South Korea, one of the world's fastest growing polluters, said on Wednesday it hopes to become Asia's trading hub for carbon emission certificates and related products under its plan for a new carbon exchange from 2011.

The government is also considering tax breaks to boost renewable energy consumption and investment, Ki-jong Woo, secretary general of the presidential panel on green growth, told Reuters in an interview.

Combining our financial market influence and knowhow, we believe South Korea has an advantage in carbon trading, he said.

Under the United Nations' clean development mechanism (CDM), industrialized countries can invest in projects in the developing world in exchange for certified emission reductions (CERs) that can be traded or used to meet CO2 targets set out by the Kyoto Protocol.

Japan, China, Hong Kong and India have all said they are considering trading primary and secondary carbon credits.

But so far the trading has only been in primary CERs on the over-the-counter market and Singapore's Asia Carbon Exchange. There is no liquid market to trade carbon allowances under cap-and-trade and secondary CERs, including derivatives.

Under cap and trade schemes, companies or countries face a carbon limit. If they exceed their limit they can buy allowances from other polluters which stay under their cap. Alternatively, they can buy carbon offsets from projects which avoid greenhouse gas emissions outside the scheme, often in developing countries.

Details of Korea's carbon exchange, set to test services in 2011 and start trading in 2012, are waiting for passage of a green growth bill in parliament.

Passage of the bill has been held up by wrangling over other laws. The bill itself has drawn criticism from industry, which is uncomfortable with cap-and-trade schemes while civic groups oppose plans to boost production of nuclear power.

Woo said that South Korea, the world's fifth-largest buyer of crude and its second-largest buyer of liquefied natural gas (LNG), was still discussing where to base the exchange to serve domestic and overseas players, including major gas emitters, institutional and private investors.

The stock and electricity trading exchanges are competing to run the carbon market.

The carbon exchange should be different from other commodities and securities exchanges, Woo said.

TAX BENEFITS FOR RENEWABLE ENERGY

Parliament is also due next month to debate an energy law revision that requires firms to use more renewable energy.

The government wants to raise renewable energy consumption to 11 percent of total consumption by 2030 from 2.5 percent estimated in 2008.

To encourage indirect investment in renewable energy sectors, we are thinking of providing tax incentives including interest income tax exemption and tax deduction to private investors in green-related saving accounts and bonds, Woo said.

Renewable energy providers should cut costs by developing technology and selling the products to international as well as domestic buyers, he added.

South Korea early this month pledged for the first time to set a 2020 emissions reduction target. It set a range of targets, using 2005 as its base, from an 8 percent increase to a 4 percent fall by 2020.

South Korea's emissions doubled in the 15 years to 2005, the fastest growth in the OECD.

With our 107 trillion won ($85.77 billion) investment, our carbon reduction target will be achieved more effectively, Woo said, referring to the country's vow to invest 2 percent of annual GDP in green sectors.

Since then, Samsung Electronics Co Ltd, Hyundai Motor Group, which owns Hyundai Motor Co, Kia Motors Corp, POSCO and SK Energy have all announced billions of dollars of green-related investment plans.

($1=1247.5 Won)

(Editing by Jonathan Thatcher and Sambit Mohanty)

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