○On July 14, 2021, the European Commission announced its Fit for 55 package to reach the EU’s climate target of cutting emissions by 55 percent by 2030. A Carbon Border Adjustment Mechanism (CBAM) legislative proposal was introduced as part of this package.
○The CBAM proposal includes details for execution and outlines a phased implementation following a transition period.
- The proposal describes the mechanism and scope of CBAM, emissions calculation methods, and exclusions.
- It follows the method by which Emissions Trading Schemes (ETS) operate for EU importers. During a transitional phase, imports must be accompanied by a mandatory reporting of carbon data. Starting in 2026, following the conclusion of a transitional period, importers will be required to buy certificates with carbon prices determined by the EU ETS.
- The data reported during the transitional phase prior to 2026 is expected to enhance the effectiveness of policy implementation.
○Beginning with the EU in 2005, governments had have launched ETS at various levels, from the municipal to the national level.
- Korea launched its own national ETS in 2015, and is currently implementing the planning phase.
- The United States and Japan have regional emissions trading schemes in place and China will launch a national ETS this year.
○While different countries are responding in disparate ways to the EU CBAM, Korea needs to prepare a forward-looking, strategic response to the proposal based on Korea’s domestic import and export structure and its climate change policy.
- Through an examination of Korea’s domestic ETS and an identification of the country’s strengths we must find ways to minimize the potentially negative impacts of ETS on our domestic industries.
- In the longer term, we must preemptively address the potential for carbon leakage along the global supply chain by fostering enhanced capabilities at small- and medium-sized subcontractor enterprises (SMEs) through technological innovation and investment. In addition, we must strengthen carbon data collection and improve system development focused on supply chain considerations.
This study investigates the changes in Korea’s regional supply chains resulting from the major FTAs that Korea has concluded and provides policy implications. Previous studies mainly focused on the economic impacts from reducing tariffs by concluding FTAs. However, preferential rules of origin also play an import role in addition to tariffs, especially where the production process is fragmented since these rules ultimately decide which goods will benefit from preferential tariffs.
Using an expanded and refined methodology of Conconi et al. (2018), which codifies preferential rules of origin of NAFTA, we quantify the level of sourcing restrictions on intermediate goods which is transferred from rules imposed to final goods in the Korea-USA, Korea-EU, and Korea-China FTAs. Using quantified RoO of these three FTAs, in addition to trade and tariff data, we analyze the effects of rules of origin with triple difference methodology. Exploiting cross-country and cross-product variation in treatment over time, we show that RoO in Korean FTAs do not provide incentives to final goods producers for changing their sourcing decision to FTA partner countries.