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Korea Emissions Trading Scheme

Compare ETS
ETS Status
in force
Jurisdictions
Korea, Republic of
Start of operation (year)
2015
Sectoral coverage
Waste
Domestic Aviation
Transport
Buildings
Industry
Power
Allocation
Free Allocation (Grandparenting; Benchmarking) and auctioning
Offsets and credits
Domestic and international
Cap
589,3 MtCO2e (2023)
GHGs covered
CO2, CH4, N2O, PFCs, HFCs, SF6
Average auction price (2022)
KRW 23,243 (USD 17.99)
Average secondary market price (2022)
KRW 20,633 (USD 15.97)
Total revenue since beginning
KRW 1,092.6 billion (USD 845.2 million)
Total revenue (2022)
KRW 317.1 billion (USD 245.4 million)
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General Information

The Korea Emissions Trading Scheme (K-ETS) launched in 2015 as East Asia’s first nationwide, mandatory ETS. It covers around 74% of South Korea’s national GHG emissions and will help the country in its objective to become carbon neutral by 2050, a target embedded in the “Carbon Neutral Framework Act” of 2021.

The K-ETS covers 684 of the country’s largest emitters in the power, industrial, buildings, waste, transport, and domestic aviation sectors. At least 10% of allowances must be auctioned. Free allocation is provided for EITE sectors based on production cost and trade intensity benchmarks. Since 2021, domestic financial intermediaries and other third parties have been able to participate in exchange.

The K-ETS was established by the “Framework Act on Low Carbon, Green Growth” (2010). It was preceded by a mandatory Target Management System (TMS) which launched in 2012, following a two-year pilot phase. The TMS facilitated the collection of verified emissions data and training in the MRV process, and still applies to smaller entities not covered by the K-ETS.

From August, the government met regularly with relevant ministries, enterprises, associations, and experts as part of a major stakeholder consultation process. The first set of near-term changes were announced in November, and included:

 

1.       Increasing incentives to reduce emissions and facilitate low-carbon investment by issuing more free allowances to the top 10% most efficient covered entities per sector and to those which implement new energy efficiency measures.

2.       Encouraging trading and mitigating price volatility by opening up the ETS to more financial firms and increasing the current Korean Allowance Unit (KAU) holding limit. Consignment trades will also be permitted.

3.       Facilitating the conversion of international offset credits to Korean Credit Units (KCUs).

4.       Strengthening the MRV system.

5.       Increasing support for small businesses and new entrants.

Longer-term changes – including the development of a roadmap to better align the cap with the country’s updated NDC – will be implemented with the establishment of new rules for Phase 4, which begins in 2026. The government also intends to increase the share of auctioning, a pre-emptive response to potential upcoming trade requirements, e.g., the EU’s carbon border adjustment mechanism.

Waste
Domestic Aviation
Transport
Buildings
Industry
Power

Emissions & Targets

727

BY 2030: At least a 35% reduction below 2018 emissions (Carbon Neutral Framework Act); 40% reduction below 2018 levels (updated NDC)

BY 2050: Carbon neutrality (Carbon Neutral Framework Act)

KRW 23,243 (USD 17.99) (Average auction price in 2022)

KRW 20,633 (USD 15.97)(average secondary market price in 2022; updated prices available here)

Size & Phases

554.00MtCO2e
CO2, CH4, N2O, PFCs, HFCs, SF6

PHASE ONE: 3 years (2015-2017)
PHASE TWO: 3 years (2018-2020)
PHASE THREE: 5 years (2021-2025)

PHASE ONE (2015-2017): 1,689.2 MtCO2e, including a reserve of 89.4 MtCO2e for early action and new entrants. 84.5% of the reserve was used within the phase. 14.3 million allowances were set aside in a reserve for market stabilization (see ‘Market Stability Provisions’ section), bringing the total number of allowances in Phase 1 to 1,704.2 million.

Annual Caps in Phase One:
2015: 540.1 MtCO2e
2016: 560.7 MtCO2e
2017: 585.5 MtCO2e

PHASE TWO (2018-2020): 1,777 MtCO2e, including 134 million for new entrants and other purposes. 14 million allowances were set aside for market stabilization and 5 million for the market makers (see ‘Market Design’ section) bringing the total amount of allowances to 1,796.1 million in Phase 2.

Annual Caps in Phase Two:
2018: 593.5 MtCO2e
2019: 563.2 MtCO2e
2020: 562.5 MtCO2e

PHASE THREE (2021-2025): 3,048.3 MtCO2e. This corresponds to an average annual cap of 610 MtCO2e, including reserves. Annual caps appear higher in Phase 3 due to the expansion in scope but reflect a 4.7% decrease in emissions compared to the 2017-2019 baseline. In addition, 14 million allowances are set aside for market stability purposes and 20 million for market makers, bringing the total amount of allowances in Phase 3 to 3,082.3 million.

