On September 20, 2023, the Ministry of Environment (“MOE”) unveiled a plan to stimulate the Korean Emissions Trading Scheme (“K-ETS”), which was jointly established by various ministries. According to the plan, the MOE will increase the number of K-ETS participants, diversify relevant financial products, stabilize the carbon market, and strengthen the trading foundations to address the problems associated with low trading volume and how price volatility. The key details are as follows:

Increase K-ETS Participants
 

• Introduction of consignment transactions: To allow consignment transactions (brokerage) of emission permits, the MOE will amend the Act on the Allocation and Trading of Greenhouse Gas Emission Permits (“Emission Permit Trading Act”), prescribing obligations for registration and consignment.

• Gradual expansion of eligible market participants: Starting in 2024, financial institutions – including asset management companies – will be allowed to participate in the K-ETS, and the MOE will review whether to further expand the eligibility of market participants to include individuals.
   

Diversify Products
 

• Opening of derivatives market: The MOE will devise a detailed operation plan for derivatives by 2024 and also open a derivatives market (by working on the relevant systems) by 2025. This will allow K-ETS participants to respond to fluctuations in emission permit prices and provide risk hedging tools for investment in emission permits.

• Introduction of emissions-related financial products: Starting in 2024, financial institutions will be able to launch emissions-linked financial products such as exchange-traded notes (issued by securities firms, “ETNs”) and exchange-traded funds (issued by asset management companies, “ETFs”) for the purpose of promoting indirect private investment.
   

Stabilize Carbon Market
 

• Relaxation of carry-over standards: By the end of 2023, the MOE will revise the allocation plan to relax the carry-over standards. Specifically, companies with an emission permit surplus will be allowed to carry over up to three times their sales volume (currently, only same volume allowed), and companies in short of emission permits will be allowed to carry over the volume of emission permits that were bought in excess of what was needed in the previous term. In addition, the period to convert emission credits from external projects will be extended from two years to five years after certification.

• Adjustment of auction volume: The MOE will adjust the annual paid auction volume based on the supply and demand of emission permits in the short term, whereas the MOE will pursue the introduction of the Korean Market Stability Reserve (“K-MSR”)¹ in the long term.

• Strengthening of market stabilization: Details on the market stabilization measures set forth in the Emission Permit Trading Act (e.g., setting the minimum/maximum price, expanding/reducing auction volume) will be published to increase predictability, and relevant incentives will be expanded by designating additional market makers.²
   

Strengthen Trading Foundations
 

• Improvement of risk assessment indicators: Through an amendment to the Financial Investment Business Regulations (Financial Services Commission’s Notification), the Government will lower the risk assessment value of securities firms’ holdings of emission permits from 32% to 18%, thereby eliciting more participation in the K-ETS.

• Establishment of oversight system: Prior to the implementation of consignment transactions and expansion of third party participation, the Government plans to establish a transaction oversight system similar to that of the financial market by 2024.

• Expansion of training: The Government will provide regular training courses related to the K-ETS and conduct pre-training on consignment transactions, etc.
   

The unveiled measures to stimulate the K-ETS reflect the Government’s policy stance to revitalize the emission trading market through market principles rather than regulations. Considering that the relevant ministries in charge of the detailed plans are the Ministry of Environment, the Ministry of Strategy and Finance, the Financial Services Commission, and the Korea Exchange, etc., and that the implementation schedule varies from 2023 to 2025, it will be crucial to closely monitor the implementation status. Furthermore, as discussions on the basic plan for Phase 4 of the K-ETS (to be applied from 2026) are ongoing, it is also necessary to analyze potential impacts based on the overall change in the K-ETS.

1   Market Stability Reserve: A system whereby annual auction volume is adjusted in accordance with established rules based on the supply and demand of emission permits.
2   Market makers: Seven financial institutions that enter into contracts with the Government to offer quotes and execute trades on a daily basis for the purpose of expanding trading volume.

[Korean Version]