[The Editors' Verdict] The Carbon Emissions Trading Market Needs Urgent Reform

Juyushin, Dean of the Graduate School of Technology Management at Sogang University

Among ESG (Environment, Social, Governance) factors, the element with the greatest impact on the economy and industrial structure is the ‘environment.’ As countries around the world declare goals for fostering eco-friendly energy industries and achieving carbon neutrality, China has recently attracted attention by launching a nationwide standardized carbon emissions trading system that integrates regional trades (Shanghai Environment and Energy Exchange). On the opening day, the price of carbon emissions rights rose 6.7% from the opening price to 53 yuan (9,340 KRW) per ton, with a trading volume of 450,000 tons and a transaction amount of 22 million yuan (3.8 billion KRW), which is considered a success.

Looking at the main details of the trading structure, the maximum single trade declaration volume is less than 10 tons of carbon dioxide, the price limit range for upper and lower limits is 10%, and for over-the-counter block trades, bids within a maximum of 30% of the upper and lower limits are allowed. Trading hours are the same as those of the A-shares (China mainland stock market). It is said to benchmark the European Union (EU) carbon emissions trading system, the largest in the world. The market expects that although the Chinese government currently targets only 2,225 power companies for trading, it plans to add seven industries by 2025, including steel, petrochemicals, chemicals, building materials, non-ferrous metals, paper, and aviation, making it only a matter of time before China becomes number one globally. This year’s carbon emissions trading volume is expected to be 250 million tons, three times last year’s, with a transaction amount of 13.2 billion yuan (2.3 trillion KRW), ranking second in the world after the EU.

Why is China so focused on the carbon emissions trading market? Experts believe it is primarily to seize leadership in the international competition for ‘eco-friendliness and carbon neutrality.’ The Chinese government views the four years of lost time during the Trump administration’s withdrawal from the Paris Agreement as an opportunity to push forward aggressively now. In fact, China ranks first in the world in electric vehicles, batteries, solar power generation, and equipment and materials. Eight of the top ten global solar panel manufacturers are Chinese companies. Last year, 56% of wind power equipment supplied to the global market was made in China. Therefore, as production by these companies increases, the acquisition of carbon emissions rights by Chinese companies also rises, leading to expanded trading on the integrated exchange. There is an expectation that this will increase China’s influence over the global carbon emissions trading market and the global eco-friendly industry.

Secondly, it is the optimal way to promote eco-friendly production by green companies (wind power, solar power, electric vehicles, etc.) while simultaneously facilitating a soft landing for environmentally unfriendly companies. As the EU and the US begin to implement carbon border taxes in earnest, countries will inevitably strengthen regulations such as penalties on carbon dioxide emissions. This would negatively impact sales in industries based on carbon dioxide emissions, such as steel and chemicals, which could be fatal to overall economic growth. Therefore, rather than a decline in sales for these companies, purchasing carbon emissions rights from eco-friendly companies provides time to guide a soft landing.

Thirdly, China’s ambition to dominate the global automotive market through the promotion of the electric vehicle (EV) industry cannot be overlooked. Decarbonization of the power industry is key to fostering the EV industry. In particular, securing electricity for electric vehicles from coal-fired power would derail the carbon neutrality goal.

Of course, South Korea’s market is neither as large nor the situation the same as China’s. However, South Korea also has a high proportion of environmentally unfriendly industries such as steel and chemicals, making a soft landing for these industries important. Additionally, South Korea declared ‘2050 Carbon Neutrality’ ten years ahead of China, and the EU’s carbon border tax is an urgent issue. It is time to urgently reform South Korea’s carbon emissions trading market, which has recently exposed structural problems such as sharp price fluctuations.

Jeong Yushin, Dean of the Graduate School of Technology Management, Sogang University