[Issue Briefs] Promoting Investment in Renewable Energy through Effective Tax Benefits

HIGHLIGHTS There are a number of countries that provide various tax incentives to promote investment in the renewable energy industry, and these systems are said to have positively impacted investment in the sector. The purpose of this Issue Brief is to discuss issues related to tax benefits for the domestic renewable energy industry and to highlight problems and possible solutions.  

[Issue Briefs] Increasing Electricity Demand in the Metropolitan Area is Beyond the Capacity of the Existing System

HIGHLIGHTS • (Current Status) Due to the large-scale expansion of new semiconductor industries and data centers, electricity demand in the metropolitan area is expected to increase by at least 19 GW by 2034.  - (Semiconductor industry) If Samsung Electronics' Pyeongtaek Campus and SK Hynix's Yongin Cluster are completed and operational as planned by 2025, additional demand for at least 3.5 GW is expected compared to the current level.  - (Data center) Data centers are expected to require an additional 14.7 GW (13.5 GW for the metropolitan area) power in 2029 (Korea Electric Power Corporation).  • (Issues & Problems) The 9th Basic Plan for Electricity Supply and the Demand and Power Grid Reinforcement Plan does not reflect the current surge in electricity demand in the metropolitan area. - According to the 9th Basic Plan on Power Supply and Demand, the metropolitan area's power expansion (including transmission capability) is planned for 10.5 GW based on rated capacity, so some power demand needs to be moved to non-metropolitan areas or additional power generation facilities and fusion lines should be secured in the metropolitan area.  - The imbalance in electricity supply and demand between the metropolitan area and the non-metropolitan area contributes to system instability • A total of 34 or more coal-fired generators nationwide operate must-run generators to maintain system stability.  - In the current system, there is a paradox in that more thermal power plants must be placed in areas linking the metropolitan area with the non-metropolitan area (the central area) in order to stabilize the system. It may hinder the implementation of the existing plan to eliminate coal-fired power generation. • (Implications)   - It is necessary to move the electricity demand of the semiconductor industry and data center to a non-metropolitan area or otherwise to secure additional power generation facilities and transmission lines within the metropolitan area.   - To achieve carbon neutrality while maintaining system stability, a change in the existing power system is inevitable.  • (Suggestions)   - An impact assessment of the power system is essential to reduce centralized power grid dependence.  - Business plans for semiconductor manufacturing facilities and data centers should be approved only after a special bill on the revitalization of distributed energy has been passed and a power system impact assessment conducted.  - A specific introduction plan is needed for the supply of resources for system inertia other than generators, such as synchronous condensers. 

[Issue Briefs] [Opinion] Why CCUS Cannot be the Answer Now

Why CCUS Cannot be the Answer Now  Carbon Capture, Utilization and Storage (CCUS) - The only post-reduction technique  The Tesla CEO recently made headlines for offering a $100 million donation to a team that could develop a technology that can collect one gigaton of carbon at a carbon collection technology contest. Carbon Capture, Utilization and Storage (CCUS) is a technology that is gaining attention in the midst of mounting climate change impacts. In contrast to renewable energy, which blocks all greenhouse gas emissions entirely, CCUS is the only "post-reduction technology" available at the moment. The idea is that while allowing the production of carbon dioxide, it should be collected and processed before being released into the atmosphere and heating up the Earth. It used to be known as Carbon Capture and Storage (CCS) to denote capturing and burying carbon in the ground. As of a few years ago, a "U" for “Utilization” was added, rendering it "CCUS," indicating that marketability should be given to the carbon dioxide collected. Currently, the "point capture" method of capturing carbon dioxide emitted from thermal power plant chimneys is common. In spite of its technical difficulties, however, a method called "Direct Air Capture" is also being studied steadily to capture carbon dioxide in the atmosphere. There is disagreement among experts about the viability of CCUS on a large scale. Even so, countries and companies that have recently declared 2050 net zero have a strong reliance on the CCUS, whether in large or small scale. With the current infrastructure, it is nearly impossible to reduce total emissions to zero within decades, so CCUS is often used to offset what cannot be reduced. Limitations of CCUS: Why it has not been commercialized yetIn the early stages of this technology, which is decades ago, many people predicted that by 2020 there would be technologies capturing a significant portion of carbon emissions. As of 2019, however, the amount of carbon dioxide collected globally was only 40 million metric tons. This figure is insignificant when considering that the United States alone emits over 5 billion tons annually. In order to understand why we remain at this stage, it is necessary to examine each of the three stages of collection (C), storage (S), and utilization (U).This first part of the collection comes at an overwhelmingly high price. Since molecules have to be collected before carbon dioxide is released into the atmosphere, it may be necessary to install a collecting facility in every power plant chimney, which would be far from being cost-effective. Although the cost of collecting carbon dioxide per ton varies depending on the source of emissions, it is currently around $60. In recent data from the U.S. Department of Energy, capture equipment which can be installed on a commercial scale costs between $400 million and $500 million.Separating carbon dioxide is still a technique used in oil fields and natural gas reserves, but because it is tailored to a small scale, the funds required to scale it up to a coal-fired power plant is very high. In addition to being costly, a large-scale collection facility is too large that it may require a space as large as the power plant itself at times. In some studies, it has been demonstrated that such large-scale collection does not only increase the burden of land size and operation, but it also reduces the efficiency of the power plant due to the high amount of energy used by the equipment. In 2010, the Southern Company Project attempted a large-scale project at the Mississippi coal-fired power plant with a budget of $2.4 billion, but it was halted due to a lack of funds despite spending up to $7.5 billion.Even if the collection is successful, burying it in the ground could be problematic. For a long time, civil engineering has buried various structures in the ground, so technology and monitoring systems have been developed. These existing technologies would be used to find a suitable place to store the collected carbon, then the embedding process would be carried out considering the configuration of the surrounding ground. Typically, collected carbon must be stored underground at least 800 meters (2,600 feet) below the surface, where the temperature and pressure would create a stable condition to store carbon dioxide.However, storing the carbon collected is more complicated than simply burying a structure. In addition to safety concerns associated with natural disasters such as earthquakes, there is also a lack of experience with long-term storage spanning hundreds to thousands of years. Aside from technical aspects, site selection also presents a challenge. In the original state, the ground is not filled only with soil, but there is an aquifer and empty space left from the development of buried oil and gas. According to experts, those spaces would provide sufficient storage space. Apparently, the amount of carbon dioxide emitted every year is 24 gigatons, and the amount of storage space related to oil, gas, and coal development alone is 800 gigatons. Unfortunately, in countries such as South Korea, the land is small and storage spaces like those are scarce, so there are many issues to be addressed, such as where to bury the carbon, how to convince the public, and how to deal with carbon leaks.There is also talk of collecting carbon and exporting it overseas, but the infrastructure needed makes this an arduous task. Large-scale transportation will eventually require pipelines rather than ships. However, the construction of pipelines solely for carbon dioxide transportation is neither realistic nor economically feasible. Even American experts advocating for CCUS are suggesting that existing infrastructure like gas pipelines be used instead of building new ones.Lastly, the amount of carbon that can be utilized is limited. Using even part of the collected carbon dioxide is definitely better than burying it. It may be especially useful if processes themselves require carbon dioxide. For example, fuel, chemical products, construction materials, etc. are produced by chemical conversion, or used as industrial raw materials, food and beverage, or agricultural materials without being converted. Cement industry, which generates a lot of carbon dioxide emissions, also came up with the idea of recycling carbon collected in power plants or cement manufacturing facilities to produce de-carbon cement. Nevertheless, this is still a theoretical option, and even if used this way it will merely contribute to a 10% reduction in emissions.In conclusion, it is evident at this point that the limitations of CCUS are obvious, regardless of which stage is examined. Vaclav Smil, EU's historian of energy, diagnosed the current situation as follows.EU energy historian Vaclav Smil diagnosed the current situation with the following words. "To remove only one-fifth of today's carbon dioxide emissions, we should develop new industries worldwide in absorption, collection, compression, transportation, and storage that have annual throughputs roughly seventy percent greater than the annual volume covered by the world’s crude oil industry today. Moreover, it will take several generations to build such a huge infrastructure involving facilities for collecting, transporting, compressing, and storing."   Domestic and International CCUS CasesGlobal CCS Organization estimates that the CCUS facility will need to process 5.6 gigatons annually to achieve carbon neutrality by 2050. However, as of last year, there were only 26 CCUS facilities operating, with a storage capacity of around 40 million tons. Even if all of the projects currently in development are completed, only 75 million tons of carbon dioxide will be removed by 2030.Currently, the world's largest CCS project is Norway's Northern Lights project, approved last year, which aims to collect and separate 1.5 million tons of carbon dioxide annually and bury it under the sea at depths of 2,600 meters in the North Sea. Meanwhile, the largest Direct Air Capture (DAC) facility in the world was launched just a few days ago in Iceland, which is much smaller in size, since it handles about 4,000 tons annually. As compared with the United States and Europe, Korea’s collection is at the level of demonstration projects. Korea intends to promote a large-scale gas capture demonstration project using the Donghae Gas Field, which will cease production by 2022, but it is hard to expect immediate results.Recent trends indicate that "utilization" is gaining momentum. Europe already produces foam mattresses and construction materials using collected carbon, and Korean companies such as Hyundai Oilbank and Lotte Chemical are using carbon dioxide to manufacture calcium carbonate, dry ice, and cleaning solutions for semiconductors. Nevertheless, it only constitutes 2% of the commercial process, so it remains at the pilot stage. What are the conditions for the success of CCUS?As such, CCUS has been tried in various ways both domestically and internationally, but it still faces many obstacles in terms of size and commercialization, barriers that prevent it from playing a significant role in addressing climate change. Thus, it is important to examine whether CCUS, which is part of every Net-Zero proposal, will be able to meet the expectations and the conditions for success.To begin with, the capture category must prove economically feasible. As of now, the related industry is aiming to lower the collection costs to $30 per ton, from $60 per ton. According to MIT, adding carbon capture facilities to the power generation process will increase power costs by 3-4 cents per kWh, and current technology will increase power costs by about 60%. Through technological development, this figure could possibly be lowered to 30%. A number of startups and research centers are also exploring alternative approaches to lower costs, including the integrated gasification combined cycle with built-in carbon dioxide capture facilities or constructing small-scale prefabricated facilities that can expand. In Canada, for example, the Boundary Dam project, which started in 2014, is expected to lower costs by installing a more cost-effective cooling system.In the categories of transport and storage, a logical and objective assessment should be made to determine if there are feasible and stable storage techniques. Unless the risks of leakage and stability of the underground rock layer are addressed, CCUS technology cannot be a long-term solution to climate change. As an alternative, carbon dioxide can be stored in deep sea gravitational storage, and it will remain stable for hundreds of years because it is heavier than water. However, it should be noted that unlike oil-producing countries like the United States, Norway, and the Middle East that have large salt domes and saline aquifers, which guarantee a high storage potential that can be harnessed for commercial interests, Korea does not possess such features.Lastly, there must be suitable policy support. In a world where releasing carbon dioxide into the atmosphere without capturing it or even considering other actions is the cheapest option, CCUS would only become more attractive once measures such as increasing taxes on carbon emissions are implemented. It is also important to develop specific support measures for CCUS. In the case of the United States, seven regions were selected to promote regional accessibility and to establish carbon storage partnerships, with many funds invested in complexes at commercial scale. In Korea, the CCUS roadmap was released in June of this year, and 50 private companies are participating in the K-CCUS promotion group. As discussed so far, CC"S" and CC"U" represent strictly different matters, but in the case of Korea, storage is particularly problematic, so it is necessary to develop policies applying a deeper understanding to such issues. ConclusionFor now, it would be inaccurate to state that CCUS plays a major role in reducing greenhouse gas emissions. It is, in fact, a technology that is expensive, complex, and in its infancy. Still, most authoritative organizations mention CCUS in connection with their greenhouse gas reduction efforts.It is a technology that is expensive, difficult, and in its infancy.  As an example, the International Energy Agency (IEA) stated that Net-Zero might not be possible without CCUS, and suggested that CCUS' contribution might be 15% by 2070.Why is there such a big gap between plan and reality? Perhaps this is because we are at a time when we must mobilize all means (no matter how infeasible) to prevent climate catastrophes. However, without any specific measures for success, referring to CCUS unconditionally just because it is the "only way to offset once greenhouse gases are released" should be avoided. That is, there are still too many limitations of this technology to sneak it into parts of the plan where reduction is not as effective despite using various controls after setting a reduction goal. Unless specific figures and methodologies on the amount of reduction, policy implementation measures, and public reactions are considered from multiple angles, reduction plans are nothing more than false hope.There is no doubt that continuous research, investment, and pilot projects should be conducted. A leading expert on CCUS research, Professor Michael Celia, stated as follows. "This technology will undoubtedly play a key role at some point in the future. As a researcher, I need to be ready for that time." To put it differently, while working diligently to fully prepare and invest, the priority still must be objectively evaluating the present status of the technology.

