KAU-pop!

Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

The Korean carbon market has surged by almost 50% over the past six months to ₩12,750 (~€7.50) per tonne CO2. By contrast, the EU carbon price, which had been trading as high as €93 per tonne CO2 until mid-January, is now a little over €72 per tonne CO2.

Korea's emissions trading scheme covers electricity generators and major industrial emitters such as petrochemical and steel manufacturers. Covering 70% of the country's emissions, the Korean carbon market is the worlds third largest ETS, after China and the EU.

A series of structural factors is set to transform the East Asian carbon market over the next five years.

The Korean carbon market is now entering its fourth compliance period (2026 to 2030) for which the government has set a total emissions cap of 2.537 Gt CO2, down 17.9% compared with the third compliance period (2021–2025).

Furthermore, the government is committed to gradually withdrawing free allowances. Utilities must purchase 50% of the allowances they require by 2030, up from 15% this year. Meanwhile, industrials which have received 100% of their allocation for free, will have to pay for 15% of their emissions by the end of the decade.

The ambitious cut in the emissions cap between now and 2030, plus the commitment to phase out free allowances has helped to support the bull market in the price of allowances, the Korean Allowance Unit or KAU. It's a marked contrast to the sharp decline in carbon prices observed in Europe, California, and New Zealand.

A rapid increase in prices needs more than just a spark, it requires sufficient energy to fuel the ascent. That fuel began to appear on the horizon late in 2025 after the Korean government announced that it had given approval for financial institutions to begin trading KAU's.

The move is likely to increase liquidity in the market, help improve price discovery, and enable obligated emitters to more efficiently hedge their carbon risk exposure. In the longer term it is likely to result in the development of futures and options products that may even include exchange traded funds (ETFs) such as those geared to European and North American carbon markets.

Why are Western nations seeking to talk down their carbon markets, while the Korean government and many others in Asia and elsewhere are moving in the opposite direction? Well, Korean industry in particular faces escalating carbon risks along its supply chains as global climate disclosure rules and border carbon adjustments (BCA's) are introduced.

A strong carbon market is just the tool to help mitigate some of that risk. If the government is serious about tackling the country's fossil fuel dependent power mix the KAU price will need to rise at least 3-fold from current levels.

However, as we'll see the Korean governments attempt to get serious about carbon emissions is coming up against resistance from another long-term ambition – it's target of becoming a "top-three AI powerhouse" alongside the United States and China.

Lets dive in.