South Korea Emissions Trading Scheme (KETS)

Overview

South Korea's Emissions Trading Scheme (KETS) stands as a cornerstone of the nation's climate policy, representing the second largest emissions trading system in the world by scale, trailing only the European Union Emission Trading Scheme. Launched on January 1, 2015, KETS marked a significant milestone in global carbon markets as the second nationwide carbon market initiated in Asia, following Kazakhstan. The scheme was established to fulfill South Korea's international commitments, specifically the pledge made at the Copenhagen Accord of 2009, which aimed to reduce the country's greenhouse gas (GHG) emissions by 30% below its business-as-usual scenario by the year 2020. This cap-and-trade system serves as the primary market-based mechanism for achieving these reduction targets, applying to over 525 companies that collectively account for approximately 68% of the nation's total GHG output. The operational framework of KETS is structured into three distinct phases: the first phase covered the period from 2015 to 2017, the second phase spanned from 2018 to 2020, and the final phase extends over five years from 2021 to 2025. This phased approach allows for gradual adjustments and refinements in the carbon pricing mechanism, ensuring that the market remains robust and effective in driving emissions reductions across key sectors. The Ministry of Environment oversees the operation, ensuring that the scheme aligns with broader national environmental goals and international obligations. By targeting a significant portion of the country's emissions, KETS plays a critical role in South Korea's strategy to mitigate climate change while fostering economic growth through efficient carbon allocation. The system's design reflects a balance between environmental ambition and economic practicality, making it a model for other emerging carbon markets in Asia and beyond.

Why it matters

The South Korea Emissions Trading Scheme (KETS) holds a prominent position in the global landscape of carbon pricing mechanisms. It is recognized as the second largest emissions trading system in the world by scale, trailing only the European Union Emission Trading Scheme (EU ETS). This ranking underscores the substantial weight of the Korean market in international climate policy and provides a critical reference point for analysts evaluating the efficacy of cap-and-trade systems outside of Europe. As the second country in Asia to initiate a nationwide carbon market, following Kazakhstan, South Korea’s adoption of KETS marked a significant shift in regional climate governance, demonstrating that Asian economies could implement complex, market-based instruments to manage greenhouse gas (GHG) outputs effectively.

Strategic Alignment with National Climate Pledges

The launch of KETS on January 1, 2015, was not an isolated policy decision but a direct operationalization of South Korea’s international commitments. The scheme was designed to comply with the country’s pledge made at the Copenhagen Accord of 2009. Under this accord, the South Korean government committed to reducing its greenhouse gas emissions by 30% below its business-as-usual scenario by the year 2020. The implementation of a cap-and-trade system provided the structural mechanism necessary to translate this percentage-based target into actionable economic signals for emitters. By establishing a quantifiable cap on emissions, the policy created a direct financial incentive for companies to decarbonize, thereby aligning domestic industrial output with international climate goals.

Market Structure and Corporate Accountability

The operational design of KETS ensures broad coverage across the South Korean economy. The system applies to over 525 companies, which collectively account for approximately 68% of the nation’s total GHG output. This extensive coverage ensures that the carbon price signal reaches a significant portion of the economy, influencing investment and operational decisions across multiple sectors. The scheme is structured into distinct temporal phases to allow for market maturation. The first and second phases each spanned three years, covering the periods from 2015 to 2017 and 2018 to 2020, respectively. The final phase extended over five years, running from 2021 to 2025. This phased approach allowed regulators and market participants to adjust to the cap-and-trade mechanism, refining the system’s efficiency over time.

Implications for Energy Security and Fossil Fuel Reliance

While the primary metric of KETS is the reduction of GHG emissions, its secondary effect on energy security is significant. By placing a price on carbon, the scheme influences the relative cost of different energy sources. In a country heavily reliant on imported fossil fuels, a robust carbon market can accelerate the transition toward more efficient energy use and the integration of variable renewables. The financial pressure exerted by the cap-and-trade system encourages industries to optimize energy consumption, thereby potentially reducing the volume of imported coal, oil, and natural gas required to meet domestic demand. This dynamic supports the broader national objective of enhancing energy security by diversifying the energy mix and reducing exposure to volatile global fossil fuel markets. The operational status of KETS, managed by the Ministry of Environment, continues to serve as a critical tool for balancing economic growth with environmental sustainability in one of Asia’s largest economies.

How does the KETS cap-and-trade mechanism work?

South Korea's Emissions Trading Scheme (KETS) operates on a cap-and-trade mechanism, a market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emissions of pollutants. The system establishes a limit, or "cap," on the total amount of greenhouse gases that can be emitted by the covered entities. This cap is enforced by the Ministry of Environment and applies to over 525 companies, which collectively account for approximately 68% of the nation's total greenhouse gas output. These companies are issued or buy emission allowances, each of which permits the holder to emit one ton of carbon dioxide equivalent. If a company emits less than its allowance, it can sell its surplus on the market; if it exceeds its allowance, it must buy additional allowances from others. This creates a financial incentive for companies to reduce their emissions efficiently.