[Issue Briefs] U.S. Carbon Border Tax - A Major Blow to Steel Despite Its Uncertainty

HIGHLIGHTS•  Although the carbon border tax proposed by the U.S. Congress in July may be delayed from the original 2024 proposal, it is likely to be implemented.•  The steel industry will be a major target, and the U.S. market margin rate could fall by more than 4% depending on carbon prices in the U.S.•  As soon as the EU CBAM is implemented in earnest in 2026, the EU market margin rate is expected to drop by an additional 24%.------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Carbon border tax officially proposed by the U.S. Congress•  On July 19, the U.S. Democratic Party proposed the "FAIR (Fair, Affordable, Innovative, and Resilient) Transition and Composition Act," a policy that imposes carbon taxes on imports such as fossil fuels, aluminum, steel, and cement from 2024.- As part of the $3.5 trillion stimulus plan agreed to by the Democratic Party, this measure aims to raise funds for the country's economy in addition to pressuring China and other trading partners.  •  The bill faces two obstacles, both internal and external. On the domestic front, it's about passing by Congress, and on the international front, it's about complying with WTO rules.-  The bill is expected to face resistance in Congress. The Republican Party is opposed to the stimulus plan due to inflation fears and tax burdens. However, the Act can still be passed with a simple majority of votes without Republican support if the issue is handled as a "budget reconciliation." -  To comply with WTO rules, carbon prices paid by producers in the United States should be clearly defined. However, there is no federal carbon tax. → Under the Act, the Treasury will be obligated to calculate the environmental costs borne by producers in the United States annually. Whether this method will be consistent with the WTO is debatable. •  It is expected that there will be procedural difficulties. However, given that President Biden's campaign pledge was that climate and environmental measures should be tied to tariff rates and that the U.S. and the EU are already discussing carbon taxes, the U.S.' introduction of carbon borders will be unlikely to fail. - Although it may arrive later than 2024, as the Act proposed, it is likely to be introduced following an amendment. Korea emits 1.5 times more carbon from steel and aluminum than does the U.S.•  In terms of only the items subject to the carbon border tax, Korea's steel and aluminum unit emissions are 53-54% higher than those of the United States, and 21% lower in petroleum products(Figures 1-3). •  In particular, for steel, Korea and the US have a gap in emissions of 0.51 tCO2, which is greater than that of the EU.- This is because the U.S. electric furnace process has the world's highest percentage.The U.S. produces 66% of its steel through electric furnaces, while Korea produces 33%. •  In the case of aluminum,aluminum imported by Korea emits 11.4 tCO2/ton, which is already higher than the aluminum emissions in the United States, which is 8.94 tCO2/ton. The reason for this is that major sources of import such as Australia and India have high power emission factors. •  Korea is highly competitive only in upstream petroleum product emissions, which are 29% lower than those of the United States. → In other words, the carbon border tax of petroleum products will be close to 0%.- Korea, which mainly imports crude oil from OPEC, has better upstream emissions than the United States, which imports crude oil from Canada and South America.•  Except for fossil fuel, which is positioned high in carbon intensity, Korea’s steel and aluminum exports are subject to carbon border taxes. Exports of steel and aluminum to the U.S. between 2019 and 2020 amounted to 3-4 trillion won, accounting for 3-5% of exports to the U.S  The issue is that it is difficult to predict how much US carbon prices will be •  A major concern with the U.S. carbon border tax is how the government will set carbon prices. •  The FAIR Act stipulates that the Ministry of Finance shall calculate carbon border tax annually based on the "environmental cost" per emission. - The term "environmental cost" is defined as the average cost borne by companies in the U. S. to comply with the laws and policies introduced to reduce greenhouse gases. The logic is that carbon prices will be calculated in reference to costs incurred in complying with the Clean Air Act, the automobile emission rating system, and the emission trading system. - This may be the most reasonable approach for the U.S. where carbon prices do not exist at federal level.  - Although there are no official figures calculated by the government, the cost estimated by the Natural Resources Defense Council (NRDC) in 2020 was around $9.4/tCO2 •  Carbon allowance price, which can be a reference to carbon prices, is $17/tCO2 in California, while they are $7.0-7.6/tCO2 in Massachusetts and the RGGI (“Regional Greenhouse Gas Initiative,” which is a power sector emission trading system involving 11 U.S. Eastern states). -  However, it is difficult to say that Massachusetts and RGGI reflect the industry's carbon costs because they do not obligate companies to engage in the emission trading system.•  The only "social cost" proposed by the U.S. government for carbon was $51/tCO2.However, since this figure represents damage caused by greenhouse gases to society such as abnormal weather, health, and agricultural productivity, it differs from the actual cost paid by industries in the United States  •  For the items defined by the FAIR Act, $9.4 is the most consistent reference, which is the cost to NRDC of complying with greenhouse gas regulations, but that number may not be an official estimate from the government. •  If aggressive action is taken by the Biden administration on climate change and carbon's social cost standards are strengthened early next year, compliance costs in the U.S. will likely increase even further than they currently are. An analysis on the impact of the U.S. carbon border tax on steel exportsMajor assumption ① Considering the uncertain outlook for carbon prices in the United States, carbon prices are assumed to be $10, $20, and $30. ② The carbon border tax imposed is borne by the exporter.③ The Korean steel industry is not exempt from carbon border taxes due to the free allocation of emission allowances  •  When carbon prices are $10, 20, and $30/tCO2, the estimated tax amount for a ton of steel products is $15, 29, and 44 respectively, which leads to a 4-11% reduction in steel margin based on hot-rolled steel price of $383.- Hot-rolled spread prices of $383 reflect the average price between September 2020 and August 2021 and is a record high that bounced excessively due to the resolution of COVID-19's influence. If calculatedbased on the lowest level of $241/year, the margin reduction rate expands to 6-18%. •  However, it can be seen that the level is significantly lower compared to the EU CBAM's estimated tax amount of $90 for 2026, with the margin reduction rate of 24%.- The wide gap in tax amounts between the EU and the US is due to the difference in carbon prices. The EU has operated the EU ETS for more than 15 years during which carbon prices were formed through the market and reached the level of national consensus.- The United States has no consensus on carbon prices and has little experience in carbon trading, making it impossible to reach EU-level carbon prices in the short term.  Although the measure has many uncertainties, its impact on the steel industry is evident•  Considering the uncertainty of carbon prices in the United States, it is difficult to determine the extent of damage caused by the carbon border tax, but it is immediately clear that the steel industry will suffer the most. •  It is never a wise strategy to claim WTO violations by carbon border taxes while allowing domestic companies the ability to delay the transition to decarbonization and attempt to evade the inevitable international trends. Unfortunately, this is the stance currently taken by the Korean government and industry.- The possibility cannot be ruled out that the US and EU will lead to WTO member states deciding on climate-related trade measures and establishing exceptions to the WTO environmental provisions. - Since the United States and the EU, which account for 20% of steel exports from Korea, are crucial markets to defend, active countermeasures are essential.•  The short-term goal should be to closely monitor the direction in which the U.S. agrees on carbon prices in order to develop appropriate countermeasures, and in parallel, to encourage an accelerated decarbonization of the steel industry.  ReferenceBNEF. (2020). ‘Net-zero Steel and Recycling Beyond 2050’Climate Leadership Council. (2021). Leveraging a Carbon Advantage: Impacts of a Border Carbon Adjustment and Carbon Fee on the U.S. Steel Industry – Key Findings.En+Group. (2021). 『Korea's Progress toward Zero Carbon: The Transition to a Low Carbon Economy and the Role of Aluminum』European Aluminium. (2020). Circular Aluminium Action Plan.Hasanbeigi, A. and Springer, C. (2019). How Clean is the U.S. Steel Industry? Global Efficiency Intelligence.Interagency Working Group on Social Cost of Greenhouse Gases, United States Government. (2021). Technical Support Document: Social Cost of Carbon, Methane, and Nitrous Oxide Interim Estimates under Executive Order 13990.Jing et al. (2018). ‘Carbon intensity of global crude oil refining and mitigation potential’ Nature Climate Change. October 2018.Masnadi et al. (2018). ‘Global Carbon Intensity of Oil Production’ Science 361(6405). American Association for the Advancement of Science.Ponciano, Jonathan. (2021.07.18). ‘'Hell Yeah I Would Leave': Lindsey Graham Suggests Republicans Copy Texas Democrats, Flee Washington To Block Infrastructure Vote’. Forbes. https://www.forbes.com/sites/jonathanponciano/2021/07/18/hell-yeah-i-would-leave-lindsey-graham-suggests-republicans-copy-texas-democrats-flee-washington-to-block-infrastructure-vote/?sh=8f292cf4a988Pozzi, C. (2021.06.24). The EU Aluminium Industry at the Crossroads and the Need for an Effective Industrial Policy.Presentation.Reuters. (2021.06.14). ‘Europe carbon prices expected to rise to 2030-industry survey’ Reuters.The Aluminum Association. (2013). The Environmental Footprint of Semi-Finished Aluminum Products in North America.The World Bank. (2021). Preliminary Study on the economic impact that EU CBAM could potentially impose on foreign exporters of products to the EU market.U.S. Energy Information Administration. ‘U.S. Imports by Country of Origin’ accessed Aug. 11, 2021. https://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_epc0_im0_mbbl_a.htmWorld Aluminium. (2018). Adddendum to the Life Cycle Inventory Data and Environmental Metrics for the Primary Aluminium Industry.  

