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Industrial effects of emissions trading scheme
FKI / FKI
2014-09-11
Domestic businesses to take brunt of emissions trading

In cooperation with major trade associations, FKI has recently conducted research on how the emissions trading scheme will influence domestic industries if the government policy is executed as scheduled. The following is a summary of the survey results.

   Domestic industries have brought up institutional issues of emissions trading over the years. The industrial concern is three-pronged:

   Firstly, if the plan is implemented by Korea alone (which accounts for 1.8% of the total amount of emission) without agreement of the world's major emitters of greenhouse gas (GHG) such as China (28.6%) and the U.S. (15.1%), efforts for GHG reduction would actually prove to be futile. Given their own industrial competitiveness, major emitters refuse to adopt such a policy on a national level. Australia even abolished carbon taxes this past July. With a negligible effect of reduction, the new scheme could only seriously hurt the domestic industry.

   Secondly, underestimated allocations which were based on underestimated Business As Usual (BAU) GHG emissions are expected to put an economic burden of 27.5 trillion won for the next three years (2015~2017). The nation's emission already exceeded the projected amount in 2010 by 24 million tons of COand by 43 million tons of COin 2011. To fill the shortfalls in allocations by purchasing emission rights would require additional six trillion won1)and the penalty would bring about another 27.5 trillion won2).

   Finally, the government does not disclose the calculation process of GHG emission projections which is the rationale for allocations. It did verify the controversial underestimation of emission projections again last year only to announce that it would maintain the existing projections but did not make public a specific calculation process. Discussions about the appropriateness of the projected amounts are stalled at the moment.

   Against this backdrop, we introduce the following four possible types of damage to businesses.


Transfer of domestic production output abroad

   A Korean LCD panel maker, having recently established a factory in China, is grappling with its domestic production volume. Although it is currently enjoying the price competitiveness, emissions trading would make its price about the same as its Chinese competitor's. Should it pay 600 billion won in the first phase of implementing emissions trading,3) the price gap of 7,000 won per square meters for LCD production would be narrowed down to nearly 300 won.

   At an even higher risk are two steel makers who are consuming a lot of coal in their integrated steel mills. The financial burden these two companies would need to shoulder in the first phase totals a maximum of 2,800 billion won. The estimated steel output in 2014 is 72 million tons, but domestic steel makers would not be able to produce over 65 million tons a year from 2015 on when they are asked to meet the allocations offered by the government. We need to do something to change this.


Worsening management of companies in crisis

   A cement producer in Korea predicts that it might not be viable in the future. Suffering a net loss of 350 billion won last year, it could pay some 70 billion won during the first phase of the emissions trading scheme. In making one ton of clinker, a semi-finished cement product, 0.9 ton of GHG is emitted, but there is no way to reduce GHG emission at the moment, according to the cement industry. A semi-conductor producer who recorded a net deficit last year feels more burden from emissions trading. Payment of over 10 billion won for the first phase of the scheme would make the company unable to improve its profit structure through enhanced price competitiveness.


Constraints in domestic production

   Even after chalking up a net profit of over 40 billion won last year, another domestic business is concerned about its future. It needs to shoulder about 270 billion won during the first phase of the emissions trading scheme. If the government does not modify the allowance, it has no other choice but to curtail production and shut down one of the four production lines.

   There would be an uphill battle in expanding a production volume. Barely getting out of a managerial crisis, an auto maker in Korea strives to raise its operating rate by about 50%, but in the meantime, it is forecast to bear the expenses for emissions trading. When the government recognizes that a company builds new or additional facilities, it gives more allowances to the company. Raising an operating rate, however, is not recognized by the government as building new or additional facilities. It will be bound to purchase more emission rights, or permits.


Delays in new technology development and new market preoccupation

   A Korean chemical fiber maker is ambitiously getting ready for a take-off with new materials such as carbon fibers and super fibers. The problem is that since its products using new materials require more energy consumption than existing products, emissions trading is becoming a serious headache. A car maker who develops a green car is also subject to the new scheme. Development of a new car requires ten research units and additional equipment which greatly increase electricity consumption, in other words, they trigger financial burden for indirect emissions.4) The possibility is that it may have to shoulder up to 25 billion won during the first phase of the scheme.


Four types of possible damage to business by emissions trading
Transfer of domestic production output abroad
Worsening management of companies in crisis
Constraints in domestic production
Delays in new technology development and new market preoccupation
-A Korean LCD panel maker could pay 600 billion won

-The possibility of losing a price competitive edge over China

-3 to 4 trillion won to build new factories could flow out of Korea
-A domestic cement producer could pay some 70 billion won

-A net loss of 350 billion won in 2013

-Managerial difficulties may lead to a crisis
-A domestic company could pay 270 billion won

-The possibility of shutting down one of the four production lines

-Half of its exports could be cancelled
-A chemical fiber producer

-Products using new materials require more energy than existing products

-Since the key lies in cutting down on higher costs of new materials, paying for permits could make their commercialization not feasible
-Steel makers could pay 2,800 billion won

-They could lose price competitiveness

-Unable to meet a projected output of 72 million tons in 2014 (If emissions trading is implemented, annual production will be up to 65 million tons)

-The possibility of difficulty in making new investment at home
-B semi-conductor producer could pay at least 10 billion won

-B huge net loss in 2013

-Worried over a delay in managerial improvement and worsening investment and employment conditions
-B Korean car maker

-Its plan to expand production by 50% could not work out

-The government does not give additional allowances for raising an operating rate. It will have to purchase more emission rights, or permits
-B car maker could shoulder up to 25 billion won

-Development of a new car requires new research units and additional equipment which greatly increase electricity consumption. They trigger financial burden for indirect emissions.


Three suggestions for making a soft-landing of the scheme

   To satisfy the needs for national interest and environment, there are three preconditions for implementing the emissions trading scheme.

   Firstly, the government needs to recalculate the underestimated Business As Usual (BAU) GHG emissions. Regarding the government estimates, the business community has kept referring to a far cry from real business. Point Carbon, a carbon market analysis firm, revealed in its report last year that the estimate of Korea's COemission amounting to 1.3 billion tons was different from the government estimate of 776.1 million tons.

   Secondly, to guarantee transparency of calculating BAU GHG emissions and acceptability of the scheme, professionals from the private sector must take part in the recalculation process.

   Last but not least, for the scheme to take root smoothly, the government needs to come up with down-to-earth actions to minimize the effects of the new plan on business during the first phase of the scheme such as heightening total allowances.


Notes:
1) Application of an average price of 21,000 won based on 2010 EU ETS
2) Application of a penalty ceiling of 100,000 won
3) Expected expenses for permits industries need to bear by case: application of a penalty ceiling
   of 100,000 won
4) Indirect emissions: emitting GHG when companies use electricity or heat supplied by other sources