Greenhouse Gases Covered

The KETS covers six specific greenhouse gases, which are converted into carbon dioxide equivalent (CO2e) for standardized measurement and trading. These gases are selected based on their global warming potential and their significance in South Korea's industrial and energy sectors. The table below lists the six greenhouse gases included in the scheme.

Greenhouse Gas	Chemical Formula
Carbon Dioxide	CO2
Methane	CH4
Nitrous Oxide	N2O
Hydrofluorocarbons	HFCs
Perfluorocarbons	PFCs
Sulfur Hexafluoride	SF6

Initial Cap and Phases

The scheme was launched on January 1, 2015, as part of South Korea's pledge under the Copenhagen Accord of 2009, aiming to reduce greenhouse gas emissions by 30% below the business-as-usual scenario by 2020. The operation is divided into three distinct phases. The first phase ran from 2015 to 2017, and the second phase covered 2018 to 2020. The final phase extends from 2021 to 2025. While the total emission cap for the initial year of 2015 is a critical parameter of the system, the specific numerical value of this cap is not detailed in the provided grounding snippets. The cap-and-trade system allows for flexibility in how companies meet their targets, fostering innovation and cost-effectiveness in emission reduction strategies across various sectors.

History and policy background

South Korea's Emissions Trading Scheme (KETS) represents a major milestone in the nation's climate policy, launching on January 1, 2015. This initiative established South Korea as the second country in Asia to initiate a nationwide carbon market, following Kazakhstan. Its establishment was driven by the country's commitment to international climate goals and domestic legislative frameworks aimed at sustainable development.

International Commitments and the Copenhagen Accord

The policy background for KETS is deeply rooted in South Korea's pledge made at the Copenhagen Accord of 2009. This target served as a primary catalyst for the adoption of a cap-and-trade system, providing a market-based mechanism to achieve the reduction goals efficiently. The launch of KETS in 2015 was a direct operational response to fulfill this international obligation, integrating climate targets into the economic structures of major emitters.

Legislative Framework and Green Growth Agenda

The implementation of KETS was supported by the broader legislative framework, including the Framework Act on Low Carbon, Green Growth. This act provided the statutory basis for carbon pricing and emissions management, aligning with the country's long-term Green Growth Agenda that began taking shape in the 1990s. The policy aimed to transition the economy toward sustainability while maintaining growth. The Ministry of Environment serves as the primary operator of the scheme, overseeing the allocation of allowances and the compliance of participating entities.

Phased Implementation Strategy

The operation of KETS is divided into three distinct periods to allow for gradual adjustment and market stabilization. The first phase spanned from 2015 to 2017, establishing the initial market dynamics. The second phase followed from 2018 to 2020, refining the cap-and-trade mechanisms. The final phase extended over five years, from 2021 to 2025, aiming to deepen the market's impact on national emissions. This phased approach allowed the government to monitor performance and adjust policies to meet the 30% reduction target relative to the business as usual scenario.

What are the phases and allocation methods of KETS?

The South Korean Emissions Trading Scheme (KETS) operates through a structured cap-and-trade system designed to meet national greenhouse gas reduction targets. The scheme is divided into three distinct operational phases, each with specific duration and allocation mechanisms. The first phase ran from 2015 to 2017, followed by the second phase from 2018 to 2020. The third and most recent phase spans five years, from 2021 to 2025. These phases reflect the government's strategy to gradually tighten emissions caps and increase market participation among the over 525 companies covering approximately 68% of the nation's GHG output.

Phase 1 (2015–2017)

The initial phase, lasting three years from 2015 to 2017, served as the foundational period for the KETS. During this time, the majority of allowances were distributed through free allocation to minimize initial costs for participating companies. This approach allowed industries to adjust to the new market dynamics while establishing baseline emissions data. The scheme aimed to stabilize the carbon price and encourage early adoption of energy-efficient technologies across key sectors.

Phase 2 (2018–2020)

The second phase, also spanning three years from 2018 to 2020, continued the cap-and-trade mechanism with refined allocation methods. The government increased the proportion of allowances subjected to auctioning, thereby enhancing revenue generation and market liquidity. This phase aligned with South Korea's commitment under the Copenhagen Accord of 2009, targeting a 30% reduction in GHG emissions below the business-as-usual scenario by 2020. The expansion of auctioning helped to reduce the reliance on free allocation, encouraging more competitive pricing.