[Issue Briefs] From Renewable Energy 3020 to 3040

HIGHLIGHTS• The 3020 and 3040 renewable energy goals are both fully feasible assuming the potential renewable energy capacity. • While the price of renewable energy in Korea is currently high, it is expected to fall as the cumulative installation volume increases.• When the 3040 goal is achieved, the amount of energy increase compared to the present will be as follows: solar PV △ 31.3 won/kWh, onshore wind power △ 36.2 won/kWh, offshore wind power △ 64.4 won/kWh.• The government should lead a virtuous cycle by raising the renewable energy supply target to 3040 by 2030. 5% → 20% in 10 years• The most controversial topic surrounding carbon neutrality and energy conversion is definitely the proportion of renewable energy generation. The goal of generating 20% of renewable energy by 2030 has already been established three years ago ('renewable energy 3020 implementation plan'), but people are still discussing whether it can be accomplished. In fact, it seems a difficult task to quadruple renewable energy generation in the remaining 10 years of the plan, considering that the percentage of contributions to total power generation purely from renewable energy barely exceeds 5% (as of 2019). The two issues that are most frequently discussed in relation to raising the proportion of power generation are as follows: the first concerns whether it can be installed as much as the goal suggests, that is, the issue of renewable energy potential; the second concerns the high cost of renewable energy production, which will demand enormous amounts of resources. Goals for renewable energy 3020: High, but not too high• It is first necessary to check how much solar and wind power facilities are needed to meet the 3020 renewable energy target in order to determine whether the renewable energy potential is sufficient. The Renewable Energy 3020 Implementation Plan specifies that the cumulative installation of solar power and wind power capacities must be combined to reach 36.5 GW and 17.7 GW, respectively. According to the Korea Institute of Energy Research,potential renewable energy capacity is estimated to be 129 GW of solar power and 42 GW of wind power, which is sufficient to reach the goal of renewable energy by 3020. In order to reach 40% renewable energy generation by 3040, that is, 2030, the simple calculation shows that 73 GW of solar power and 35.4 GW of wind power will be required. Since this installation capacity target falls within the range of the potential capacity, doubling the target value is not an impossible or too far-fetched idea.• It is also important to consider that energy potential is not fixed, but may increase due to technological advancement and falling costs. In the case of petroleum, huge quantities of petroleum have been mined and used every year for decades, however due to technological advancements and reduced production costs, the amount of proved reserves is increasing every year. In particular, through the development of hydraulic fracturing, previously unusable resources have now been made available for use. Likewise, technological innovation can also enhance the potential of renewable energy sources such as solar power and wind power.The higher the goals, the lower the production costs• The unit price of renewable energy generation in Korea is very high compared to other countries (Appendix A). Except for Japan, both solar and wind power are the most expensive among major countries. because of this, there is a widespread concern that it will be expensive to generate electricity using renewable energy sources.Ironically, however, the unit cost of renewable energy generation can be lowered only if many renewable energy facilities are installed, despite the current high cost of renewable energy. The common perception is that with the development of technology, production costs will decrease over time, but it is difficult to see a drop in production costs if we simply wait for that "time."• The decline in production costs is, first of all, limited by the learning effect of the global market alone. For solar PV modules, it is true that the benefits of learning effects from worldwide cumulative solar installations can be enjoyed regardless of the amount of solar PV installations in Korea. Apart from that, balance of systems (BOS) and installation costs can only be reduced through local and national learning (Schaeffer et al., 2004). Historical data indicates that the proportion of module prices in the total Capex of solar power generation costs has decreased by nearly 30 percent from 55.7% in 2011 to 26.4% in 2020 (Figure 1). Therefore, even if solar cumulative installation increases globally, solar power generation costs will not drastically decrease if all other costs remain static. In the case of wind power, since turbines or blades are not yet a commodity traded in the global market, the importance of such local and national learning is even higher.• Moreover, the learning effect, which is the most important mechanism in lowering the unit cost of renewable energy generation, arises from accumulating technical knowledge through the process of producing and installing products, that is, renewable energy facilities. Technology that is not actually installed cannot go down the learning curve and lower prices, and technology cannot become competitive in terms of price only with research and development carried out in labs (IEA, 2000; Sagar & van de Zwaan, 2006). Thus, in order for Korea's renewable energy generation costs to decrease, its cumulative installation volume must increase. When reaching 3040, the Unit price of renewable energy generation when 3040 is achieved• A type of empirical law dealing with the cost reduction of technology through learning effects is known as the Learning Curve Method, and the rate at which unit production costs decrease as cumulative installed capacity doubles is called the learning rate (Tsiropoulos, et al., 2018). Using this model, the learning rate can be calculated using two time series of cumulative installed capacity and unit production costs, and assuming that the learning rate is constant, it is possible to project the decline in unit production costs resulting from growth in cumulative installation in the future. • This chapter examines the targets of the Renewable Energy 3020 Plan, as well as how much reduction in power generation unit prices would occur for each of solar, onshore wind, and offshore wind power when the 3040 target, which is double the 3020 target, is reached. The assumption is that renewable energy is installed in the same amount each year (Appendix B) and that costs other than capex remains unchanged. Since global solar power and wind power show learning rates of 20% and 10%, respectively (Tsiropoulos et al., 2018; EIA, 2021), this study assumed that the above-described learning rate would remain unchanged during the analysis period.• A widely known measure called Levelized Cost of Energy (LCOE) was used to calculate power generation costs, which is a value equalized by dividing the total cost required for the lifetime of the generator by the total amount of power produced during that lifetime. As there may be differences in computation values depending on the items included or the inputs selected in LCOE calculation, it is appropriate to consider the calculated LCOE figures and the items and assumptions included to calculate that figure as a whole rather than simply focusing on the LCOE figures themselves. For instance, even though Lee Keun-dae& Kim Ki-hwan (2020) and IEA (2020) both published LCOE data in the same year, their values differ significantly (see Table 1).  • Lee Keun-dae& Kim Ki-hwan (2020) has a 100kW class solar power generation LCOE of worth 169.8 won/kWh (discount rate of 5.5%), while in IEA (2020), a 100kW class solar power generation LCOE is worth 108.0 won/kWh (discount rate of 7%). In both data sets, plant-level costs that are typically included in LCOE analysis ranges were calculated. As studies done in Korea usually rely on data published by the Korea Energy Economics Institute, this report examined the LCOE decline as a result of an increase in cumulative installation for 1MW solar power and 20MW onshore wind power LCOE in Lee Keun-dae& Kim Ki-hwan (2020). This report did not separately calculate the LCOE for offshore wind power, but instead applied the IEA's (2020) ratio of onshore wind to offshore wind for each of LCOE and capex in order to examine the LCOE decline for the same scale of offshore wind power. Following are the results of estimating the LCOE of solar and wind power in Korea using the most commonly used one-factor learning curve model (Appendix C) (Figures 2 and 3). 2020 → 2030: Solar△31.3 won/kWh, onshore wind △36.2 won/kWh, offshore wind △64.4 won/kWh• Under the RE3020 scenario, as the cumulative installation volume increases, the LCOE for solar power in 2030 falls by KRW 18.9/kWh, for onshore wind power by KRW 29.3/kWh, and for offshore wind power by KRW 52.1/kWh, respectively, compared to 2020 (Figure 2). Solar, onshore, and offshore wind power LCOE drop even further in the RE3040 scenario, becoming 31.3 won/kWh, 36.2 won/kWh and 64.4 won/kWh, respectively. This amount of reduction is 1.2 to 1.7 times that of the RE3020 scenario. Specifically, in the 3040 scenario, the LCOE of onshore wind power will be less than 100 won per unit kWh, and the LCOE for offshore wind power will be 66% in 10 years, all of which will secure considerable price competitiveness. The decline in LCOE means that even if the same amount of renewable energy facilities is installed each year, it will cost less (excluding system costs). Renewable energy facilities can be installed for about 30% less than in 2020 if the RE3040 target is achieved. As for coal-fired power or LNG power generation, the learning potential is low because decades have already passed since the technology was commercialized, and unit prices of power generation will increase compared to the present due to the environmental costs caused by various regulations. Accordingly, if the 3040 target is achieved, renewable energy will be competitive in price against traditional power sources, and as in other developed countries, the subsequent energy conversion based solely on price will inevitably lead to the fossil fuel sources being displaced from the energy market.  Virtuous cycle must be sought by raising the goal of renewable energy capacity• The cost of solar PV installation has declined to 38% of what it was 10 years ago (Figure 1). It is true that efficiency improvements due to technological innovation played a role in the decline in costs, but ultimately, it is the deployment in practice that provides the economic capacity for companies to innovate, as well as clues to technological innovation such as process improvement. In recognition of this importance, IEA also stated that technologies learn through the market, and emphasized that purchasing and installing low-cost energy sources should be viewed as a learning investment (IEA, 2000).• In the next 10 years, there will be a lot at stake. In light of the limited carbon budget, this period is even more important. With faster decarbonization in the conversion sector, not only will carbon budgets be saved, but international competitiveness in the industrial sector will also be strengthened, and essentially, renewable energy will have its own price competitiveness. Most importantly, 3040 is a very realistic goal that is within the range of potential capacity already identified. Consequently, the government should raise its 2030 renewable energy capacity goal to 3040 and create a virtuous cycle where price declines are accompanied by more renewable energy installations.Appendix• A. LCOE by country (Discount rate 3%) (IEA, 2020)   Reference• Ministry of Trade, Industry and Energy. Renewable Energy 3020 Plan (2017.12)• Ministry of Trade, Industry and Energy. The 3rd Basic Energy Plan (2019.6)•  Ministry of Trade, Industry and Energy. The 5th Basic Plan for New and Renewable Energy (2020.12)• Korea Power Exchange (2018). A Study on the Calculation of Levelized Cost of Electricity by Power Generation Source.• Lee Keun-dae & Kim Ki-hwan. (2020).Establishment and operation of a mid- to long-term Levelized Cost of Energy (LCOE) Forecast System to Expand the Supply of Renewable Energy(1/5). 2020-21 Basic Research Report of Korea Energy Economics Institute.• International Energy Agency (2000). Experience Curves for Energy Technology Policy, IEA, Paris.• International Energy Agency (2020). Projected Costs of Generating Electricity 2020, IEA, Paris.• Sagar, A. D., & Van der Zwaan, B. (2006). Technological innovation in the energy sector: R&D, deployment, and learning-by-doing. Energy policy, 34(17), 2601-2608.• Schaeffer, G.J., Alsema, E., Seebregts, A., Beurskens, L., de Moor, H., van Sark, W., Durstewitz, M., Perrin, M., Boulanger, P., Laukamp, H., Zuccaro, C., 2004. Learning from the Sun – Analysis of the Use of Experience Curves for Energy Policy Purposes: The Case of Photovoltaic Power. Final Report of the Photexp Project. ECN, Petten.• Tsiropoulos, I, Tarvydas, D, Zucker, A, Cost development of low carbon energy technologies - Scenario-based cost trajectories to 2050, 2017 Edition, EUR 29034 EN, Publications Office of the European Union, Luxembourg, 2018, ISBN 978-92-79-77479-9, doi:10.2760/490059, JRC109894.• U.S. Energy Information Administration. Assumptions To AEO2021 – Electricity Market Module. (Released at Feb 3, 2021. Available online: https://www.eia.gov/outlooks/aeo/assumptions/   

