In January 2015, South Korea launched its Emissions Trading System (SK ETS) modeled on the European Union Emissions Trading System (EU ETS). It has become the second largest ETS in operation after the EU ETS. In the Kyoto Protocol, “flexible mechanisms” were introduced to lower the overall costs of achieving its mitigation target. These mechanisms include Clean Development Mechanism (CDM), Joint Implementation (JI), and Emissions Trading. At the Durban COP-17 in 2011, it was decided to establish a new international market mechanism (NMM) under the United Nations Framework Convention on Climate Change (UNFCCC) to complement the existing carbon market mechanism for years beyond 2020. Its details will be negotiated and worked out at upcoming meetings. We use the term “international carbon markets” collectively to refer to the existing mechanism such as ETS, voluntary markets as well as other mechanisms which are yet to take shape.

Against the backdrop of these developments, it is of paramount importance to see how South Korea can meet its mitigation target for 2030 on its own as well as working with another country with the information available. In this report, we examine the economic impacts of meeting South Korea’s mitigation target on its own, via international carbon markets, or when linked to China, the EU and Mexico’s carbon markets.


Key findings: Linking South Korea’s carbon market to international carbon markets would lower mitigation costs

• Using the Capri (Carbon Pricing) model, we quantified and analyzed various scenarios to meet South Korea’s carbon mitigation targets.

• The results clearly show that linking South Korea’s carbon market to international carbon markets can significantly reduce the costs of mitigation (see Section 2).

• The actual market dynamics will depend on the country that South Korea links its market with. For example South Korea would be a net seller of carbon credits to the EU, but a net buyer of carbon credits from China (see Section 3).

• The benefits of linking the SK ETS to carbon markets in similar countries, such as Mexico, would be less significant. The reason is that similar circumstances mean that the opportunities for trade would be smaller, as both countries would likely find it cheaper to achieve their mitigations domestically.


Recommendations: Link South Korea’s ETS to other carbon markets, beginning with low-risk pilots with voluntary carbon markets

• The results suggest that South Korea may benefit from linking its carbon market with those of other countries: this can lead to considerable cost reductions.

• However, experience shows that linking separate carbon markets is a complex challenge and may take several years to implement.

• A quick and low risk strategy to link South Korea’s carbon market to international markets is to run pilots linking South Korea’s carbon market with international voluntary markets. This could be a short/mid-term solution, a ‘stepping stone’ strategy that would offer learning opportunities. This could be complementary to the more complex process of linking the SK ETS with other major compliance markets.

• Also, linking South Korea’s carbon market with voluntary markets in developing countries would have several economic and geopolitical advantages:

– Create and enter new markets in fast growing developing countries.

– Raise South Korea’s standing, and gain concrete influence, in developing countries.


About Experts

Choi Hyeonjung
Choi Hyeonjung

Center for Foreign Policy and National Security

Dr. CHOI Hyeonjung is a Senior Fellow of Center for Foreign Policy and National Security concurrently serves as the Director of the Publication and Communications Department at the Asan Institute for Policy Studies. He is also an adjunct professor of sustainable development and cooperation at Underwood International College, Yonsei University. Previously, Dr. Choi was the Deputy Secretary for Green Growth and the Assistant Secretary for National Agenda at the Presidential Office of ROK. Dr. Choi also worked as a policy research fellow in the 17th Presidential Transition Committee. Prior to the public service positions, he was a research scholar at the Institute of Social Science, the University of Tokyo, Japan, and full-time instructor at the Korean Air Force Academy. Dr. Choi’s areas of research interest include national future strategy; climate change and sustainable development; renewable energy and green economy; international development assistance and cooperation; and non-traditional threats and human security. Dr. Choi received his B.A. and M.A. from Yonsei University and his Ph.D. in political economy from Purdue University, and he has been the recipient of the Order of National Service Merit and two Presidential Distinguished Service Awards.

Federico Gallo
Federico Gallo

Managing Director, Believe Green LLC

Dr. Federico Gallo has international expertise in quantitative environmental finance, and has advised top decision makers including aides to British Prime Minister Gordon Brown and Mexico’s President Felipe Calderon.Since completing his PhD in Applied Mathematics at the University of Cambridge in 2005, Federico has been applying advanced quantitative modeling skills to help solve today’s environmental and social challenges, in particular by developing market based solutions. His early work at the RAND Corporation received international media coverage, including the Economist Magazine, the BBC, and the Guardian.In 2007, Federico joined the British Government, where he led the development of a set of innovative models to quantify and analyze renewable energy and carbon finance, including carbon markets. The models played a crucial role both nationally, for example in supporting the UK Climate Change Act of 2008, and internationally, for example supporting the Prime Minister on a number of occasions, such as in preparation for Gordon Brown’s G8 meeting in Japan in 2008.Federico has also been very active on the international arena. In 2009, under the British Foreign Office, he led an international collaboration to support the development of the national carbon finance modeling capabilities in India, Brazil, Argentina, Colombia, Peru and Mexico. For example, in 2010 he led a team at the Mexican Finance Ministry to quantify its proposal for a Global Green Fund. Findings by Federico were formally endorsed by the United Nations Secretary-General (UN AGF Report), and paved the road for today’s Green Climate Fund. Federico is also a regular adviser to international organizations, including the World Bank and the United Nations.Federico holds a BSc in Theoretical Physics from King’s College London and a PhD in Applied Mathematics from Cambridge University.

Kim Chong Woo
Kim Chong Woo

Center for Quantitative Research

Dr. KIM Chong Woo is a senior fellow of the Center for Quantitative Research at the Asan Institute for Policy Studies. Previously, Dr. Kim was an analyst working on choice modeling and valuation at RAND Europe. He was also a senior TCAD engineer at the Samsung Semiconductor Research and Development Center and a Java application developer at PCMS-Datafit in the United Kingdom. Dr. Kim's research includes the estimation and application of discrete choice modeling, stated preference analysis, valuing public services and non-market goods; and SP model development in the transport, health, communication and utilities sector. His publications include "Security at What Cost? Quantifying Individuals’ Trade-offs between Privacy, Liberty and Security,” RAND Report (2010) and “Modeling Demand for Long-Distance Travelers in Great Britain: Stated preference surveys to support the modeling of demand for high speed rail”, RAND Report (2011). Dr. Kim received his B.Sc. in mathematics from the University of London and his Ph.D. in mathematical physics from Imperial College of Science, Technology and Medicine, London. He also holds a post-graduate Diploma in Computer Science from the University of Cambridge.