Secondary offset market emerges in South Korea

Published 15:07 on April 13, 2015  /  Last updated at 16:36 on April 13, 2015  /  Asia Pacific, South Korea  /  No Comments

Offset credits have started trading in small amounts at 10,450 won ($9.50) in the Korean carbon market, offering a window of profitability for CDM project owners that take their carbon credits out of the UN market and offer them to the domestic market instead.

Offset credits have started trading in small amounts at 10,450 won ($9.50) in the Korean carbon market, offering a window of profitability for CDM project owners that take their carbon credits out of the UN market and offer them to the domestic market instead.

The Korean Carbon Units (KCUs) closed on the Korea Exchange (KRX) Monday at 10,450 won, compared to 10,100 for KAUs, the regular allowances under the Korean ETS.

No KCUs traded Monday, but 75,000 changed hands on Friday at the same price level, marking the first action in South Korea’s nascent carbon market since mid-January, after which it has been caught in a Mexican stand-off amid complaints from industry that they have been under-allocated, severely restricting market supply.

Earlier this month the South Korean government issued the first offset credits under the scheme, in exchange for proof that owners of Korea-based CDM projects had cancelled CERs generated after April 2010.

Some of those offsets are now trickling into the market, and at $9.50 offer a significantly improved revenue opportunity compared to the EU market, where CERs at the moment are valued at $0.56.

This means the Korean market is at the moment the world’s only carbon market where offsets appear to  trade higher than allowance prices, although market participants say the real value of KAUs are uncertain, given that they haven’t traded since Jan. 16.

“It’s not true that KAUs are cheaper than KCUs. There is just no trading activity and I believe that KRX marks on last trade, or on the bid,” one trader told Carbon Pulse.

“In reality, KAUs would trade at least on level, and I think more expensive, than KCUs.”

CONVERSIONS

While a fresh supply of offsets is welcomed by utilities and manufacturers, immediate supply is likely to be limited, and the exchange-traded volumes even smaller.

Around 2.2 million CERs have been cancelled from the UN and New Zealand registries so far with the intention of converting them to Korean Offset Credits (KOCs). The Korean Ministry of Environment has converted 1.91 million.

But using the offsets in the domestic market is a two-legged process.

Anyone in South Korea can trade KOCs, and the majority of those offsets are expected to be sold by developers to emitters, either directly or via speculators.

But in order to use the offsets for compliance under the ETS, they have to be converted further to KCUs. Only after that will they be listed on the KRX, and KCUs can only be traded by compliance buyers or a handful of public policy banks cleared for the market.

“I think the KRX should list KOCs for liquidity,” the trader said.

“I think there would be more liquidity in KCUs than KAUs, but most liquidity could be achieved by listing KOCs to allow non-allocated companies to also provide liquidity in this market.”

If the KRX wanted to list KOCs it would need approval by the government, which initially banned non-covered companies from participating in the market in a bid to avoid price manipulation by speculators.

By Stian Reklev – stian@carbon-pulse.com