Carbon Emission Permits Surge 2.5 Times in Six Months... Mounting Pressure on Electricity Rates [Digging Energy]

June auction price up 147% compared to January
Decrease in total emission allowance and free allocation boosts prices
Soaring permit prices increase burden on companies and the public
Industry: "Support needed for transition to greenhouse g

The price of domestic carbon emission permits has surged, rising 2.5 times over the past six months. This sharp increase is attributed to expectations that the supply volume will decrease significantly during the fourth phase (2026–2030) of the Emissions Trading Scheme, prompting power generation companies and industrial sectors to compete to purchase permits.

While higher emission permit prices can encourage companies to invest in greenhouse gas reduction, a rapid escalation may increase the burden on both businesses and the public, raising concerns. The industrial sector is calling for policy support to facilitate such investments.

According to the Korea Exchange (KRX) on June 12, in the domestic carbon emission permit (KAU25) auction held on June 10, the winning bid price reached 26,450 won per ton. This is a 147% increase compared to the auction price in January (10,700 won). It also marks a 35% rise from the previous month's price (19,600 won).

The Emissions Trading Scheme is a system where companies are only allowed to emit as much greenhouse gas as the number of permits they hold, with any shortage or surplus of permits traded in the market. The system was introduced to incentivize greenhouse gas reduction through market principles. If it is more advantageous for a company to reduce emissions than to purchase permits, they are motivated to invest in reduction technologies.

The Ministry of Climate, Energy and Environment regularly holds monthly auctions to allocate the right to emit greenhouse gases for a fee. These auctions are conducted through the Korea Exchange system, with permits awarded sequentially to companies that submit the highest bids.

The real-time trading price of carbon emission permits in the market moved ahead of the auction price. On June 9, the trading price climbed to 29,700 won. Given that last year, the trading price was below 10,000 won, this indicates a threefold increase over the past year.

The recent sharp rise in domestic carbon permit prices is understood to be due to a significant increase in demand over supply as the settlement period for 2025 emission permits (KAU25), which runs from June to August, approaches.

During the fourth phase, the Ministry of Climate, Energy and Environment reduced the total greenhouse gas emission allowance by 16.8% compared to the third phase (2021–2025). In addition, the proportion of paid allocation for the power generation sector will be expanded from 15% in 2026 to 50% by 2050. The paid allocation ratio for sectors outside of power generation has also been raised from 10% to 15%.

As the total emission allowance has decreased and the number of permits allocated free of charge has also been reduced, companies now need to secure more permits through auctions or the market. Furthermore, companies holding surplus permits are delaying sales in anticipation of further price increases, which is also fueling the price surge.

With the steep rise in permit prices, the burden on companies is increasing as well. The Korea Economic Research Institute noted in a report published in December last year, "The pre-allocated volume of permits for the industrial sector during the fourth phase was reduced by 18.6% compared to the third phase," adding, "With the increase in the paid allocation ratio, which reduces the number of permits allocated free of charge, the cost burden related to emission permits for companies will rise significantly."

At the time, the Korea Economic Research Institute estimated that the total cost of purchasing emission permits over the next five years (2026–2030) would reach 26.9 trillion won.

In response, the Ministry of Climate, Energy and Environment explained that the Institute had overestimated both the demand for permits by companies and the purchase costs by assuming that permit prices would surge to 40,000 won starting in 2026. However, at the current pace, it seems only a matter of time before the market price of permits surpasses 30,000 won.

Although rising permit prices can have a positive effect by encouraging investment in greenhouse gas reduction, they also increase costs for both companies and the public. In particular, the permit purchase costs for power generation companies may become a factor in raising electricity rates through the climate environment fee. This fee, included in electricity bills, reflects costs associated with greenhouse gas reduction, such as those for emission permits.

The industrial sector is urging the government to stabilize permit prices and provide active support for investments aimed at reducing greenhouse gases. An industry representative commented, "Higher permit prices do not automatically lead to investments in reduction. Massive investments are required for electrification and hydrogen-based steelmaking, so effective government transition support policies must be implemented in parallel."

With the sharp rise in permit prices, the Ministry of Climate, Energy and Environment is closely monitoring the situation. A ministry official stated, "If permit prices surge, we can set a maximum price, but that threshold has not yet been reached," adding, "We are watching the situation closely." If the price and trading volume of permits over the past month are more than double the average of the previous two years, the government can set a maximum price.

Starting in September, the 'Market Stabilization Reserve System' will be introduced, allowing the government to manage market prices using reserve volumes it holds. If prices move outside of the range announced by the government, the reserve will be used to adjust auction supply and mitigate price volatility. The ministry plans to determine the price range by August after collecting stakeholder opinions, consulting experts, and reviewing it with the Emission Allowance Allocation Committee.

This content was produced with the assistance of AI translation services.