Kim Sung-woo
On Dec. 13, 2023, the 28th United Nations Climate Change Conference (COP28) in Dubai came to an end after relentless discussions over the next battle against climate change. Amid the severe climate crisis, the parties adopted the UAE Consensus based on the Global Stocktake (GST) result that the progress in responding to climate change is “not yet collectively on track.”
In this regard, the parties reaffirmed the goal of the Paris Agreement — keeping global temperature rise within 1.5 degrees Celsius above the pre-industrialization level — and recognized that it was necessary to reduce carbon emissions from the 2019 level by 43 percent by 2030, reduce by 60 percent by 2035 and achieve carbon neutrality by 2050.
As the parties officially agreed for the first time in COP history to “transition away from fossil fuels in energy systems,” Korea as a country, heavily dependent on fossil fuel, will face increasing demand from the international community to keep up with the UAE Consensus. For example, as re-requested by COP28, Korea should submit a biennial transparency report to the U.N. in 2024 on the country’s progress in achieving the Nationally Determined Contributions of a 40 percent reduction by 2030 as promised to the international community.
Notably, among 291 million tons of Korea’s target reduction by 2030, 12.9 percent (37.5 million tons) is supposed to come from overseas (International Mitigation). The overseas-driven reduction target further increased in April 2023 and takes a larger portion than the country’s reduction target for the domestic industry or transportation sector. This is why the Korean government is under pressure to earn the reduction credit outside the country.
Ministry of Environment announced that the budget for supporting overseas reduction projects increased by 126.9 percent from 10.4 billion won ($7.93 million) in 2023 to 23.6 billion won in 2024. Ministry of Trade, Industry and Energy (MOTIE) also selected four overseas reduction pilot projects in the industrial and energy sectors, including three projects in Vietnam for waste refrigerants recycling, improvement of brick manufacturing processes, and solar power in the industrial complex, and one project in Uzbekistan for coal fuel conversion, subsidizing six billion won in total.
The MOTIE plans to increase this budget to 33 billion won in 2024. In addition, the Ministry of Foreign Affairs is accelerating its progress on entering into bilateral climate change cooperation agreements, which serve as the foundation of Korea’s overseas reduction. As of the end of 2021, Vietnam was the only country that signed an agreement with Korea. While 2022 did not see any signatories, in 2023 alone Korea signed agreements with Mongolia (February), the Gabonese Republic (May), and Uzbekistan (June), and signed tentative agreements with the UAE (January), Peru (May) and Morocco (July). Aside from these countries, Korea is currently seeking to sign an agreement with about 20 more countries.
Korea is in a rush because the country needs to bridge the gap with its overseas reduction target under a very limited timeframe. However, this is an optimal timing for the private sector to tap into the increased government support. Companies looking to invest in the reduction project in developing countries have three ways to earn reduction credits: (a) international reduction under Article 6.2 of the Paris Agreement, in which the reduction performance is recognized under bilateral agreements, (b) international reduction under Article 6.4 of the Paris Agreement where the reduction performance is recognized by the UNFCCC, and (c) international reduction where the reduction performance is recognized in the carbon emissions market operated by the private sector. Nevertheless, each presents its own risks.
One risk associated with Article 6.2 reduction is that different bilateral agreements depending on agreed parties may result in inconsistent reduction performance criteria. In the case of Article 6.4 reduction, the risk is that the host country’s control over reduction performance criteria and allocation of such performance has asymmetrically increased vis-à-vis investing country. Lastly, reduction through the private sector’s criteria may bring about the public and stakeholders’ scrutiny over potential greenwashing. To mitigate this particular risk, companies need to enhance transparency by disclosing how they will utilize the reduction credit earned and communicate with stakeholders along the way.
When I worked for POSCO about 20 years ago, I was a business leader in charge of the Clean Development Mechanism projects, the predecessor of the reduction mechanism governed by Article 6.4 of the Paris Agreement. Based on my experience, corporate decisions are made under a simple principle: whether it is domestic or overseas reduction, or whether the company seeks to sell or buy reduction credit, companies would seek the most economical means to achieve (and to monetize) their carbon reduction targets. Another takeaway was that opportunities for international reduction projects are not limited to securing reduction credit, and projects often present myriad business opportunities for developing various designs, facilities and technologies required to achieve the projects. Companies can even secure future cash flows by having low-carbon infrastructure in their asset portfolio.
These “by-products” oftentimes are more appealing to corporate sectors than the actual reduction credit earned. Korea should capitalize on businesses’ appetite in its journey to meet the reduction target. When you are behind in your school project, sometimes working as a team is the only way to meet the deadline. Korea has only seven years to clear 37.5 million tons on its overseas reduction plate. Business sectors and the government should work together to complete the assignment in the most efficient manner. Understanding the score points in the assignment, i.e., studying the international standards for earning the reduction credit, is of course also critical in getting an A+ overnight.
Kim Sung-woo is head of Environment & Energy Research Institute at Kim & Chang.