Trading volume-based regulation in cap-and-trade programmes: numeric analysis in South Korea

초록

Emission Trading Systems (ETS) often use additional regulatory measures to stabilize allowance prices. South Korea introduced unique regulations restricting the number of allowances firms can bank (carry forward) based on their current net allowance sales. Under the rule, companies must sell a portion of their surplus allowances if they wish to bank credits for future compliance, leading to increased allowance sales and lower prices in the short term. Using a dynamic economic model, this study finds that while this policy effectively prevents short-term price spikes by increasing immediate market liquidity, it may unintentionally delay necessary investments in emissions reduction technologies due to temporarily suppressed prices. Consequently, the long-term efficiency of emission reductions can be compromised, as firms respond to artificially low prices by postponing critical abatement actions. This research provides important insights for policymakers seeking to balance short-term market stability with long-term climate goals.

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