South Korea is seeking to add futures option related to carbon credit for leveraging against risks in carbon emission allowances.

According to the Korea Exchange and the Ministry of Environment, the country’s exchange authority will soon outsource research on carbon credit futures, deeming price stability has been difficult from spot trade, while the ministry separately outsourced a similar research in February.

Both are working to make futures available by next year.

Under the emission trading scheme introduced in 2015, the government allocates a limit on each company’s annual emissions. To emit more than the allocated amount, they should buy credits from other companies. While the trading volume has ballooned since the scheme’s initiation, the demand-led market lacks liquidity with price volatility in carbon credits. To tackle the problems, the Korea Exchange plans to expand carbon trading through a futures market. The environment ministry is also preparing for a futures market opening through its 2021-2025 project for carbon emission trading.

Previously, the scheme allowed a limited number of participants, but from late last year, 20 brokerage houses can trade credit.

A futures market for carbon credits can help ease price volatility and lower market participants’ risks. “An introduction of a futures market will remove volatility and enhance liquidity. It will help activate Korea’s carbon trading market along with the government’s goal of being carbon neutral by 2050,” said Song Hong-seon, a researcher at Korea Capital Market Institute.

Exchange-traded funds (ETFs) or exchange-traded notes (ETNs) tracking the prices of carbon credits are likely to emerge with the initiation of a futures market.

By Jenny Lee

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