[Issue Briefs] Green Bonds? Ask Us Anything

Green Bonds? Ask Us AnythingInterest in Green Bonds is on the rise. A total of 12.624 trillion won in green bonds have been issued so far since the Korea Development Bank first issued green bonds in 2018. The green bond market is expected to grow further as interest in climate finance and ESG investments increases. However, the terms such as green bonds, ESG bonds, and socially responsible investment bonds are used interchangeably, causing confusion. This report is for those who have heard of green bonds but are unfamiliar with them yet are curious about how they are issued, how much they return, and whether there is a possibility of greenwashing.  Q1. What is the definition of green bonds? How is it different from ESG bonds and climate bonds?Climate bonds ⊂ Green bonds ⊂ ESG bondsThe Korea Stock Exchange (KRX) refers to Green Bond, Social Bond, and Sustainability Bond collectively as “Socially Responsible Investment Bond”.  Also, socially responsible investment bonds are often referred to as ESG bonds in various research reports and media press releases. In other words, ESG bonds encompass a broader concept than green bonds. However, ESG bonds and socially responsible investment bonds are not synonymous. According to the International Capital Markets Association (ICMA) (2021, a), ESG bonds differ from socially responsible investment bonds in that they cover governance items that are not covered by GBP, SBP, and SBG (each of which is defined later) and that they are used to strengthen the overall sustainability of issuers rather than specifying the purpose of fund utilizationThen, what are the green bonds? [Table 1] shows the definitions of each bond in the Korea Stock Exchange's segment operation guidelines for socially responsible investment bonds. However, [Table 1] does not immediately make clear what the difference between bonds is. In order to accept this, it is necessary to understand the relevant international standards.Currently, there is no single international standard for defining and issuing green bonds. Instead, several well-known standards can be referenced, such as the Green Bond Principle (GBP) of the International Capital Market Association (ICMA), Climate Bonds Standard (CBS) of Climate Bonds Initiative (CBI), and EU Green Bond Standard of the EU Technical Expert Group (TEG). Among them, ICMA's GBP served as the basis for the Green Bond Guidelines (hereinafter referred to as “GBG”) developed and released by the Ministry of Environment of Korea in December 2020. Green bonds are debt securities that meet the four key elements of GBP, which is the criteria, while recruiting investors for the purpose of financing/borrowing projects with clear environmental benefitsThe ICMA presents the concepts of green, social, sustainability, and sustainability-linked bonds as a means of inducing a transition to a sustainable economy and defines each as shown in [Table 2]. In summary, if a bond meets the four key elements of GBP standards, while attracting investors for projects with clear environmental benefits, such as spreading renewable energy, improving energy efficiency, building a circular economy, and preserving biodiversity, it is named green bond. If a bond meets SBP while attracting investors for the purpose of solving or easing specific social problems such as building basic infrastructure, creating jobs, and strengthening food security, it is called social bonds. If a bond meets both GBP and SBP while attracting investors to satisfy the purposes of green and social bonds at the same time, it is called sustainability bonds.  Among the sectors of socially responsible investment, CBI, which focuses on green bonds, also defines the green bonds as debt securities that are issued only for the purpose of financing or refinancing new/existing green projects and are in line with the four key elements of GBP. In addition, green bonds certified by the Climate Bonds Standard Board for meeting the CBI's Climate Bonds Standard (CBS) are called Certified Climate Bonds.Summarizing, ESG investment is being used for sustainable finance, and ESG bonds encompass governance issues along with environmental and social issues, and are used interchangeably with SRI bonds in Korea. Based on the concept of ICMA, the Korea Stock Exchange classifies socially responsible investment bonds into three categories: green bonds, social bonds, and sustainability bonds, of which green bonds refer to debt securities raised or refunded to finance (qualified) green projects. Additionally, only those green bonds that are certified by the Climate Bond Standards Board can be called certified climate bonds. Q2. Are green bonds different from general bonds in the financial market?Among the bonds traded in the financial market, some qualified bonds are labeled green bonds.Green bonds are similar to general bonds in that they are issued for the purpose of raising borrowed capital; but whereas general bonds have no significant restrictions on the use of proceeds, green bonds must be used for (qualified) green projects. In other words, those bonds that have been verified or certified to qualify for the general bond market are traded under the name of green bonds. Accordingly, procedures such as verification and post-reporting by external evaluation agencies have been added to the process for issuing green bonds. Green bonds and other general bonds that do not comply with socially responsible investment principles, such as GBPs and GBGs, cannot be interchangeably used​Below, an actual case of Hyundai Steel Co. is examined to enable a better understanding of the concept Hyundai Steel raised a total of 500 billion won by issuing unguaranteed bonds of 132-1, 132-2, and 132-3 in January 2021, and a total of 550 billion won by issuing unguaranteed bonds of 128-1, 128-2, 128-3, and 128-4 in January 2020. Credit ratings for both are AA, but only the non-guaranteed bond 132-1 issued in 2021 is classified as a green bond. The bonds’ characteristics associated with classification can be found in the publicly disclosed securities report data attached (Preliminary Investment Manual-Purposes of Fund Use). Hyundai Steel stated that non-guaranteed bonds of 132-1,2,3. were issued to finance investment in facilities for reducing carbon emissions and air pollutants, that the said bonds qualified as green bonds under GBP and that the purpose of using funds was to support eco-friendly green businesses. Furthermore, the company mentioned its green bond management system had been verified by an external rating agency (Korea Investors Service) as conforming to GBP, attaching documents as proof. Nevertheless, in the case of 128-1,2,3,4 non-guaranteed bonds that are not green bonds, it was stated and publicly announced that the majority of these funds will be used to renew existing bonds, and part of it will be used as operating funds, such as for repaying the import loan. Who then decides whether a bond is a green bond and based on what criteria? This is answered in the next question, Q3.Q3. How is it decided whether a bond is a green bond?If the green bond management system is certified by an external agency to conform to the social investment bond principles recognized by the exchange, the issuer can issue green bonds autonomously.An issuer determines whether to issue green bonds voluntarily, and if it decides to issue green bonds, it must develop a green bond management system according to GBP (Green Bonds Principle, ICMA) or GBG (Green Bonds Guideline, Ministry of the Environment). Moreover, external agencies should verify, certify, or evaluate that the issuing company’s green bond management system is compliant with GBP or GBG. As soon as the external agencies disclose the results of the verification, certification, and evaluation, the issuer proceeds with general bond issuance procedures, such as submitting securities reports and forecasting demand. Hence, for the issuance of green bonds, an appropriate "green bond management system" must be in place and verified by an external agency.The green bond management system must include the following four core components, and third-party institutions review/certify/evaluate whether the system’s four core elements meet the standards, such as GBP or GBG.  Who is the external agency that verifies these? Currently, GBG of the Ministry of Environment mentions that accounting firms/credit rating agencies/consulting companies/research institutions with expertise in evaluating sustainability can conduct external reviews, but the definition and requirements for evaluating sustainability are not specified. Considering the importance of the role of external agencies in verifying or certifying standards for green bonds issuance, it is critical to discuss whether their expertise and system are sufficient. Let's look at the green bond management system and examples of verification by external institutions. Korea Southern Power Co. Ltd.’s green bond management system (issued green bonds in September 2018) states the following key elements. (Partial excerpt from Korea Southern Power's green bond management system)   Approval of execution of green bond issuance cost is limited to (1) projects that are launched within two years of the date of issuance, (2) projects that start after the date of issuance, (3) refinancing and additional investment of projects that are completed prior to the date of issuance, and (4) purchases of new and renewable energy certificates made after the date of issuance.The department in charge of funds may operate unused portions of the issuance costs as cash, cashable assets, or short-term financial instruments in accordance with internal fund management regulations.②    ReportingThrough the company's website, the company plans to release "Notice for Investors" on an annual basis, which will include information about how green bonds' issuance cost is used and their effectiveness. The following information is contained in the annual investor notices, which are distributed from the date of issuance until the issuance costs are exhausted.- Amount of support for the project (proportion of the total issuance cost, %)- Information related to the support project (business name, business period, total project cost, facility capacity, power generation amount)- The total used and unused amount of the green bond issuance cost- Annual CO2 and fine dust reduction related to the amount of used green bond issuance cost- Annual RPS performance results Korea Southern Power received a second opinion on the green bond management system from CICERO, a Norwegian climate research institute. CICERO stated that "this opinion is limited to evaluating the mechanism or management system for selecting eligible projects at a general level" and that it is "not intended to verify or certify the climate impact of a single project."CICERO stated that Korea Southern Power has a detailed and fine management system for climate-friendly investments in general. Typically, The CICERO's opinion suggests a 'shade of green' by assessing whether a project can contribute to the establishment of a low-carbon society in the long term, while preventing the lock-in effect of carbon emissions. In relation to that, CICERO has presented a "medium green" opinion on Korea Southern Power's green bond management system. This is because the fuel cell technology Korea Southern Power Corporation has proposed as a source of funding is considered a "bridging technology. Q4. If green bonds are issued, do they sell well? Do they yield a higher return than regular bonds?The issuance of domestic green bonds is concentrated on blue-chip companies, which makes recruiting investors easier. In the international market, ESG investments are in high demand, so it is deemed that supply is rather inadequate.Companies with excellent credit ratings are more likely to issue green bonds in Korea, with the those with AA to AAA credit ratings accounting for about 69.2% (94.2% if A grade is included) of 52 issuers who issued green bonds in KRW by July 2021.In addition, the demand for green bonds is expected to remain favorable as domestic pension funds and mutual aid associations, including the National Pension Service, have recently announced plans to expand ESG-related investments. According to many analysts, there are "Greenium, Green+Premium" in foreign countries, which are green bonds issued at lower interest rates (high prices) than general bonds in reflection of supply and demand conditions.As a result of CBI (2021, a) drawing a yield curve for 33 of the 54 new green bonds issued in the second half of 2020, it is found that a total of 19 cases were issued below the field curve and 7 cases were issued above the field curve. If the issuer, terms of issuance, and maturity are the same between the general and green bonds, there is no theoretical basis for green bonds to be issued at lower interest rates than general bonds. However, it can be found in actual issuance cases in both Europe and the US, and is known as "GREENIUM," which combines the terms green and premium. Presumably, this phenomenon is attributed to the fact that demand for green bonds has exceeded supply (bond issuance) that there is demand to buy green even if there are extra costs to do so.Since there are not enough green bonds issued in the Korean market, it is yet difficult to determine whether 'greenium' would take place. If, however, demand for green bonds exceeds supply as the ESG investment trend expands, as in overseas cases, greenium may result. As the supply and demand environment improves in the mid-term, greenium is likely to shrink or disappear. Q5. Is the green bond really "GREEN"? Is there a possibility of greenwashing?principles and guidelines related to the issuance of green bonds are not legally binding, so a possibility of green washing existsInternational organizations and the Ministry of Environment have established principles and guidelines concerning the issuance of green bonds, but since they are only recommendations that are expected to be followed assuming voluntary participation by the issuer, they are not legally enforceable. In other words, just because the funds are not used as planned after the issuance of green bonds, it does not necessarily result in penalties related to events of default. Thus, greenwashing is still possible. In the absence of legal or institutional regulations as such, investors need to take an active role to minimize the possibility of greenwashing. The following contents should be carefully examined and checked both during the stage of determining investments in green bonds as well as after the investment has been completed. 