Annual Caps in Phase Three (excluding reserves):
2021: 589.3 MtCO2e
2022: 589.3 MtCO2e
2023: 589.3 MtCO2e
2024: 567.1 MtCO2e
2025: 567.1 MtCO2e

PHASE ONE (2015-2017): 23 sub-sectors from the following five sectors: power, industry (e.g., iron and steel, petrochemicals, cement, oil refining, nonferrous metals, paper, textiles, machinery, mining, glass, and ceramics), buildings, waste, and transportation (domestic aviation).

PHASE TWO (2018-2020): According to the Phase 2 Allocation Plan, the public and waste sectors were disaggregated such that the K-ETS covered the following six sectors: heat and power, industry, buildings, transportation, waste, and the public sector. These were divided into 62 sub-sectors.

PHASE THREE (2021-2025): Coverage within the transport sector was widened to include freight, rail, passenger, and shipping. Construction industries have also been brought into the system’s scope. This increased the number of sub-sectors to 69.

INCLUSION THRESHOLDS: Companies emitting more than 125,000 tCO2 per year, and facility emissions in excess of 25,000 tCO2 per year.

Next to direct emissions coverage, the K-ETS also covers indirect emissions from electricity consumption. The same inclusion thresholds apply.

Point source (power, industry, buildings, transport, domestic aviation, waste, public/other); downstream (buildings).

684 (2021, at the start of the Phase 3)

Allowance Allocation & Revenue

PHASE ONE (2015-2017)
Free Allocation: 100% of total allowance supply. Most sectors received free allowances based on the average GHG emissions of the base years (2011-2013). Three sub-sectors (grey clinker, oil refining, and aviation) were allocated free allowances following benchmarks based on previous activity data from the base years (2011-2013).

PHASE TWO (2018-2020)
Free Allocation: 97% of allocation to entities in sub-sectors subject to auctioning; 100% for EITE sectors. Toward the end of Phase 2, the share of sector-specific benchmarking reached 50% of total primary allocation and was expanded to a total of seven sub-sectors: grey clinker, oil refining, domestic aviation, with the addition of waste, industrial parks, electricity generation, and district heating/cooling.

EITE sectors received 100% of their allowances for free if they met one of the following three criteria:*

  • Additional Production Cost of >5% and Trade Intensity of >10%; or
  • Additional Production Cost of >30%; or
  • Trade Intensity of >30%.**

Auctioning: 3% of allocation to entities in sub-sectors subject to auctioning. 26 sub-sectors were eligible to participate in auctions, including entities from the electricity, domestic aviation, wooden products, and metal foundry sectors. Regular auctions began in 2019. In 2019, authorities auctioned a total of 7.95 million allowances, and 9.3 million in 2020.   

Participation in auctions is subject to some limitations. Only companies that do not receive all their allowances for free are eligible to bid, with a list of eligible bidders published by the Ministry of Environment. Bidders can purchase 15-30% of the allowances on offer. The auctions are subject to a minimum price.

PHASE THREE (2021-2025)
Free Allocation: Less than 90% of free allocation to entities in sub-sectors that are subject to auctioning; 100% for EITE sectors. The share of sector-specific benchmarking is to reach 60% and has been expanded to a total of 12 sub-sectors: grey clinker, oil refining, domestic aviation, waste, industrial parks, electricity generation, and district heating/cooling, with the addition of steel, petrochemicals, buildings, paper, and wood processing.

EITE sectors receive 100% free allocation if they meet the following criteria: Production cost*Trade Intensity≥0.2%

Allocation is calculated using the following formulas:

  • Benchmark allocation: Benchmark value (tCO2e/t) x historical activity level (t) x correction factor x carbon leakage factor
  • Grandparenting allocation: Average GHG emissions of base year x correction factor x carbon leakage factor

The carbon leakage factor is 1.0 for sectors exposed to significant risk; for non-EITE sectors, it is 0.9.

A tightening of benchmarks to align the K-ETS with long-term climate targets is under discussion.

Auctioning: At least 10% of allocation to entities in sub-sectors subject to auctioning. Entities from 41 sub-sectors, excluding EITE sectors, can participate in auctions. The same auction provisions as for Phase 2 apply. The government is expected to increase the share of auctioned allowances in the coming years.

As per the 2023 Auction Allocation Plan, total auction volume for the year is planned to be 20.6 MtCO2e, which represents around 3% of the 589.3 MtCO2e 2023 cap (excluding reserves).

