Some 20 million South Korean offsets will come to market during the first three years of the country’s emissions trading scheme, but that will not be enough to cover the permit shortage in the market, analysts at Thomson Reuters predicted.
Not a single permit has traded in South Korea’s new carbon market since mid-January, as permit holders refuse to sell amid claims ETS participants received 20% fewer allowances than they will need during the first phase of the scheme, spanning from 2015 through 2017.
Lobby groups have launched a series of lawsuits against the government to force an increase in permit allocation. In the meantime, emitters are hoping that an inflow of offsets, in the form of Korean-generated CERs converted into domestic offsets, can offer some relief.
However, so far the Ministry of Environment has only announced the conversion of just over 1.9 million CERs.
“We estimate that some 20 million offsets will become available during phase I,” analysts at Point Carbon said in a report this week.
Theoretically almost three times as many could come to market, but the analysts assumed the government will deem offsets from HFC 23 and N2O adipic acid projects – the biggest source of CER supply in South Korea – ineligible.
“A key question in the market right now is how many offsets will be available to close the perceived gap between allocated allowances and the actual need for emission units. We believe 20 million offsets will be insufficient to meet offset demand in KETS,” Point Carbon said.
The company cited a theoretical maximum demand of 187 million offsets over the three years, but stopped short of predicting an overall market balance.
The strong opposition against the government’s allocation decisions and its overall target of keeping 2020 GHG emissions at 30% below BAU levels, has heaped pressure on Seoul to issue more permits as well as reducing the ambition level for future climate action.
It has also created the world’s only carbon market where, at least for the time being, offsets (KCUs in South Korea) are more expensive that government-issued permits (KAUs).
KAUs are currently valued at the Korea Exchange at 10,300 won ($9.32), compared to 10,550 won for KCUs, although trading is thin in KCUs and non-existent for KAUs.
The analysts predicted this trend would be short-lived, however.
“Many Korean market observers – including Thomson Reuters – believe this situation will not last long given current low trading activity. At some point in time, KAUs will probably be priced above the offsets,” they said.
“In our view an upwards revision of the allocation volumes (requested by many of the compliant entities) would probably reduce the demand for KCUs and spur a price drop.”
By Stian Reklev – stian@carbon-pulse.com