1)    Is the investment really made for a green cause?A green bond management system that specifies how proceeds are used, as in the case of Korea Southern Power discussed in Q3, certainly helps determine investments, however, many systems fail to do so. Unlike credit ratings, external verification/certification for the green bond management system is not required for every issuance (public offering). Hence, if the management system is comprehensively written and verified/certified by external institutions, then it can easily be used without any further verification of the green bonds’ eligibility for use. This is the exact point at which green washing could occur.Korea South-East Power, on July 26, 2021, issued unguaranteed 50-1 and 50-2 bonds (green bonds) for the purpose of investing in coal-fired power plants for environmental protection. The installation of desulfurization facilities, DeNOx facilities, and dust collection facilities is regarded as a green project as far as improving air quality, but there are risk factors that could lead to a lock-in effect of greenhouse gas emissions over time. Some regard the implementation of environmental investment funds as additional capital expenditures and as a basis for ensuring the longevity of coal-fired power plants. Even so, Korea Investors Service, an external evaluation agency, awarded the highest rating of E1 (excellent) for the "plan to input proceeds and project eligibility", and the final rating was given the highest rating of "GB1" in consideration of the "management, operating system, and transparency" review. Korea Investors Service responded that the positive effect outweighed the negative effect when considering a step-by-step closure plan for coal-fired power plants and the rational reduction strategy of fine dust based on the age of the power station facilities. Although this opinion seems reasonable at first glance, given that green bond issuance activities are being promoted by a number of media outlets as part of ESG management activities, it is doubtful whether public awareness will consider the details of the project as a green investment that is "excellent" enough.  Accordingly, domestic credit rating agencies not only examine the GBP or GBG of the green bond management system but also the specific use of proceeds for each case of green bond issuance and use the method of scoring project eligibility. These measures can contribute to preventing greenwashing. However, these alone are not enough. This is because the judgment as to whether the bond proceeds will be sufficiently invested into green-enough projects is ambiguous. Is the investment in the installation of desulfurization facilities in coal-fired power plants considered a green-enough project?Korea South-East Power, on July 26, 2021, issued unguaranteed 50-1 and 50-2 bonds (green bonds) for the purpose of investing in coal-fired power plants for environmental protection. The installation of desulfurization facilities, DeNOx facilities, and dust collection facilities is regarded as a green project as far as improving air quality, but there are risk factors that could lead to a lock-in effect of greenhouse gas emissions over time. Some regard the implementation of environmental investment funds as additional capital expenditures and as a basis for ensuring the longevity of coal-fired power plants. Even so, Korea Investors Service, an external evaluation agency, awarded the highest rating of E1 (excellent) for the "plan to input proceeds and project eligibility", and the final rating was given the highest rating of "GB1" in consideration of the "management, operating system, and transparency" review. Korea Investors Service responded that the positive effect outweighed the negative effect when considering a step-by-step closure plan for coal-fired power plants and the rational reduction strategy of fine dust based on the age of the power station facilities. Although this opinion seems reasonable at first glance, given that green bond issuance activities are being promoted by a number of media outlets as part of ESG management activities, it is doubtful whether public awareness will consider the details of the project as a green investment that is "excellent" enough.  The Ministry of Environment is preparing a Korean-style classification of green activities (K-taxonomy) to distinguish between green and non-green activities, which will be announced sometime this year. The K-taxonomy may be set up inclusively to encompass as many investment activities as possible without significantly impairing industrial or economic activities, so the burden of determining whether bonds are green enough is still on investors.2)    Are follow-up reports transparently conducted?According to Korea's green bond guidelines, a report on allocated proceeds must be prepared annually until the issuance cost has been fully distributed, and an impact report must be prepared and disclosed at least once after the issuance cost has been fully distributed.In the CBI (2021, b) analysis of 694 green bonds issued between November 2017 and March 2019, 78% of 694 green bonds showed good disclosure practices, such as disclosing at least one Allocation Reports or Impact Reports. The number has improved since the time of analysis in 2019, but the comparability is still limited due to the inconsistencies and the quality of the individual reports. In its report, CBI (2021, b) emphasized the need for a globally consistent and integrated sustainability reporting framework, such as that laid out in the EU's Non-Financial Reporting Directive (NFRD)  In Korea, 6 out of 18 green bonds with issuance periods exceeding 6 months have not been disclosed (as of July 27, 2021)In Korea, the first green bond in KRW was issued only in May 2018, and the number of green bonds with an issuance period exceeding one year is very limited, making it difficult to conduct statistical analysis as CBI (2021) did. This paper examined only the status of post-reporting, including bonds more than six months after issuance, and the results are given in Table 8.There are a total of 18 bonds subject to analysis, with a total of 14 issuers and 4.3 trillion won in issuance.Among the 18 issued bonds, nine bonds issued by financial institutions such as banks and capital companies have completed reports of proceeds allocation and environmental impact. In contrast, energy companies are somewhat reluctant to post-report, and GS Caltex (refinery) and TSK Corporation (waste treatment) did not disclose their allocation reports, despite their bonds being more than a year old. Furthermore, Korea South-East Power has not published an environmental improvement impact report, and SK Energy has written qualitatively about the impact of environmental improvement, so it is difficult to understand exactly how much net impact will be on the environment. There is some doubt, however, that greenwashing is taking place since the number of bonds whose issuance has exceeded one year is not very large, and the market and system have yet to settle down, requiring continuous monitoring and analysis. Furthermore, Korea also needs to standardize the disclosure method to increase the comparability between companies and bonds.   ConclusionKorea's green bond market is still very young, so there are many institutional shortcomings. The Next Group believes that green bonds will serve as an important financing tool for companies to invest in the environment, as an investment means for investors, and as an economic means that help to build a sustainable social system in the country. Growing in the right direction requires the attention, surveillance, and checks of many people from the early stage. As part of contribution to that, NEXT Group strives to deliver information about the green bond market and work to help those unfamiliar with green bonds become knowledgeable with green bonds, so that they will be able to voice their opinions as stakeholders for a sounder market formation   ReferenceB ondweb, bondweb.edaily.co.krKorea Exchange Socially Responsible Investment Segment, https://sribond.krx.co.kr/index.jspClimate Bonds Initiative (2019), Climate Bonds Standard Version3.0, Dec 2019Climate Bonds Initiative (2021, a), Green Bond Pricing in the primary market: July-December 2020, March 2021Climate Bonds Initiative (2021, b), Post-issuance reporting in the green bond market, May 2021International Capital Market Association (2020), Sustainable Finance: High-level definitions, May 2020International Capital Market Association (2021, a), Guidance Handbook, June 2021International Capital Market Association (2021, b), Green Project Mapping, June 2021Korea Exchange, Securities Market Headquarters Bond Market Department, Korea Bond Market, Knowledge and Sensibility Publishing, ISBN 979-11-6275-461-0 Appendix1. Bond-related terms(Korea Bond Market (Korea Exchange), excerpt from bondweb.edaily.co.kr)①    BondAs a promissory note issued by the bond issuer for the purpose of raising funds, it promises to pay the bondholder a fixed amount (interest and principal) on a fixed date (interest payment date and repayment date). Bonds are also called fixed income security because future cash flows are determined in advance.  ②    Primary marketIt is a market in which issuers (or proceed consumers) such as the government or businesses issue bonds to provide them to investors (or proceed providers) and receive proceeds. Issuers of bonds include governments, local governments, corporations established under special laws, financial institutions, and corporations, and this has important implications because bond terms and investment risks vary depending on the issuer.③    Secondary marketIt refers to a market in which bonds already issued are traded between investors. While the issuance market is an indirect market, the distribution market is a continuous, specific, and organizational market, and increases the marketability and liquidity of bonds issued in the issuance market. The price set in the distribution market is an indicator of the price of new bonds to be issued in the future.④    Yield CurveThis refers to a curve that links the interest rate by maturity to similar bonds issued by an issuer with the same credit rating at a given point in time. This is collectively known as Term structure of interest rates based on difference in maturity.Appendix 2. Original text of the ICMA definition by sustainability financial bonds Appendix3. The four key elements of the green bond management system①    Use of Proceeds  Green bond proceeds should be used for eligible green projects, and all eligible green projects should have obvious environmental benefits. In addition, the benefits will be evaluated by the issuer and quantified if possible. GBP presents several broad categories of eligibility for green projects to enable contribution to environmental goals such as "relieving climate change, adapting to climate change, preserving natural resources, conserving biodiversity, pollution prevention and control." Qualified green project categories are as follows but are not limited thereto.Renewable energy / Energy efficiency / Pollution prevention and control / Environmentally sustainable management of living natural resources and land use / Biodiversity conservation / Clean transportation / Sustainable water and wastewater management / Climate change adaptation / Eco-efficient and/or circular economy adapted products, production technologies and processes / Green buildings②    Project evaluation and selection procedures  The issuer of green bonds should clearly inform investors of the following ③   Management of ProceedsA green bond's net raised amount or equivalent should be attributed to the appropriate sub-account or sub-portfolio or tracked in an appropriate manner so that the issuer can prove its loan and investment activities for eligible green projects through formal internal processes. In addition, GBP recommends that the issuer's fund management be reinforced through external audits or verification by third-party organizations.Until the time of repayment of green bonds, the balance of the net raised amount should be adjusted periodically to match the level of eligible green project allocation. The issuer must inform the investor of the temporary operation of the unused balance. The procured proceeds for green bonds may be operated based on a single bond (bond-by-bond approach) or by combining multiple green bonds (portfolio approach).④   ReportingThe issuer must update information on the use of procured proceeds annually until all proceeds are executed. The annual report should include a list of projects to which green bond proceeds are allocated, a project overview, the allocation amount, and expected effects. However, if restrictions on information disclosure exist due to confidentiality obligations, competition, and a large number of underlying projects, GBP recommends expressing information on a portfolio basis.Appendix 4. Status of issuance by socially responsible investment bond in Korea (As of July 26, 2021) 

[Issue Briefs] A Proposal to Introduce Climate Change Impact Assessment Contributing to Reduced Greenhouse Gas Emissions

