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INTERVIEW: South Korean carbon credit provider looks at voluntary carbon markets

Highlights

South Korea's oldest carbon credit provider turns to voluntary market

But higher prices in K-ETS keep Ecoeye's focus on national market

Low prices, lack of transparency deter more active entry into VCM

One of the oldest and largest carbon credit providers in South Korea, Ecoeye, has invested $100 million in projects globally focusing on forestry, cookstove and biochar credits and is an active participant in the K-ETS carbon market, but now finds itself at a crossroads. Ecoeye Executive Director Sangsun Ha spoke to S&P Global Platts on South Korea's compliance market and opportunities in the global voluntary carbon market.

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Q: How did Ecoeye get involved in carbon markets?

A: Ecoeye started its business in 2005, the start date of the Clean Development Mechanism, the UN-run carbon offset scheme. We recognized the opportunity in CDM in South Korea so we started domestic project development, participating in about 50% of registered CDM projects in the country. At the time there was no South Korean emissions trading scheme so we traded certified emission reductions in the European ETS market. We traded over-the-counter as well as on the French exchange BlueNext. As CER prices in the EU market collapsed in 2012, we turned to the domestic market. The South Korean government at the time operated a verified emissions reduction scheme called K-VER. We acquired around 200 domestic projects. There were no buyers and the government used to purchase the credits.

From 2015, the K-ETS started and allowed domestic CERs to be converted to KOCs (Korean Offset Credits). As we already were the major CDM developer in South Korea, we automatically became a major provider of KOCs for the K-ETS. From 2018, K-ETS allowed overseas projects to be included in the market if a South Korean entity had directly implemented the project allowing us to develop projects abroad. For example, we have a cookstove project in Bangladesh.

Since 2020, the future of CDM projects hasn't been clear. In that uncertainty, we feel micro community-based household projects in least developed countries have a high potential for transition considering the mechanism for Article 6.4 of the Paris agreement. We have invested in projects in Africa, Bangladesh and Myanmar. We have received official letters from host countries including Bangladesh allowing and fully supporting CDM transition into Article 6.4 as soon as the rules and procedures are ready. We have invested $100 million with several South Korean entities including public utilities and Samsung in 20 different projects.

However, the transition to the Article 6.4 mechanism has been delayed as COP26 was postponed, and there has been a lack of clarity. We are considering an alternative market so we are looking at the global voluntary market, although prices are not attractive. If the market expands and prices increase, we hope to be more actively involved in the future.

Q: How do you view global voluntary carbon markets?

A: Voluntary markets are a back-up for us. Most of our overseas projects are newly registered CDM projects in order to use the CERs in the South Korean compliance market. We are going to register some of our projects with standards like Gold Standard and VCS. South Korean compliance market prices now are about $20 and will increase up to $30-$40 in coming years, so are much higher than the voluntary market and hence more appealing.

We have invested in 600 hectares in Myanmar mangroves, but plan to expand it to 35,000 hectares. We hope to bring this project to the voluntary market and are looking for investors abroad. We have received the official letter from the Myanmar government allowing the sequestered emissions to be used for other countries' Nationally Determined Contribution of the Paris Agreement.

I expect the voluntary market price will increase. Demand will increase and supply also can be increased. But a lot depends on the quality of credits, especially the avoidance of double counting by corresponding adjustment. There is a lot of mitigation potential in developing countries. If double counting for the source country and the complier country is allowed, supply will be higher.

Voluntary buyers are keen on high-quality credits with co-benefits and SDGs. I expect removal credits like afforestation or reforestation to increase in demand in the near future. Rice husk biochar and soil carbon projects have also a lot of potential. We are considering a rice husk based biochar project in Myanmar for the voluntary market.

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Q: You seem to focus on project scale rather than quantity.

A: We have invested in 3 million Bangladeshi cookstoves, which can reduce over 4 million mt of CO2e a year. It is probably the world's largest cookstove project. Our target is 7 million by 2025.

Q: What do you think of cookstove credits?

A: The mitigation potential is higher in household and cookstove projects in least developed countries. They also have relatively lower risk for transition to Paris Agreement Article 6 as many of host countries are supportive for carbon finance to continue the projects. We found an opportunity for waste-to-energy projects in developing counties, but it takes several years to install and operate such a project. The risk increases with the longer gestation. When Article 6.4 under Paris Agreement becomes clear and ready, we are going to invest in waste-to-energy projects in developing countries. .

Q: What kinds of credits are gaining interest in South Korea?

A: We are seeing voluntary demand increase in South Korea. Corporations are more interested in removal projects over avoidance and mitigation. We have a mangrove reforestation project that we are developing for the voluntary market. Many Korean companies have made net-zero pledges like SK Group and others. Voluntary market interest is increasing because of that.

Q: Where is your demand coming from?

A: In the South Korean ETS, demand comes from the power sector primarily. According to the ETS regulations, Korean companies can use carbon offset credits for up to 5% of their emission submissions. Total power sector emissions are 200 million mt/year -- 5% of that is only 10 million mt/year of demand. The steel sector also emits 100 million mt/year. They are major clients of the Korean carbon market. We also have overseas buyers. We are seeing some voluntary demand from Japan. But the demand is not as significant as the Korean demand.

Q: South Korea was one of the first countries in Asia with an established carbon market. What factors drove this early move?

A: The South Korean government considers K-ETS a major tool to achieve the NDCs of Korea. About 80% of total South Korean emissions are covered by the ETS. The Korean government 2030 Paris agreement target is very strict. They are going to increase emission mitigation requirements further. Korea wants to be a climate leader and is looking at the opportunity to be leader in sustainability.

The government is considering increasing targets further. South Korean industry is very energy intensive and also very energy efficient. The government, I foresee, will need overseas credits to achieve Korean emissions targets. The Korean carbon price, which was higher than the EU ETS in 2020 at $36, will then rise further. But right now we have a market surplus as banking of allowances is very limited in the Korean market due to regulations. COVID has impacted the prices as well. Prices are now are around $19 -- much lower than before. However, we expect the price to come back to $30 when the COVID impact is resolved.

Q: The 27th Allowance Auction of the K-ETS failed to sell out. Why do you think that was the case?

A: Many companies don't know how many allowances they need to buy for the emissions of 2021. It's still early in the year, so trading isn't that aggressive now. It often picks up in the fourth quarter -- around November and December. Right now, demand is low. In South Korea there is very little speculative demand and banking is strictly restricted. Right now the price is less than $20. If the government's NDC targets increase, prices will rise. As of now the private sector can't participate in the auction. The auctions only allow a few sectors and not too many private companies.

Q: How do you see the future of the voluntary carbon market?

A: The voluntary market will become more global and connected. If there is consensus on credit quality and the prices become more transparent, it will become more global. Right now, it is difficult to find buyers. The K-ETS is quite transparent comparatively. We can see prices daily. But in the voluntary market, there are varying project types. It is difficult to find the end-user. It is a tough market for project developers.