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Carbon neutrality

S.Korea to allow brokerages to trade carbon credits

Financial services firms will be allowed to trade emission permits only for their own accounts

By Sep 08, 2021 (Gmt+09:00)

S.Korea to allow brokerages to trade carbon credits

Financial services companies, including brokerage firms, will be able to participate in South Korea's carbon emission trading market by year's end at the earliest, which the government expects to enhance the market liquidity and ease the price volatility of carbon credits.

The Ministry of Environment announced the relevant regulations on Tuesday, a week after the National Assembly passed the law aimed at achieving the government's goal of becoming carbon neutral by 2050.

To initiate carbon trade which will be restricted to trading with their own balance sheet, financial services companies are required to register with the Korea Exchange. Their trading volume of emission permits will be capped at 200,000 tons per company so that a few financial services firms cannot dominate the market, according to the ministry. 

Going forward, the environment ministry will consider expanding the scope of financial services companies' carbon trading business to those for both carbon-emitting companies and individual investors.

A carbon credit is a permit that allows the company that holds it to emit a certain amount of carbon dioxide or other greenhouse gases. The price of carbon credits traded in the market changes in real time according to demand and supply.

A limited number of market participants and excessive trade around June when the settlement falls due were blamed for the volatility and drastic increase in the carbon credit price, while the governments around the world are increasingly limiting the level of carbon emissions allowed for firms.

Under the emission trading scheme introduced in 2015, the South Korean government allocates a limit on each company’s annual emissions. To emit more than the allocated amount, they need to purchase carbon credits from other companies.

To expand the emissions trading scheme, the government plans to introduce a relevant futures market, details on which have not been unveiled yet.

"Third parties' participation in the emission trading market will create a market where companies can buy carbon credits on a regulator basis," the ministry said in a statement. "It will also likely resolve the imbalance of supply and demand and the price volatility problem." 

The trading volume of carbon credits in the country has soared more than sevenfold to 44 million tons in 2020, versus 5.7 million tons in 2015.

To achieve carbon neutrality by 2050, South Korea aims to slash its carbon emissions by about 35% by 2030 from its 2018 level, a more aggressive target than the previously-stated 26.3%.

The government will maintain the current market maker system under which the Korea Development Bank and the Industrial Bank of Korea have been providing both buy and sell quotes for carbon credits since June 2019. Hana Financial Investment Co., Korea Investment & Securities Co. and SK Securities Co. have joined them as market makers since May of this year.

Meanwhile, domestic asset managers are preparing to launch the country's first set of carbon credit-themed exchange-traded funds  later this month to address the rising investor demand for carbon trading. The new ETFs will largely follow the movements of carbon futures in the US and European markets.

Write to So-hyeon Kim at alpha@hankyung.com

Yeonhee Kim edited this article.

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