Carbon allowance prices in South Korea have surged about 50 per cent over the past six months as companies brace for tighter emissions limits under a new phase of the country’s carbon trading scheme.
The benchmark allowance for 2025 (KAU25) rose to KRW12,750 (US$9.6) per tonne on 12 February from a low of KRW8,580 (US$5.94) last August, according to data from the Korea Exchange.
South Korea operates a nationwide emissions trading system (ETS) that caps greenhouse gas output from major industrial emitters and power producers. Companies receive a certain number of allowances – many historically provided free of charge – and must buy additional permits if they exceed their quotas.
The system, launched in 2015, is the world’s third-largest carbon market by emissions coverage after China and the European Union. It covers roughly 70 per cent of the country’s greenhouse-gas emissions, reflecting South Korea’s heavy reliance on energy-intensive industries such as steel, petrochemicals and coal-fired power generation.
Prices have climbed ahead of the fourth compliance period of the scheme, which will run from 2026 to 2030 and impose stricter limits. The government has set a total emissions cap of 2.537 billion tonnes for the new phase, a reduction of about 17.9 per cent compared with the previous 2021–2025 period.
Authorities also plan to scale back free allocations, a key factor that has long suppressed prices. In the power sector, the share of allowances that must be purchased at auction will rise from 15 per cent this year to 50 per cent by 2030. Other industries will continue to receive most allowances free, with the paid portion set to reach 15% by the end of the decade.
South Korea’s carbon prices have historically been lower than those in Europe, limiting the scheme’s effectiveness in driving emissions cuts.
Industry observers say prices need to reach roughly KRW20,000–30,000 (US$13.84–20.76) per tonne to meaningfully incentivise companies to invest in cleaner technologies.
Prices briefly exceeded KRW40,000 (US$27.68) in 2019 but later fell below 10,000 won as surplus permits accumulated.
Higher prices could increase costs for emissions-intensive sectors, particularly coal-fired power plants, and may eventually feed into electricity tariffs. The Federation of Korean Industries estimates that expanding the share of paid allowances could raise manufacturing electricity costs by up to KRW2.5 trillion (US$1.73 billion).
Authorities say the impact on consumer power bills may be limited, however, because fuel costs, such as imported coal and natural gas, account for most of electricity pricing in South Korea.
Separately, the country’s overall energy demand is expected to decline despite a projected economic recovery, reflecting structural changes in heavy industry.
The state-run Korea Energy Economics Institute forecasts total primary energy demand will fall by 0.4 per cent in 2026 to about 304 million tonnes of oil equivalent (toe), following a 1.6 per cent decline in 2025. The drop is largely attributed to restructuring in petrochemicals and steel, sectors that consume large amounts of energy.
Industrial energy demand is expected to fall by about 2.2 per cent in 2026, while consumption of oil and coal continues to decline. Nuclear and natural gas use, however, is projected to rise as new reactors enter service and fuel switching continues.
Electricity demand is forecast to increase modestly by about 0.5 per cent this year, while transport energy use is expected to edge down amid weak freight activity despite recovering passenger travel.
