"Korean Emissions Trading Turnover Rate 4.3%... Utilizing the 'Voluntary Carbon Market'"

"World Embraces Civil-Led 'Voluntary Carbon Market' Activation"

COP26 Also Recognizes... Credit Utilization and Linkage Plans Established"

[Asia Economy Reporter Moon Chaeseok] Opinions have emerged that it is necessary to utilize the privately-led 'voluntary carbon market' due to the serious liquidity shortage problem, as the turnover rate of the domestic carbon emissions trading system is only 4.3%. This market is where all companies voluntarily engaging in greenhouse gas reduction activities, regardless of legal regulations, participate to trade 'carbon credits' (certificates), and it is explosively growing mainly overseas.

The Federation of Korean Industries (FKI) argued on the 21st that Korea should actively prepare measures to utilize credits from the voluntary carbon market recognized at the United Nations Climate Change Conference of the Parties (COP26). At the end of last year, COP26 also recognized that credits issued in the voluntary carbon market can be linked with the existing trading system.

The trading system operates by allowing companies that emit less carbon than their government-allocated carbon emissions to sell emission permits, while companies exceeding their allocation buy permits. However, contrary to the system's purpose of encouraging lower emissions than the allocation, the trading of emission permits itself is criticized for being sluggish.

Turnover rates of the emission trading market and the stock market. (Source: Federation of Korean Industries)

According to the FKI, the turnover rate of emission permits in the Korean market is only 4.3%. This is because supply is limited beyond the permits allocated by the government to companies. Moreover, 56.1% of transactions occur over-the-counter. Due to insufficient trading volume in the market, the price of emission permits fluctuates wildly. Such large price volatility undermines the system's original purpose of encouraging companies to reduce carbon emissions.

Classification and Definition of the International Carbon Market. (Source: Federation of Korean Industries)

To resolve the liquidity shortage issue, the FKI suggested the need to link and utilize the voluntary carbon market with the domestic trading system. Until now, growth has focused on regulatory markets such as the Clean Development Mechanism (CDM) and domestic carbon emission regulation systems (ETS), but since the CDM market sharply declined after 2012, the voluntary carbon market has been gaining attention. According to the World Bank, the voluntary carbon market accounted for 74% of the world's credit production last year. McKinsey forecasted that the voluntary carbon market could grow up to 15 times by 2030 and up to 100 times by 2050.

Carbon credit issuance market share. (Source: Federation of Korean Industries)

Finally, in November last year, the COP26 Paris Agreement Article 6 international carbon market guidelines were agreed upon, enabling linkage between the voluntary carbon market and the trading system. Credits issued in the voluntary carbon market only need to meet the international carbon market guidelines and receive approval from participating countries to be converted into internationally transferable mitigation outcomes (ITMOs). In this case, companies obligated to reduce carbon emissions can convert these outcomes into offset credits and use them in the trading system.

The reason Article 6 of the Paris Agreement has mainly been discussed domestically focusing on regulatory trading systems was due to distrust in the quality of voluntary carbon market credits. However, the atmosphere has changed as self-regulatory efforts have become active, such as the launch of independent monitoring organizations like the Taskforce on Scaling Voluntary Carbon Markets (TSVCM). The Oxford Energy Institute predicted, "There is a high possibility that credits from voluntary carbon markets and regulatory carbon markets will be institutionally linked in the future."

Yoo Hwan-ik, head of the Industry Division at FKI, emphasized, "The growth of the voluntary carbon market is likely to develop into a complementary relationship with the trading system in the future," adding, "It is necessary to promptly allow linkage between overseas ITMOs and the domestic trading system, support verification systems to foster the domestic voluntary carbon market, and diversify channels for acquiring ITMOs through international cooperation."

Suggestions for Utilizing the Voluntary Carbon Market. (Source: Federation of Korean Industries)

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