"To Stabilize the Greenhouse Gas Emission Trading Market, 'Carryover Restriction Measures' Must Be Eased"

Domestic Carbon Price Falls to Around 7,000 Won
Price Volatility Burdens and Hinders Private Reduction Efforts

Seoul Jung-gu Korea Chamber of Commerce and Industry. Photo by Jinhyung Kang aymsdream@

Since the implementation of the domestic greenhouse gas emissions trading system in 2015, the price of emission permits has plummeted to the 7,000 KRW range for the first time. Some argue that the restrictions on the rollover of surplus emission permits held by companies should be eased.

On the 13th, the Korea Chamber of Commerce and Industry (KCCI) released a report titled "Domestic Greenhouse Gas Emissions Trading System Price Trends and Policy Tasks," stating, "The domestic emissions trading system price started at 8,640 KRW in January 2015, rose to 42,500 KRW in early 2020, and since April 2020, the price has fluctuated sharply, falling to 7,020 KRW in July. Since the government's rollover restriction measure, introduced to increase the supply of emission permits in the market, is a major cause of the price plunge, the rollover restriction should be eased."

Korea has been operating the greenhouse gas emissions trading system since 2015. Companies can sell or buy emission permits if they have a surplus or shortage of permits allocated by the government. Under the current system, participating companies are limited to rolling over only up to twice the net amount of permits sold to the following year. Starting next year, only the net sold amount can be rolled over.

Rollover Restriction on Emission Permits Causes Surge in Sales Due to Fear of Permit Expiration... Reason for Price Decline

KCCI pointed out that while the decrease in emissions due to COVID-19 is a factor in the price decline since April 2020, the main cause is the government's rollover restriction on emission permits.

Last year, Korea's greenhouse gas emissions were tentatively estimated at 655 million tons, a 10% decrease compared to 2018. However, KCCI explained that the price plunge cannot be explained by emission reductions alone. Although major countries such as the European Union (EU) and the United States also saw emission reductions due to COVID-19, emission permit prices in Europe rose by more than 400% and in the U.S. by nearly 150% since April 2020.

KCCI pointed out that since the amount of emission permits that companies can roll over from their surplus is limited to twice the amount of permits sold, the fear of expiration of permits that cannot be rolled over has increased the volume of permit sales, causing prices to plummet.

Professor Yoo Jong-min of Hongik University said, "Korea's rollover restriction on emission permits was introduced to discourage companies from holding onto carbon permits without selling them in a situation where permit prices were continuously rising," adding, "If the rollover restriction is not eased, the problem of carbon prices plunging will repeat every year."

Policy Tasks: Easing Rollover Restriction Criteria, Introducing Market Stabilization Measures, etc.

In response, KCCI proposed ▲ easing the rollover restriction on emission permits ▲ introducing fundamental market stabilization measures ▲ supporting market stabilization through rollover and utilization of government reserve permits.

KCCI stated that since there are sufficient emission permits circulating in the market currently, it is necessary to gradually ease the rollover restriction criteria by referring to the pre-2019 standard (three times the net amount of permits sold).

Along with this, KCCI argued that fundamental market stabilization measures should be introduced to complement the possibility of a sharp surge in demand and prices of emission permits after easing the rollover restriction. According to KCCI's analysis, the U.S. and EU currently seek to stabilize emission permit prices by pre-setting price or volume criteria.

KCCI emphasized the need to particularly refer to the EU's market stabilization measures. Since 2019, the EU has maintained the volume of emission permits circulating in the market within a range of 400 million to 833 million tons by adjusting the supply of permits within a certain range to stabilize prices. Accordingly, if the supply volume falls below 400 million tons, the government supplies additional reserve permits it holds, and if it rises above 833 million tons, the allocation is reduced to stabilize prices.

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

Furthermore, to implement volume-based market stabilization measures like the EU's, the government needs to secure sufficient reserve emission permits. Therefore, it was proposed that the government should not discard remaining reserves from each plan period but roll them over to the next plan period to be used for price stabilization.

Woo Tae-hee, Executive Vice Chairman of KCCI, said, "With the 2050 carbon neutrality and the 2030 national reduction target (NDC) decided, the need for companies to reduce greenhouse gas emissions will increase further," adding, "To enable companies' reduction investment decisions, market stabilization measures must be promptly established so that emission permit prices operate predictably according to market mechanisms."

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