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Carbon emissions

Stronger carbon stance puts cost pressure on manufacturers

By Mar 22, 2021 (Gmt+09:00)

Stronger carbon stance puts cost pressure on manufacturers

South Korea’s carbon emission regulations – strengthened again this year – are projected to exert financial pressure on the country's manufacturing sector, especially on the auto, oil and steel industries.

In terms of 2019 revenue, the country’s top 30 companies posted a total of 424.5 billion won ($376.4 million) last year as greenhouse gas emission liabilities, according to the Financial Supervisory Service on Mar. 22.

The figure is up 72.8% from 245.6 billion won ($217.8 million) the year previous.

Emission liabilities are the costs generated by purchasing carbon credits to offset emissions beyond each company's allocation.

Adopted in 2015, the carbon emission trading scheme in Korea allows the government to allocate a limit on each company’s annual emissions.

Industry experts project that the stronger carbon policy means companies will report higher emission liability figures in their financial statements this year.

SIGNIFICANT CHANGES IN 2021

For companies, carbon emissions regulated by the government fall into two categories: free allocation and auctioning.

The amount designated as free allocation can be emitted without any additional cost, while the portion designated as auctioning must be paid off through carbon credit purchases.

The Korean government set the portion of free allocation at 100% and auctioning at 0% in phase one (2015–2017) of the carbon emissions trading scheme. But in phase two (2018–2020) the auctioning portion was raised to 3%, and again by more than threefold in phase three (2021–2025) to 10%.

The scheme applies to 684 companies with annual emissions higher than 125,000 tons per entity or 2,500 tons per business facility.   

The annual average amount of carbon emissions allocated for the 684 companies during phase three is 610 million tons. In other words, these companies must purchase 10% of 610 million tons, or 61 million tons, of emissions from the carbon emissions trading market operated by the Korea Exchange from 2015.

The price of carbon credit traded in the market changes in real time according to demand and supply.

According to the Korea Exchange, the daily transaction in the market was only 57 million won ($50,500) in 2015, whereas the figure became almost 50 times higher at 2.8 billion won ($2.5 million) as of September 2020.

In terms of emissions, the daily traded amount was only 5,100 tons in 2015, while it rose by almost 18 times at 91,400 tons as of September 2020.

The latest market price of carbon credit as of Mar. 22 was 18,500 per ton, but experts are forecasting that the price in the second half of this year will rise to at least 35,000 won.

In such a scenario, Korean companies must pay double the price to offset the amount allocated as emission liabilities in their financial statements.

RISING PRESSURE ON KEY INDUSTRIES

Korea’s major companies in the manufacturing segment are already facing a burden from the strengthened regulations.

By company, Hyundai Steel posted the highest greenhouse gas emission liabilities last year at 157.1 billion won ($139.3 million), more than twice the company's 73 billion won operating profit for the same period.

Kia Corp., POSCO and Samsung Electronics Co. followed behind with 152 billion won ($134.8 million), 78.6 billion won ($69.7 million) and 31.8 billion won ($28.2 million), respectively.

A Kia spokesman explained that the company had projected such a large amount as emissions liability due to the higher volume of its vehicles sold in the US failing to meet the country’s environmental standards.  

Emission liabilities are a type of provisions, or estimated liabilities, meaning that the amount of liability is not definitive and thus be recorded in the ledger in its estimated amount.

This means that some companies are likely to post higher emission liabilities in their financial statements than their original estimates.

Aside from private companies, national power supplier KEPCO (Korea Electric Power Corporation) affiliates are also facing similar pressure.  

The five affiliates of KEPCO, excluding Korea Hydro & Nuclear Power Co., recorded total 682.2 billion won ($605 million) of emission liabilities as of 2019.

Another factor that may aggravate the situation for domestic companies is that factories are likely to operate at a higher capacity this year with the economic rebound. Increased factory operation will lead to higher emissions, which in turn will raise the price of carbon credit.

The oil industry is the most likely to be hit by such a scenario, as it had reduced its operating rate to as low as 70% last year.

The Korea Institute for Industrial Economics & Trade forecasts that the domestic steel, cement and petrochemical industries are looking at a combined cost of 400 trillion won ($355 billion) to achieve carbon neutrality by 2050.

Industry experts noted that the financial burden will likely continue for many years, as it will be almost impossible to slash carbon emissions in the short term.

Write to Kyung-Min Kang at kkm1026@hankyung.com

Daniel Cho edited this article.

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