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S. Korean carbon market numb in first month

As widely expected, South Korea's carbon market had thin trading in the first month of opening due in large part to a lack of confidence and the reluctance of affected companies to actively join the new trading scheme, data showed on Wednesday.

The Korea Exchange (KRX), the country's bourse operator, opened the cap-and-trading system on Jan. 12 after the government offered an emission quota of 15.98 billion Korean Allowance Units (KAUs) to 525 companies to curb emissions to 30 percent below business-as-usual (BAU) levels over the next five years. One KAU is equivalent to a ton of carbon dioxide gas.

A total of 1,380 tons of carbon credits worth 11.55 million won (US$10,521) changed hands over the past month, with actual trading taking place only for four days, the KRX said.

The closing price of the first day sat at 8,640 won, similar to that of the European carbon exchange on the same day, and it finished at 9,610 won on Jan. 16, the last day of trading, it said.

The market is only open to companies subject to the emission quota as well as three state-controlled lenders. During the pilot stage from 2015 to 2017, companies under the emission target will receive carbon allowances for free.

The scant volume in this early stage had been widely expected due to a lack of confidence in the new system and the flexible accounting system. Companies can carry forward or use allowances in advance during the first stage.

Companies have also been reluctant to sell allowances at a time when they are pressuring the government to distribute more, complaining about financial burden amid the economic slowdown.

More than a dozen companies in the metal industry last month filed an administrative suit against the government, and several petrochemical firms are also preparing a collective suit to urge the government to reconsider the carbon scheme. 

Market watchers say the 10,000 won price ceiling set by the government is another factor that discourages active trading among participants.

"If the government intentionally sets the upper limit at 10,000 won, the price of the carbon allowances could go below to the marginal abatement costs," Kim Kab-rae, a researcher at the Korea Capital Market Institute, said. "The market can function well when the price is set accordingly considering costs of reducing pollution without government intervention."

Market watchers said that trading will pick up starting in 2018, when the second stage of the program begins after a three-year grace period.

They say the scheme will help expand the green energy market in the long term as South Korea, the world's seventh-largest carbon emitter, is facing growing pressure to join global efforts to tackle climate change.

"A company's carbon reduction capacity will be an important competitive edge in the future, which will help expand the renewable energy market," said Han Byung-hwan, a researcher at Eugene Securities.

Jeff Huang, the China director of Greater China for Intercontinental Exchange, said the government should allow institutional investors to join the market and raise awareness of the importance of hedging business risk in advance.

"It's all about management and hedging, as well as longer term financial planning to become more competitive than your competitors," Huang said. "If they (the South Korean government) open this market to the right people, sophisticated institutions will provide the right liquidity, then you have a good start."

Huang said regulators should provide an open market that attracts big industry players and professional traders to boost the market in the long term.

"One thing I'm totally confident about Korea ETS (emission trading scheme) vis-a-vis than other developing ETS is that Korean ETS arguably has the best quality data. That's a very good foundation." (Yonhap)