Financial firms turn to carbon trading for growth, ESG goals

The local carbon trading market is set for a boost early next year, with an influx of financial firms joining as players and securities firms expanding their roles as transaction brokers.

Effective Feb. 7, 2025, the government has amended the Enforcement Decree on the Allocation and Trading of Greenhouse Gas Emission Permits, allowing financial institutions -- such as asset managers, banks and insurers -- to participate. These firms will be required to trade through brokers.

The revision also establishes registration and compliance rules for securities firms acting as brokers in the carbon transactions market, along with grounds for sanctions.

Experts anticipate that expanding market participation will boost carbon trading and help stabilize carbon credit prices at more sustainable levels.

"Once the amendment is implemented, we expect the environment of the greenhouse gas emissions trading market to become more open and dynamic, just like the financial market," an official from the ministry of environment noted.

Launched in January 2015, South Korea's greenhouse gas emissions trading system allocates allowances to companies with reduction obligations, enabling them to trade any surplus or shortfall, encouraging carbon reduction through market mechanisms.

However, the local market has struggled to gain momentum due to inefficient regulations and low market participation. According to local reports, trading volume rose from 5.66 million tons at inception in 2015 to 54.72 million tons in 2021, only to plummet to 39.1 tons in 2022, dropping by 28 percent on-year.

Although securities firms are already eligible players in the market, they have mainly focused on proprietary trading due to unclear regulations. The new rules will allow them to officially manage trading, regulatory reporting and account registration on behalf of institutions as brokers in the carbon trading market.

With the forthcoming revision, the government also inches closer to its goal of allowing individuals to trade carbon credits via securities firms.

To enhance market liquidity, the government plans to encourage individual participation through the introduction of futures products, such as exchange-traded funds, which will facilitate easy indirect investment in carbon credits.

While domestic investors can currently trade ETFs linked to EU carbon credits, there are no products based on domestic carbon prices due to insufficient regulatory foundations. The government aims to establish the legal framework for launching carbon-linked financial products within this year, with a related futures market set to launch by 2025.

According to government data, as of April, 780 companies with allocated carbon credits, eight market-makers and 21 securities firms are participating in the carbon trading market. The government projects about 150 additional participants to join following the legal revision.

Kim Joon-sop, a researcher at KB Securities, expected that more outstanding participation in the market would lead to stabilization of carbon credits prices.

"The circulation of surplus credits can distort carbon credit prices. … With greater liquidity, the price volatility will be reduced."

The price of South Korean carbon credits began at 8,640 won ($6.50) when the market opened in 2015 and peaked at over 40,000 won in early 2020. After significant fluctuations starting in April of that year, it fell to 7,020 won by July 2023 and has since hovered around 9,000 won this year -- only around 10 percent of the 63 euros ($70.40) at which EU carbon allowances are currently trading.

"The domestic carbon credits are projected to remain stable (at the current level) in the short term but trend upward in the long term," said SK Securities analyst Choi Kwan-soon.

"We are looking forward to the launch of futures products linked to the domestic carbon market this year, which will encourage various participants, including asset management firms, to enter the market," added Choi. "We anticipate this increase in market participants, along with a reduction in free allocations, will contribute to long-term gain in carbon credit prices."

As carbon transaction brokerage services emerge as a new profit source aligned with the global focus on environmental, social and governance principles, securities firms have been taking proactive steps to establish themselves in the market.

In 2021, Hana Securities became the first domestic brokerage to serve as a market-maker in the carbon emissions market, later signing a memorandum of understanding with Singapore's Carbon Exchange to promote participation in the voluntary carbon market.

KB Securities launched a dedicated carbon and energy finance team in 2022 to focus on voluntary carbon trading and brokering, while NH Investment & Securities, with its own carbon finance team, was selected this year as the first Asian firm to manage the United Nations’ Green Climate Fund. In 2023, Korea Investment & Securities became the first Korean brokerage to directly acquire voluntary carbon credits through a project in Bangladesh, securing 100,000 tons with plans to expand to 1.9 million tons over the next decade.