Korea's ETS: structural limitations and demand-side policy as the solution

Since its 2015 launch, Korea's Emissions Trading Scheme (ETS) has consistently shown allocations and actual emissions roughly aligned. As a result, firms have little incentive to engage in additional trading, and the market suffers from structural limitations to liquidity and activity.

The Diagnosis

Market turnover (volume / allocation) has risen recently, but largely due to growing surplus allowances at firms. The core problems:

• Over-allocation: no incentive for emissions reduction
• Distorted price signals: carbon price fails to reflect true abatement cost
• Increased speculative trading: focus on allowance trading rather than substantive reduction
• Lack of liquidity: difficulty finding counterparties

Why Demand-Side Policy?

Supply-side measures (allocation tightening) alone are limited. To drive carbon reduction, we need:

1. Demand creation for low-carbon products — building a green-premium market
2. Strengthened public procurement standards — government as a leading buyer
3. Mandatory carbon-footprint disclosure — informing consumer choice
4. Carbon-intensity-based financial regulation — guiding green capital allocation by financial institutions

Recommendations

ETS is a core tool for carbon reduction, but it is not sufficient on its own. Combining demand-side policy with ETS is the key to making the carbon market effective. Only when allocation tightening is paired with policies expanding demand for low-carbon products can ETS deliver on its intended function.