Korea sets temporary floor price for ETS

The Korean Ministry of Environment has introduced a temporary minimum price on the secondary market in the Korea ETS (K-ETS) in response to a continued decline in prices.
 

The temporary minimum price took effect 19 April 2021 on the Korea Exchange (KRX) for 2020 allowances and will remain in force for up to a month, but it can be removed sooner should Korean Allowance Unit (KAU) prices rise 10% or more above the floor price for five consecutive days. Prices have declined steadily since late 2020 after beginning to recover in October 2020.

The conditions triggering the floor price and the price level settings are regulated by the Act on Allocation and Trading of Greenhouse Gas Emissions and its Enforcement Degree, which allow for a number of market stabilization measures. The Ministry of Environment released a notice on 16 April stating that KAUs had traded below a rolling trigger price for market stabilization measures for more than a month, enabling the government to intervene to stabilize price levels. This marks the first time a price floor for secondary market trading has been applied.

The floor price was set 10% below the lowest transaction price on the emissions permit exchange over the previous five-day period, at KRW 12,900 won (USD 11.57).  K-ETS auctions are already subject to a reserve  price based on the average price over various points during the previous three months (see the ICAP 2021 Status Report for specifics).

The Ministry of Environment has confirmed that there will be an oversupply of KAUs in the K-ETS for the 2020 compliance year, and analysts with Ecoeye have estimated that the surplus will reach 24 million allowances by the compliance deadline of 30 June 2021. The Ministry of Environment is expected to release a supply and demand report covering the 2020 compliance period by May 2021. Some four million allowances are likely to be cancelled after the compliance deadline, as holders of these allowances will not be able to sell enough KAUs to be able to bank the units in accordance with market regulations. These regulations set quantitative limits on the number of bankable allowances between the 2020 and 2021 compliance years.

The K-ETS has dealt with price volatility and low market liquidity in recent years, prompting amendments enabling financial intermediaries in the secondary market to  trade allowances as well as converted carbon offsets on the KRX in Phase 3 of the K-ETS which began in 2021. The Environment Ministry has also re-iterated its intention to appoint three new “market makers”, institutions that can draw on a government-held reserve of 20 million allowances to increase liquidity in the market, in late April or early May 2021.

The Ministry of the Environment hopes that increased participation in the K-ETS will bring more stability to trading conditions, flexibility to trading volumes, and invigorate the market further.