Highlights •        The Framework Act on Carbon Neutrality and Green Growth for Coping with Climate Crisis presents climate change assessment (Article 23) as a measure to reduce greenhouse gas, and this scheme is planned to be enforced in September 2022 after the promulgation of the Enforcement Decree in March 2022.•        Climate change impact assessment is expected to be conducted in practice organically in connection with the current environmental impact assessment.•        While there is the continuous criticism that environmental impact assessment is merely a formality, we propose that climate change impact assessment clarifies and operates the following three points in an enforcement decree or assessment guidelines to overcome the limitations of environmental impact assessment:-        First, predict the effect of long-term emissions for at least 20 years and establish a mitigation plan, considering the permanent effect of greenhouse gas emissions from projects subject to climate change impact assessment;-        Second, put in place a follow-up verification system to periodically investigate actual emissions after the completion of projects; and-        Third, specify a mechanism to determine consistency with the goals of the national vision or related local governments

[Issue Briefs] Issue Brief EU Carbon Border Adjustment Mechanism Finally Revealed

HIGHLIGHTSThere are fewer obligations than expected. It appears to be a measure to minimize the risk of major trading partners' backlash and WTO complaints.In the pilot period from 2023 to 2025, no carbon border adjustment tax will be collected, and only the amount of emissions for the product will be reported. From 2026, the obligation to pay goes into effect, and the price of emissions is based on the EU-ETS price.Until 2026, indirect emissions from power use are excluded from the calculation of emissions.Taxes on carbon border adjustment can be discounted as much as the carbon costs paid through emission trading systems or carbon taxes within the country of origin. EU CBAM at a Glance •  The European Commission announced the Fit for 55 bill package on July 14, 2021. A final implementation plan for the EU Carbon Border AdjustmentMechanism (CBAM), one of the packages, is also unveiled.  Weaker than expected, but intensity will gradually increase • Overall, the scope of obligations has been reduced compared to what was discussed so far. This appears to be a measure to prevent major trading partners from backlashing and filing a WTO complaint. - During the pilot period from 2023 to 2025, there is an obligation to report emissions, but there is no obligation to pay expenses. - During this period, indirect emissions from power consumption (Scope 2) is excluded from emissions calculation. • During the pilot period, Korea sees no immediate impact, other than the administrative burden, which means the shock on export price competitiveness has been suspended until 2026. • The free allocation ratio applied to producers in the EU will also apply to imports, but the EU-ETS plans to reduce the 100% free allocation ratio allowed to the CBAM industry by 10% every year starting in 2025, until it is 0% by 2035. - Imported goods subject to CBAM will also be affected by the reduction of EU-ETS free allocation. • Scope 2 emissions have been discussed continuously, so despite being excluded during the pilot program, they will likely be included from 2026 and onwards.   Then, how should we prepare? Emission trading is not always the best solution. Korea must ensure that carbon costs are actually paid within its borders… • To reduce CBAM costs, it is necessary to prove that carbon costs have been paid within the country of origin and that they have not been compensated or refunded during the export process. • It does not mean that exemption can be granted merely because Korea's emission trading system is in place, but that it can be reduced or exempted based on the actual carbon price paid by the company.• Under Korea's current emission trading system, even a company with large emissions rarely purchases carbon credits for a fee as more than 90% free allocation and excessive allocation are available.- The carbon credit free allocation surplus between 2015 and 2019 is 14.04 million tons for POSCO and 1.5 million tons for Samsung Electronics.This means that the emission allowance allocated by the state is higher than the actual emissions. Therefore, the cost paid by the two companies for emissions is 0 won, and the sale of carbon credits can rather result in profiting. •      In order for companies to avoid having to pay carbon costs at the EU border, it is imperative that the actual carbon costs paid by companies are rationalized by reducing the total quota of the current emissions trading system and adjusting the free allocation ratio.   Reference Shin Dong-yoon& Yeon Da-hye. (2021). “Project 1.5°C: Broken emission trading system... Companies that made money by emitting greenhouse gases.” Newstapa. 2021.03.11. web. https://newstapa.org/article/eRQBR European Commission. (2021a). Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757. European Commission. (2021b). Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing a carbon border adjustment mechanism. 

[Issue Briefs] Declining LCOE of Renewable Energy – What Measures Can the Government Take?

