The Pacific Rim is one of the most important economic regions in the world, built on significant trading relationships. During today's E&ETV event coverage of the International Emissions Trading Association's Carbon Forum North America, panelists from China, Japan, South Korea and Australia discuss how each country is moving forward with emissions reduction policies and how the focus on carbon is affecting business, economies and politics. Panelists include Xueman Wang, team leader of the Partnership for Market Readiness, World Bank; Martijn Wilder, head of Global Environmental Markets, Baker & McKenzie; Takashi Hongo, senior fellow, Mitsui Global Strategic Studies Institute; and Yun Soo-Hyeon, Korea Energy Management Corp. The panel is moderated by E&ETV's Monica Trauzzi.
Monica Trauzzi: We're closing those doors. We're getting started. I know everyone's very excited for this last panel of the day. I'm Monica Trauzzi. I'm managing editor and anchor of E&E TV. And we have what I think will be a very fascinating and interesting panel this afternoon.
The Pacific Rim is one of the most important economic regions in the world, built on significant trading relationships, and we have representatives here today from some of the most critical nations, China, Japan, Korea, Australia, and they're going to address how these countries are moving forward with emissions reduction and trading, and how the focus on carbon emissions and cap and trade programs is affecting the economics and politics of these countries. How transparent is each country being in the reporting of its achievements? What are some of the political obstacles facing these countries as they attempt to move forward? How does lack of certainty in the U.S. on its policies affect the future of these countries' policies? So we're hoping to address a lot of these question as we get into the discussion today.
So joining me on stage directly to my right is Xueman Wang, team leader for the Partnership for Market Readiness at the World Bank. To my left, Martijn Wilder, head of global environmental markets at Baker & McKenzie. All the way to the right, Takashi Hongo, senior fellow at Mitsui Global Strategic Studies Institute. And all the way to my left, Soo-Heyeon Yun, Korean Energy Management Corporation.
So we'll start off with presentations from each panelist, and then we'll get into what I expect will be a vibrant discussion. So we'll start with Xueman.
Xueman Wang: Well, thank you, Monica. I will talk about why China is interested in exploring ETS, and also quickly talk about the status of development preparation in China on ETS, and finally talk about challenges. But before that, I ever much want to share with you a personal observation on China. I was in China just one week ago, and that was really part of discussions under this Partnership for Market Readiness to help the Chinese government design the national ETS. I will come back to this later.
But on the margin of that meeting, we were invited by the Shanghai Ball Steel Company, which is the sixth largest company, steel company in the world, and to help them understand ETS, and the one, really, how industry prepare for the ETS. So we had the owner to have their CEO and the entire senior management with us for a half day. We talk about the E.U. ETS, lessons, and also other ETS and China's preparation.
At the end of the meeting, of course there were many questions, so after that, their vice president summarized, you know, what he had heard. But he started by some - I really think there's a cultural difference. He said that, "Look, I was very disappointed by all the questions my colleagues have raised, and why?" He said, "Look, you still ask her why, why, why. It's time for you to ask how, how to do it." And to me he says that, "Look, I - " he instructed different departments, say to work together, that we need to identify opportunities ____ emissions reductions, what kind of preparation we need to take forward, because Ball Steel is part of this Shanghai ETS.
So the question, that it's not about how, it's not about why, it's how to do it, you know, where would be the opportunities. I would think that's why I started this, because I think that this Ball Steel, this narrative, you know, this reflection, is really also reflection of where China is. I think that China has moved from why to that how to do it, how to deal with the inevitable emission mitigation agenda, and also the carbon constrained world. What will be the appropriate cost effective instruments to deal with it?
So that's, I will start with this personal observations. But then still I like to just, for the audience, I still like to just quickly discuss why, and I like to put in this much bigger, China's agenda for green growth and low carbon. So to understand why ETS or why at this time they are pursuing the ETS. So many of you know that over the 32, past 32 years, China's economic rate, growth rate is on average 9.9 percent and has lifted 600 million people out of poverty. So this is absolutely extraordinary performs.
And China, according to the World Bank, is a middle income country. So it's per capita income, $5,000.00 U.S. So their objective is by 2030 to reach high income country status, and that will be $16,000.00, still much lower than this country, per capita income. But then the question is that can they do it?
So according to their own research institutes, even if they follow exactly this model for development which is a resource-intense development model, China used up all the resources in the world, they cannot simply reach this high income country status. Just to give you a few numbers, China currently consumes half the world's, the iron, steel, and half the world's aluminum, and also half the world's, the cement. So we are talking about, you know, just the current model of development, and China has taken over US, become the largest energy user.
So we are talking about this kind of development that made Chinese economic growth rate extraordinary, but moving forward, this is not the way to go. So that's why the Chinese government wholeheartedly embraces low carbon green growth, because they say that mitigation, yes, it's very challenging, but it also offered great opportunities, opportunities to optimize the economy, opportunities to restructure economy, and how to use the market and provide incentive to restructure economy.