* Additional Production Cost: annual average GHG emissions during base year x average market price of allowances during base year / annual average value-added production during base year

** Trade Intensity is calculated relative to the base year: (annual average exports + annual average imports) / (annual average sales + annual average imports)

Since the beginning of the program: KRW 1,092.6 billion (USD 845.2 million)

In 2022: KRW 317.1 billion (USD 245.4 million)

Climate response fund including support for mitigation equipment, low-carbon innovation, and technology development for small- and mid-sized companies covered by the K-ETS.

Flexibility & Linking

Banking is allowed with restrictions across and within phases.

Borrowing is allowed within a single trading phase.

PHASE ONE (2015-2017): Borrowing was limited to 20% of an entity’s obligation.

PHASE TWO (2018-2020) From Phase 2 to Phase 3, banking was initially limited to the higher of two limits: the net annual amount of allowances sold by the entity in Phase 2; or company- and facility-specific limits of 250,000 KAUs and 5,000 KAUs, respectively. Borrowing was limited to 15% of an entity’s obligation in 2018.

Rules on banking and borrowing were adjusted in 2019. The borrowing limit was set by each entity’s past borrowing activity, according to the following formula: Compliance obligation of the entity x [Borrowing limit of previous year – (“borrowing ratio” in previous year x 50%)]/entity’s emission volume.

The banking limit for the transition between Phase 2 and Phase 3 has been calculated as follows:

  • For allowances from the 2018 vintage (KAU18), entities can bank either three times the net selling amount or 75,000 allowances for companies emitting >125,000 tCO2e (or 15,000 allowances for companies emitting >25,000 tCO2e) — whichever is higher;
  • For KAU19s, the amounts above are reduced by 1/3, i.e., two times the net selling amount or 50,000 for large entities (10,000 for smaller entities) allowances, again whichever is higher;
  • For KAU20s, the amount represents a 2/3 reduction compared to the KAU18 rule.

PHASE THREE (2021-2025): In the first trading year, entities could borrow up to 15% of their compliance obligation. From the second to fourth trading years, the same borrowing formula as for 2019 applies.

Banking in Phase 3:

  • In the first and second compliance years (2021-2023), entities can bank up to two times their net amount of KAUs and offsets (KCUs) sold on the secondary market (excluding swaps and auctions).
  • In the third and fourth compliance years (2023-2024), entities’ banking limits are equal to their net amount of allowances and offsets sold.

Phase 3 allowances and offsets can only be carried over to the first compliance year of Phase 4 (2026-2030). The banking limit in the fifth compliance year (2025) is set by an entity’s annual average net sold units (KAU21-KAU25; KCU21-KCU25) on the secondary market during Phase 3.

Domestic offsets, i.e., Korean Offset Credits (KOCs) were allowed in Phase 1. KOCs and international credits (subject to qualitative criteria) have been allowed since Phase 2. Both domestic and international credits must be converted to KCUs to be used for compliance.

PHASE ONE (2015-2017):

Qualitative Limit: Only domestic credits from external reduction activities implemented by non-ETS entities — and that met international standards — could be used for compliance in this phase. Domestic CDM credits (CERs) and KOCs were allowed. Eligible activities included those eligible under the CDM plus carbon capture and storage, and had to have been implemented after mid-April 2010.

Quantitative Limit: Up to 10% of each entity’s compliance obligation.

PHASE TWO (2018-2020):

Qualitative Limit: In Phase 2, CERs generated from June 2016 from international CDM projects developed by Korean companies were allowed if:

  • At least 20% of the ownership rights, operating rights, or the voting stocks were owned by a Korean company; or
  • A Korean company supplies the low-carbon technology worth at least 20% of the total project cost.

Quantitative Limit: Up to 10% of each entity’s compliance obligation (of which up to 5% can be international offset credits).

PHASE THREE (2021-2025): Offsets are allowed according to the same qualitative criteria outlined for Phase 2. However, limitations have been introduced on the issuance and conversion of credits:

  • GHG reduction projects (according to reduction period coverage) to KOC conversion: 1) April 2010-December 2020: within two years (2021-2022); 2) January 2021 onwards: within three years (2022-2024).
  • KOC to KCU conversion: within two years of KOC issuance.

As of December 2022, there were 272 registered methodologies (211 for CDM and 61 for domestic offsets).

Quantitative Limit: In Phase 3, the share of offsets has decreased to 5% of an entity’s compliance obligation. No separate limit for international credits applies.

No linkage is currently considered.

Compliance

One year. Entities must surrender allowances for the previous emissions year by the end of June.

REPORTING FREQUENCY: Annual reporting of emissions from the previous year must be submitted by 31 March. 

