Jon Pareliussen

Korea is among the largest greenhouse gas (GHG) emitters in the OECD. Emissions rose fast during a long period of rapid economic development until they peaked in 2018 (Figure 4.1, Panel A). Per capita emissions also increased over the same time period, largely reflecting income growth (Panel B). Emission intensity per unit of GDP has improved but remains high compared to OECD peers (Panel C). Main emitting sectors are electricity generation and manufacturing, reflecting Korea’s heavy dependence on manufacturing exports, including steel and chemicals, and a continued high reliance on coal in electricity production (Panel D), which also contributes to high levels of particle pollution.

The consequences of climate change are also being felt, with the annual mean temperature over the past 30 years (1991-2020) up by 1.6 degrees Celsius compared to the past (1912-1940). Over the past 30 years, summers have become approximately 20 days longer, and winters 22 days shorter. Mean precipitation has increased, while the number of rainy days has decreased, increasing the risks of both flooding and drought (Figure 4.2). The sea level has risen by 10 cm. Particular risks to property and infrastructure are related to flash flooding and typhoons during Changma, the East-Asian Monsoon, while heatwaves are expected to be the most prominent risk to human life. By the end of the century (2081-2100), the mean temperature in Korea is expected to increase by an additional 2.3-6.3 degrees Celsius from current levels, depending on global emissions. The number of heat wave days is set to increase nine-fold, and the sea level is expected to rise by an additional 45 to 82 cm (Presidential Commission on Carbon Neutrality and Green Growth, 2023; Oh, Lee and Jeon, 2017).

A systematic assessment of climate risks to people and the economy can help select and implement adequate adaptation policies. This involves correctly identifying changes in weather patterns at the local level, and assessing exposure and vulnerability based on for example population density, cropland and economic activity potentially affected by changes in the local climate under different scenarios. Adaptation measures range from: technical measures like flood barriers, irrigation systems and green roofs; infrastructure planning or regulatory measures to for example change the settlement structure and transport systems; behavioural and organisational measures like changing working hours and diet; and structural economic adjustments like research and development into adaptation, reallocation of economic activity away from affected sectors and diversification of trade and production. A common framework to assess and prioritise adaptation actions is useful, given the broad array of available adaptation actions, the considerable uncertainty and wide range of actors involved. Cost-benefit and cost-effectiveness analyses are essential tools in this respect. Multicriteria analyses can help rank alternative options using both quantitative and qualitative data to prioritise: no-regret actions, which are cost-effective under current and a range of future climate conditions and do not present hard trade-offs with other policy objectives; low-regret actions, which are low-cost actions with large benefits under projected future climate change; and win-win actions, contributing to adaptation while having social, economic and environmental policy co-benefits, including in relation to mitigation, over actions with less robust net benefits (Pisu et al., 2024).

Korea established the First National Climate Change Adaptation Plan (NAP) for 2011-15 in 2010, and has since published NAPs every five years. The third NAP (for 2021-25) is built on three key policy pillars: i) improving climate resilience; ii) strengthening monitoring, forecasting and assessment; and iii) mainstreaming adaptation in all corners of society. Adaptation is supported by the Korea Adaptation Center for Climate Change, established in 2009 to systematically support adaptation policy and research. Policies are supported by VESTAP, a vulnerability assessment tool, and MOTIVE, a model of integrated impact evaluation. Local governments have been legally required to do adaptation planning since 2015. Public entities in possession of and managing climate-vulnerable facilities have been required to establish and implement their own adaptation plans since Korea’s Framework Act on Low Carbon and Green Growth (The Framework Act), which entered into force in 2022. Korea launched an Enhanced Third NAP (for 2023-25) in 2023 to strengthen implementation of adaptation measures at the company and civil society level. A Public Review Panel comprised of experts, local government, industry, civil society and youth is set up to engage in establishing, implementing and evaluating adaptation plans (Government of Korea, 2021).

Korea has pledged to achieve carbon neutrality by 2050 and to reduce emissions to 40% below the 2018 level by 2030 (Government of Korea, 2021). The Framework Act required the government to present the first Basic Plan for Carbon Neutrality and Green Growth (the “Basic Plan”) in 2023 for a planning period of 20 years, and to revise it every five years thereafter. The Presidential Commission on Carbon Neutrality and Green Growth acts as a climate policy council, advises on targets and policies and reviews progress on mitigation and adaptation every year.

