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Bullish Allowance Price Expected Upon Initial South Korean ETS Trading


News provided by

ICIS

08 Jan, 2015, 07:12 GMT

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SINGAPORE, January 8, 2015 /PRNewswire/ --

With a coverage of 526 entities within 23 different industries, the South Korean ETS (Emissions Trading Scheme) has been officially introduced on 1 January 2015, and scheduled to kick-start its initial trading on 12 January 2015.Trading place will be the Korean Exchange (KRX), and only compliance companies will be allowed to trade KAUs (Korean Allowance Units).

ICIS's analysis suggests that the price will see a rather sharp rise in the first trading days. The opening price is expected to be set rather low within the range of  $6-9 per KAU, but the price is expected to rise sharply.

The main demand for carbon allowances is attributable to the power and energy industry, which is expected to be significantly short. Power and heat production account for the largest share of emissions in the South Korean ETS and the allocation of volumes to that industry is significantly below the expected emissions in the following years. Within the first compliance period of the South Korean ETS (2015-2017), the power and energy industry is expected to be short by nearly 90m tonnes CO2-eq, according to ICIS's carbon emission forecast.

The strong demand coming from the power industry, however, doesn't seem to be able to find enough supply priced at below $10 in the market. Even if the rest of the industries reduce their emissions as to the government target ratio, approximately 50m KAUs of shortage is expected before the use of offset credits and supply of reserves.

Additionally, low trading volumes are expected in the first trading months. Uncertainties in the market, especially regarding the compensation of emissions costs for power producers in the wholesale power market, will decrease market activity from the power and energy industry. The main influence on the prices in the first weeks of trading will be not be the fundamental balance of the market but the behaviour of market participants. Uncertainties in the market support the preference of a long position over a short position. ICIS's analysis suggests that demand will exceed supply and prices will rise in the short term, even with low trading volumes.

In the meantime, prices above $30 seem unlikely until 2017. For the first compliance period, the government could intervene the market with market stabilisation measures once the three-month average price rises above KRW10,000, or approximately $10. Given that the trigger price of $10 was introduced in order to lower the compliance costs, thereby possibly limiting the maximum penalty below $30, companies are not expected to be incentivised to buy allowances at $30 or higher.

About ICIS

ICIS provides information and intelligence to every participant in the carbon markets. ICIS employs a unique combination of quantitative and qualitative research and expert opinion to deliver detailed insight into emissions and carbon trading schemes, and identifies important commonalities and disparities. Our Timing Impact Model provides clients with a more rounded perspective than conventional approaches and helps create competitive advantage. We offer clients a complete and transparent analysis of market dynamics, including emerging upside or downside risks to carbon prices and the assumptions on which these are based.

ICIS has more than 30 years' of experience in providing pricing information, news, analysis and consultancy to buyers, sellers and analysts of energy and related commodities. In 2013, it acquired Tschach Solutions to add specialist carbon trading services to its portfolio. ICIS Tschach Solutions is based in Karlsruhe.

About Reed Business Information

At Reed Business Information we provide information and online data services to business professionals worldwide. Customers have access to our high-value industry data, analytics, information and tools. Our strong global brands hold market-leading positions across a wide range of industry sectors including banking, petrochemicals and aviation where we help customers make key strategic decisions every day. RBI is part of Reed Elsevier, a leading global provider of data, information and solutions for professional customers.

For further information about this release, please contact:
Natasha Michaela C. Pilapil
Senior Marketing Executive, ICIS
Email: natasha.pilapil@icis.com
Direct: +65-6780-4395

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