Carbon Emission Trading: A New Investment Frontier and Climate Solution

Beyond traditional investments like stocks, currencies, bonds, and gold, a burgeoning market offers both investment opportunities and hedging strategies: the Carbon Emission Trading Scheme (ETS). This blog post will delve into the details of the Carbon Emission Trading Scheme, its importance, recent policy changes, and how individuals can participate.

1. Understanding Carbon Emissions Allowances and the Trading Scheme (ETS)

What exactly are we talking about when we say "carbon emissions allowances" and "trading scheme"?

• Carbon Emissions Allowances: These are permits allocated to individual greenhouse gas (GHG) emitting entities within a country's total permissible greenhouse gas emissions. Their purpose is to achieve mid-to long-term national GHG reduction targets, as defined by Article 2, Paragraph 3 of the 「Act on the Allocation and Trading of Greenhouse Gas Emission Allowances」.

• Emission Trading System (ETS): The ETS is a market-based mechanism designed to reduce greenhouse gas emissions. Under this system, governments allocate annual emission allowances to businesses that emit greenhouse gases. Companies can then emit GHGs within their allocated limits. If a company emits less than its allowance, it can sell the surplus allowances in the market. Conversely, companies that exceed their allocated emissions must purchase additional allowances from others. This creates a flexible system where companies can cost-effectively manage their emissions.

For more detailed information, you can refer to the Korean Legal Information Center (Easylaw).

2. Why Was the Emission Trading Scheme Implemented?

The primary goal of the ETS is to achieve cost-effective greenhouse gas (including carbon dioxide, nitrous oxide, and four other major GHGs) reductions through voluntary decision-making by businesses.

• Cost Efficiency for Businesses: Companies with high GHG reduction potential can reduce more than required by their allocation and sell their surplus allowances in the market, generating revenue. On the other hand, businesses with limited reduction capabilities can purchase allowances instead of undertaking expensive direct reductions, leading to cost savings.

• Flexibility and National Cost-Effectiveness: The ETS provides flexibility, allowing each business to autonomously decide whether to reduce emissions or purchase allowances based on their specific reduction capabilities to meet their allocated emission targets. This flexibility ultimately enhances national cost-effectiveness in achieving climate goals.

3. Recent Policies by the Ministry of Environment Regarding the ETS

The Ministry of Environment, the lead governmental body for the ETS, announced plans for activating the emission trading scheme as one of its ten key policies at the beginning of 2025.

• Expanded Market Participation: To broaden market participation and enhance flexibility, institutional investors such as collective investment scheme operators, banks, insurance companies, and fund managers will be able to participate in the emissions market starting next month. Previously, only entities subject to emission allowance allocation could participate.

• Increased Trading Convenience: While emission trading was initially only possible through the Korea Exchange (KRX), it will now also be facilitated through emission trading brokerage firms, significantly improving trading convenience for participants.

• Enhanced Rollover Flexibility: From June 2025, when applications for rolling over remaining emission allowances begin, the permissible rollover volume will increase from 3 times the net sales to 5 times, allowing for more flexible utilization of emission allowances.

4. How to Trade Carbon Emission Allowances

Participating in the carbon emission market involves a few straightforward steps:

• Open an Account: Open an account with a securities firm that supports carbon emission trading, such as NH Investment & Securities, Samsung Securities, KB Securities, or Korea Investment & Securities. (For more details, refer to the Korea Environment Corporation's information on the ETS external projects for industrial and conversion sectors.)

• Verify Allowances and Analyze Market: Before trading, it is crucial to verify your emission allowances with the Ministry of Environment or the Korea Environment Corporation. Additionally, thoroughly analyze carbon emission market price trends, supply and demand dynamics, and global environmental factors.

• Trading Methods: Trading can be conducted through the Korea Exchange (KRX) carbon emission trading platform or via the trading systems of individual securities firms. The process for placing buy and sell orders is similar to that of general stock trading.

You can access the official trading information on the Korea Exchange (KRX) Regulation website.

Currently, the price of carbon allowances in the Korean market ranges from approximately 9,000 to 12,000 KRW, which is about one-tenth of the price in the EU's emission trading scheme.

Although the market is still in its early stages of activation, as global interest in climate change and greenhouse gas reduction intensifies, the Carbon Emission Trading Scheme is expected to gain significant momentum. Understanding its mechanisms and proactively engaging in this emerging market will be crucial for future success.