Compliance Offset Programs in Korea ETS and Potential Issues

ECOEYE CO., LTD.

2013.09.

1

PDD consultant# of

ValidatedPoAs

Total #validated projects

Ecoeye 5 49

Ecofrontier 0 8

RCC 0 8

EcoNetwork Co. 0 7

Ecosense 0 4

Green Polaris 0 4

Korea Power Engineering Company 0 2

Carbon CDM Korea 0 1

CDM4U 0 1

Ecosian 0 1

a leading CDM Project developer and consulting firm in Korea(market share 40%, 38 among 96 registered projects including 5 from 6 registered PoAs)

a leading KVER(existing domestic offset program) developer and consulting firm in Korea(market share more than 60%, more than 30 new projects per year)

UNEP CD4CDM (www.cd4cdm.org) CDM pipeline data

0. Introduction - ECOEYE

2

Agenda

1. Offset Credits described in the Korea ETS Regulation

2. Candidates for eligible Offset Programs

3. Supply would be less than potential demand

4. Potential issues

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1. Offset Credits described in the Korea ETS Regulation

1. GHG reductions or removal from non-ETS area with international level MRV

2. Offset programs include CDM projects.

3. In case of CDM projects, Projects in ETS area are also eligible.

4. Offset Credits limit is determined for each period with max limit 10%

5. Offset Credits associated from foreign country is restricted up to 2020

6. After 2020, foreign project will be allowed within 50% of total offset limit

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2. Candidates for eligible Offset Programs

According to the ETS regulation, CDM and Domestic Offset Program

which meets international level offset rule will be eligible Offset Program for ETS.

CDM KVER Offset Scheme Forest OffsetAgriculture

Offset

Authority UNFCCCKEMCO(MoTIE)

MoEKorean Forest

ServiceFACT

(MAFRA)

Scope Non-AnnexI

Non-compliance installations*(Focusing on

SME)

Non-compliance installations

DomesticForest sector,

biomass

Agriculture sector

Registered Pjts 96 in Kr~ 400

(50 new per yr)

Design Phase Pilot period Pilot periodOffset supply 20M/yr in Kr 14M issued**

Market Price 0.7 €12,000KRW***

(~11 US$)

KEMCO(Korea Energy Management Corporation), MOTIE(Ministry of Trade, Industry and Energy),MoE(Ministry of Environment), FACT(Foundation of Agri. Tech. Commercialization & Transfer), MAFRA(Ministry of Agriculture, Food and Rural Affairs)

* Most KVER projects came from large-scale companies during the period from its start of 2005 to 2011. After GHG Target and Management scheme started from 2011, only non-compliance company(mostly SME) is eligible.

** 90% of registered projects from compliance companies will not be eligible to Korea ETS since the projects have been considered as Early Action for the compliance companies already. Only about annually 50 new projects with total 150,000

credits/yr would be potential supply.*** As there is no real market up to now, Government buys all the credits with preset price of about 11USD.

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3. Supply would be less than potential demand

Potential Offset Credits Demand would range from 17 million to 56 million per year.

Source) Greenhouse gas Inventory and Research center of Korea (GIR)

Ranking Company IndustryRevenue[M KRW]

@ 2012

Emission(tCO₂eq/yr)

@ 2012

10% Offset

Limit

5% Offset

Limit

3% Offset

Limit

1 POSCO Steel 35,665,000 79,081,005 7,908,101 3,954,050 2,372,430

2 Korea South-East Power Power & Energy 4,390,000 53,059,663 5,305,966 2,652,983 1,591,790

3 Korea East-West Power Power & Energy 5,950,683 44,178,649 4,417,865 2,208,932 1,325,359

4 Korea Southern Power Power & Energy 6,951,370 39,517,409 3,951,741 1,975,870 1,185,522

5 Korea Western Power Power & Energy 5,967,870 37,490,186 3,749,019 1,874,509 1,124,706

6 Korea Midland Power Power & Energy 5,427,872 36,579,795 3,657,980 1,828,990 1,097,394

7 Hyundai Steel Steel 14,128,900 14,362,823 1,436,282 718,141 430,885

8 SSANGYOUNG Cement 1,333,799 11,955,329 1,195,533 597,766 358,660

9 SK Energy Refineries 30,361,548 8,277,308 827,731 413,865 248,319

10 S-Oil Refineries 34,723,291 8,033,044 803,304 401,652 240,991

11 Dongyang Cement Cement 611,755 7,926,380 792,638 396,319 237,791

12 GS Caltex Refineries 47,872,746 7,662,652 766,265 383,133 229,880

13 Hyundai Green Power Power & Energy 283,539 7,448,119 744,812 372,406 223,444

14 POSCO Power Power & Energy 3,000,730 6,465,519 646,552 323,276 193,966

15 LG Chemical Petrochemical 20,442,790 6,319,846 631,985 315,992 189,595

16 LG Display Display 29,429,668 6,161,342 616,134 308,067 184,840

17 SAMSUNG ELECTRONICS Semiconductor.Electronics 201,103,600 6,004,674 600,467 300,234 180,140

18 SAMSUNG Display Display. 32,000,000 5,739,170 573,917 286,959 172,175

19 Lotte Chemical Petrochemical 9,095,900 5,614,448 561,445 280,722 168,433

20 Korea District Heat Corp Power & Energy 2,586,243 4,859,483 485,948 242,974 145,784

21~573 1,501,550,820 169,492,172 16,949,217 8,474,609 5,084,765

1,992,878,124 566,229,016 56,622,902 28,311,451 16,986,870

Others

Total

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- There are 96 registered CDM projects in Korea. Total expected annual CERs in PDDs is 20 million ton.

- In terms of number of project, Renewable Energy Project is dominant type with 74%.

