Carbon credit costs pile on as companies face more regulation

President Moon Jae-in, right, speaks during a meeting on carbon neutrality held at the Blue House on Dec. 10, 2021. [YONHAP]

Soaring carbon costs are adding up for companies in Korea as the government is set to tighten environmental rules.

On Monday, carbon credits traded at 21,000 won ($17) per ton of greenhouse gas emitted, up 36 percent on year, according to the Korea Exchange.

Carbon pricing is affected by local policy changes as well as fluctuations in the global carbon market. In the EU, carbon permit prices sharply plunged following Russia's invasion of Ukraine on Feb. 24, from 87 euros ($94.7) that day to 58.3 euros on March 7, a 49 percent drop.

The number bounced upward to the 80-euro level, to close at 80.1 euros last Friday, as the impact of the Russia-Ukraine conflict on the European economy was forecast to be less than the initial expectation.

"The EU carbon permit prices will move upward if the Russia-Ukraine war ends soon and the EU maintains the current level of regulation on carbon emission," said DB Financial Investment analyst Kang Dae-seung.

Strengthened regulation is another issue, as new carbon emissions legislation in Korea increased the reduction target to 40 percent by 2030 from the previous 26.3 percent.

The Framework Act on Low Carbon and Green Growth took effect on March 25 as the government aims to cut carbon emissions by 40 percent from 2018 levels through 2030.

As a result, the free allowance allocation per company, which is the amount of carbon emissions exempt from pricing, is expected to be cut significantly, adding to the costs along with the rising carbon prices.

The free allowance allocation was introduced with the carbon trading system in 2015. Among some 600 companies subject to the rule, those that emitted less than the amount allocated can sell the remaining amount of carbon credits, while those with excessive carbon emissions can buy additional credits from the market to meet the emissions cap.

The government handed out carbon credits for free until 2017. Currently companies are required to pay for 10 percent of the carbon credits allocated.

As the revised emissions reduction goal is set to accelerate Korea's carbon neutrality plan, companies will be required to pay for a bigger share in the future.

Major manufacturers are already feeling the heat.

Korea's top 50 manufacturing companies by market cap had carbon liabilities of about 294 billion won in total last year, according to Financial Supervisory Service.

Carbon liabilities refer to a reserve fund put aside by companies to pay for additional carbon credits needed.

Carmaker Kia topped the list as the biggest buyer of carbon credits, at 119.1 billion won, followed by Posco's 84.3 billion won and 45.0 billion won for Samsung Electronics.

Companies are cautiously eyeing the government's carbon neutrality plan and its possible impact on their businesses.

"We already boosted the energy efficiency to the highest level in the world, so there is not much we can do to further cut the emissions," said a source in the steelmaking business.

The source explained that a hydrogen direct reduction technology, which reduces the carbon emissions in the steelmaking process, "will be able to be deployed on a commercial scale after the mid-2030s at earliest."

Posco aims to achieve a 10 percent reduction by 2030, from the average emission level from 2017 to 2019. If it fails to secure the essential technology in time, the steelmaker would have to cut production to meet its target.

BY KIM KYUNG-MI [shin.hanee@joongang.co.kr]