The following is a synopsis of Chapter 2 (pp. 20-30) of the Asia Society Policy Institute’s recent report: ‘Carbon Market Cooperation in Northeast Asia: Assessing Challenges and Overcoming Barriers’.
China, Korea, and Japan now have variations of a carbon market at the national or subnational level, but there are wide differences in policy design and implementation status. Linkage of carbon markets in Northeast Asia could reduce industry concerns on competitiveness and offer opportunities for governments to raise emission reduction targets. The Republic of Korea’s (hereafter Korea) ETS is the most advanced, and it can share many lessons learned and experiences to policy makers and industries in both China and Japan. There are ample opportunities for increased dialogue between China, Korea, and Japan on carbon markets.
Cooperation on carbon markets through bilateral or plurilateral linkages or “carbon market clubs” can both help countries and regions increase the ambition of their emission reduction targets and address competitiveness and carbon leakage concerns. Regardless of how potential connections emerge in Northeast Asia, China’s participation will be absolutely critical to addressing climate change as it is the region’s largest emitter, economy, and carbon market.
The chapter will explore the following key question: What are the most constructive steps to take between 2018 and 2020 to build the foundation for regional market linkage?
POLICY MAPPING ACROSS CHINA, KOREA, AND JAPAN
This section of the paper focuses on policy mapping. In order to understand the key concrete steps for regional carbon market linkage, this section summarizes policy information for each ETS.
China’s National ETS
Building upon the seven regional ETS pilots created in 2013, China formally “launched” its national ETS on December 19, 2017. The launch took place more than two years after President Xi Jinping announced during his visit to the White House in September 2015 that China would have a nationwide ETS, a development that was widely anticipated by both the Chinese and the international climate change community.
Korea was the first country in Northeast Asia to implement an ETS when it launched in 2015. According to the Korean Ministry of Environment (MOE), The Korea ETS (KETS) is expected to play a significant role in enabling Korea to meet its nationally determined commitment (NDC) target of reducing emissions by 37 percent below business-as-usual emissions. Since the launch of its ETS in 2015, the Korean government has struggled to win over business support for the ETS, and there has been a ministerial clash between the MOE and the Ministry of Strategy and Finance over which should have the responsibility of administering and enforcing the ETS. As of May 2018, the KETS is in its second phase, which started on January 1, 2018, and is under MOE authority.
Japan currently does not have a national carbon-pricing system in place. In 2005, Japan pioneered a domestic voluntary ETS and domestic offset system (JVETS and J-Credit). These pilots ended in 2012, and the government of Japan has not yet introduced an ETS. Since 2012, Japan has levied a USD 0.95 to USD 3.00 carbon tax on upstream petroleum and coal emissions13 and operates mandatory ETSs in the Tokyo Metropolitan Region (TMR) and the Saitama Prefecture.
COMPARATIVE ANALYSIS OF CHINESE, KOREAN, AND JAPANESE ETSs
While there are identifiable areas where China, Korea, and Japan could collaborate over their differences on emissions trading, significant relevant differences exist among this trio of countries. While Korea and Japan are similar in terms of economic development and GDP levels, China’s level of economic development and economic output is vastly different in terms of carbon intensity. Therefore, there are limitations as to how much policy comparability is possible for carbon markets in Northeast Asia.
Korea has the most to offer in terms of experience sharing with carbon markets. Its ETS has been in force for far longer than China’s national system, and the Tokyo and Saitama ETSs are not at a national level. Korea is now studying how to regulate firms under its third ETS phase, which will begin in 2021 and eventually start the process of auctioning allowance permits rather than free distribution. Korea is also the only country of the three with the intention to fully utilize the ETS as a policy tool to achieve its NDC under the Paris Agreement. Neither China nor Japan has signaled how its carbon markets will help them achieve their NDCs, and neither country has set out a vision for using carbon markets after 2020. Japan has clearly expressed its intention to use the JCM to meet its NDC, but the JCM is not a carbon market, as there is no emissions cap or trading of permits. Taking all of this into consideration, Korea could play a critical role in providing policy insight and advice to China and Japan on a wide degree of carbon market topics.