VERIFICATION: Emissions must be verified by a third-party verifier.

FRAMEWORK: Emissions reports are reviewed and certified by the Certification Committee of the Ministry of Environment by the end of May. 

If the liable entity fails to report emissions correctly, the entity is required to revise it so that it estimates emissions correctly.

 

The penalty shall not exceed either three times the average market price of allowances of the given compliance year or KRW 100,000 (USD 77.40) per tonne.

Market Regulation

MARKET PARTICIPATION: Compliance entities. Limited participation for non-compliance entities.

Initially limited to compliance entities, the “market maker” system was introduced in Phase 2 to improve market liquidity. This involved the appointment of three new financial firms in 2021, in addition to the two market makers that had been appointed in 2019. In December 2022, the government announced a further two market makers to begin operating from 2023.

From Phase 3, as per the “Emissions Trading Act” and the Presidential Decree, non-compliance entities in the form of other non-market maker domestic financial intermediaries can participate in the secondary market and trade allowances as well as converted carbon offsets on the Korea Exchange (KRX). In line with this, 20 financial intermediaries were approved for participation in the carbon market from 2021 (the total as of February 2023 is 21 financial intermediaries). Though, they initially could only hold up to 200,000 allowances each, to avoid excessive market share, this number was increased to 500,000 in December 2022.

MARKET TYPES:

Primary: Although allowances were occasionally auctioned in 2016 and 2018 for market stabilization, monthly auctions only began in 2019. Sectors that receive 100% free allocation are not allowed to participate in auctions. Auctions take place via the KRX.

Secondary: The K-ETS has traditionally had a high share of over-the-counter transactions. Additionally, the KRX manages the platform where the spot secondary market transactions take place. Allowances, KCUs and KOCs are traded on the exchange for different vintage years.

LEGAL STATUS OF ALLOWANCES: The legal status of KAUs is not explicitly referenced in “Emissions Trading Act” or the Presidential Decree. However, KAUs are not regulated under financial market law. For the purpose of preventing market price manipulation, unfair trade and to regulate exchange of information, Article 22, paragraph 3 of the “Emissions Trading Act” specifies that certain provisions of “Capital Market and Financial Investment Business Act” apply.

TRIGGERS: An Allocation Committee is in place to implement market stabilization measures if:

  • the market allowance price of six consecutive months is at least three times higher than the average price of the two previous years;
  • the market allowance price of the last month is at least twice the average price of the two previous years and the average trading volume of the last month is at least twice the volume of the same month of the two previous years;
  • the average market allowance price of a given month is lower than 60% of the average price of the two previous years; or
  • it is difficult to trade allowances due to an imbalance of supply or demand.

INSTRUMENTS: Stabilization measures include:

  • additional auctioning of up to 25% of allowances from the market stabilization reserve, which contains 14.3 million allowances;  
  • the establishment of a limit to the number of allowances entities can hold: minimum (70%) or maximum (150%) of the allowances of the compliance year;
  • an increase or decrease of the borrowing limit;
  • an increase or decrease of the offset limit; and
  • temporary setup of a price ceiling or price floor.

In 2018, the Allocation Committee put up for auction an additional 5.5 million allowances from the stability reserve to ease the market in the lead-up to the 2017 compliance deadline; 4.7 million allowances were sold. No more such cases have occurred since.

In 2021, the Allocation Committee set a price floor of KRW 12,900 (USD 9.98) per tonne in April and KRW 9,450 (USD 7.31) per tonne in June.

As of the start of 2023, there are seven K-ETS market makers. These institutions can draw on a government-held reserve of 20 million allowances in a bid to increase liquidity in the market (the government lends allowances to the market makers that provide services for market making).

Other Information

Ministry of Environment: Holds overall responsibility for the K-ETS.

 

Ministry of Economy and Finance: Chairs the Allocation Committee; briefly held overall responsibility for the K-ETS between June 2016 and January 2018.

 

Korea Exchange (KRX): Trading and auctioning platform.

 

Greenhouse Gas Inventory and Research Center (GIR): Responsible for the registry and technical implementation.

The GIR regularly releases summary (evaluation) reports that include key emissions statistics, market performance indicators, and survey results from covered entities.  

Carbon Neutral Framework Act
Enforcement Decree of the Act on the Allocation and Trading of Greenhouse Gas Emissions Allowances 
Act on the Allocation and Trading of Greenhouse Gas Emissions Allowances 
First Basic Plan for 2015-2024 
Second Basic Plan for 2017-2026 
Third Basic Plan of the ETS 
First Allocation Plan 
Second Allocation Plan 
Greenhouse Gas Emissions Allocation and Trade Act (amended in June 2020) 
Third Allocation Plan

 

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