Phase 3 (2021–2025)

The third phase, extending over five years from 2021 to 2025, represents the most ambitious stage of the KETS. This period features a significant increase in the share of allowances allocated through auctioning compared to free allocation. The extended duration allows for longer-term planning and investment in low-carbon technologies. The government aims to further tighten the emissions cap, driving deeper reductions in greenhouse gas output across the participating companies. This phase is critical for achieving the country's broader climate goals and integrating the carbon market with international mechanisms.

Phase	Duration	Allocation Method	Key Features
Phase 1	2015–2017	Primarily free allocation	Foundational period, stabilization of carbon price
Phase 2	2018–2020	Increased auctioning	Refined allocation, alignment with Copenhagen Accord targets
Phase 3	2021–2025	Significant auctioning	Extended duration, tighter emissions cap, long-term planning

Compliance and market operation

The operational framework of the South Korean Emissions Trading Scheme relies on a structured compliance mechanism overseen by the Ministry of Environment. The scheme mandates that over 525 companies, which collectively account for approximately 68% of the nation's greenhouse gas output, must monitor, report, and verify their emissions annually (per on KETS). This broad coverage ensures that the cap-and-trade system effectively targets the largest emitters across various sectors, aligning with the country's pledge under the Copenhagen Accord of 2009 to reduce emissions by 30% below the business-as-usual scenario by 2020.

Market Infrastructure and Verification

The Korea Exchange (KEX) serves as the primary trading platform for the scheme, facilitating the buying and selling of carbon credits among participants. This market infrastructure allows for liquidity and price discovery, enabling companies to manage their compliance costs efficiently. The operation is divided into distinct periods, with the first and second phases spanning three years each (2015–2017 and 2018–2020), and the final phase extending over five years from 2021 to 2025. These phased approaches allow for gradual adjustment and refinement of the cap-and-trade mechanisms.

To ensure data accuracy, the scheme employs a robust verification process. A Certification Committee, composed of experts and stakeholders, oversees the allocation of allowances and the verification of emission reports. Third-party verifiers are engaged to audit the emission data submitted by each company, reducing the risk of over-reporting or under-reporting. This multi-layered verification process enhances the credibility of the market and ensures that the caps are effectively enforced.

Penalties and Compliance Mechanisms

Companies that exceed their allocated caps face specific penalties to maintain the integrity of the market. These penalties may include financial fines, the requirement to purchase additional allowances at a premium, or the carry-forward of excess emissions to subsequent periods. The exact nature of the penalties is designed to incentivize timely compliance and encourage investment in emission reduction technologies. The Ministry of Environment monitors these compliance metrics closely, ensuring that the scheme remains a dynamic tool for achieving South Korea's broader climate goals.

Opposition and challenges

The implementation of South Korea’s Emissions Trading Scheme (KETS) has faced significant legal and industrial resistance, primarily centered on the allocation of allowances and the economic burden placed on key sectors. Since the scheme’s launch on January 1, 2015, the Ministry of Environment has navigated over 40 lawsuits challenging the regulatory framework and the specific distribution of carbon permits. These legal challenges reflect deep-seated concerns among industry stakeholders regarding the precision of the cap-and-trade system and its impact on national competitiveness.

Industrial Concerns and the Federation of Korean Industries

The Federation of Korean Industries (FKI) has been a prominent voice in the opposition, articulating concerns that the KETS imposes disproportionate costs on domestic manufacturers. The FKI’s objections often focus on the rigidity of the cap-and-trade mechanism, particularly as it applies to the Energy-Intensive and Trade-Exposed (EITE) sectors. These industries, which include steel, cement, and petrochemicals, argue that the allocation of permits does not adequately account for global market fluctuations or the varying degrees of carbon leakage risk. The FKI has advocated for more flexible mechanisms, such as increased use of free allowances or the integration of international carbon credits, to mitigate the financial strain on these critical economic drivers.

Permit Allocation and Legal Challenges

A central point of contention in the 40+ lawsuits involves the methodology used to allocate emissions permits to the over 525 companies accountable for approximately 68% of the nation’s greenhouse gas output. Critics argue that the initial allocation phases, particularly the first phase from 2015 to 2017 and the second phase from 2018 to 2020, favored certain industries while penalizing others, leading to perceptions of inequity. The legal challenges have scrutinized the Ministry of Environment’s decisions on the total cap and the distribution of allowances, questioning whether the business-as-usual scenarios used for projections were accurately modeled. These disputes have delayed the stabilization of the carbon price and created uncertainty for long-term investment planning within the EITE sectors.

The ongoing legal and industrial debates highlight the complexity of transitioning to a nationwide carbon market. As South Korea moves into the final phase from 2021 to 2025, the resolution of these challenges remains crucial for the scheme’s effectiveness in achieving the country’s pledge to reduce greenhouse gas emissions by 30% below business-as-usual levels by 2020. The balance between environmental targets and industrial competitiveness continues to define the policy landscape.