The 2023 Basic Plan presents non-binding emission targets and annual trajectories by sector up until 2030. The biggest reduction is planned in electricity generation, which is set to reduce emissions by approximately 46% compared to 2018, corresponding to 124 Mt CO2e and 43% of the total planned emission reductions. Industry, the second-largest emitting sector, is set to reduce emissions by 11%, which is still 10% of the total planned emission reductions. Transport emissions are planned to fall by 38%, contributing 13% of total efforts. International mitigation cooperation under the Paris Agreement Article 6 is also planned to contribute 13% of the total (Presidential Commission on Carbon Neutrality and Green Growth, 2023).

The formulation of the Basic Plan is a major step forward, and its broad thrust is in line with the analyses of the 2022 OECD Economic Survey of Korea, which also pointed to electricity generation where coal can be phased out and replaced by tested and available technologies at a moderate abatement cost. Furthermore, abatement costs will likely be more than offset by gains from reducing excess mortality and ill health caused by particle pollution (Kim et al., 2020; Lanzi et al., 2022). Analyses with the OECD long-term model indicate that reducing emissions in Korea consistent with the world reaching net zero emissions by 2050 would lower potential output by less than 1% in Korea, if done cost-effectively. This is well below the OECD average cost and lower than in most OECD countries (Guillemette and Château, 2023). However, concrete policy steps need to be taken urgently to reach Korea’s 2030 emission reduction target with reasonable certainty and at a reasonable cost to society. Such steps would also put emissions on a credible path towards net zero in 2050. This chapter argues that the main elements of a target‑consistent, cost-effective and implementable policy package (D’Arcangelo et al., 2022) are the following:

• The allocations for the fourth trading period (2026 to 2030) of Korea’s emissions trading scheme (K-ETS) will be set soon. This is a fork in the road for Korea, as setting the overall cap in line with the 2030 target will take the country roughly three-quarters of the way to meet its 2030 emission reduction target, while a failure to do so would put the target in question. To maximise the efficiency of the ETS and minimise cost, price discovery should be supported with more auctioning and other reforms, and the marginal carbon price needs to pass through fully to all covered entities, including electricity supply (Table 4.1).

• Phasing out coal while decarbonizing industry and transport will require a considerable increase in electricity supply combined with increased energy efficiency. Supporting the ETS in achieving this includes strengthening policies supporting renewables and continuing to expand nuclear power while investing in energy storage solutions and the transmission grid. A number of policies, including regulations and targeted assistance schemes are in place to encourage energy savings in industry and households. These policies will only achieve their full potential if end users pay the true cost of energy.

• General policies to make markets more flexible (Chapter 3), boost the social safety net (Chapter 5) and support technology development in for example low-carbon steel production and small modular reactors would increase acceptance of necessary structural change and reduce its negative consequences. Targeted measures may be warranted in cases when negative consequences are concentrated on certain population groups, sectors and geographies. Popular support for some necessary policy reforms is lacking, but could be strengthened through dialogue, place-based policies and bundling measures to strengthen Korea’s environmental, economic and social performance.

Korea’s emissions trading scheme (K-ETS) covers about three-quarters of greenhouse gas emissions and should be the main tool to reach Korea’s climate pledges. The sum of allocations to the system through auctioning and handed out for free sets the upper limit of emissions during any trading period (the “cap”). The fourth trading period runs from 2026 to 2030, so the cap for this period, to be determined in the near future, will determine whether these three-quarters of greenhouse gas emissions will be reduced in line with the 2030 target or not. Outlining the level of allocations also for future trading periods could further boost green investments, which typically have a much longer investment horizon than five years.

K-ETS has seen limited liquidity and imperfect price discovery. This could be solved, notably by increasing auctioning of allowances and removing restrictions on saving allowances for future periods (“banking”). Current regulations restrict banking of excess allowances to use them for compliance in future trading periods, which prevents the carbon price from reflecting expected scarcity in the future. This is illustrated by the fact that the market price did not increase following the tightening of Korea’s climate targets (Nationally determined contribution, NDC) in 2020, even though rational market participants should expect this to lead to tighter supply in the future. The banking restriction was put in place in 2019 in response to low liquidity as companies hoarded allowances allocated for free, but has since been loosened somewhat. Companies are also allowed to carry over a limited amount of allowances from the third to the fourth trading period (Yoon, 2023). Banking restrictions should be abolished as of the fourth trading period to foster price discovery.

