South Korea’s benchmark carbon futures contract, KAU22, closed the final trading day of June at 15,500 won per tonne — roughly $11.8 — down 31% since the start of the year and its weakest level since around January 2025. Market participants trace the slide to a persistent oversupply problem: since the K-ETS entered its expanded second phase in 2025, free allowance issuance has outpaced actual emissions, leaving roughly 173 million tonnes of CO2-equivalent allowances unused in the system — close to double the scheme’s full annual compliance obligation.
Trading data cited from the Korea Exchange shows secondary-market volumes in the first half of 2026 down 42% year-on-year, pointing to thinning liquidity alongside the price collapse. In response, South Korea’s environment ministry and finance ministry reportedly held a joint emergency meeting to weigh stabilization options, including an allowance buyback, a temporary increase in the auction share of permits, or outright cancellation of surplus allowances. Industry groups are said to oppose aggressive tightening, arguing that depressed carbon prices ease cost pressure on manufacturers and support export competitiveness.
The scale of allowance reduction is expected to become a central flashpoint when South Korea’s National Assembly takes up draft reform legislation for the K-ETS’s fourth phase (2027–2031) at its autumn 2026 regular session.
Carbon Market Context
- The episode illustrates a recurring challenge for compliance carbon markets generally: when free allocation is set looser than actual emissions trends, allowance prices can decouple from any underlying carbon cost signal, prompting regulators to consider supply-side interventions such as buybacks or cancellations to restore price discovery.
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