Deciphering Oversupply: Asia Pacific Emissions Markets and Policy Perspectives
Carbon costs in Asia Pacific countries have remained subdued due to the generous allocation of free allowances, ultimately limiting the effectiveness of the emissions trading schemes (ETS) in driving emissions reduction efforts.
Exemplifying this trend, over the past year, South Korean Allowance Unit (KAU23) prices have dropped below those of China Emission Allowances (CEA), to become the weakest among key emissions trading schemes in the region. Similarly, New Zealand’s emissions prices have fallen by over 26% over the past six months.
Both South Korea and New Zealand face oversupply issues, exacerbated by rigid multi-year ETS planning approaches and the challenge of absorbing oversupplied units into the market.
In this blog post, we will unravel the challenges and trends shaping the region’s emissions markets.
South Korea Emissions Trading: Price Decline Persists
The South Korea Emissions Trading System (ETS) is experiencing a significant bearish trend, largely due to an oversupply of allowances for the third planning period (2021-2025).
Prices have significantly decreased, from an average of KRW 21,436/mt (US$15.61/mt) in 2022 to KRW 8,825/mt (US$6.43/mt) in mid-May 2024, according to Korea Exchange and OPIS data.
Typically, KAU prices peak at the start of each compliance cycle and gradually decline as market demand absorbs the surplus. However, these peaks have been starting progressively lower each year since the commencement of the third period.

In 2023, the Korean ETS faced an oversupply of 10.7 million mt of KAU22, compounded by a borrowing of 0.7 million mt from 2023 and a carried-over volume from 2022 of 39.2 million mt. The industrial sector, the largest emitter and net-seller, was allocated a surplus of 23.4 million mt units, contrasting with the 12.3 million mt shortfall from power entities, according to data from the Greenhouse Gas Inventory and Research Center of Korea. Considering the 2023 figures, the industrial sector made a net sale of 15.2 million mt, leaving them with a surplus of 8.2 million mt that could potentially be carried over to the current cycle as KAU23.
While power entities might need to purchase additional allowances to meet their demand shortfall, the overall supply surplus means they can afford to wait. Additionally, sectors with surplus quotas tend to sell their free quotas whenever the prices are favorable, market sources said.

Starting in 2024, the authority introduced a more lenient carryover rule for KAUs, allowing surplus entities to roll over quotas up to three times the net amount of emissions permits they sell annually. Despite aiming to deter selloffs as the compliance deadline approaches, this measure may have limited effectiveness in curbing the decline in prices, merely slowing its descent, sources said.
OPIS assessed the price of KAU23 at KRW 8,910/mt (US$6.54/mt) on May 19, and market sources said that there is still potential for further decline, with the auction price floor set at KRW 6,900 (US$5.07/mt) and the upside possibly reaching around KRW 10,000/mt (US$7.34/mt). However, due to the low level of liquidity and the limited number of active market participants, prices could fluctuate significantly. Market makers that include financial firms and brokers, in particular, could further influence the price movements as they seek to optimize their financial positions frequently, sources added.
According to a market source, the bearish sentiment could persist until the end of the third quarter with some potential for recovery in the final quarter, aligning with observed patterns from past compliance years.
New Zealand ETS: Policy Uncertainty Intensifies Price Pressure
The outlook for New Zealand Units (NZUs) remains dependent on whether concrete reforms are implemented to resolve fundamental market imbalances.
The NZU prices witnessed a general decline, marked by two distinct nosedives, during the first half of the year, plummeting over 30% from the year’s onset due to concerns about oversupply and policy uncertainty.

The initial decline occurred in late March, following a partially cleared auction that signaled weak demand. This was particularly notable after all four auctions were canceled last year, resulting in the removal of 23 million NZUs from reserves. Despite this, trading volume peaked in March, with nearly 1,000 transactions recorded for the month, according to official data. Transactions surged by 44% between January and April compared to the same period last year, attributed possibly to speculative activities, as actual compliance remained limited, market sources said.
The NZU market experienced another significant price drop in late May, reaching a near ten-month low of NZ$45.23/mt (US$27.61/mt) on May 20, according to OPIS price assessments. This plunge followed the government’s proposal to lower auction volume as well as the auction price floor starting next year. The move stirred frustration and increased policy doubts among market participants due to a perceived lack of clarity and rationale behind lowering the price control settings.
Amidst the policy uncertainties driving recent declines, some market participants expressed caution, highlighting that fundamental oversupply and weak demand could pose a more substantial price risk. Moreover, selling pressure from farm forestry participants facing lower margins and rising on-farm costs could intensify the situation.
New Zealand’s independent statutory agency Climate Change Commission (CCC) said that the oversupply, estimated at 68 million units at the end of September 2023, was a risk to meeting the country’s climate goals. The government is seeking to alleviate that risk by reducing auction volumes from 2025 onwards.
With recent NZUs trading well below the NZ$64/mt (US$39.02/mt) minimum price required for the government to sell units at auction, expectations for the remaining 2024 auctions are subdued, which could provide an upside in the longer term, sources said.
“If we get back into a series of failing auctions, then that will actually be positive for the long run as we will likely end up like last year with that volume simply vanishing and not being offered next year,” a trader said.
Other potential price supports include major policy changes aimed at limiting forestry supply entering the market, such as implementing caps or amending the Resource Management Act to restrict the amount of land available for forestry units. However, the realization of those measures may be some time away, sources told OPIS.
Forestry credits constitute one of New Zealand’s three primary sources of NZU supply, alongside free allocation and auctions, contributing around 60% or 100 million units held in privately owned accounts as of the end of March. Free allowances and others and auctions meanwhile account for around 26 million mt and 43 million mt, respectively.

Between now and next year, market sources are anticipating continued speculation and volatility with the government expected by the end of September to announce decisions around the key ETS settings for 2025-2029.
Key Developments Unfolding in APAC for Emissions Trading
In the broader region, governments are expanding their respective carbon trading schemes while carefully considering potential oversupply.
Australia, for instance, is prioritizing the development of stricter methods under its voluntary Australian Carbon Credit Unit (ACCU) scheme to address a looming supply gap caused by the expiry of two land-based methods. This comes in anticipation of increased demand from entities covered under the Safeguard Mechanism, which will face tighter emissions baselines starting next year. Prices for the ACCU Generic, the most commonly traded units, have been held relatively flat averaging A$35/mt (US$23.37/mt) over the past four months, according to OPIS price assessments.
Meanwhile, China aims to tighten allocation for the current compliance cycle to align with stricter industry benchmarks, including revising and reclaiming overallocated units from the previous cycle. Expectations around policy changes drove China Emissions Allowances (CEA) prices to an all-time high at 103.47 yuan/mt (US$14.44/mt) on April 29. Additionally, new sectors such as aluminum smelting and cement are generally expected to be incorporated into the ETS in the upcoming compliance cycle covering emissions in 2024-2025.

($1 = KRW 1,362, AUD 1.50, NZD 1.64,CNY 7.16)