Liquidity is best ensured by increasing the share of allowances allocated by regular auctions, and fully opening up these auctions to all K-ETS participants, banks, brokerages and other serious intermediaries. This is in contrast to the third trading period, when 100% of allocations to trade-exposed industries and 90% of allocations for other ETS participants were handed out for free (OECD, 2022a). Introducing a market stability mechanism with a mandate to auction additional allowances held in reserve (within the overall cap) in periods of low liquidity, as is the case in the EU and United Kingdom market stability mechanisms, would further boost liquidity in times of market stress (OECD, 2022b). Alternatively, the New Zealand ETS, the Regional Greenhouse Gas Initiative and the California ETS successfully operate price-based market stabilisation mechanisms, where reserve allowances are released above a price threshold and auctions held back or allowances purchased by the ETS operating entity if prices fall below a threshold (Yoon, 2023). All these alternative market stabilisation mechanisms require that a considerable share of allowances are eventually sold by the relevant authority as opposed to handed out for free.

The third reform necessary to make the best possible use of K-ETS is to make sure the carbon price feeds through to electricity production. The Basic Plan foresees a major reduction in coal generation, and the 10^th Basic Plan on Electricity Supply and Demand sets out to gradually abolish 28 coal-fired power plants by 2036 and switch fuel to LNG. Some coal-fired power plants may be kept in place as a cold reserve (IEA and KEEI, 2023).

Given the structure of Korea’s electricity market, dominated by state-owned Korea Electric Power Corporation (KEPCO), a certain degree of top-down planning to close existing facilities may be warranted. However, renewable electricity has become increasingly competitive over time, and electricity market regulations should make sure the facilities with the lowest marginal cost of production, including the prevailing market price for K-ETS allowances, supply electricity at any time in order to efficiently use the existing production capacity and incentivise investment in additional capacity. The most efficient solution would be electricity market deregulation. In the current “Cost based pool”, Korea Power Exchange conducts a cost evaluation based on fuel costs and fixed costs for each power plant and then purchases electricity at a price equal to the highest variable cost of the generation capacity needed to clear demand. The 10^th Basic Plan on Electricity Supply and Demand signals a shift towards market pricing in a Price Bidding Pool where power generators autonomously submit bids, and the market price is determined based on this. The transition is set to be gradual, with implementation only on Jeju island with its high penetration of renewables and bids only accepted within a predetermined range initially (MOTIE, 2023).

The government also considers to introduce a two-way bidding system in which not only the supply side (generators) but also retail electricity providers (which is today a monopoly under KEPCO) bid. Other envisaged reforms to improve the functioning of the market include introducing a long-term contract market for low-carbon power sources, a real-time electricity market in addition to the current day-ahead market, and a capacity payments market that commercialises and trades baseload and reserve power. These changes are expected to boost competition and improve price discovery in the electricity market (MOTIE, 2023). Until these reforms are fully implemented, the formula that dispatches electricity production should include the prevailing market price for ETS allowances multiplied by actual emissions from the production facility (OECD, 2022a).

Carrying out the reforms outlined above to align the ETS and electricity regulations with climate targets requires close coordination between the Ministry of Environment and the Ministry of Economy and Finance, which are jointly responsible for K-ETS, and the Ministry of Trade, Industry and Energy, which is responsible for regulating the electricity and manufacturing sectors. As outlined in the 2022 OECD Economic Survey, target-consistent carbon pricing policies also need to be developed outside of the ETS. Fuels for transport, construction and heating can likely be included in the ETS (or taxed) by charging refineries and importers based on the carbon content of fuels sold domestically as done in Quebec (Canada), California and Germany, and planned in the European Union. Double taxation of the same emissions could be avoided with a refund mechanism for fuel consumption already covered by the ETS. Negative emissions from natural and engineered removals of carbon will over time need to offset remaining emissions. They could also be included in the ETS by crediting verified removals with ETS-eligible allowances. Consistently applying the price of greenhouse gas emissions in public sector cost-benefit analyses would make sure policies across government are in line with emission reduction targets. The UK system of cost-benefit analyses regulated by the “Green book” is a good practice example, where target-consistent “carbon values” are systematically applied (OECD, 2022a).

