Emissions allowance

Emissions allowance (배출허용량/排出許容量, 배출권/排出權) is an authorization to emit a fixed amount of a pollutant, for example, one tonne of greenhouse gas represented by carbon dioxide (CO₂) equivalent during a speicfied period under the greenhouse gas control act. An emissions allowance is sometimes also referred to as an emissions permit (배출허가/排出許可). The emissions allowance is a fully marketable commodity that may be bought, sold, or traded for use by entities covered by the program.

In Korea, the Act on Allocation and Trading of Greenhouse Gas Emissions Allowances (온실가스 배출권의 할당 및 거래에 관한 법률), which was enacted in line with the Framework Act on Low Carbon, Green Growth (저탄소 녹색성장 기본법) and came into force on November 15, 2012, defines the carbon dioxide emissions allowance, and further allows it to be trade like a financial product.

In this regard, a greenhouse gas (sometimes abbreviated GHG) means a gas in an atmosphere that absorbs and emits radiation within the thermal infrared range. This process is the fundamental cause of the greenhouse effect. The primary greenhouse gases in the Earth's atmosphere are water vapour, carbon dioxide, methane, nitrous oxide, and ozone.

Key words
greenhouse gas, emissions, emissions allowance, UNFCCC, Kyoto Protocol, cap and trade program

Background
In 1992, the United Nations Conference on Environment and Development (UNCED), informally known as the Earth Summit, held in Rio de Janeiro, negotiated and adopted the United Nations Framework Convention on Climate Change (UNFCCC, 기후변화에 관한 국제연합 기본협약). So contracting states are required to establish relevant laws and policies that ensure the environment friendly economic growth. In addition, the emission reduction plan is expected to be enforced in full scale with the legally binding targets set in 2008 by the Kyoto Prototol.

Legal and Economic Nature
In the course of drafting the Bill on Allocation and Trading of Greenhouse Gas Emissions Allowances, it was intensively discussed whether the emissions allowance is of a property right or not. Though the American Act states an allownce does not constitute a property right, its nature is globally deemed as a property right.

Comparing with the emissions trading schemes of the European Union and other developed countries, it should be clarified whether emissions allowances are qualified as the financial products or the underlying asset of a derivative or derivative-linked securities under the Capital Market and Financial Investment Business Act.

Cap and Trade Programs
Under a cap and trade program (총량거래제/總量去來制), a regulating entity sets an emission target, or “cap,” for a specific pollution. Each industry covered under the system is then allocated an individual cap on their emissions, which are accounted for through a system of emissions allowance. One allowance usually equals one ton of the regulated pollutant. Under the U.S. Regional Green House Gas Initiative (RGGI), for example, the state of Connecticut has an overall emissions cap of 10,695,036 tons of CO2. The state is then responsible for allocating 10,695,036 emissions allowances to the industries covered by the RGGI program in its state.

Emissions allowance can be bought, sold or traded by covered entities to help them meet their emission cap. While each cap and trade programs has its own rules for trading allowances, the general concept works like this: if a company emits 11,000 tons of a pollutant for which it is allocated 10,000 allowances, it must, in most circumstances, buy 1,000 allowances on the open market to cover its exceedance. These allowances will usually come from companies that have cut their emissions below their cap. The principle behind cap and trade is that it will create market incentives for companies to find the most cost effective strategies to reduce the covered emissions.