- In terms of Emission Reduction potential, Industrial gas project including N2O, HFC, SF6 is

overwhelming majority type with 81%.

- About 50% (~ 10million/yr) of Emission Reductions comes from

Adipic N2O and HFCs projects, which have been banned in EU ETS Phase 3.

Adipic-N2O

44%

HFCs

7%

N2O

13%

SF6

17%

LFG

8%R E

11%

EE

0%

Fuel Switch

0%

AR

0%

[Emission Reduction Potential]

Adipic-N2O

1%

HFCs

1%

N2O

7%

SF6

6%

LFG

4%

Renewable

Energy

74%

EE

2%

Fuel Switch

4%

AR

1%

[Number of Registered Project]

3. Supply would be less than potential demand

Korea CDM projects could supply 10 ~ 20 million per year

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• ETS Compliance companies engage in more than 90% of potential supply from

registered Korea CDM projects. Need to identify supplus over its offset limit.

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

20,000,000

합계 : 2013 planned

합계 : 2014 planned

합계 : 2015 planned

합계 : 2016 planned

합계 : 2017 planned

합계 : 2018 planned

합계 : 2019 planned

합계 : 2020 planned

Including risky projects (Adipic N2O & HFC23)

3. Supply would be less than potential demand

Compliance buyer involved projects Others

Adipic N2O project 1st Crediting Period ended in Aug 2013.

HFC project 2nd Crediting Period ends in Dec 2016.

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If exclude Adipic N2O and HFC23 projects, potential supply would only 10M per year.

Considering crediting period renewal risk and end of fixed crediting period,

potential supply from registered projects would decrease continuously.

Without risky projects(Adipic N2O & HFC23)

3. Supply would be less than potential demand

Compliance buyer involved projects Others

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When we consider historical average issuance rate (88%),

Potential supply from registered CDM projects would decrease to 8.8 million per year

3. Supply would be less than potential demand

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Potential supply from KVER projects would range from 0.5 to 1 million per year

2006 2007 2008 2009 2010 2011 2012

Expected Emission Reduction per year for new project each year

Newly registered project each year

- During 2006~2011, relatively large-scale (avg. 20k/yr) KVER projects had been

implemented in large-scale companies which become compliance company .

These offset credits from compliance companies will not be eligible for ETS.

- KVER offset credits from non-compliance company projects would be about 60 new

projects with potential total Emission Reduction 125k per year since 2012.

3. Supply would be less than potential demand

Number of PJTER

Registered projects each year

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3. Supply would be less than potential demand

10% Offset

Limit

5% Offset

Limit

3% Offset

LimitCDM KVER

Domestic

OffsetForest Agri. total

56.6 28.3 16.9 8.8 1.0 1.0 0.5 0.5 11.8 -5.1

Potential Demand Potential SupplyBalance

Supply would be 30% less than Potential Demand!

We might expect short of more than 5 million offset per year (30million up to 2020)

• As Korea ETS convers almost all sectors including waste management facility,

Building, Transportation and so on if annual emission is more than 25,000 tCO2eq,

almost all new offset project would be small-scale project (less than 10,000tCO2eq).

• PoA type offset scheme would be essential to increase supply.

• If the authority allow issued CERs as early action, the shortage would be reduced.

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• How CERs in UNFCCC CDM Registry or Annex I National Registry

can be transferred to Korea Registry?

• Whether it is technical issue or policy issue related with Kyoto Protocol?

• Physical link between those registry is not mission-impossible

but it would take much time and efforts.

4. Potential Issues

UNFCCCCDM-Registry

Annex INational Registry

KoreaOffset Registry

Annex INational Registry The Union Registry

(The European Union Transaction Log : EUTL)

? ? ?

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The simplest solution is to use Voluntary Cancelation Procedure of UNFCCC.

4. Potential Issues

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① Project participant(PP) could request voluntary cancelation for certain amount of CERs

to UNFCCC secretary.

② UNFCCC secretary could transfer the amount to Voluntary Cancelation Account and

publish the data in webpage and issue attestation to the PP

③ The PP could submit the attestation to Korea ETS authority.

④ Korea ETS authority could validate the attestation comparing with UNFCCC

webpage data and issue Korea Domestic Offset Credits to the PP.

4. Potential Issues

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If Korea ETS adopt UNFCCC Voluntary Cancelation Procedure,

CERs in National Registry or EU Union Registry could not be used.

UNFCCCVCA

4. Potential Issues

Pending Account

Holding Account

UNFCCC CDM Registry

Attestation

NationalRegistry

X

X

X

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Whether Issued CERs could be allowed as early action or not?

• The Authority would concern that

if allow issued CER as Offset Credits

It is difficult to meet National Mitigation Target (30% reduction below 2020 expected BAU

emission).

• As actual BAU would be expected BAU plus CER (real and additional Emission Reduction below

validated Baseline), Authority might not concern about the issue and allow the issued CERs.

• California CAP & Trade allows Early Action Offsets, if eligible project start after 31 Dec., 2006.

• China Pilot ETS allows CCER (domestic offsets), if eligible project start after 16 Feb., 2005.

(Kyoto Protocol entry into force date)

4. Potential Issues

[ Actual BAU 2020 = expected BAU 2020 + submitted CERs ]

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4. Potential Issues

• 112 million CERs has been issued so far.

• If exclude risky CERs, 18.9 million CERs has been issued.

• We expect that about 5 to 8 million CERs would be in UNFCCC CDM registry.

k ton CO2eq

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Thanks

ECOEYE CO., LTD.

Managing Director, Sangsun Ha

sangsun_ha@ecoeye.com

Sangsun.ha@gmail.com

www.ecoeye.com

Office.+82 (0)31-710-7346

Mobile. +82 (0)10-6359-6627