KDI "Emission Allowance Carryover Restrictions Should Be Gradually Eased... Increasing Burden on Companies"

A research institute under the national policy suggested that the 'restriction on the carryover of emission allowances' should be eased to address the issue of falling domestic greenhouse gas emission allowance prices.

The Korea Development Institute (KDI) stated in its report titled "Measures to Improve the Market Function of the Emission Trading System," released on the 18th, that "to reflect the enhanced greenhouse gas reduction targets in the emission allowance market, it is necessary to gradually ease the carryover restrictions."

KDI explained that despite Korea's greenhouse gas reduction targets being significantly strengthened, emission allowance prices have instead fallen, causing the price mechanism to malfunction. Companies are choosing to purchase emission allowances rather than investing in greenhouse gas reduction facilities and technologies, and the size of climate response funds financed by emission allowance sales revenue has also shrunk.

KDI analyzed that the root of this problem lies in the 'carryover restriction' introduced in 2017. This measure was implemented to induce the sale of excess emission allowances and stabilize market supply, but its effect of lowering demand for emission allowances became excessively large, leading to price declines.

KDI stated, "The carryover restriction is undermining the price function and efficiency of the emission trading system," and explained, "It is necessary to ease the carryover restriction on emission allowances so that the enhanced greenhouse gas reduction targets can be reflected in the emission allowance market."

However, if the carryover restriction is eased, demand from companies aiming to stockpile emission allowances in advance may increase, causing a short-term surge in demand and prices. To prevent this, KDI recommended introducing an explicit market stabilization system that utilizes planned reserves.

The institute explained that a system adjusting total supply according to emission allowance prices should be introduced to stabilize prices and improve market efficiency. KDI also emphasized the need to relax the auction participation restrictions, currently limited to entities with paid allocations, to prepare for supply shortages, and to activate consignment trading through financial institutions and securities firms to reduce transaction cost burdens.

Furthermore, KDI stated that to assist companies' long-term decision-making, a long-term plan for the total supply of emission allowances should be announced in advance to improve market predictability.

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