1. A major factor in achieving carbon neutrality is the decline in the unit cost of renewable energy generation•    At the end of last year, the "2050 Carbon Neutral Promotion Strategy" was adopted, followed by the 9th Basic Plan for Electricity Supply and Demand and the 5th Basic Plan for Renewable Energy, with new and renewable energy generation goals of 20.8% (2030) and 25.8% (2034), respectively. Aside from the question of whether these goals aresufficient to achieve carbon neutrality by 2050, it is clear that achieving this intermediate goal will not be easy given that the new and renewable energy generation in 2019 accounted for only 5.62% of total generation.[1]  Furthermore, there is a plan to increase 2030 nationally determined contribution (NDC) within this year, so it will be necessary to continue pushing for carbon neutrality.  •     Due to the difficulties involved in energy conversion and the extremely high costs associated with it, such as in the industrial sector, the conversion sector is the one most in need of achieving carbon neutrality. It is also within this sector that carbon neutrality can be achieved at a relatively low cost. Above all, there is an alternative called renewable energy. The decarbonization of the conversion sector will improve overall industrial export competitiveness by reducing greenhouse gas emissions as well as Scope 2 emissions.  •   Despite many policy attempts over the past two decades, grid parity remains a distant dream. This is evidenced by the relatively low proportion of renewable energy generation at 5% as mentioned above, as well as the reversal of the growth of new and renewable energy companies and their employees as of 2019 as compared to 2018, at 9.5% and 4.8%, respectively. A slow rise in renewable energy installations due to high unit cost of power generation, so-called the “levelized cost of energy” (LCOE), leads to additional unit generation costs dropping slowly as a result of technological learning. slow reduction in unit generation costs of generation drop due to technological advancements. This creates a vicious cycle in which the government's goal of providing renewable energy is further delayed by impeding the profitability of renewable energy generation projects. In contrast, if the cost of renewable energy generation falls, the business feasibility of the project increases, resulting in a greater amount of renewable energy installed and lowering the generation unit cost again through learning effects. Therefore, the most important and urgent goal for the government at this point is to bring about a decline in the unit generation cost of renewable energy, thereby leading to a virtuous cycle. 2. Solar and wind power LCOE as of 2020: A Snapshot •     Levelized Cost of Energy (LCOE) is calculated by dividing the total cost required for the life of a generator by the total amount of power generated during that period. In addition to LCOE, other methods have been developed to measure the unit cost of renewable energy generation, and LCOE has its own limitations; however, LCOE is the most intuitive and straightforward way to calculate and compare renewable energy unit costs. Figure 1 shows the LCOE of solar and onshore wind powers in Korea as of 2020. The LCOE includes capital expenditures (CAPEX), operating expenditures (OPEX), land costs (LAND), financial costs and corporate taxes (Taxes).   •     According to Figure 1, CAPEX accounts for the largest share of both solar and wind power, which are a single item on all scales. This indicates the characteristic that, despite renewable energy's large initial investment cost, it does not require fuel costs for energy production. In the case of solar power, land cost and finance cost are both 10%, while OPEX is 15%. In onshore wind power, land costs are minimal, but OPEX and financing costs are high. Onshore wind power's high OPEX is attributable to the direct employment of electrical safety managers.    3. What measures can the government take   3.1 CAPEX•   CAPEX accounts for the highest proportion (more than 60%) in LCOE of solar and onshore wind power, so lowering CAPEX would help to effectively reduce LCOE. The learning effect is the most important mechanism driving the decline in CAPEX. The learning effect is a phenomenon in which productivity increases and unit costs decrease because of learning-by-doing in production, economies of scale, and standardization as the cumulative installation capacity increases.The rate at which the price of technology decreases each time installation capacity doubles is called the learning rate,[5] and the higher the learning rate, the greater the cost reduction for the same increase in installation capacity. In contrast, even with the same learning rate, if the cumulative installation capacity increases significantly, the cost decreases significantly. Additionally, even if the existing learning rate is high, if the cumulative installation capacity does not increase further, the price does not decrease over time.  •   The methodology for estimating the cost of technology using the learning rate is called the Learning Curve Methodology. In this paper, the estimated LCOEs for the three scenarios (Base, High, Low) were calculated by applying the univariate learning curve methodology on the goals for solar and wind power installation recently announced in the 9th Basic Plan for Electricity Supply and Demand and the 5th Basic Plan for Renewable Energy in Korea and the historic data of direct investment costs (Figure 2). All remaining values other than CAPEX were assumed to be fixed during the analysis period. For the assumptions and basic data needed to calculate LCOE, Lee Keun-dae& Kim Ki-hwan (2020) of the Korea Energy Economics Institute was used. The LCOE value may vary if assumptions and basic data are changed.  •     In solar power, although there are slight differences based on the size, it is expected that even in 2050, power generation costs per kWh will range from 89 to 113 won/kWh. Particularly in the case of onshore wind power, the learning rate is lower than that of solar power, so only a very modest level of unit price decline is possible. According to the IEA's Projected Costs of Generating Electricity 2020 Edition published every five years,onshore wind LCOE in Belgium, Denmark, and Finland in 2020 is 78.33, 29.18, and 44.88 USD/MWh (86.2, 32.1, 49.4 won/kWh), respectively. This means that even if all the current national renewable energy installation targets are met, the decline in CAPEX by 2050 through learning effects will not be sufficient.  •      The following reasons explain why the decline in CAPEX due to learning effects cannot be relied upon entirely:  •    1) It takes a long time. Prices only fall after all the required installations have been completed, as described above.  •     2) There is uncertainty about the learning rate. In general, learning speed slows down as technology advances. Thus, the U.S. EIA concluded, when estimating the unit generation cost, that learning potential gradually decreased, and divided the period into three, and applied different (decreasing) learning rates to each (EIA, 2020). In this paper, it was determined that Korea still has a high generation cost and thus a high learning potential, so a fixed learning rate was applied.  •    3) There is uncertainty about the price of raw materials. As can be seen from the solar power case, in which module prices have increased due to the recent rise in silicon costs (Figure 3), CAPEX may not fall or slow down despite the learning effect. Raw materials such as steel, aluminum, and copper, which are the main materials of wind power generators, may not be able to fully benefit from learning because prices may rise due to increased demand when the global economy is recovering from COVID-19.  •   4) For amplifying the CAPEX declineby way of learning effects in policy, the target for renewable energy installation should be significantly increased. However, whether renewable energy installation goals can be raised further is not easy, and there are limitations when considering the domestic renewable energy market and social acceptability.  •    Taken together, the decline in CAPEX due to learning effects cannot be solely attributed to the decline in power generation unit prices, thus it is essential to implement additional policy measures to create a virtuous cycle of lowering power generation unit prices. 3.2 OPEX •  In contrast to traditional fossil fuel-based power sources, renewable energy does not require fuel, so OPEX accounts for a relatively small proportion of LCOE. Insurance premiums, Internet costs, safety manager appointment costs, and inverter replacement costs are included in OPEX. Since the Internet cost is about 30,000 won per month, which is a very small amount, the effect on the overall power generation unit price is very small. The inverter has an economic life of 10 years, and if solar and wind power have an economic life of 20 years as discussed in this paper, a one-time replacement expense would be incurred. As discussed in the CAPEX case above, inverter replacement costs are expected to decrease as technological advances and cumulative installation capacity increase.  •   The rest of the costs are insurance premiums and the cost of appointing safety managers, and since both of these factors are safety-related, it will be difficult for the government to actively reduce them. Also, encouraging IT technologies such as AI to reduce costs will conflict with the country's top policy goal of creating jobs through the Green New Deal, so it will also be a measure that cannot be introduced quickly. However, if the risk of renewable energy facilities is set higher than it actually is, and insurance premiums are calculated higher than other facilities, efforts can be made, such as providing data, in order to dispel this misunderstanding and reduce information asymmetry.    3.3 Land price •    In order to find out how LCOE in land price varies with the land category where the power plants are located, the solar power plant LCOE was calculated by the size of six sites (fields, paddies, forest, farmland, factory site, grassland) (Table 1). Under the assumption that the power plant site is leased, the land cost LCOE was calculated based on the annual rental cost. As can be seen, the LCOE of power plants of the same size could vary greatly from 0.7 to 87 depending on which land they are installed on. Therefore, a power plant built on land owned by the operating person or corporation and without incurring any land costs can gain significant price competitiveness in competitive bidding, etc. In addition, because land prices continue to rise, even if a power plant of the same size is built in the same location, land costs are likely to rise in the future (Figure 5).     •    Solar power plants installed in forests or farmland have frequently been the target of speculative activities towards capital gains from rising land prices following the completion of the power generation project by giving incentives to change the land category to grassland. Since such a system was abolished and the "temporary use permit system" was implemented in mountain areas and farmland, it is expected to be difficult for the government toagain introduce a system that directly benefits land purchases for power generation projects to reduce land costs. The reason is that there may be controversy that government policies are used to increase the assets of renewable energy generation companies. •     As an alternative, a policy that supports a rented power generation site can be considered. For instance, the total area of national, provincial,       and county lands in the current territory is 33,718 km2. If 337.18 km2, or 1% of the total area, is rented free of charge for solar power plants, a      total of 34.5GW of solar power generation facilities could be added by applying the 29,339m2 needed for 3MW solar power plant installations.•  Expansion of renewable energy through free rent of state-owned land can directly or indirectly impact the unit price of renewable energy production. This can directly eliminate land costs for renewable energy generators and increase price competitiveness, allowing more companies to enter the renewable energy generator business. Consequently, renewable energy installation capacity expands rapidly, which in turn reduces CAPEX through learning effects, indirectly resulting in further decreases in renewable energy generation costs. 3.4 Financial cost •       Financial cost refers to the expense incurred by receiving loans from financial institutions for the remaining amounts from the total capital required to install renewable energy facilities, excluding equity capital, and paying interest on those loans.  It is possible that financial costs may vary greatly depending on the equity ratio or interest rate, as well as the energy source and size. Table 2 shows the financial costs of each energy source and each power plant size in terms of changes in interest rates. Commercial banks' Project Financing (PF) loans were used to determine the percentage of loans (80% of construction costs) and interest rates (fixed interest rates), and the financial cost (interest amount) for the loan amount was calculated in equal monthly repayment of principal and interest for 20 years without grace. In the case of equal principal and interest repayment, the following equation can be used to determine the monthly repayment amount (principal + interest).   •        Given that the actual loan rate available from commercial banks is 2.93% for 100 kW solar power and 4% for the rest of the base power plants, Table 2 shows that those that start with 100% equity capital have a low unit price ranging between 17 won/kWh and 25 won/kWh. In addition, even if the equity capital is equally 20%, the power generation cost can be reduced by about 5 to 7 won/kWh by simply lowering the interest rate by 1%. •    Projects providing long-term low-interest loan support have already been available for some time. A project called "New and Renewable Energy Financial Support Project" has been conducted by the Korea Energy Agency since 2006. It provides funds for facilities, production, and operations to individuals (including cooperatives) and small and medium-sized businesses that manufacture or install renewable energy-related facilities. When receiving support from the project, the repayment period is usually ten years with a five-year grace period, and is subject to quarterly variable interest rates. Interest rates on the "New and Renewable Energy Financial Support Project" have remained at 1.75% since the fourth quarter of 2012, about half the rate of commercial banks. Even with support from this project, Renewable Energy Certificates (RECs) can still be issued. Considering the loan rates that are currently available from commercial banks, financial costs will be significantly reduced by about 6 won/kWh for 100 kW solar power and more than 10 won/kWh for the rest of the standard power plants if they are supported by the "renewable energy financial support project." •    The total budget for "New and Renewable Energy Financial Support Project" in 2021 was 524 billion won, a double increase from the previous year (2020's budget was 262 billion won). However, even if this amount is not used as production and operating funds but rather is used to install all 3MW-class solar power plants, only about 470MW of additional facilities will be added.The total size of newly installed solar facilities in 2020 is 4,069MW, which means that only 11.5% businesses are eligible for financial aid. •          In contrast to installation subsidies, financial support, such as long-term low-interest loan programs, provides loans. As such support can be recouped over time, the actual amount is insignificant in comparison to the budget being organized. The government should expand its budgets to encourage renewable energy installation and use it as a pump-priming mechanism to reduce power generation costs.  3.5 Corporate tax •     In December 2020, the system of investment tax credits was completely reorganized as part of a revision of federal tax law. In the past, renewable energy generation facilities were eligible for "Tax Credits for Investment, etc. in Safety Facilities" (Restriction of Special Taxation Act, Article 25), allowing SMEs to receive a deduction rate of 1/100, mid-sized companies to receive 3/100, and other companies to receive 1/100. The amended tax law, however, will apply a special case in recognizing the depreciation cost of the assets invested in plant and equipment as a deductible expense instead of the existing investment tax credit. Accordingly, the amortization range can be calculated by selecting 75/100 of standard durable years for SMEs and mid-sized companies, and by selecting standard durable years within the range of adding or subtracting 50/100 for other companies.The system is similar to the Modified Accelerated Cost Recovery System (MACRS)[18] in the United States, under which solar power generation facilities can deduct all facility investments with durable years of five years. According to the domestic tax law, solar power generation facilities can enjoy 20 years of depreciation standard durability (Kim Gyeong-nam, 2020). According to the revised tax law, small and medium-sized companies may apply standard durable years within the range from 5 years at the shortest to a maximum of 35 years, and other companies within the range from 10 years at the shortest to a maximum of 30 years. •     Nevertheless, in practice, getting special tax reductions designed for SMEs may be more advantageous than the special system for renewable energy facilities. As for the renewable energy generation business, it is classified under "D. electricity, gas, steam, and air conditioning supply industry." Hence, renewable energy generation business can be recognized as a medium enterprise if its average sales exceed 12 billion won but less than 100 billion won, and as a small enterprise with less than 12 billion won in sales, as long as it meets all of the requirements of Article 3 of Enforcement Decree of the Framework Act on Small and Medium Enterprises. Special tax deductions or exemptions are available for SMEs in both of these cases. The tax credit rates by corporation size and location can be found in Table 3. A 7% investment tax credit rate was available to small and medium-sized firms before the tax law revision, but enterprises not located in Seoul metropolitan areas and not medium-sized can receive up to 30% tax reductions.  •     The minimum tax amount applies to special tax reductions and exemptions for SMEs, investment tax deductions, and special taxation for including depreciation costs in deductible expenses, meaning that more than 17/100 of the tax base (7/100 for SMEs) must be paid. A summary of the results of calculating the tax paid by the 100 kW solar power plant for each tax benefit can be found in Table 4. For the convenience of calculation, it was assumed that there were no other income deductions, inclusions in deductible expenses, or tax deductions other than (1), (2), and (3) and that 100% equity capital was used. Moreover, the assumptions used to calculate the profitability of the power plant were derived from those used to calculate the LCOE. As shown in the table below, even though the types of tax benefits differ, the amount of tax due is the same under the application of the minimum tax. The actual amount of tax is the same whether it is applied with a 7% deduction through an investment tax credit or a 30% deduction through a special tax reduction for SMEs. In the same way, an onshore wind power plant with a much larger capacity of 20MW produces the same result (Table 5). •     Special taxation for including depreciation costs in deductible expenses is not really a tax deduction system, but rather a way to improve cash flow by deferring taxes to future years. At present, small and medium-sized businesses can expand to 75% of standard durable years, so standard durable years can be set from at least five years to 35 years. In an accelerated depression, a large portion of revenue is treated as expenses, which lowers the tax base itself. However, if the minimum tax amount is set as it is in Korea, the benefits of accelerated depression are limited, and in that case, there is no incentive to exhaust investment costs early. Depreciation costs that exceed the depreciation limits under the tax law can still be included in a future deduction using a reservation of non-inclusion of excess deductible expenses. But this is only possible because the limit itself has been increased significantly, leaving no amount to be reserved, as renewable energy generation projects are currently eligible for special cases for the inclusion of depreciation deductions. The given tax benefits are fully attained by a corporation that is not a small or medium enterprise if it has two or more renewable energy power plants built in different fiscal years and can handle much of its annual income through accelerated depreciation. •     Taken together, unless the minimum tax is adjusted, the government’s simply increasing the tax reduction rate or allowing additional accelerated depreciation will not have a significant impact on the corporate tax reduction related to power generation costs; even if there is any impact at all, it will be minor. Several forward-looking policies, including lowering the minimum tax rate, are needed to achieve a significant drop in power generation unit prices. To accomplish this, a national consensus and social agreement should be formed first.                                4. Conclusion: the government should first focus on expanding its support for land and financial costs •   As examined in Section 3, policy-making is not easy, and there are many considerations that need to be taken into account. The reason is that support policies should be developed by comprehensively considering whether the policies will actually have an effect, whether there are any conflicts with higher-ranking plans, and whether they will harm equity between businesses or other major industries. •   The analysis of this paper suggests that among the various options, land and financial costs appear to be relatively accessible solutions for the government. In the case of land costs, the decision-making process and policy implementation can be smooth since state-owned land can be utilized. When it comes to financial costs, since the renewable energy financial support system is already in place, expanding the project budget and support targets can allow for the provision of financial support to more renewable energy generation operators without too much difficulty, resulting in a significant drop in power generation prices across the industry. •   Given the possibility that the decline in unit generation costs of renewable energy could result in a rapid increase in cumulative installation capacity and subsequent positive feedback that further reduces unit generation costs, it is imperative to "do whatever is possible" rather than just wait for the decline in unit generation costs to occur through learning effects. In a similar way that a fist-size snowball rolls and grows to the size of a snowman, swifter implementation of the policy will have an increasing impact through a virtuous cycle. •    There is a pressing need to reduce greenhouse gas emissions to prevent climate change, and attempts are being made in each country to establish trade barriers using carbon emissions as weapons. This means that a country's overall greenhouse gas emissions matter, but decarbonizing the grid is also critical to overcoming carbon trade barriers. The government should now take bold and forward-looking actions to accelerate the virtuous cycle of reducing the unit costs of renewable energy.  Reference •   Collaboration of relevant ministries, Korean New Deal Comprehensive Plan (July 14, 2020).•   Ministry of Trade, Industry and Energy & Korea Energy Agency. 2020 White Paper on New and Renewable Energy (Dec. 2020).•   Ministry of Trade, Industry and Energy, Announcement No. 2021-268 (Announcement of Support for New and Renewable Energy Financial Support Project in 2021).•   Korea Energy Agency (2020). 2019 Statistics on New and Renewable Energy Supply.•   Korea Energy Agency (2020). 2019 Statistics on New and Renewable Energy Industry.•   Korea Electric Power Corporation (2021). 2021 KEPCO Statistics (No. 90).•   Lee Keun-dae& Kim Ki-hwan. (2020). Establishment and operation of a mid- to long-term Levelized Cost of Energy (LCOE) Forecast System to Expand the Supply of Renewable Energy(1/5). 2020-21 Basic Research Report of Korea Energy Economics Institute.•   Kim Gyeong-nam(2020). Institutional Incentives for Investment in Solar Energy Facility and Equipment: Analysis of the Economic Effects of the Depreciation Method, New and renewable energy, 16(4), 65-75.•   Tsiropoulos, I, Tarvydas, D, Zucker, A, Cost development of low carbon energy technologies - Scenario-based cost trajectories to 2050, 2017 Edition, EUR 29034 EN, Publications Office of the European Union, Luxembourg, 2018, ISBN 978-92-79-77479-9, doi:10.2760/490059, JRC109894.•   IEA (2020). Projected Costs of Generating Electricity 2020, IEA, Paris.•   U.S. Energy Information Administration. Assumptions To AEO2021 – Electricity Market Module. (Released at Feb 3, 2021. Available online: https://www.eia.gov/outlooks/aeo/assumptions/•   SEIA (Solar Energy Industries Association), https://www.seia.org/initiatives/depreciation-solar-energy-property-macrs (accessed on Jun 11, 2021)•   e-Nara Indicators. https://www.index.go.kr/potal/main/EachDtlPageDetail.do?idx_cd=2728 (Accessed on Jun 18, 2021)