Korea plans to realise 13% of its emission reductions for the 2030 target abroad. The Paris Agreement Article 6 allows countries to reach their targets (NDCs) in bilateral or multilateral cooperation, or by trading emission reductions in an international framework supervised by the Conference of the Parties. Such cooperation is in principle welfare enhancing as it contributes to align the marginal cost of emission reductions across borders. The EU ETS and Effort Sharing Agreement are notable examples of multilateral cooperation under Article 6. However, if trading with countries whose NDCs are inconsistent with net zero, the prospect of selling emission rights might discourage them from tightening their targets. Furthermore, such trade depends on trust that trading partners will indeed fulfil their net zero consistent NDCs, demonstrated by clear plans and timely policy action (OECD, 2022b). As of March 2024, Korea had already signed bilateral agreements with four countries, including Vietnam and Mongolia, aimed at utilising voluntary cooperation under Article 6 of the Paris Agreement, and is cooperating with these countries on a project basis.

Korea’s economy is one of the most energy-intensive in the OECD, with the third-highest energy use per unit of GDP (Figure 4.3, Panel A). This largely reflects Korea’s reliance on energy-intensive industries including petrochemicals, iron and steel. Steady energy efficiency improvements have reduced the energy intensity of the economy by around 30% since the start of the century (Panel B). Continued energy efficiency improvements are needed going forward, and they should centre on the industrial sector, which accounted for 63.3% of the country’s total energy consumption in 2021. By comparison, residential and commercial energy consumption accounted for 17.4%, transportation 16.9%, and the public sector 2.4%. Energy consumption in the industrial sector increased more than four-fold from 1990 to 2021, much faster than in the other sectors. In the 3rd Energy Master Plan from 2019, Korea set targets to reduce total energy consumption by 14.4% by 2030, 17.2% by 2035, and 18.6% by 2040 below the projected business-as-usual level (Aridi et al., 2023).

Korea has put extensive policies in place to improve energy efficiency, but such policies would be much more effective if end-users had faced the true cost of energy use. Allowing the temporary fuel tax cut put in place in 2022 to lapse would be one step in this direction, while market-friendly regulatory reform in the electricity sector should be a priority going forward. Korea’s electricity price is in principle set to reflect the cost of provision by KEPCO, the state utility, but within limits and subject to government approval. Electricity bills consist of four elements: a fixed charge (“demand charge”), a variable (by consumption) energy charge, a variable “climate change and environmental charge” and a variable fuel cost pass-through adjustment rate. The energy charge is reviewed annually to reflect the difference between baseline fuel prices and the actual fuel prices consumed during the preceding year. The variable fuel cost pass-through adjustment rate is in principle adjusted every quarter, but increases are limited to maximum KRW 5 (USD 0.004) per kWh per quarter. The climate change and environmental charge is set at KRW 9 to compensate KEPCO for the cost of the sum of the renewable portfolio standard (RPS), K-ETS and coal generation reduction (KEPCO, 2024).

In line with its commitment to resolve the deficits of KEPCO and Korea Gas Corporation (KOGAS) and strengthen their balance sheets, the government allowed substantial electricity price increases to go ahead in 2022 and 2023, returning KEPCO to profit from the third quarter of 2023. These were the first substantial increases since 2012, and important steps to align energy prices with their true cost. Before this, KEPCO’s recommendations to increase prices had repeatedly been overturned. Prices remain differentiated by six consumer categories, including households, agriculture and industry, leading to distortive cross-subsidies between sectors (Figure 4.4). Electricity used in agriculture for example costs approximately 40% of electricity used by households. KEPCO also shoulders rebated electricity provision to low-income households. KOGAS, the state-owned natural gas monopoly, has faced similar issues. Companies and individuals will respond to underpriced electricity by overconsuming. Even in the buildings sector, where energy efficiency requirements have tightened a lot, behavioural change from occupants is needed to maximise the associated energy savings (Park and Chung, 2023). Besides incentivising overconsumption of energy, keeping prices artificially low has led to large accumulated deficits in KEPCO and KOGAS and mounting contingent liabilities. This may slow down the considerable required investments in the transmission system, which is also owned by KEPCO. Electricity sector reform should therefore be a priority, with competition in production and retail sales of electricity ensuring full pass-through of relevant costs, including that of ETS compliance, overseen by an independent regulator in line with OECD best practice (OECD, 2021a; OECD, 2022a).

