

The cap-and-trade system generally works as follows. First, a government places a cap on carbon emissions.²⁹ Then, the government distributes permits, otherwise called allowances, for emitting CO₂ to the polluting entities through various methods.³⁰ For example, the government can choose to sell permits through an auction, distribute the permits for free, or a combination of both.³¹ These permits ensure that the amount of carbon dioxide emitted remains under the cap.³² After the initial distribution of carbon permits by the government, the

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distributed permits can be freely traded in the so-called carbon market.³³ Market prices for the carbon permits are then determined based on supply and demand for the permits, and polluting entities can freely buy and sell permits depending on their individual needs.³⁴ Unlike a carbon tax, governments are not directly involved in setting the price for emitting carbon dioxide; instead, cap-and-trade lets the market decide on its own, without direct intervention by government.³⁵ over time, governments can tighten the cap to eventually decrease the aggregate carbon emission.³⁶

The cap-and-trade mechanism provides numerous advantages to both polluting entities and governments.³⁷ First of all, cap-and-trade would likely spur the invention of low-carbon technologies.³⁸ Just like the carbon tax, carbon permit prices established under a cap-and-trade scheme are an additional burden on polluting parties.³⁹ The less carbon they emit, the less money they have to spend on purchasing carbon permits; therefore, carbon permit prices would incentivize polluting parties to create innovative technologies that would alleviate the financial burden imposed by emitting carbon dioxide.⁴⁰ In addition to saving money for polluting parties in the present, the invention of new environmentally-friendly technologies would undoubtedly contribute to further CO₂ reduction in the long term.⁴¹

Second, cap-and-trade provides polluting entities with flexibility.⁴² Because the carbon permit prices are determined by carbon market, the price will fluctuate by reflecting changed circumstances. However, cap-and-trade allows polluting entities to take advantage of fluctuations in price because they can buy permits when prices are low and use them when permit prices are high.⁴³ In this way, the cap-and-trade approach allows entities to behave strategically in complying with the carbon emission requirement.⁴⁴ This advantage

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distinguishes cap-and-trade from a carbon tax because the carbon tax lacks flexibility because a government sets a fixed price on CO₂, which is unlikely to be adjusted promptly in response to changed...