So you need to put this over, I would say that ETS is much bigger agenda. This is absolutely important.
So, and of course, you may ask that, you know, they are doing quite well on this command control, but they also have experience over the last, this previous five-year plan to use a command control to pursue energy efficiency target. It has not been very effective. That's why moving forward they want to say that we know we can use, they can use, you know, this market ____ emissions trading scheme to pursue objectives.
That's, I would say that's, you'll probably put that China says why, and where they are now. So you may have heard that China has launched these seven ETS pilots. Even we talk about seven ETS pilots as five cities, two provinces, we are talking about more than 250 million people. So it's not even just seven. It's still quite a significant portion of, you know, people would be part of this ETS.
And so the three of them, that's Beijing, Shanghai, and Guangdong, they have developed - issued their action plan, and is on track to launch pilot in 2013. But at the same time, that's where, you know, the _____, you know, fit in. At the same time, while they do the ETS, but the overall object here is really to set up a nationwide emissions trading scheme. So at the same time, they have started this process of systematically design ETS, and the issues, you know, really cover from the upstream studies, just to study policy mapping for potentially covered sectors, to say that how different policies interact with each other. What will be the policy implications? How this would affect allocation cap setting? So there's a whole ___ study also _____ work and policy mapping for all the covered sectors. That's one very important piece.
And then of course the whole cap setting. And here, we are talking about economy is rapidly growing, and how you make sure that you cap emissions without capping economic growth. So - and then, of course, the approach to allocations. There are different ways. What will be the appropriate way? So we talk about actions versus free allocations.
And then this whole about the legal framework and how you design the whole legal framework for the ETS. So you see that there's like two parallel tracks. One is the ETS piloting, where they gain some experience. At the same time, we ____ support of the PMR and World Bank, you know, they start ____ this I would say very exciting process. They will systematically design all the key components for ETS, and the timetable is for the next two to three years. You know, this whole recommendation ___ to be put forward for the government to take action.
And the current thinking is that everything goes well, that between 2016 or 2020, that's their 13th five-year plan, and it is expected that the national ETS would be launched.
So that's about the status. And finally, I don't know whether I have just a few minutes to talk about challenges. As I say, that there are many challenges to go ahead, and number one is, as I mentioned, that compared with your ETS, some other, you know, ETS, we are talking about economy with still fast growing, even the next five years, so we are talking about at least a seven to nine percent growth rate, and how you have this cap setting and, without a cap in economic growth.
At the same time, we are also talking about the economy fast, expanding very quickly. We are talking about these new entrants, ___ not really your typical under the EU ETS, for example. We are talking about factories opening up on a daily basis. So we're talking about also the existing, like Ball Steel. They are also having a lot of new operations throughout China.
So here is a question of how you design a system that would accommodate new entrants at the same time, you know, you really need to address the so-called linkage issue. So that's, I will say, that there's whole challenges there.
And secondly, really the legal framework. And here, I give you example that now all the pilots, now they try to collect data, but companies say, "Why should I give you data? What will be the legal basis?" And all they have now is one sentence under the 12th five-year plan, that China will gradually set up national ETS, but that will not be sufficient for the local governments, for the national government to move ahead. So they are looking at what will be really this whole legal framework, and what will be regulated, to what extent existing regulations can be used, and also by which, you know, legislative body. Where some regulations can be adopted by government agencies, some will have to go through the legislative body. And all this, you know, so it's quite a tremendous challenge to move ahead.
And then thirdly, I also talk about the whole, the technical part, about the data. I would say data, data, everything start with data. And again, we are talking about cap setting, we are talking about allocation, and what will be the basis, the data. And if you look at, if you ask companies, they have some - some companies have quite good energy consumption, energy production data, but the emission data, how you do the emission factor, all this are still, I mean, it's a big vacuum, and that needs to be done quickly in order to have a functioning ETS, of course, the whole MRV framework. So this whole technical part.
And then fourthly, I would also think that the whole institutional arrangement. Here, you deal with China with a central government versus many provisional governments. How you set up system that - how you sort out for this government structure? What will be the competency for the local government to regulate part of it? What will be the responsibility for the central government? How you ensure there are ____ reducing once province ___ carry the same quality, at the same time you just keep in mind different provinces, they also compete with each other. How you make sure that they are all under the same playground? So all this, I mean, it is the whole governance structure design is a huge challenge as well.
And finally, I mentioned this Ball Steel, you know, this whole industry preparation. You ask companies how much really they know about ETS, to what they can prepare themselves for this, using Ball Steel Company's inevitable ETS. And again, what we have seen, it's still a long way to go.
But there's a Chinese saying that 10,000 miles starts with the first step. I would think that China just started with the first step. It's a very important first step, and absolutely critical. And sometimes, of course, __ ____ and we feel that it's our collective interest to help China success. China's failure or success would have huge impact on the prospect of global carbon market.
