Emitters are calling for the Korean government to release CO2 permits from its market reserve to break an ETS deadlock that on Friday saw spot KAUs close unchanged and untraded at 10,100 won ($9.15) for the 25th consecutive day.

Market regulators have the option to release supply from the 14.9 million KAU reserve if the average price stays above 10,000 won for three months. At current levels, that average will be reached on Apr. 13 – three months and one day after the market opened.

Power generators and manufacturers say they have been given 20% fewer permits than they need, and the last trade to go through on the Korea Exchange (KRX) was Jan. 16 due to a dearth in supply.

In addition to filing several lawsuits, emitters are now urging the government to use the reserve to alleviate the situation.

“Even if the provision is not compulsory, most experts expect that the government will take action if there is no trading until mid-May,” one observer told Carbon Pulse.

The allocation committee, which controls the reserve, is headed by the minister of strategy and finance, who last year pledged to keep the carbon price below 10,000 won.

The committee has not commented on the issue and the government did not respond to emails from Carbon Pulse.

But some market participants were doubtful the regulator would release extra permits so soon after the ETS launched, especially since no one has actually paid 10,000 won for a KAU yet.

“I think the government will not take any action for a while to keep the KAU price down because there is no permit trade now, and no one knows for sure that the current price level needs government interference,” one broker said.

OFFSETS

The first source of fresh supply is likely to come from offsets. The government is expected to issue around 2 million Korean Carbon Offsets (KCOs) soon from Korea-based CDM projects that have cancelled their CERs to have them replaced with domestic credits.

But supply from the offset market may not have a major impact on the overall market balance, according to Younghun Choi, an analyst with ICIS Tschach.

“Due to several limits, i.e. timeline and project types, the expected volume of offset credits … is not significant vis-à-vis expected shortage of allowances in the market,” he told Carbon Pulse.

“What we think would have more significant impact is the timeline and design of emissions compensation for power generation, given that the demand is expected to be significantly shaped by the details (of those),” he said.

With South Korea’s coal capacity set to expand, electricity generators – who have received around half the permits handed out – potentially face a significant KAU shortage.

“When it comes to industrials, the shortage is not expected to be as significant as the expected shortage of power and energy,” Choi said, adding that the outcome for individual sectors depend on how the early action reserve is distributed.

Analysts at Thomson Reuters Point Carbon have previously estimated that industrials in the Korea ETS may have a surplus of permits, despite three industry associations filing lawsuits over the allocation plan.

By Stian Reklev – stian@carbon-pulse.com