SOUTH Korea plans to launch exchange-traded notes (ETNs) linked to carbon allowances this year, making it the first country in Asia to open emissions trading to retail investors in a bid to support the struggling market.
The Ministry of Environment is working with Korea Exchange and local securities firms to launch ETNs by August, said Lee Young-seok, a director general at the ministry’s climate change and international cooperation bureau. The nation’s emissions trading system is currently open only to corporate polluters and some brokerage firms.
ETNs are similar to exchange-traded funds (ETFs) in that they both track an underlying index. But instead of a fund that holds a mixture of assets, ETNs are a single security that pays out based on the performance of the benchmark.
“We will first roll out ETNs, which will be a good opportunity for us to test the market before we launch ETFs and a futures contract,” Lee said. “Our goal is to boost liquidity by having a wider group of participants to trade in the market, and operate similar to how the European market works.”
The move to expand participation is part of South Korea’s efforts to stimulate its sluggish carbon market. The country’s cap-and-trade scheme has been in place since 2015, covering almost 700 companies. But it is so far failed to encourage industrial polluters to slash emissions due to an oversupply of permits, of which 90 per cent are given out for free.
ETFs could be launched as soon as early 2025, with a futures market to follow later, Lee said. Korea Exchange is working on creating an index that tracks the carbon market, and the government is talking to securities firms on how the new financial products should be packaged and traded, he said.
Retail investors in Asia who are interested in carbon-related products have so far had to make do with tracking prices in Europe, where emissions trading is more developed. The European Union’s cap-and-trade system is mostly futures based, which allows investors to manage price volatility via hedging. Asian markets in contrast only offer spot contracts.
South Korea is also looking to solve its permit oversupply problem. Effective from 2026, it plans to shrink the total number of allowances and raise the share of those that have to be paid for, said Lee. Details should be released by the end of this year, he said. BLOOMBERG
