Approaches to enhance the market functionality of the K-ETS

Yeochang Yoon

No 123, KDI Focus from Korea Development Institute (KDI)

Abstract: South Korea has set ambitious greenhouse gas (GHG) emission reduction targets. However, the country currently confronts a decline in the price of emission permits. This downward trend could obstruct the successful realization of GHG objectives through market mechanisms. The current emissions trading scheme (ETS) restricts banking of excess emission allowances, which has been identified as the main reason of the ongoing price decline. Consequently, this restriction hinders the adequate reflection of updated targets within the emissions trading market. To address this issue and avert potential shocks from a substantial reduction in emission allowance supply during Phase IV, it is necessary to relax the banking restrictions. At the same time, to proactively manage potential price escalations resulting from eased restrictions on permit banking, supplementary measures are required. These measures could include the introduction of explicit market stability mechanisms utilizing allowance reserves and the expansion of allowance supply channels.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:kdifoc:123

DOI: 10.22740/kdi.focus.e.2023.123

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