Carbon offsets on the Korea Exchange have jumped 20.7% over the past two days to 13,400 won ($11.36), catching up with OTC prices as buyers stepped in to scoop up fresh supply after the government issued around 4 million new offset credits.
Korean Carbon Units (KCUs) on the exchange surpassed 12,000 won on Monday and 13,000 on Tuesday, the highest levels since they began trading in April this year, although the buying was on low volumes.
A total 33,000 KCUs traded over the past two days, the first such deals on the exchange since June 19.
Supply of both allowances and offsets has been limited in the Korean market, though the recent issuance of Korean Offset Credits (KOCs) has helped. With ETS participants claiming they are 10-20% short, there is no shortage of willing buyers.
“KOCs can only be traded in the OTC market, and there has been only one or two major sellers who could easily raise the unit price up to over 13,000 won regardless of the price of other types of credits,” one market participant said.
He referred to South Korea’s two offset types – KOCs, which trade OTC and can only be used for ETS compliance when converted into KCUs, the offset type offered on the exchange.
Due to the limited supply, KOCs have mostly been picked up as soon as they were issued, meaning sellers haven’t needed to convert them to KCUs to use the exchange. As a consequence, price levels on the exchange have regularly been quoted 10-20% below OTC prices, but with no liquidity to back them up.
“I think the situation is changing. Now, some compliance companies are putting their KAUs up for sale and more offset sellers are coming into the market with new volume,” the market participant said.
A total of 140,000 allowances have traded on the exchange this month, but the price remains relatively subdued at 11,700 won. However, the asking price for KAUs through a consultative sales process – an optional way to trade on the KRX – hit 14,000 won on Tuesday.
Some companies in the power sector, the most under-supplied sector in the ETS, plan to wait until early next year to enter the market due to what they consider “unstable” prices, sources said.
That might pave the way for further price hikes in the next couple of months, though the fact that the Ministry of Environment is losing authority over the ETS to the Ministry of Strategy and Finance could have unexpected consequences, especially if the new market regulator decides to increase allocation levels to deal with over 40 ongoing lawsuits against the scheme.
By Stian Reklev – stian@carbon-pulse.com
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