But before I finish this, you know, I put up this slide. I just want to show you all the PMR countries and the potentials. This morning, Christiane ______ mentioned that a number of countries are very much interested, like market instruments. In fact, you say that all of them are here. And so what we have seen, that through this PMR platform, that we see that really the countries are learning from each other. So you may say, and I think she mentioned a recommendation. I would say that yes, if you look at this map, when you look at where they are, it's kind of recommended, but on the other hand, the recommendations is really a sign of progress. At the same time, it's really embedded, I would think that a real potential for integration. Thank you.
Monica Trauzzi: Thank you. Martijn to speak about Australia.
Martijn Wilder: OK. Thanks very much, Monica. Well, I think in the Australian context, for many of you who may not be aware, carbon policy and emissions trading is probably one of the longest, most drawn-out policy measures in the history of Australia. We first started talking about an emissions trading scheme in 1999, and the first proposal to put out a scheme was put on the table then. And in reality, the scheme that we have today isn't too significant a departure from where we started so long ago.
But I just want to go through a few comments on the scheme today, then talk a little bit about what's happened very recently with the linkage discussion, and then talk a little bit about the politics and what the reaction of business has been.
So the first thing is that you often hear a lot of the political rhetoric in Australia is about having a carbon tax. The scheme that is set up in Australia is an emissions trading scheme. It just happens that for the first three years, the permits that are issued by the government as opposed to the offsets are a fixed price, and then after the first three years, we move into a floating price. And the reason that was done was because it was really to try to make sure there was a high enough carbon price at the start to get the scheme moving, and it starts at around Australian 23 dollars, which at the moment's about $24.00 US to begin with, and it slightly goes up each year for the first three years.
Another important thing is that the permits in the first few years that are issued by government for free have to be used within that year. So if you're given a free permit within the first three years, you have to surrender those within those years. But after that, any free permits you can get when the scheme opens up completely can be fully banked and traded.
The liability threshold is that anyone who operates a facility that emits above 25,000 tons, which actually is similar to the Korean scheme, has a liability to basically buy permits and offset them, and it's done on a facility by facility basis. And the sectors that are largely covered are energy, industry, transport, aluminum smelting, et. cetera.
And one of the interesting things is that what we've already seen is that a number of those industries that are getting free permits have already worked out, if they're at the more efficient end of the spectrum, they're actually going to have an over-allocation of permits, and will actually have excess permits to what their liability is, which is quite interesting.
The scheme also, as was in the U.S., recognizes that there are certain industries that will be trade exposed, and for those industries that are trade exposed, what they will get is an allocation of free allowances. The most heavily trade exposed industries get 94.5 percent free allowances. And as I said, those - that's based on an average industry benchmark, and those who are at the very high end are the ones who they've now worked out will be getting an excess of free permits.
In addition to that, there's also a recognition that there are some sectors of the economy that will get a very high pass through cost of carbon. So if they're buying, if they're very large users of electricity, for example, they'll get a large pass through cost. So the government has given them a one-off allocation of free permits, or a one-off cash allocation to help compensate them in the early few years.
In addition to this, what the government's also done is with a lot of the money that's being raised from the permits, they're being given, they have been giving some of that money back to households in the form of household assistant to try to, in the first few years, what they say is ease the pain of the, of the increased cost under the scheme.
Now the emissions trading scheme that's been set up started on 1 July last year, and unlike all the other emissions trading schemes, it operates on an Australian financial year. So it starts in June and runs to the following June, as opposed to January to December, which is interesting, because that's different than most other schemes.
And if you're a liable entity, what you have to do is you have to, when the scheme starts on 1 July, as it did this July, by the following July you have to surrender 75 percent of your permits towards your liability, and the other 25 percent than gets surrendered in the following February. So you've basically got over the first year, you have to estimate roughly what 75 percent of your emissions are, and then you can make up that shortfall over the next 7 months. And part of the reason for that is because although we've had three years of very quite detailed reporting, and there's been an obligation to report on your emissions for many years, so the data is very good, a lot of that data is still being finalized, and this is a way to sort of help people transition as well.
The other important part of the scheme is that sitting alongside the scheme is also an offset mechanism scheme. And the offset, one of the key sectors that's excluded from the Australian scheme is agriculture, and if you're doing a land-based activity, whether it's afforestation, reforestation, methane capture in agriculture, what we have is called - surveillant burning is another offset, and there's a range of offsets. If you're doing one of those land-based offsets, you can actually generate offsets which can be traded into the scheme.
And this does raise an interesting point, because we're having a discussion this morning about different offset schemes. We are really seeing all these different countries developing very different models around how to develop domestic-based offsets, and the Australian scheme in many ways is, it sort of follows the CDM in terms of methodologies and having to get the methodologies approved, and then they become public. Now there's a very rigorous process to go through to get these units issued, and in some ways, it's actually, I hate to say it, it's almost more bureaucratic in some areas than the CDM. But nonetheless, I mean, the idea is that you'll be able to generate these offsets, and then trade them into the scheme.