Pricing policy aside, Korea has systematically promoted energy efficiency through five-year Basic Plans for Rationalization of Energy Use since the 1990s, including demand-side management strategies and performance targets for industry, buildings and transportation. The policy mix ranges from mandatory regulations, voluntary performance targets, standard setting, financial support, operational support and information generation and sharing. Many policies include a combination of several elements. Energy audits are for example mandatory for large energy consumers, but voluntary and incentivised by financial support for other companies (Aridi et al., 2023).

Korea’s industrial energy efficiency policies have several strengths, but also suffer from some of the weaknesses regarding state support and regulatory complexity discussed in Chapter 3. Companies receiving support are required to report the results of individual steps taken following recognised reporting standards. Output for more indirect programmes, such as awareness raising, certifications, and networking schemes, are measured through simple metrics such as the participation rate and number of certifications. Institutes, notably the Korea Energy Economics Institute (KEEI) conduct research on improving the implementation of policies. The National Assembly Budget Office tracks budget execution. However, there are no regular comprehensive assessments or cost-benefit analyses of the outcomes from each industrial energy efficiency policy or of the outcomes from a combination of these policies (Aridi et al., 2023). Such systematic analyses should be put in place and integrated in the wider overhaul and consolidation of business support and regulations recommended in Chapter 3.

Even though energy efficiency can help balance future demand and supply of electricity, there is no doubt that the supply of clean electricity needs to expand to replace fossil fuels in the generation mix, electrify transport and industry, and produce feedstocks for chemicals production. Electricity supply was approximately 600 TWh in 2023, with coal contributing approximately 31%, natural gas (LNG) 27%, nuclear power 31% and renewables 10%, a 45% increase from 2020, but still the lowest share in the OECD. Renewables constituted only 3.6% of Korea’s final energy consumption in 2020 (IEA, 2024). Expansion of renewables is held back by high costs related to prolonged permitting processes and delayed grid connections, electricity market structure limiting competition and holding back new entrants, and social opposition from local communities. Korea’s mountainous topography and high population density may also contribute to drive up costs compared to other countries, as available sites may not be optimal (REI, 2023). The 10^th Basic Plan on Electricity Supply and Demand forecasts electricity supply to increase to approximately 620 TWh in 2030 and 670 TWh in 2036, with a targeted renewable share of 21% in 2030 and 30% in 2036 (Table 4.2).

The scale of new clean generation capacity needed is uncertain and depends on the speed at which renewables and nuclear should replace coal and gas-fired power plants, the pace of electrification and technology development. Korea’s official carbon-neutral scenarios foresee a doubling in electricity demand by 2050. Scenarios for other OECD countries, including the United Kingdom and Sweden, also imply a dramatic increase in total electricity supply to reach net zero targets (OECD, 2023; Pareliussen et al., 2022). Replacing current coal and LNG-based electricity generation alone will eventually require approximately 300 TWh of clean electricity produced per year. Using hydrogen and hydrogen-derived fuels such as ammonia for energy production, transport and as feedstocks to chemical industries is a key part of Korea’s plans to achieve carbon neutrality. However, producing green hydrogen from water by electrolysis is very energy-intensive and other methods are either emission intensive or not yet ready to be deployed at a commercial scale. Decarbonizing Korea’s production of roughly 70 million tonnes of steel per year by means of direct hydrogen reduction of iron ore, which is currently the only low-carbon steel production technology close to commercialisation after successful piloting in Sweden, would for example require roughly 250 TWh of additional clean electricity per year (Pareliussen and Purwin, 2023).

