Korea Emissions Trading Scheme
The Korea ETS (K-ETS) was launched in 2015, becoming East Asia’s first nationwide mandatory ETS and, at the time, the second-largest carbon market after the EU ETS. The K-ETS covers 684 of the country’s largest emitters, accounting for ~73.5%* of national GHG emissions. It covers direct emissions of six GHGs as well as indirect emissions from electricity consumption. The K-ETS is meant to play an essential role in meeting Korea’s 2030 updated NDC target.
The legal base for green growth and implementation of the K-ETS is the “Framework Act on Low Carbon, Green Growth” (2010). The “Act on Allocation and Trading of Greenhouse Gas Emissions Allowances” (Emissions Trading Act) and its Enforcement Decree, passed in 2012, stipulate government actions, institutions, and timelines for the K-ETS. Further details of the K-ETS have been outlined in three “Master Plans” (January 2014, February 2017 and December 2019). Detailed Allocation Plans have been released for each trading phase (January 2014, July 2018, and September 2020).
The K-ETS was preceded by a mandatory GHG and Energy Target Management System (TMS) launched in 2012 (following a two-year pilot phase that started in 2010). 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.
In 2021, Korea enacted the “Carbon Neutral Green Growth Framework Act for Response to Climate Crisis” (Carbon Neutral Framework Act), which institutionalized the carbon neutrality goal for 2050 that the government had originally announced in 2020. Furthermore, during COP 26, the government announced that it would seek to increase its 2030 NDC goal, initially for a 24.4% reduction from 2017 emissions, to 40% below 2018 emissions. This proposed increase in ambition is also 5% above the minimum set in the Carbon Neutral Framework Act.
With regards to the ETS, the government decided to suspend the monthly allowance auctions from February to May, following assessments of low allowance prices and oversupply for the 2020 compliance year, in part due to lower emissions in covered entities arising from the COVID-19 pandemic. These circumstances also led the government to implement a temporary price floor for allowances traded in the secondary market in the Korea Exchange (KRX) from 19 to 26 of in late April. In the second half of the year, both prices and trading volumes increased.
Starting from Phase 3, domestic financial intermediaries (“third parties”) can participate in the secondary market and trade allowances as well as converted carbon offsets on KRX. In line with this, 20 third parties were approved for participation in the carbon market from December 2021. However, they can only hold up to 200,000 allowances each, to avoid excessive market share. To support market liquidity, the “market maker system” that was introduced in Phase 2 saw the appointment of three new financial institutions in April 2021, in addition to the two market makers that had been appointed in 2019.
Emissions & Targets
BY 2030: At least 35% reduction below 2018 emissions (Carbon Neutral Framework Act); 40% reduction below 2018 levels (proposed revised NDC)
BY 2050: Carbon neutrality (Carbon Neutral Framework Act)
Size & Phases
PHASE ONE: 3 years (2015-2017)
PHASE TWO: 3 years (2018-2020)
PHASE THREE: 5 years (2021-2025)
PHASE ONE (2015-2017): 1,686.3 MtCO2e, including a reserve of 88 MtCO2e for early action and new entrants. 84.5% of the reserve was used within the phase. 14.3 million allowances were set side in a reserve for market stabilization, bringing the total number of allowances in Phase 1 to 1,700.6 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 Stability Mechanisms’ 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 the 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, petrochemical, cement, oil refinery, nonferrous metals, paper, textile, 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 are disaggregated such that the K-ETS covers the following six sectors: heat and power, industry, buildings, transportation, waste, and the public sector. These sectors are divided into 62 sub-sectors.
PHASE THREE (2021-2025): The K-ETS covers the following six sectors: heat and power, industry, buildings, transportation, waste, and the public sector. The transport sector was widened to include freight, rail, passenger, and shipping, and 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/year, and facility emissions in excess of 25,000 tCO2/year.
Next to direct emissions coverage, the K-ETS also covers indirect emissions from electricity consumption. The same inclusion thresholds apply.
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. No one bidder can purchase more than 30% of the allowances offered. The auctions are subject to a minimum price set by the following formula:
(average price over the previous three months + average price of last month + average price over the previous three days)/3
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.
Fuel-specific benchmarks apply to electricity generators and will be updated again by the end of 2023. Industry benchmarks are currently undergoing revisions.
EITE sectors receive 100% free allocation when meeting the following criteria:
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, which excludes EITE sectors, can participate in auctions. The same auction provisions as for Phase 2 apply.
As per the 2022 Auction Allocation Plan, total auction volume for the year is planned to be 25.8 MtCO2e, which represents around 4% of the 589.3 MtCO2e 2022 cap (excluding reserves).
Domestic financial intermediaries and other third parties can participate in exchange trading since 2021. A futures market will be introduced as a part of Phase 3 reforms at a yet-to-be-determined date.
* 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 775.5 billion (USD 667.5 million)
In 2021: KRW 294.8 billion (USD 257.7 million)
Climate response fund including support for mitigation equipment, low-carbon innovation, and technology development of ETS-covered entities.
One year. Entities need to surrender allowances for the previous emissions year by the end of June.
REPORTING FREQUENCY: Annual reporting of emissions must be submitted within three months from the end of a given year (by the end of March).
VERIFICATION: Emissions must be verified by a third-party verifier.
OTHER: Emissions reports are reviewed and certified by the Certification Committee of the Ministry of Environment within five months from the end of a given compliance year (by the end of May).
If the liable entity fails to report emissions correctly, the report will be disqualified.
The penalty shall not exceed three times the average market price of allowances of the given compliance year or KRW 100,000 (USD 87.42)/tonne.
MARKET PARTICIPATION: Initially only compliance entities could trade in the K-ETS, but sectors that receive 100% free allocation are not allowed to participate in auctions (in Phase 3, this represents 41 of 69 industries). Since 2019, financial institutions designated by the government can participate in the K-ETS as market makers, to increase the liquidity of the market. As of December 2021, there are five such market makers.
Furthermore, as per the “Emissions Trading Act” and the Presidential Decree, emission trading brokers can also participate in the market, and 20 financial intermediaries are participating as of December 2021. However, each can only hold up to 200,000 allowances, to prevent any from obtaining excessive market share.
Primary: Although allowances were occasionally auctioned in 2016 and 2018, a regular auction schedule only began in 2019. 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 in 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.
AUCTION RESERVE PRICE: Regular auctions as well as auctions for market stability are subject to a reserve price determined by a formula (see “Allocation” section).
ALLOCATION COMMITTEE: An Allocation Committee is in place to implement market stabilization measures in particular cases:
- 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 40% of the average price of the two previous years; or
- it is difficult to trade allowances due to an imbalance of supply or demand.
The stabilization measures may include:
- additional auctioning of allowances from the reserve (up to 25%);
- 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 2016, the Allocation Committee doubled the borrowing limit to 20%; as well, an additional 0.9 million allowances were offered for sale at a reserve price of KRW 16,200 (USD 14.16), of which almost one-third were sold.
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. In 2021, the Allocation Committee set a price floor of KRW 12,900/t (USD 11.28) in April and KRW 9,450/t (USD 8.26) in June.
As of the end of 2021, there are five 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 stability. Market makers can return allowances in-kind or transfer the proceeds of allowances sold.
In 2016, overall responsibility for the K-ETS moved from the Ministry of Environment (MOE) to the Ministry of Economy and Finance (MOEF). In January 2018, responsibility was transferred back to the MOE, although the MOEF still chairs the Allocation Committee.
Korea Exchange (Trading Platform)
Greenhouse Gas Inventory and Research Center (GIR; 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 as of June 2020)
Third Allocation Plan