The other important thing is the scheme has an independent regulator that's set up who oversees the scheme, which is separate from the government. Also, most of the people who trade any of these permits, the permits will be considered financial products, so you'll need to get an AFSL license to trade. And in addition is a discussion paper out at the moment, which actually says that if you want to be a carbon offset provider, you actually have to go through a course and get qualified. Now that is partly to make the market even more robust, and it'll be interesting to see how much traction that actually gets.
Now while that sets out the basic architecture of the scheme, there's been a lot of movement about the very specific details of the scheme, and in the last few weeks we've had a couple of significant announcements. The government's view is basically the scheme came into operation on the first of July, and it's now law, and it's now operating, and people have to buy and sell under that scheme and start meeting compliance obligations.
But one of the key things that was in the scheme previously was a price floor, and some of you may have heard that Australia had a price floor and a price ceiling. The government has now put legislation in the House to, in the Parliament to actually remove that price floor. So everyone expects that will go through. Part of the reason for doing that was there was a lot of industry opposition to it, and the model of the price floor, which was on international units, was a very complicated model involving four different potential ways to approach that. And because it was so complex, there was so much disagreement, ultimately the government did agree to lower that pressure and has removed the price floor.
But in doing so, they also announced, as many of you probably know, a link to the European scheme. Now what they said was once the fixed price period is finished, there would be a link to the E.U. scheme, and from 2015 to 2018 there'll be a one-way link, which means Australian companies can buy European allowances to meet their liability under the Australian scheme.
Once you get to 2018, the idea is then that link will become two-way, and you'll be able to trade Australian units into the European scheme as well. Now this is interesting for a couple of reasons. Firstly, in terms of having a one-way link, that's fairly easy to do, because the Europeans just need to, can pass that through without going through the E.U. Parliament.
When it comes to a two-way link, though, that does require parliamentary approval in Europe. Secondly, there's a whole lot of issues to be resolved. For example, can Australian domestic units and offsets be used in the European scheme? And as a specific note, there will be a discussion about the ability to use Australian land-based offsets in Europe.
The second thing which is important is that the linkage proposal says that between 2015 onwards, Australian companies can use up to 50 percent of their liability from the European units. Actually, it says you can use 50 percent of your permits from international units, of which no more than 12.5 percent can be CERs or UAs or, I mean, sorry, CERs, RMUs, or AAUs. So depending on whether or not we can even access those will depend on what happens in Doha, but assuming we can access CDM, it means if I'm an Australian company, once I get to 2015, I can buy 100, 100 percent of my units could possibly come from Australian units; 100 percent could come from domestic offset units; up to 50 percent can come from European units; and of that 50 percent, 12.5 percent can come from CERs.
So what it actually does, and I think people didn't realize this at the time, it actually makes the European market the price setter for the Australian carbon price. So when you see, past 2015, what you'll be, what somebody would be doing is in terms of buying permits, they'll be looking at what are the cheaper permits, and if the European price is significantly lower, that will in effect be setting the price in the Australian market.
Now that's interesting, because part of the reason people were objecting to the price floor in Australia was they were saying, our price is very high. Europe is very low. At the moment, the Australian dollar is very strong. And therefore, you know, when you're got an Australian price of 23 dollars and in effect an E.U. price of 10 Australian dollars, the economics look very good. Where it will be in 2015 nobody knows. But the whole dynamic shifts.
So not only does that raise some interesting dynamics for Australian price within the European scheme, it means that the Australian price to some extent will be influenced by decisions of European policy makers, which when you think about it is very interesting. And I'm not sure that a lot of businesses - well, no one really saw that coming when the government announced it a few weeks ago. And so I think that has created quite a lot of debate in Australia.
The other interesting thing about it is that it also leaves a big question mark over domestic offsets. So if the price of European units is not high enough to encourage investment in domestic abatement offsets, it'll have an impact there as well.
The other thing about the Australian scheme also is that while until very recently, the last few years, it has been a bipartisan policy, we do have a government at the moment that is a minority government, and it has successfully brought the scheme in, but we have an opposition government that has vowed that if they get into office, and they are expected to get into office, the leader of that party, the current leader of that party has made what is called, he called it a blood oath to repeal the scheme. What that actually means will remain to be seen, and whether or not he's still there remains to be seen. But at the moment, the opposition's policy is to actually repeal this legislation, which creates an interesting dynamic.
Now the consequence of that is for a lot of businesses in the market, they're saying, well, we will comply with the scheme now because it's law, and we'll continue to comply, but we won't actually do things like purchase units way into the future, because we don't want to bank a whole lot of domestic units in the event that you're not able to use them. It doesn't mean you couldn't buy European units for 2015 and then just resell them to the E.U. market, but it does create an interesting, it's creating an interesting sort of element of uncertainty in the Australian marketplace at the moment.
Having said that, even if, the only way the legislation could be repealed would be for the government to get into a significant landslide to win both houses of Parliament and then repeal the legislation, which is really a very small chance. And even if they, even if they were to win, it wouldn't be till mid-2014, so two years into the scheme, that they could actually repeal it. So most of the traders and the banks and the clients who we deal with think that repeal risk is very low, but they won't necessarily move towards long term purchasing of offsets until the next election.