Wind and solar are weather-dependent, which can lead to an intertemporal mismatch of supply and demand. This is a particular issue for Korea, which has a relatively similar prevailing weather across the country much of the time and no international interconnections. The intermittent nature of wind and solar can also undermine profitability if prices are set in a competitive market as this Survey recommends (D’Arcangelo et al., 2022). This happens because good wind/solar conditions will boost production from wind turbines/solar panels at close to zero marginal cost, depressing prices, while prices will typically be high in periods when wind or solar facilities produce little due to weather conditions. These facilities will therefore over time earn well below the average market price for electricity, and from a system point of view there could even be shortages unless this issue is addressed. Solving this problem requires investments in energy storage, boosting transmission and flexibility of demand. Storage solutions range from hydroelectric dams, which can be further augmented by pumped storage, to different types of batteries and thermal storage technologies. Electric vehicles can also help smooth short-term variations in supply and demand by means of vehicle-to-grid-solutions. To the extent electricity market reform ensures that scarcity is reflected in prices, the very price variations caused by an increasing share of intermittent supply will incentivise storage to come online. However, in order to secure safety of supply, Korea is right to consider capacity payments for flexible production capacity and storage, as signalled in the 10^th Basic Plan on Electricity Supply and Demand.

Korea’s Renewable Portfolio Standard is the main policy in place to incentivise the development of new renewable electricity generation. This system mandates power producers that installed generating capacity over 500MW to produce a minimum proportion of their power using new and renewable energy sources, or fulfil their obligations by purchasing renewable energy certificates from other producers. The target has been gradually tightened from 2% in 2012, and is expected to reach 25% in 2030 in line with the Basic Plan. Renewable energy certificates are weighted, incentivising investments in some less developed and more expensive technologies. For example, some categories of bioenergy, tidal power and solar power are weighted with a factor of one. Large-scale solar, waste gasification and electricity from landfill gas are discounted with a factor below one, while onshore wind, offshore wind, floating solar and small-scale solar on rooftops have factors above one (KEA, 2024). The market for energy storage solutions has been growing quickly, also driven by the mandatory installation of an energy storage system for newly-built public buildings since May 2016. KEPCO installs these systems and uses them to regulate frequency on the grid (IEA, 2023). The government is considering to introduce a wind power bidding market and converting the Renewable Portfolio Standards system into an auction system (MOTIE, 2023). Such reform could offer a number of advantages. If competition is sufficient, an auctioning system can secure a targeted supply of any given technology while minimizing the cost to society, while incentivizing less developed and more costly technologies through separate auctions, as is done in the United Kingdom’s Contract for a difference scheme (Pareliussen et al., 2022).

Some nuclear plants under construction in Korea will come online by 2030, but these are only expected to increase the nuclear share of total electricity supply by two percentage points by this time (MOTIE, 2023). If current efforts to boost nuclear supply are sustained, including efforts to develop small modular reactors, nuclear can make a substantial contribution to reaching net zero by 2050. However, clean electricity from nuclear power also poses distinct challenges. Nuclear energy has very long lead times. It can incur considerable delays and cost overruns, even though these problems have been less prevalent in Korea than in the United Kingdom, France and Finland for example. Nuclear power also warrants strict safety measures and poses challenges related to permanent storage of used fuels. Like most countries, Korea has still to designate a final repository for used nuclear fuels. Finally, nuclear is best suited to provide a stable output (“base load”), so its complementarity to weather-dependent renewable sources is limited.

Demand-side policies may help address the issues related to weather-dependent supply. Korea has implemented a demand management project that addresses both efficiency improvements and load management (IEA, 2023). If the cost of electricity to end-users reflects the cost of production, demand will adapt to variations in supply. Notably professional users in energy-intensive industry will pause production if electricity prices make production run at a loss. This can also be formalised in agreements to maintain a reserve of flexible production capacity and storage, and such stand-by agreements could in principle be auctioned out without discriminating between additional supply to be released and reduced demand at given thresholds linked to the supply-demand balance. There is already a large scope for such demand adjustments from Korean energy-intensive industries, but the potential is set to increase drastically as Korea starts to realise its ambitions for energy-intensive hydrogen production. Hydrogen electrolysers can be turned on and off by a switch, adding a large amount of flexibility to the system. The hydrogen produced at times of plentiful and cheap electricity supply has multiple uses in industry but can also potentially be used as a stored reserve to produce electricity (MOTIE, 2023; OECD, 2023).

Policies to increase low-carbon electricity production can also contribute to build supply-chain resilience. Korea is among the most exposed OECD countries to an energy supply shock, due to its high energy intensity of GDP and high dependence on imported fossil fuels. Reducing fossil fuel dependencies by 40% would reduce the output loss from a potential energy supply shock by an order of magnitude similar to what a major push towards diversification of sources of fossil fuel imports would achieve (Figure 4.5).