RECOMMENDATIONS FOR MOVING TOWARD LINKAGE
Despite the wide differences in carbon market design and evolution in Northeast Asia, ample opportunities still remain for cooperation on carbon markets in this subregion. With the right political environment and support in place, discussions and tangible progress on linking carbon markets between China, Korea, and Japan could take place. Policy makers should consider the following:
1. NDC Quantification Dialogue
One of the most challenging aspects of the implementation of the Paris Agreement is the wide variety in how countries count their emissions reductions and track progress. Many countries with economy-wide NDCs have advocated for quantification of NDC targets as a precursor to participation in Article 6 transactions. NDC quantification would help ensure that double counting is avoided and would safeguard the environmental integrity of these reductions by having a robust inventory of emissions under the NDC in place.
Recommendation: Hold an ongoing regional working dialogue on NDC quantification and measuring NDC progress. Regional governments could host such a dialogue in conjunction with experts and personnel from the regional United Nations Framework Convention on Climate Change (UNFCCC) office.
2. Exploring Article 6 Interests and Alignment
China, Korea, and Japan view the use of Article 6 to meet their current NDC in distinctive ways. China has not signaled any intention to use Article 6 at the time of this writing, whereas both Korea and Japan intend to use it to fulfill their NDC pledges. An Article 6 dialogue could achieve tangible results as it would allow not only for a difference of views to be exchanged but also a discussion on exploring pilot opportunities for the three (or two) countries to jointly pool resources in internationally transferrable mitigation outcomes (ITMOs) to mutually increase the ambition of their NDCs. By increasing exchanges on Article 6, indirect and informal opportunities for exploring carbon market linkage could also occur.
Recommendation: Establish a government technical-level dialogue on the use of Article 6 within the context of each of the NDCs in China, Korea, and Japan. Such a dialogue could take place prior to the annual UNFCCC negotiations and rotate among the three countries.
3. Tackling Industry Opposition
Industry in Northeast Asia is largely opposed to regulations that impose a price on carbon, given the pressures of consistent economic growth and maintaining economic stability. Exploring areas for dialogue among industries on how carbon markets work in practice and how they have impacted economies in other jurisdictions (e.g., Europe, California, and New Zealand) could lead to an improved understanding of the merits of carbon pricing.
Recommendation: Facilitate an international industry exchange on overcoming obstacles to carbon markets in Northeast Asia. The goal of such a dialogue would be for industry to understand the benefits of regional ETS linkage and to support policy makers for a linked carbon market.
4. Establish Official Cooperation
Since 1999, the Tripartite Environment Ministers meeting among Japan, China, and Korea (TEMM) has taken place to explore and strengthen environmental cooperation in Northeast Asia.18 While some discussion of carbon market cooperation has taken place through the TEMM, a formalized technical dialogue could be added to the agenda for policy makers from China, Korea, and Japan on offset usage, accounting frameworks, and market evolution, with the goal of identifying linkage opportunities.
Recommendation: Explore opportunities for officials from China, Korea, and Japan to meet annually to explore cooperation on carbon markets, with the TEMM as a key example.
5. Simulation Learning
A number of carbon market simulation tools available today are an excellent resource to learn in practical terms how carbon markets function. Organizations such as the Environmental Defense Fund and the Fundação Getulio Vargas business school have simulation tools available. These tools could be adapted and programmed to simulate a linked emissions market for Northeast Asia.
Recommendation: Establish a linked carbon market simulation exercise for policy makers and industry participants to better understand how linked carbon markets could reduce competitiveness concerns and increase ambition.
During the past 10 years, substantial progress has been made in establishing carbon markets in Northeast Asia. Japan established subnational carbon markets in Tokyo and Saitama, China set up seven ETS pilots in several cities and provinces and a national ETS, and Korea established Asia’s first economy-wide carbon market. Each of these carbon markets was set up to address national concerns over climate change and energy management and, as a result, were designed to function in a national economic context. Thus, carbon market policy design differs across Northeast Asia with a very wide gap in each implementation schedule. Korea sits geographically in the middle of this trio and is also the most advanced in terms of implementing its ETS. It has a clear mandate and intention to use its carbon market for the fulfillment of its NDC and is currently exploring ETS legislation for after 2020. It could offer vast insights to both China and Japan on carbon market implementation and policy design. In addition, many low-cost opportunities and easy-to-implement recommendations for information sharing and policy exchanges could help create the foundations for linkage of carbon markets in Northeast Asia.