Financial firms vie for lead in private carbon market

Voluntary carbon market expected to reach $50 billion in size by 2030

By Lee Yeon-woo

Some corporations in Korea have been promoting their products for almost two years as being powered by "carbon neutral gas" or "carbon neutral LNG."

It's common knowledge that fossil fuels contribute significantly to the climate crisis by releasing large amounts of carbon emissions into the atmosphere. So how is it possible for these carbon neutrality claims to be true?

The answer lies within the carbon market.

In this market, companies or individuals can use carbon credits to offset their greenhouse gas emissions that exceed set limits. These credits are issued by the government in recognition of a firm's greenhouse gas reduction efforts.

For example, a manufacturing firm can effectively reduce its emissions to zero using carbon credits, derived either from its own reduction efforts or by purchasing credits from another firm that has made such efforts.

As global efforts to reduce carbon emissions intensify, a new market is emerging in Korea, presenting a blue ocean opportunity for financial firms seeking fresh sources of revenue.

This market, known as the voluntary carbon market (VCM), plays a similar role as the existing compliance carbon market (CCM). But the VCM operates independently from government intervention.

So far, Korea has only implemented the CCM. It has limitations since only companies authorized by the government can participate.

Moreover, with the tightening of greenhouse gas emission regulations around the world, this model struggles to meet the growing demand for carbon emission allowances within the industrial sector. The trade volume of carbon credit surged nearly 3.8 times year-on-year in 2021.

In contrast, the VCM allows numerous firms to earn carbon credits through voluntary carbon reduction projects and to engage in transactions freely. Nongovernmental organizations operating this market review the carbon reduction efforts of participating companies and issue credits accordingly.

The VCM is experiencing rapid growth, notably in Europe, Singapore and Japan. For instance, Japan has been operating a carbon emissions trading platform certification system incorporating blockchain technology since 2018.

According to a 2021 report by McKinsey, the scale of the VCM is expected to reach $50 billion by 2030.

The market is also gaining momentum in Korea. The Korea Chamber of Commerce and Industry (KCCI) plans to launch the country's first VCM as early as the second half of this year.

"The KCCI has established a carbon reduction certification center this year to quantitatively assess the carbon reduction efforts of companies," KCCI Chairman Chey Tae-won said during an MOU signing ceremony with the Ministry of Environment in May. "In the second half of the year, we will begin officially certifying companies' carbon reductions, contributing to the early adoption and activation of the VCM."

Minister of Environment Han Wha-jin, left, and Korea Chamber of Commerce and Industry (KCCI) Chairman Chey Tae-won pose during the signing ceremony for a memorandum of understanding aimed to bolster efforts to establish a voluntary carbon market in Korea, in a hotel on Jeju Island, July 13. Courtesy of KCCI

With this new market on the horizon, financial industries are carefully examining potential opportunities and limitations.

Industry observers expect a significant increase in the role of financial businesses. Beyond merely mediating transactions, they could invest in carbon emission reduction projects, develop and manage trading platforms, provide consultation services or participate in the trading of derivative products related to carbon emission credits.

"Securities firms are definitely looking to the carbon market as a future source of growth. It's not only profitable, but also aids in enhancing their environmental, social and corporate governance (ESG) principles," an industry official said on condition of anonymity.

According to the Financial Supervisory Service (FSS), eight securities firms have applied for qualifications to mediate transactions of carbon credits or derivative products in the VCM. They are Hana Securities, Korea Investment & Securities, KB Securities, SK Securities, NH Investment & Securities, Shinhan Securities, Mirae Asset Securities and Samsung Securities.

Hana Securities has made a notably early move. It was the first to file for qualifications to mediate VCM transactions. Last April, it provided 123 solar-powered water-cleaning facilities to six provinces in Bangladesh, securing 940,000 tons of carbon credits. Last December, it also signed an MOU with Climate Impact X, a Singapore-based global carbon exchange.

Hana is closely followed by SK Securities and NH Investment & Securities.

In April, SK Securities upgraded its climate finance team to the head office level and established a new ESG headquarters. In May, it became the first standalone securities firm to join the Partnership for Carbon Accounting Financials (PCAF) and the U.N. Environment Programme Finance Initiative (UNEP FI).

NH Investment & Securities, leveraging its close ties with agriculture and livestock industries, plans to conduct carbon reduction projects within those sectors and distribute carbon credits issued through these projects in both domestic and international VCMs. It established a carbon finance team earlier this year.

"The VCM will act as an accelerator that can drive growth in the overall transaction volume of the carbon market," Hana Institute of Finance noted in a report released in May. "Korean financial firms, which entered the market later than their European counterparts, should seek niche markets or specialize in services such as consulting on carbon emissions management."

Concerns about potential greenwashing

However, the first challenge Korean financial firms would face before making strides in the market is the question of trust regarding VCM certification.

Even Verra, the world's biggest carbon credit certifier, faced criticism earlier this year when investigations revealed that its certified projects had almost no carbon reduction effects.

Kim Kyung-sik, chairman of ESG Network, emphasized that public confidence is required for the KCCI to energize the VCM in Korea and gain global recognition, even though it would be "extremely hard."

Kim also warned against the market being abused for corporate greenwashing.

"The VCM should be a place where corporations wanting to reduce carbon emissions voluntarily can make transactions in addition to participating in the government-run CCM," Kim said. "However, some corporations globally use their records in the VCM for marketing purposes, while the effectiveness of their carbon reduction efforts remains dubious. This must be eliminated."