South Korea expands ETS to enhance market effectiveness, may cancel Feb auction to curb oversupply

South Korea's Emission Trading System (K-ETS) will open for wider market participants starting Feb. 7, as announced by the country's Ministry of Environment after a partial amendment to the Act on the allocation and trading of greenhouse gas emission permits was approved at a cabinet meeting Jan. 31.

The expansion comes as a strategic move and is aimed at enhancing the effectiveness of the greenhouse gas emission trading system, which manages 74% of the country's GHG emissions.

Market participants were previously limited to allocated companies, market makers, and emission trading intermediaries, but will now be expanded to include investment traders, collective investment managers, trust companies, banks, insurance companies, and fund managers.

"With this amendment to the enforcement decree, we hope to secure the effectiveness of companies' GHG reduction efforts and further activate the emission trading market," said Kim Jeong-hwan, the director general of Climate Change Policy and International Cooperation at the Ministry of Environment.

To improve the convenience of emission trading, the government will now allow emission trading intermediaries to handle the trading and reporting of emission permits on behalf of market participants.

This decision is expected to encourage companies to achieve more substantial reductions in greenhouse gas emissions. Jeong-hwan emphasized that the success of the emission trading system is directly linked to the achievement of the country's Nationally Determined Contributions.

Feb auction may be canceled

South Korea's Ministry of Environment has decided to cancel the upcoming monthly auction, which was scheduled for Feb. 12, market sources told S&P Global Commodity Insights. Market participants believe this decision is aimed at curbing oversupply in the market.

There has been no official statement from the ministry regarding the auction cancellation.

"It seems they are adjusting the supply for the first half of the year because a significant portion of the KAU24 allocated quota has already been supplied. Additionally, the reason could be related to the fact that last year's bid rate was 107.4% in November, but only 70.9% in December," a South Korea-based carbon market analyst said.

Korean Allowance Units are greenhouse gas emission allowances allocated to entities subject to emissions targets under K-ETS, while Korean Offset Units are voluntary carbon credits.

Platts, parts of Commodity Insights, assessed KAUs at Won 9,450/mtCO2e ($6.53/mtCO2e) and Korean Offset Credits at Won 10,450/mtCO2e Feb. 6, both steady day over day.

With the market's current sluggishness, a cancellation of the auction would raise further questions about the stability and maturity of the Korean carbon market. The upcoming Phase 4 plan, set for release in June, is expected to provide specific numbers that could significantly impact trading dynamics moving forward.

"Price has been increasing since it [4th basic plan] was published, we can say it does work as a supportive factor. But the thing is trading volume is too low nowadays, less than 100,000 mt/day mostly. Hard to say this was a real bullish factor. It can fall anytime. And as you see, the Korean carbon market is not mature for now. Phase 4 allocation plan will be quite important. It will have specific numbers, not like the Phase 4 Basic Plan," the carbon market analyst said.