And so finally, I guess putting the politics aside, the only other point I wanted to make was that, you know, the important thing about Australia is that the law is now in place, that most, it is a complex piece of legislation, working out liability and transferring liability within companies, and a lot of companies are transferring liability to particular corporate holdings, is a fairly complex process. Most of the large companies are very much across it, but the experience has been that it's the middle tier companies and the smaller businesses that still aren't, haven't really got to grips with how complex the legislation is and what they have to do. But there's no doubt that the legislation is here. The scheme has begun, and everyone's pretty much operating on that basis.
And the final comment is that in order to reinforce that position, the government is highly aggressive on linking. So the government's view is that we want to do everything we can to link the Australian scheme with every other scheme, and we realize it's a step by step process, so while we have this firm agreement now with Europe, the government has an exchange of letters with Korea, New Zealand, it's working on with China, many of you saw the announcement with California on the weekend. All these are small steps in terms of building a longer term linkage for the Australian scheme, and it's part of the government's attempt to reinforce the view in Australia that this is just one scheme as part of a global framework.
Monica Trauzzi: Thank you. Takashi to talk about Japan.
Takashi Hongo: Thank you very much. So the, first, I would like to explain the Japanese climate change policy in general. Japan's government policy, in my understanding, two part. Part one is, of course, domestic reduction. Another part is international contribution to the reduction globally. Well, another one, how to support a project in developing countries.
BOCM, Bilateral Offset Credit Mechanism, this is a rather supply side, because Japan don't have emission trading scheme or no ____ offset mechanism like ___ ____ before 2012. But the point is, Japanese government committed 25 percent reduction following the Copenhagen Accord. So the ____, Japanese government, did not submit to any reduction target under the second commitment period ____ Kyoto. But still, 25 percent reduction commitment. That is a international commitment ____.
So the Japanese government did not decide whether this should be - this is going to be changed or keep this target during the period from 2013 to 2020, not decide yet. This is the demand side. So the next point is the supply side. So ____ major agenda ____ offset credit mechanism.
So this slide is based on government explanation on 22nd of August. This is the most updated version. And the - I feel there was a very big progress from the previous one. The reason why I think so is principle of MRV is better than before, much clearer than before. The previous explanation was a kind of a bottom up approach, one by one, case by case, of course, taking into account the global issues, but bottom up.
But now, Japanese government reports ____ MRV is more top down. So the message on the - from the government is very clear. So the ____ MRV is necessary to be simple, objective, and practical. And another one, it accelerated the deployment of the _____ technology for that, and the services.
So this is a very important message for the investor, so that there are no language, something like conservativeness. So the how to accelerate ___ low carbon investment, that is the purpose of the Japanese BOCM. ____ reason why Japanese industry support the BOCM. So Japanese industry group opposed to the emission trading scheme, domestic ETS; however, they support BOCM, because this scheme can accelerate and can support the investment. So this is ____ different from the CDN.
And also Japanese BOCM is going to comprise NAMA in ____ countries. So this is also the key point. And the practical, as a practical matter, I think one of the very important things is benchmarking. Today Christiana ______ say global benchmarking, global standard baseline, anyone, so there are kind of a clear-cut target, as a baseline, if such kind of thing will be ____ ____ much easier to make investment.
In case of CDN, we cannot predict the outcome after our evaluation, case by case. That's the reason why. But the baseline or standard baseline or benchmarking is good for investor. So this is the reason why I think the very big progress was observed on the explanation by Japanese government in August. And the next, yeah.
And the next slide shows harmonization of the decentralized market. Japanese government, their position in my understanding is the BOCM is a transitional one, because the Japanese government agreed to have a new framework after 2020, so that everybody want to have a one single framework after 2020. So the BOCM is a kind of transitional one, but they expect BOCM's experience will be used as the scheme under the new framework in 2020 scheme, so a kind of development they are expecting.
And one other thing I would like to say here is harmonization among the fragmented or decentralized markets. I think the key point is MRV, how this is a offset scheme. So the key point is definitely how to measure the reduction. In other words, the how to set up a baseline emission. Emission after the investment very easy to measure ____ big difference. Perhaps a very big different ____ is baseline. What is the baseline? So that's ____ why I said benchmarking, use of benchmarking would be developed globally or regionally, common one, that is a very, very good instrument for harmonization among the different markets.
So I would like to conclude my explanation here. The here is Washington, D.C. As a ____, I'd like to say one very important thing. The origin of the _____ scheme is the United States, in my understanding. Also, today I said, benchmarking is one of the important factors of MRV, benchmarking, benchmarking, benchmarking. ____ I have a meeting in Japan, and I'm always benchmarking, benchmarking, benchmarking.
