CCM(Compliance Carbon Market) ·VCM(Voluntary Carbon Market)
How businesses should respond in the net-zero era
2024.07.01
As the global community intensifies efforts to combat climate change, carbon markets are becoming increasingly crucial. In 2024, numerous firms, including those in Korea, are set to explore effective carbon pricing strategies. This exploration is driven by the EU Commission’s requirement for importers to report embedded carbon emissions in their imports by January 31, 2024, and the impending enforcement of the EU’s Carbon Border Adjustment Mechanism (CBAM) in 2026. The CBAM aims to encourage stronger climate action by imposing tariffs on carbon-intensive products from trading partners lacking their own carbon pricing mechanisms. Consequently, firms are expected to heighten their focus on both voluntary and compliance markets to mitigate potential costs.
Korean Emission Trading System (KETS)
The Korean Emission Trading System (KETS), which began operating in January 2015, covers approximately 73.5% of national emissions across six sectors: heat and power, industry, buildings, transportation, waste, and the public sector. Currently in its third phase, KETS has undergone several changes, including an increase in the number of participating companies, a shift toward more auction-based emissions permit allocations, and the inclusion of financial investment companies and individual investors in the trade of allowances.
Despite these developments, there is uncertainty about KETS' effectiveness in contributing to South Korea's commitment to reduce greenhouse gas emissions by 40% by 2030 compared to 2018 levels. This uncertainty stems from the significant presence of free allowances and low carbon permit prices, which discourage widespread low-carbon investments.
Growing Interest in the Voluntary Carbon Market (VCM)
Role and Function
The Voluntary Carbon Market (VCM) operates as a platform where emissions reduction or absorption resulting from greenhouse gas mitigation projects is commodified and traded for carbon offsetting. VCMs serve as a tool for companies to address their hard-to-abate emissions through voluntary carbon offsets, with carbon credits being issued by third parties upon certification.
Unlike government-managed compliance markets (CCMs), VCMs issue carbon credits through certification by a third party, making the credibility and reliability of the certification body critical. Carbon credits have been criticized for greenwashing, as companies may rely on purchasing carbon credits instead of prioritizing emission reduction efforts. In response, the Voluntary Carbon Market Integrity Initiative (VCMI) was launched to promote market integrity. The VCMI released the final version of the CoP-Claims Code of Practice on June 23, 2023, to improve the credibility of carbon credits.
Korean Initiatives
The Korea Chamber of Commerce and Industry (KCCI) is intensifying efforts to establish a voluntary carbon emissions certifying center and trading market in Korea. The KCCI aims to register the "Korean Carbon Reduction Certification Standard" with international benchmarks to uphold the credibility of credits. Additionally, the SK Group has spearheaded Asia's first-ever alliance to develop a voluntary carbon market ecosystem, establishing the Environmental Protection Credit Market (EPCM) at COP28.
< Greenhouse Gas Emissions Trading System Plan >
First Planning Period (2015~2017) | Secondary Planning Period (2018~2020) | Third Planning Period (2021~2025) |
|---|---|---|
Trade Targets | Spot Emission Allowances | Spot Emission Allowances |
Paid Allocation Revenue Estimation | - | KRW 558.9 billion |
Paid Allocation | Full Free Allocation | 3% Paid Allocation |
Participants | Allocated Companies | Allocated Companies, Market Makers |
*Source: Ministry of Environment, National Emissions Allocation Plan for the Third Plan Period (2021-2025) of the Greenhouse Gas Emissions Trading System (Draft)
Complementarity of Carbon Markets
Compliance Market Growth
The global compliance carbon credit market reached a value of approximately $850 billion in 2021, showcasing a significant increase from the previous year, as reported by Carbon Credits. Despite the existence of 30 major emissions trading systems globally, the market currently encompasses only about 17% of global emissions, according to the International Carbon Action Partnership.
Voluntary Market Expansion
The voluntary carbon market experienced significant growth, with a value of approximately $2 billion in 2021, marking a fourfold increase from 2020, as reported by BCG. Projections suggest that these markets could reach between $10 billion and $40 billion by 2030. Voluntary carbon markets allow emitters to offset their unavoidable emissions from the compliance market by acquiring carbon credits in the voluntary carbon market.
Synergy and Collaboration
Compliance and voluntary carbon markets complement each other. The CBAM's tariffs on imported products lacking their own carbon pricing might encourage the Korean government to collaborate with the EU to recognize carbon permits and credits purchased in the domestic trading market. This collaboration could boost the liquidity of both carbon markets and raise carbon prices, potentially mitigating the high costs that companies might face.
< Global Carbon Emissions >
Source: Global Carbon Budget (2022) | September 4, 2023
Looking Ahead: Challenges and Expectations
Anticipated Challenges
Both carbon markets may encounter challenges in 2024 due to the lack of agreement on standards at COP28. However, there is a heightened focus on reducing carbon emissions to fulfill net-zero commitments, leading to enhanced rigor and transparency in both compliance and voluntary carbon markets.
Future Prospects
As the world moves into 2024, stakeholders—including investors, companies, governments, and financial market participants—will insist on more stringent, transparent, and tangible outcomes from these markets. The anticipated surge in confidence, coupled with increased government involvement, is poised to drive demand. Global representatives at COP28 have expressed intentions to reinstate credibility in the VCM.
In Korea, there is potential for expansion in both compliance and voluntary carbon markets. Companies actively engaging in initiatives such as RE100 commitments, embracing ESG practices, facing increasing pressure from external policies like CBAM, and receiving support from KCCI for the VCM market are expected to drive market growth. This expansion is likely to be fueled by strengthened support programs and incentives aligning with both domestic and international government policies.
Conclusion
The future of carbon markets is dynamic and evolving, with significant developments expected in 2024 and beyond. Korea's proactive stance in both compliance and voluntary markets positions it well to navigate the challenges and opportunities ahead, contributing to global efforts in achieving substantial greenhouse gas reductions.