Efficiency in the Early Stages of Carbon Markets: The Case of the Korean Emissions Trading Scheme

The Korean Emissions Trading Scheme (K-ETS) in its initial stages experiences low market liquidity driven by sellers' supply shortages. We empirically investigate for the first time the informational market efficiency of the K-ETS, specifically how the efficiency varies over time with policy measures taken to increase liquidity, such as individually constrained banking. Our findings indicate that temporary measures taken to improve liquidity in the K-ETS do not ensure informational market efficiency. We also find after the COVID-19 onset, inefficiency does not disappear even with a large surplus of allowances under pre-scheduled constrained banking. This study provides valuable implications for emerging carbon markets, which move forward toward more stringent caps.