But this benchmarking is come from the proposal of United States. Please remember, ___ ____, it was proposed, I think is that 2005 or 2006, under the Bush administration. So by using such experience, now _____ experience accumulated, like steel, cement, aluminum, many, many benchmarking studies, it is available. So the - my conclusion is ____, the ____, the Asian region, but the - another side of _____ is United States, so that I would like to facilitate harmonization in the country along the Pacific, Pacific Rim Cooperation and the Asian Market Collaboration. That is my conclusion. Thank you very much.
Monica Trauzzi: Thank you.
Monica Trauzzi: Soo-Heyeon to talk about Korea.
Yun Soo-Heyeon: Hello. My name is Yun Soo-Heyeon from Korea, and my ____ ___, and ____ tiger. And before I talk about Korea emissions trading ____, I'd like to introduce my company briefly. KEM Corp, Korean Energy Management Corporation, is government agency which regulates energy ____, climate change mitigation, and promoting renewable energy. If you are interested in these things in Korea, just contact me.
And from now on I'll talk about emissions trading system in Korea. Before we start emissions trading, we take some time to prepare completely. We launch it _____ and energy target measurement in 2010. Basically, it has ____ but no trade. Companies should report their emissions annually and get the emissions allowance from government. But they cannot buy and sell.
Throughout this, companies as well as government can accumulate the experience and know-how. It is kind of like taking step by step to ETS. In 2012, May, Korean National Assembly passed a law for launching emissions trading system. The law is composed of, sorry, next. The law is composed of 8 chapters, 43 clauses, and 3 additional clauses. It points out the skeleton of Korea ETS, like who's the participants, establishing allocation plan, how to make emissions trading market stable, like offset mechanism, penalty for default, and so on.
Then from now on, I'll explain in more detail. So ETS in Korea, we are in - we start ETS from 2015. Basically, every five years, it's decided as implementation period, ____ ____ stage of ETS first, and second phase, we will take every three years, so that we can have flexibility and getting experience. Allocation, allocation would be the mix of paid and free allocation. Industry competitiveness, international trends, emission reduction derived from ____, fairness between participants, and like that, where we consider ____ paid allocation will be applied from second phase, around three percent by ____ by presidential decree.
Participants on ETS can be divided into two types. The first one is the entities which emit more than standard annually. These entities are assigned by government, and they are mandatory to participate. Second one, second is the voluntary participants in the law. There are some changes for foreign corporation and individuals to participate.
However, during first and second phase, only government-related banks can participate for market stability. This is perhaps because in Korea, Presidential decree is still ongoing of public hearings, or the _____ are not decided.
Reporting and verifying emissions should be conducted annually. ETS, our ETS, my ETS ____ MRV system of _____ target management, so that participants are not confused and use their experience to adapt themselves to Korean ETS. And participants - I mean, the compliance entities can carry over and borrow emissions or allowance to - emission allowance to or from next year.
However, the range of _____ scheme is limited by presidential decree, because it should not interrupt market stability. Carrying over limitation would be within ten percent of emission allowance. I mentioned before, it's perhaps because ___ ongoing process.
Offset. Offset from external region ____ ____ basically, and participating from abroad is basically allowed, but the ____ is not decided yet.
Default. Default penalty will be paying fine for three times more than market price, and this is the basic outline of Korean ETS. And before I close, I'd like to use the proverb, because English is not my mother tongue, so I looked into the proverb on the internet, and I was very surprised that there are the similar proverb in Korea and the United States in English.
What can we infer from outline of Korea emissions trading system? First, practice makes perfect.
Yun Soo-Heyeon: As I mentioned before, we started this from target management and to ETS systems. We took some time to prepare and then make everything _____. And the second one is I think that the, Ms. Wang? Yeah, Ms. Wang used the same proverb. A journey of a thousand miles begin with a single step. Like throughout our first phase and second phase, perhaps we'll probably go through a lot of like trial and errors, but Korean government is struggle to minimize the burden for companies and the burden for itself, and then that's why that they are many considerations when they adopted the current ETS.
And anyway, these considerations will result in the success of Korean emissions trading system, I believe.
Monica Trauzzi: Thank you. Thank you.
Monica Trauzzi: Thank you to all the panelists. So I have a few questions for the panelists, and then we're going to open it up to the audience, and you'll be able to ask questions of the panelists as well. My first question relates to Asian oil markets and the rising demand for oil in Asia. How does that influence what these countries are trying to do on emissions, since that demand is rising so rapidly? And how is that influencing some of the internal discussions in these countries on the future of energy policy and how that relates to climate change? And that's for any of the panelists.
Takashi Hongo: In Japan, one of the critical issues related to the energy is nuclear. So after the nuclear accident, the public sentiment is very much against the nuclear. So the public comment towards the long term energy and environmental policy were done in August, and the, most of the public comment quite strongly opposes nuclear. So the Japanese government, the statement is zero nuclear in the future, this is the strategy. So - but the reality is different, because without the nuclear, Japanese energy become a very big problem. So I think the reality of the nuclear in Japan in 2030 is perhaps, in my personal view, is 15 to 20 percent. So little bit below the current ____.
