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Paradox of Carbon Neutrality

#Key Business Issue l 2021-11-22


A reduction in coal use comprises the key of the “Glasgow Climate Pact” that has been adopted at the recent U.N. climate talks attended by 197 countries. It seems carbon neutrality is emerging as one of the main topics concerning global economic order. 

However, the path to carbon neutrality is not entirely smooth. While countries push to reduce coal-based power generation, economic recovery in line with the “living with COVID-19” strategy all around the world, coupled with the trade conflict between China and Australia, is raising concerns over a global energy crunch. Ahead of the winter season, when demand for energy is high, prices of raw materials such as coal, oil and natural gas are soaring, putting upward pressure on inflation. 

Here is Lee In-chul, director of the Real Good Economic Institute, to discuss how the long and difficult process of achieving carbon neutrality may influence the Korean economy. 

The Glasgow Climate Pact was adopted at the 26th U.N. Climate Change Conference of the Parties or COP26, which was held for about two weeks from October 31 in Glasgow, Scotland. A clash of interests of participating countries extended the grueling negotiations an extra day. Eventually, they agreed to phase down from coal use to tackle the climate crisis, while advanced economies were committed to increasing climate funding by 2025. To implement the goal of limiting global warming to within 1.5 degrees Celsius, the participants agreed to check their greenhouse gas emission reduction targets again next year. 

Most notably, the climate pact calls on countries to accelerate the phasing out of unabated coal and inefficient subsidies for fossil fuels. The draft agreement included the expression “phase out” regarding coal use. But the wording was eventually toned down to “phase down” due to protests of large greenhouse gas emitters, including India. It’s a shame that the talks ended with an insufficient deal as a result of widely differing views among the participants.  

Although the agreement was not as bold as expected, it is expected to have a major impact on Korean industries that emit a large amount of carbon. 

The climate pact urges countries to reduce their reliance on fossil fuels. In South Korea, the agreement is expected to hit the steel industry, in particular, as it produces the largest amount of carbon, compared to other sectors. The industry emits 117 million tons of carbon dioxide a year, accounting for 30 percent of emissions in the country’s industries. The steel industry is developing new technology of replacing coal with hydrogen, but it will likely be introduced in 2050 at the earliest. Other carbon-intensive industries such as petrochemical and cement are also developing carbon-cutting technology, but it will take considerable time to be actually deployed on a commercial scale. There are concerns that the recent climate pact may place a burden on South Korea’s heavy chemical industry that depends on coal and the overall economy as well. 

The South Korean government has been keen on carbon neutrality. Internationally, disasters such as a fierce forest fire in Australia and severe flooding in Europe have awakened the people the world over to the dangers of global warming. 

But the atmosphere has changed a lot lately. Some of the world’s major coal users including the U.S. and China were not committed to shifting away from coal at the recent climate talks, apparently influenced by the latest energy shortage. 

More use of renewable energy and an end to the fossil fuel era, along with the transition from internal combustion engines to batteries, is no longer a controversial topic but an important task that should be fulfilled. 

But in reality, the situation is different. Many countries are suffering from a shortage of fuel and energy. Even advanced countries that have advocated carbon neutrality are now consuming more fossil fuels again as a stopgap measure. Amid rising demand for green energy, surging prices of raw materials have hit many industries and affected electricity generation. Prices of agricultural and fisheries products as well as those of daily necessities have also risen sharply to stoke inflation. 

Due to high international oil prices, South Korea’s import prices in October jumped 35.8 percent from a year earlier, representing the biggest gain in 13 years. The Bank of Korea estimates that prices of natural gas in Europe will stay high, at least until the first half of next year. The rising raw material prices are making the Korean petrochemical industry increasingly anxious. The industry produced the best-ever sales result in the second quarter of the year, but the sales have been on the decline in the latter half of the year. International LPG prices have also jumped over 60 percent, compared to five months ago, forcing the gas industry to suffer from worse performance in the second half of the year. 

As these problems have arisen in many countries including South Korea, many are raising their voice against carbon-neutral, eco-friendly policies. 

Many are questioning if the environmentally-friendly policies will proceed smoothly. Faced with problems including inflation, they are showing disapproval of those policies and ESG management. Even in the U.S., 22 percent more electricity will be generated from burning coal this year than in 2020, marking the first year-over-year increase in coal generation in the country since 2014. The Biden administration, which has placed so much emphasis on carbon neutrality, is criticized for going against its own eco-friendly policy. With soaring raw material prices increasing volatility in the economy, business activities and households, there are worries that green policies of many countries may end up in a mere gesture. 

A “Minsky Moment” refers to the onset of a financial crisis following a sudden, major collapse of asset values and financial systems. Policies related to carbon neutrality are feared to trigger a “Minsky Moment.” That is, the carbon neutrality scheme may emerge as another time bomb for the global economy, leading to an energy crisis, the sudden rise of raw material prices and greenflation. 

We all agree that we should implement eco-friendly policies over the long term. To attain carbon neutrality, companies have to enhance their capabilities through intensive R&D efforts and technological development. South Korea should overhaul its industrial structure that excessively relies on the heavy chemical industry. 

People on the globe face a dilemma between the climate and energy. It’s necessary to stop using fossil fuels to prevent climate change, but it’s hard to find alternative energy sources for now. Nevertheless, South Korea must walk the path of carbon neutrality after all. For that purpose, it’s necessary to make up for the shortcomings revealed in the initial stage and spur technology development to facilitate the transition to clean energy.

Concerns over the energy crisis and greenflation clearly show how deeply the carbon system is rooted in our lives. Still, the climate crisis is a grave and urgent issue to be resolved, as we all know. The South Korean economy should hopefully be able to stay firm and strong in the challenging process of energy transition.  

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