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South Korea’s carbon market

World Coal,


South Korea’s carbon market will likely be oversupplied, however power producers will be under-allocated allowances, according to Thomson Reuters Point Carbon.

South Korea will launch its carbon trading market on 1 January 2015, however its proposed form could fall short of the country’s goal to cut greenhouse gas (GHG) emissions to 30% below business-as-usual (BAU) levels by 2020. In its current form, the market will likely be oversupplied during its first trading period (2015-2017).

Highlights

  • The Korean government has allocated 1687 million Korean Allowance Units (KAUs) to the power and industry sectors for the years 2015-2017 as part of the country’s cap-and-trade scheme.
  • Point Carbon’s business-as-usual projection indicates emissions of 1663 million t, which would leave the market 53 million KAUs oversupplied overall after adding domestic carbon credits.
  • KAUs will be unevenly distributed between the power sector and industry relative to their needs however, with the former being short, or under-allocated, by 75 million t. Power producers will basically have three alternatives:
    • Buy the KAUs they need from industrials (who have a surplus).
    • Switch some generation from coal to more costly gas. This will cost them approximately US$ 7.5/t of emission exceeding their allocation of KAUs.
    • Scale down power generation, to avoid having to take action.
  • Point Carbon estimates that power producers are most likely buy KAUs.
  • Assuming that utilities will continue to meet the expected demand for electricity, Point Carbon expects a modest volume of trading between industrials and utilities, with prices in the range around US$ 7.5/KAU. While the government has not expressed any expectations regarding prices, this US$ 7.5 figure is close to the €6/t price in the EU ETS and significantly below the US$ 11/t seen in the California market.
  • The oversupply is narrow however: 53 million t for an overall allocation of 1600 million t 2015-2017, or 550 each year, in comparison to the EU ETS oversupply of some 2000 million t for a yearly supply of 1900 million t.
  • South Korea will have the world’s second largest emissions market after the European ETS.

Comments

“South Korea is clearly keen show the world that it takes emission reduction seriously, but it will also be reluctant to risk excessive costs on export industry”, explained Anders Nordeng, senior analyst.

“With the power producers’ likely shortage of allocated KAUs and the possibility for fuel switching, we expect prices will be driven by the relative cost of generating electricity from gas compared to coal. Given the current fuel price trajectories, that difference is likely to be in the order of US$ 7-8 in 2015, rising to US$ 18 in 2016 and US$ 30 in 2017. If power producers buy up-front to cover their future needs, we are likely to see a more flat price trajectory,” Nordeng concluded.


Adapted from press release by Katie Woodward

Read the article online at: https://www.worldcoal.com/power/04112014/south-korean-carbon-market-2015-1529/


 

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