The reason why is impact on energy market. If Japan decide completely zero nuclear, the energy saving, we are making effort, but still ____ amount of energy need to secure. So that means Japan needs to use more oil, more gas, more coal. So from that ____ I said, zero nuclear is not ____ before 2030. So the Japanese ____ very much are about the natural gas, not oil. So the - how we can use the shale gas from United States or other countries. So that is a real situation in Japan, and not the - and also the - very much afraid of the price up or the energy price if Japan decides to stop nuclear.
Monica Trauzzi: And there are some serious discussions happening here in the U.S. about whether we should be exporting liquefied natural gas to countries like Japan, and that'll be interesting to watch as well. Did anyone else want to comment about the energy profile of your country?
Martijn Wilder: Sure. I'll, sorry.
Yun Soo-Heyeon: Oh, go ahead. Go ahead.
Martijn Wilder: No, you go first. Well, I mean, in terms of Australia, we're going pretty much through an economic boom at the moment, particularly resources-wise, particularly coal, iron ore, largely because of the appetite of China, who are demanding those resources. And so there's a big debate about coal as a very cheap resource, and it obviously powers a lot of the electricity in Australia. At the same time, we're seeing a whole mix of policies. So we've got a lot of electric vehicles being rolled out around Australia, and we've got a significant shift towards renewables. And in one state, for example, South Australia, I think that state is now at around 35 percent renewables in terms of base load.
We're also seeing a lot of movement on things like biofuels, and some of you may know, Australia's just signed a bilateral with the U.S. on aviation biofuel to try to sort of promote the development of biofuels between Australia and the U.S. So there's a lot of mandates around ethanol. And another thing the Australian government done as part of this package is actually set up a 10 billion dollar Energy Finance Corporation, and that is similar to the Green Fund in the U.K. But the idea is that that corporation will fund a whole suite of clean energy and clean energy initiatives in the country going forward.
So what exactly it will fund remains to be seen, but it's really in the process of being set up now as part of the emissions trading framework.
Monica Trauzzi: Do you want to talk about Korea?
Yun Soo-Heyeon: Energy demand is relatively stable in Korea, because before, 20 years ago, we used a lot of energy, but Korean government was engaged in improving energy efficiency, as I mentioned before. This is why my company is existing, engaged in that kind of activities. And we had ___ ____ to improve energy efficiency.
So nowadays, I think that the energy efficiency in Korea is like world record, so ...
Monica Trauzzi: Soo-Heyeon, I think your mic is off.
Yun Soo-Heyeon: Sorry. And as I mentioned before, this is why my company is existing, for the kind of activities for energy efficiency. So I think that nowadays the energy efficiency in Korea is kind of world level. So energy demand is stable relatively.
And then nowadays, Korean government, around the pilot program for a smart grid, and like developing the ____ gas and something like that. And then our other project on the ____ process to improve more.
Xueman Wang: Just a, perhaps just very quickly, not directly related to your question, I think we have heard, and we all know that when we talk about mitigation policies, in fact, we're talking a lot about energy security. So when countries develop their mitigation plans, it's just simply impossible not to take into account this whole energy security.
So I think here, I mean, in the case of China, that's why we, I mean, they need to look at this sector by sector, and what will be the policy interactions. And that would also come down to what would be the demand, how a particular policy would respond to a particular, you know, policy objectives. So that's one side.
And another one, I think we still face a reality, if you look at the projection on China's energy mix in the next 20, 30 years, coal still would be the dominant. That's just a fact. The only thing we can say, that this whole discussion of BAU, say ____ mitigation policy, what would it be? And so, I mean, just that we need to also put, I think that's only not the case of China, also some other emerging economies that rely on coal.
So that's a reality, that how you have the ____ mitigation policy to put the mitigation under a passway that would be otherwise. Yeah.
Takashi Hongo: Well, the ____ the point, and according to the IES estimation, if the global emission ___ degrees to 450 PPM scenario, from the baseline scenario, the oil price would be reduced by, I can't remember, perhaps 20 percent. So that if 20 percent energy price is down, that is a very, very big benefit for the energy importing countries.
In the case of Japan, every year around $200 billion fossil fuel imported. If ten percent price down, that is a very big benefit. But Japan cannot initiate such kind of global action, because they cannot be confident all the countries take the same action. So that if Japan as a country believed - as a country ____ such kind of action, perhaps many energy importing countries would have a benefit. And that means the consumer will have a benefit. I speak ____ Japan, but very difficult to ____ to ____ including the policy people.
Monica Trauzzi: A question about China. How reliable is the data coming out of China, and how forthcoming is the government? And how much can we actually look to China as an example of a successful system, based on the quality of the data?
Xueman Wang: So I guess you mean the data for GHGs, ____ different types of data. That's ____ say that currently what they have, they have an inventory, right, this much aggregated, so it's much more the high level. They have submitted their inventory to the UFCCC, and they are preparing their so-called _____ National Communication, but really only cover I think _____.
