Key considerations for implementing the Carbon Contract for Differences in Korea

The Emissions Trading Scheme ("ETS"), which has been in effect since 2015, is Korea"s core climate change policy, covering more than 70% of the country"s total greenhouse gas emissions. Although Korea has received positive reviews for being the second country in the world to implement a national ETS after the EU, there are skeptics about whether it is fulfilling its purpose of providing incentives to reduce greenhouse gas emissions. While both Korea and the EU have pioneered ETSs, they have not yet succeeded in attracting investment in the innovative low-carbon technologies needed to achieve carbon neutrality. The low level and high volatility of allowance prices have been cited as reasons for this, as low prices make it unprofitable to invest in expensive new technologies, while high volatility discourages long-term investment decisions. The Carbon Contract for Difference, which guarantees companies a high, fixed carbon price, has recently been discussed in the EU as a possible solution. This study provides an overview of the Carbon Contract for Differences, discusses its theoretical advantages, and examines whether it is appropriate for the Korean situation. This study also identifies five key components that should be considered for implementation of the contract: (1) strike price, (2) contract duration, (3) contract type, (4) selection process, and (5) targeted projects.