Evaluating the impact of the KETS on GHG reduction in the first phase

The purpose of this study is to test whether Korea’s emission trading scheme (KETS) was effective in curbing GHG emissions in the three major emitting sectors during the first commitment period (2015–2017). The merged dataset, which contains GHG emissions, the amount of free allowances, fuel use and sales at the firm level, and market price information for fuels and Korea’s allowance units (KAU), was used for the empirical exercise in this paper. Our research show that the adoption of the KETS was effective in improving the carbon intensity of KETS-regulated entities in the manufacturing and building sectors, but not in the power sector. The reduction burden, defined as the proportion of the expected emission level to the amount of free allowances allocated before the complying year starts, was shown to be critical in altering CO2 emission characteristics of covered entities in the manufacturing and building sectors. This paper’s empirical findings also suggest that the development of a pricing scheme reflects carbon costs in electricity prices, In addition to the stringency in free allowances allocated to large emitters, is necessary to mitigate CO2 emissions in the power sector.