Greenhouse Gas Emission Permit Price Volatility... "Price and Volume Stabilization Needed for NDC Implementation"

KCCI Report on 'Overseas Cases and Implications for Stabilizing Greenhouse Gas Emission Allowance Prices'
Emission allowance prices fluctuated sharply from 8,640 KRW to 42,500 KRW per ton after the implementation of the Emission Trading Scheme
Confusion in corporate investment plans and emission allowance trading decisions

[Asia Economy Reporter Kim Hyewon] Amid recent discussions on raising the '2030 Nationally Determined Contribution (NDC)' targets, which have put companies on high alert for greenhouse gas reduction, there is a call for measures to stabilize the price of greenhouse gas emission permits to ensure the smooth implementation of the 2030 NDC.

The Korea Chamber of Commerce and Industry (KCCI) suggested in its report titled "Overseas Cases and Implications of Greenhouse Gas Emission Permit Price Stabilization" on the 12th that "since the implementation of the greenhouse gas emission trading system in 2015, companies have experienced confusion in investment plans and permit trading decisions due to sharp fluctuations in permit prices," and emphasized "the need to establish fundamental price stabilization measures by referring to overseas cases operating emission trading systems."

South Korea has been implementing the greenhouse gas emission trading system since 2015. Companies can sell or buy emission permits if they have a surplus or shortage of permits allocated by the government.

The problem lies in the price volatility of emission permits. The permit price started at 8,640 KRW in January 2015 and surged to 42,500 KRW at the beginning of last year, repeatedly experiencing sharp fluctuations. The government has implemented market stabilization measures such as additional supply of reserve permits and restrictions on the carryover of surplus permits held by companies as countermeasures against price volatility, but their effectiveness has been insufficient.

Professor Lee Ji-woong of Pukyong National University pointed out, "The purpose of the emission trading system is to induce greenhouse gas reduction through market mechanisms," adding, "If permit prices fluctuate unpredictably, companies find it difficult to decide whether to make additional reduction investments based on economic gains and losses or to buy or sell permits."

Analysis of overseas cases where emission trading systems are implemented by KCCI revealed that major countries such as the European Union (EU) and the United States present permit price or quantity criteria in advance to stabilize permit prices. This increases the predictability of permit prices.

Clear Standards Overseas Prevent Market Confusion... Pre-Set Permit Prices and Quantities Stabilize Prices

The emission trading system has been operating in 16 units across 39 countries as of 2019, starting with the EU in 2005.

Since 2019, the EU has been adjusting the quantity of emission permits supplied to the market within a certain range to stabilize permit prices. The amount of permits available for purchase in the market is maintained within 400 million to 833 million tons, which is 22-45% of the annual allocation.

Accordingly, if the supply quantity falls below 400 million tons, the government supplies additional reserves it holds, and if it rises above 833 million tons, the permits allocated to companies in the following year are reduced to stabilize prices.

A KCCI official explained, "The EU's market stabilization policy minimizes government intervention while allowing companies to purchase permits from the market whenever necessary, preventing price surges caused by heated purchasing competition."

California in the United States presents a price range for permits sold by the government in advance to stabilize the permit market. The floor price started at $10 in 2013 and is increased annually by 5%, considering inflation and interest rates. The ceiling price is set in three stages at $40, $45, and $50, also increasing by 5% annually. If the market price exceeds the ceiling price of each stage, permits can be purchased at the ceiling price of that stage.

This system allows the floor price to act as a market price benchmark, while the ceiling price serves as a 'psychological safety net' for companies, contributing to price stabilization.

New Zealand separately sets a ceiling price for government-sold permits (approximately $17.8 per ton as of September 10) apart from the market trading price. This gives companies needing to purchase permits the option to buy from the market or from government sales.

The government-set ceiling price not only helps stabilize market prices but also allows companies to settle permits at the ceiling price, which is preferred by small and medium-sized enterprises (SMEs) that lack the capacity to comply with the emission trading system.

Benchmarking Overseas Models to Develop Permit Price Stabilization Measures That Enhance Predictability

KCCI proposed three permit price stabilization measures by referring to overseas models. First, adopting a method like the EU’s to maintain a certain level of surplus permit supply in the market. Second, providing a ceiling price option like New Zealand. Third, allowing the carryover of remaining reserves from the previous planning period to the next planning period.

The report stated, "The U.S. method of setting upper and lower price limits is straightforward but may face difficulties in reaching social consensus on price levels," and added, "The EU method of maintaining permit supply at a certain level is more realistic." To this end, it is necessary to expand the surplus supply in the domestic permit market, which currently accounts for only about 2% of the annual allocation, by referring to the EU case.

One of the biggest reasons permits are not circulating in the market currently is companies’ anxiety that "if they sell permits now, they might not be able to buy them when needed." However, quantity-based market stabilization policies like those in Europe provide psychological reassurance that permits can be purchased whenever necessary, encouraging companies with surplus permits to sell them.

There is also a call to introduce an option to purchase permits at a pre-set ceiling price, referencing the New Zealand model. This would reduce the burden on SMEs and others lacking the capacity to trade permits individually and help address the problem of price surges at the time of permit settlement.

Additionally, it seems necessary to carry over the remaining reserves from the second phase of the emission trading system (2018?2020), which ended last year, to the third phase (2021?2025) instead of discarding them, to help stabilize prices. It is estimated that about 10% of the annual allocation remained during the second phase due to the impact of COVID-19, meaning that greenhouse gas emissions were reduced by that amount until last year.

Kim Nok-young, Director of the Sustainability Management Center at KCCI, said, "With the 2030 NDC expected to be finalized around October, demands for greenhouse gas reduction are likely to increase," adding, "To promote companies’ carbon reduction efforts, permit prices must be predictable, and for this, proper market stabilization measures need to be promptly established."

This content was produced with the assistance of AI translation services.