S.Korea to launch first carbon credit ETFs in September

South Korea will launch its first set of carbon credit-themed exchange-traded funds (ETFs) next month, in a move to address the rising investor demand for carbon trading.

According to the industry on Aug. 13, three of the country’s leading asset management firms -- Samsung Asset Management, NH-Amundi Asset Management and Shinhan Asset Management -- have submitted applications to the Korea Exchange to list their ETFs simultaneously within September at the earliest.

The new ETFs will largely follow the movements of carbon futures in the American and European markets. The asset management industry expects that the ETFs will enable retail investors in Korea to participate in the carbon futures market more conveniently.

Carbon credit ETFs have not been so popular in global markets until this year, when carbon credit prices have grown at a striking rate of 70% year-to-date. Europe had listed its first carbon credit ETF, called ETFS Carbon (CARB), on the London Stock Exchange in 2008, but was later delisted due to low performance. Experts highlight that CARB failed to perform as well as expected due to the oversupply of carbon credits in the market at the time, when the regulations were not so stringent as today.

But due to stricter regulations in Europe and the US, the firms are now only allowed to emit lower levels of greenhouse gases and thus must purchase carbon credits to offset any excess carbon emission. In the European market, the price of carbon credit has surpassed 50 euros per ton for the first time in May at the Intercontinental Exchange (ICE) Futures Europe. Some experts, including Berenberg Bank’s joint head of carbon and utilities research Lawson Steele, project that the price will reach 110 euros per ton by the year-end.

In the US, stronger demand for carbon credit has created the country’s first set of carbon credit ETFs, KraneShares Global Carbon ETF (KRBN), in July 2020. In just about 12 months since its launch, KRBN now has more than $500 million under management and also posted a year-to-date profit of 49.4% this year as of Aug. 11.

South Korean financial industry expects the new carbon credit ETFs in Korea will better address the demand of retail investors for the carbon segment. While the retail investors in South Korea can technically invest in carbon trading in Europe, the world’s largest market, they must undergo a stringent process including deposit payments. South Korea’s own carbon trading futures market is expected to open in 2023.

Experts say that carbon credit prices are likely to continue to rise, as the governments around the world are increasingly limiting the level of carbon emissions allowed for firms. On the other hand, the firms are expected to emit more greenhouse gases than before, as the world is slowly coming out of the pandemic, meaning that they must purchase more carbon credit from the market.

“Carbon credit has now become a type of commodity, like gold and oil. Its average annual growth rate since 2015 is 37.8%, much higher than gold at 5.4% and crude oil at 6.8%,” said Meritz Securities in a recent report.

Write to Eun-seo Koo at koo@hankyung.com
Daniel Cho edited this article.