[Issue Briefs] [Opinion] Fake Net-Zero, Fake ESG - Greenwashing Alert

Fake Net-Zero, Fake ESG - Greenwashing Alert The Rise of Net Zero and ESG: The Temptation of Greenwashing  As if in keeping with Benjamin Franklin's famous line, " Grow up by doing good," "Net-Zero" and ESG (Environmental, Social, and Corporate governance) have definitely become hot topics. Management once prioritized the environment or climate change in order to improve the company's image or to fulfill their social responsibility, but today it is an issue that is tied into profit and loss calculations for growth. The U.S. Apple declared that its supply chains and products would be 100% carbon neutral by 2030, and Kakao and NC Soft established separate ESG committees in Korea. SK Group affiliates joined RE100 last year, a global initiative aiming to achieve 100% renewable energy for the first time in Korea.This is relevant to the evolution of consumption culture. There has been a noticeable increase in environmental awareness, and a greater number of consumers are willing to purchase products from good companies even if those are more expensive. Such a growing preference for "green" consumption has led to companies expanding their eco-friendly marketing efforts.However, this trend does not always produce the desired results. The reason for this is that "greenwashing," the practice of using false, exaggerated, or misleading information in marketing, is frequently discovered. In one famous case, a cosmetic company sold its products in plastic bottles after merely changing the label to paper, and adding the word "Paper bottle" to make consumers mistake it for a paper bottle. The same goes for ESG. When an investment is made based solely on ESG considerations, without a standard, it may lead to a "green bubble" that overestimates the actual value of the business. In particular, following the COVID-19 crisis, ESG bond issuance to stimulate economies has surged in countries around the world, raising concerns about "ESG washing.” In the same way as greenwashing, it refers to instances where ESG investment strategies are opaque, or asset management fails to match expectations. For example, although Danish wind power generation company Ørsted has not performed well over the past few years, the company's ESG portfolio has made investing in it a foregone conclusion across the globe. Thus, management and investment decisions require careful examination of whether there is a substance involved.   A case of greenwashing in response to climate changeThere has been a recent trend among petrochemical conglomerates to declare net zero. What's behind this trend is a market shift toward climate change.  It is no exaggeration to say that companies most responsible for climate change, such as those in the oil, gas, and steel industries, are now at a crossroads of survival at a time when market changes are evident. Companies in the IT and general sectors can adapt to climate change by using new production methods or management patterns based on digital platforms, but not companies whose corporate purposes are directly associated with greenhouse gas generation. Consequently, greenwashing is more tempting for these companies.Greenwashing comes in several forms. In some cases, 'net-zero' or 'carbon neutral' are declared, but there is no substance, the scope of net-zero activities is narrowed cunningly, or the goal is just too grand to be achieved. In other cases, decisions made for other business reasons could be framed as if they were taken for decarbonization.In the case of BP, it changed its name from "British Petroleum" to "Beyond Petroleum" in an attempt to alter the image of the company. The company committed to net-zero by 2050, followed by other major companies such as Royal Dutch Shell, Total, Exxon, and Chevron. However, if one looks closely at their goals, it appears that some deceitful efforts have been made to frame these goals differently from the truth. It is because their products still contain natural gas, a fossil fuel, or a significant portion of their plans is dependent on CCS, which is still far from commercialization.As for Shell, which has also announced net-zero ambitions by 2050, uses "carbon intensity" as a metric, not "greenhouse gas emissions." The current plan forecasts a reduction in intensity by 2030, but it is expected to eventually result in increased production of natural gas by 20%. Hence, a Dutch court ruled recently that Shell's plan was not sufficient to achieve net-zero and that the absolute amount of emissions should be reduced.Southern California Gas (hereafter referred to as "SoCal Gas") is an American utility company that only provides natural gas services. Due to the abundant natural gas reserves in the U.S. and the fact that natural gas generation emits far less greenhouse gases than coal, gas companies are often big supporters of natural gas, calling it a "bridge fuel" that enables an energy transition to cleaner energy in the future. In the end, however, this claim is also nothing more than greenwashing in the face of the complexity of achieving net-zero. SoCal Gas recently announced reforms and used the ambiguous term "renewable natural gas." The idea is to replace the current gas demand with biomethane generated from livestock, food waste, and sewage treatment plants. While it seems plausible at first glance, these facilities cannot avoid criticism for greenwashing since not only air and water pollution problems persist, but also only a small portion of the total gas demand can be met.In Korea too, SK Innovation has recently caused controversy. While it announced it would sell a shale gas mine in North America to strengthen ESG management, the true motive behind the sale was driven by the fact it had been in deficit for years. In other words, the company would have sold the mines anyhow due to their low value, but promoted it as a decarbonization strategy.The practice of greenwashing is not exclusive to private companies. The government and public enterprises also frame climate change policies without substance. This is due to increased pressure from the international community and civil society on taking action against climate change.The 2021 United Nations Climate Change Conference (COP26) will be held in the UK towards the end of this year. Eco-friendly organizations, however, have criticized the British government for greenwashing the image of companies that do not adopt eco-friendly practices. Reckitt, selected as the main sponsor, is the parent company of companies that produce cleaning and air freshener products that we are familiar with, such as Dettol and Air Wick. The problem is that this company has not taken a proactive stance on climate change. In fact, palm oil is known to be consumed in huge quantities in producing its products, and this palm oil production leads to the tremendous destruction of forests and land.The same is true of the governments in all countries that made net-zero statements recently. South Korea has declared net-zero, but some experts are concerned about how it will achieve it. With an operating asset of 785 trillion won, the National Pension Service ranked first in financing the domestic coal power generation industry (based on 2009-June 2020), and KEPCO was at the center of controversy for pressing ahead with investment and support to Vietnam's coal power generation business despite various criticism.The case is similar in China. In the first half of this year, despite its goal for net-zero, China's greenhouse gases generation has shown the steepest increase of any country in the world. Further, as with Korea, China has no choice but to face criticism since it began investing in coal-fired power plants in developing countries. While China reluctantly made its declaration with the international community in mind, it is delaying its action for practical reasons.  The key to preventing greenwashing: TransparencyThen, how can this greenwashing practice be prevented? To combat the practice of greenwashing, governments of each country are preparing a variety of measures to protect consumers. In a number of countries, marketing falsehoods including greenwashing can be penalized by law. For example, "Consumer Protection from Unfair Trading Regulations" enacted in 2008 in the UK is the basis for such regulations in the country, and a fully-fledged guideline on greenwashing will be released this summer by the Competition and Markets Authority (CMA). Also, the French government decided recently to impose a fine on greenwashing for the first time in history.Around 2013, there was a strong need in South Korea to establish guidelines to prevent greenwashing, but there was little action taken.  K-ESG, a Korean version of the ESG evaluation guideline, is planned for this year as ESG is receiving attention, but future performance, such as whether it meets international standards, needs to be monitored.Government regulations or guidelines alone cannot prevent greenwashing. In the recent K-ESG indicator evaluation, POSCO came out on top, causing people to doubt. POSCO is the largest emitter of greenhouse gases in Korea, not to mention that it is currently constructing a coal-fired power plant in Samcheok. Then, if POSCO puts forward the top ranking in K-ESG, it will only encourage greenwashing. Therefore, what is ultimately required is to lay the groundwork for economic actors to make objective and transparent judgments about net-zero and ESG. That is to say, anyone proclaiming such goals must be able to use objective data to determine whether their goals are valid.Criteria for evaluating net-zero goals are their scope, method of achievement, and transparency. In other words, matters such as the types of greenhouse gases involved, specific activities that must be reduced, and the timeframe must be considered. Upon declaring its intent to achieve net-zero by 2050, a company would need to check whether there are subsequent plans in place. It is also essential to consider how greenhouse gas reductions, removals, and offsets can be combined to meet net-zero commitments.Furthermore, it is necessary to determine if there is a mechanism for monitoring activities transparently up until the net-zero goal is attained. There are also tools that can help with evaluating and monitoring. These include the Carbon Disclosure Project (CDP), which discloses governance and strategies relevant to greenhouse gases and climate change, Science Based Targets initiative (SBTi), which provides technical methods to reduce greenhouse gases, and the Greenhouse Gas Protocol, which supports greenhouse gas reduction in a standardized manner.On the other hand, a universal standard does not yet exist for the ESG.  European Union’s ESG-related legislation, which has recently been strengthened, could serve as a model. As an example, the Sustainable Finance Disclosure Regulation (SFDR) developed by the European Commission requires financial market participants to evaluate and disclose sustainability-related data and policies at various levels. Likewise, a Task Force on Climate-Related Financial Disclosure (TCFD) also seeks to disclose consistent and standardized information. The two are distinguished by the fact that TCFD is a recommendation focused on climate change whereas SFDR is concerned with sustainability in general. The release of data in these ways facilitates market participants in evaluating the validity of an ESG goal.Only recently have government and private sector efforts been made to deal with climate change. Thus, they are busy making resolutions, declaring, and promoting to follow the trend. Nevertheless, making unattainable promises is nothing more than greenwashing. For the carbon-based economy in place today to be transformed into a fundamentally sustainable one, the system itself must be able to drive out disguised environmentalism. This is why measures to increase transparency are so important, such as strengthening the obligation to disclose ESG data relating to carbon.