Pressure grows on Korea to release ETS permit reserve as offset supply remains thin

Published 10:48 on February 19, 2016  /  Last updated at 10:50 on February 19, 2016  /  Asia Pacific, South Korea  /  No Comments

South Korea on Friday issued 231,972 Korean Offset Credits (KOCs) taking the total number of cancelled CERs to hit the market to 7.33 million, but supply remains scarce and market participants are increasingly calling on the government to release the market stabilisation reserve.

South Korea on Friday issued 231,972 Korean Offset Credits (KOCs) to take the total number of cancelled CERs to hit the market to 7.33 million, but supply remains scarce and market participants are increasingly calling on the government to release the market stabilisation reserve.

The offsets issued Friday were from seven different Korea-based CDM projects and went to three companies, sources told Carbon Pulse.

Access to South Korea’s offset registry system is restricted to market participants.

The KOCs can be converted to Korean Carbon Units (KCUs), which are eligible for use in the emissions trading scheme.

KCUs traded at record highs of 16,500 won ($13.38) in the OTC market on Thursday as emitters are desperate to pick up any supply in a market they say is undersupplied by 10-20%.

But the steady trickle of KOCs does little to change the overall balance in the market, which was capped at around 575 million tonnes of CO2 in 2015.

Offset supply from new projects is scant, although sources told Carbon Pulse that the government last week approved three new methodologies, including one on waste heat recycling that observers said had potential to deliver volume. A total of 19 methodologies have now been approved.

PRICE STABILISATION RESERVE

Many market participants believe that bigger changes than steadily increasing offset supply are needed to balance out supply and demand and are eyeing the reserve of 69 million allowances set aside for 2015-2017 for purposes such as stabilising market prices and new entrants.

“Almost every compliance company I have spoken to recently has said that the government must use the reserve volume to increase supply and stabilise the price,” one market observer told Carbon Pulse.

A non-binding provision in the ETS allocation plan suggests the government can release some or all of the reserve to adjust the price if it stays above 10,000 won for an extended period of time.

Market participants point out that the allowance price has stayed above 10,000 won for over a year now, even though only 320,100 permits have actually traded in that period.

Korean Allowance Units (KAUs) closed Friday at 13,100 won, up 2.3% on the day but with no permits changing hands.

A political decision on whether to release the reserve may have been delayed by the uncertainty over which government agency will be responsible for running the ETS.

The Ministry of Environment is currently administering the market, but the government has been planning for a while to shift the responsibility over to the more business-friendly Ministry of Strategy and Planning.

However, the move has not been formally announced and the lack of clarity has increased speculation in policy circles that the government may not go ahead, amid concern it would put South Korea’s climate policy in a bad light internationally.

LAWSUITS AND EARLY ACTION

There are two other potential sources of market supply.

Companies and industry associations have filed more than 40 lawsuits against the allocation plan, and even though Hyundai Steel lost the first of those in December, emitters remain hopeful that future court decisions will go their way.

The government has also said that some 41 million allowances will be distributed to companies that can prove they have undertaken early action to cut emissions.

Experts say that lack of certainty over how many of those extra allowances will be handed out may be restricting the way some firms behave in the market.

The government also plans to compensate upstream utilities for their emissions costs using a reference price that it has not yet finalised, and that may further alleviate some concerns when clarified.

By Stian Reklev – stian@carbon-pulse.com

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