But what we are looking at, or they are looking also at, is that they added installation level at the company level. So if you have much higher level aggregated inventory, then you look at the company level. At the company level, currently, there's very little ___ data available. So that's why I said moving forward, the huge task for the Chinese government, for municipality government, is how you build up this whole data collection, and on what basis, and what kind of guideline they can provide to the companies, and then build up whole data management system.
This is why, you know, we want to, I would really think that U.S. EPA and also of course other countries, including Korea, have done a great job. You know, they, like Australia, they start with this three-year GHG reporting before they move to the carbon pricing scheme.
And China, here, they need to build up this whole, this data reporting ____ the data, and that's somehow ____, put it this way, that we have heard different, people say that, look at E.U. They start with also, it's learning by doing, that they started with kind of piloting the first phase without, you know, solid, concrete data. But after that, you know, you get a better basis.
So that has been something that _____ ____ start instead of doing - have ____ three or four year just doing the data, perhaps. Just ____ do some piloting. Once you have the - go into the first phase, you'd have some data there. And then when national scheme comes, which it would be three, four years, so at that time probably would have a much better data basis.
Monica Trauzzi: OK. Martijn, you had mentioned the importance of linking systems.
Martijn Wilder: Yep.
Monica Trauzzi: How much of a game changer would it be if there was a U.S. national system to link into?
Martijn Wilder: I think the thing about the U.S. is that Australia and the U.S. have sort of run on their emissions trading politics in a fairly sort of common dialogue. And often, people in Australia have said, we can't have an emissions trading scheme in Australia until the U.S. have one, until China has one. And, you know, and that argument, I'm not quite sure that the Americans have been so concerned about what Australia's doing. But I think it's definitely the other way, and it's always been the argument.
And so I think, you know, now Australia, having gone out, I think some of the political rhetoric against the Australian scheme, and it is sort of too late now, but some of the political rhetoric against the Australian scheme has been we can't have it till to the U.S. have it. So if the U.S. does have it, it just reinforces the need for an Australian scheme.
It just, the argument against the Australian scheme by those opposed to it has always been that we cannot go out in the world and do this unless every other country is doing it, particularly the big trading partners, and particularly people like the U.S.
Now I think, as I said, because the scheme is in Australia, and the longer it's in, the less merit that argument has, but certainly it's very symbolic, and I think, yeah, there are people in Australia who see, you know, it's very important.
The also, the other interesting point to make is that while the scheme just before this was being developed in Australia called the Carbon Pollution Reduction Scheme, a lot of the provisions in that were very similar to Waxman-Markey, things about how compensation was worked out, how industry was assisted. There was a lot of overlap, and people were looking quite closely at the two schemes and how they were treating the economies.
Monica Trauzzi: Did anyone else want to comment on that? I'm interested to hear a little bit more about the politics in each country, and if, I know Martijn had mentioned that in Australia, there's a potential risk of this plan going away if a new administration comes in. Is there such a risk in any of your countries as well? Or are these plans set in stone and it's full steam ahead? What's the situation?
Xueman Wang: Well, it's very different dynamics in China, probably different kind of debate. I think here that what we see is the policy overlapping. For example, you know, we know that China has, you know, this emission intensity target ___ some of the allocation to the provinces. But at the same time, they also have another set of targets, let's say energy emissions, energy conservation target. So they are ____ some discussions, that, well, while, you know, thy want to pilot the ETS at the same time, but they also want to pilot energy efficiency trading scheme.
So there is, we have this, you know, ____, we have the two trading schemes somehow going on at the same time, probably at same time. What this means, right? And of course, there have been, you know, the carbon tax, you know, this discussion. So if you, probably if you talk to Minister of Finance, it's much easier to manage a carbon tax.
So I would think that, so it's very different, the kind of debate compared with, you know, many other countries. It's really just what would be, the debate ___ what would be the really _____ and policy instruments. When people understand more and more ETS and the challenges we're facing, and also questions being raised of whether this really can be done, whether still, you know, it's much easier to do command control. So, I mean, I would think that in the case of China, it's more that kind of debate, rather than the political dimension. Yeah.
Monica Trauzzi: OK. Do any of the other panelists want to comment on it?
Yun Soo-Heyeon: Actually, I think that it is natural that there are pros and cons, and of course there is some opposition, like in my country, Korea. And actually, it is hard to predict our future, because like nowadays, everything is changed every day. But - so it is hard. But I think that I can point out the status when we passed the law to adopt ETS system in Korea, because when we passed the law last year, it was supported by a bipartisan ___. In Korea, there are two major parties. The first one is - first one is major, and then second one is minor party. I don't know the exact name of them. But anyway, these two parties, all of them supported to pass the law last year.
But in late this year, in December, we are supposed to have the Presidential election again, but at this moment, I cannot predict ____. But anyway, I think that it is true that like we are going forward. So, because I'm from government, so it's very hard to express my personal opinions, but I think that it is also meaningful to _____ to like explain about the situation in Korea.
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