Apart from policies directly aimed at reducing emissions, Korea’s climate strategy rightly encompasses policies that lower the cost of the transition and seek social consensus (Presidential Commission on Carbon Neutrality and Green Growth, 2023). Enabling policies encompass a range of areas. Competition-friendly reforms streamlining regulation and employment protection combined with strengthening the social safety net can speed up structural change and minimise its negative effects on individuals and society (Chapters 3 and 5). Streamlining spatial planning can speed up investments in renewable energy and transmission. Policies can also be put in place to address market imperfections, like positive externalities from research and development (R&D) and charging networks (D’Arcangelo et al., 2022; Pareliussen et al., 2022). Policy can also be designed in ways that enjoy more popular support without necessarily reducing their effectiveness, and stakeholder consultations, dialogue and information campaigns can help to fight misperceptions. Finally, some local communities depending disproportionately on polluting activities may require targeted policies to dampen the fallout.

The positive externalities from R&D justify public support in general. Korea already assigns a large share of GDP to R&D, including by supporting companies’ R&D efforts. As argued in Chapter 3, rather than adding new supports, Korea should prioritise and consolidate existing spending. Increasing the share of existing support that goes to low-carbon technologies with high relevance for Korea’s main emitting sectors, many of which would also have export potential, should be considered. The Basic Plan identifies 100 core technologies for carbon neutrality, 35 of which relate to energy, 13 to transportation, 44 to industry and 8 to buildings and the environment. The goal is to support about one-third of these technologies into early commercialisation by 2030, while the others are at earlier stages with commercialisation envisaged by 2050 (The Presidential Commission on Carbon Neutrality and Green Growth, 2023). Korea already has considerable capabilities within areas such as car making, ship making, steel, petrochemical and nuclear power, where technology development could enable large potential emission reductions and reduce their associated cost. Decarbonising steel production using alternative less energy-intensive technologies to hydrogen-based direct reduction of iron ore could for example drastically reduce the need for additional low-carbon electricity and boost the profitability of steel makers, but such technologies require research, development and deployment of test facilities to reach commercialisation (Kildahl et al., 2023).

Small modular reactor (SMR) development is also within Korea’s current strengths, and such reactors have the technical advantage that they could utilise the existing sites and grid infrastructure when electricity production from coal and LNG is shut down (IEA and KEEI, 2023). Korea is accelerating the development of SMRs for export and potential domestic use, with plans to complete an SMR standard design with a lifespan of 80 years by 2025 (International Trade Administration, 2024).

Repurposing by for example the deployment of SMRs can provide reemployment opportunities and ease the transition for communities heavily affected by the green transition. Electricity generation from coal and natural gas is set to be phased out completely by 2050 as part of Korea’s climate efforts. More than 25 000 workers currently work in the coal generation sector alone. Other repurposing options making use of existing infrastructure and skills include using these sites for energy storage, renewable energy generation or a combination of these. In addition to quality employment, achieving just transitions requires fair treatment of workers and communities that rely on the coal industry, and compensation if sustainable employment options cannot be implemented. As a good practice example, Chungcheongnam-do developed a five-pronged strategy for a just transition when phasing down coal plants in the region, including industry diversification, worker support, local community support, restoration of land and facilities for regional development, and building a system to facilitate stakeholder involvement and the long-term transition process (IEA and KEEI, 2023).

To help policy implementation, a target‑consistent and cost-effective policy package can be designed, sequenced and framed in a way that matches the preferences of the Korean people as much as possible. Recent surveys show that, like in other OECD countries, an overwhelming majority of Koreans agree that climate change is an important problem (94%) and that it will negatively affect their personal life (86%) (Dechezleprêtre et al., 2022). Even so, problems close to home may still be perceived as more pertinent in daily life. While 60.3% of the population find climate change to be the biggest threat to humanity, only 12.7% find it to be the biggest threat to Korea. In this context, climate change ranks third after widening socioeconomic disparity (39.9%) and the low birth rate and population ageing (37.5%) (IEA and KEEI, 2023). Taking these priorities into account points to some win-win policies, including policies to reduce productivity gaps and labour market duality outlined in Chapters 3 and 5, which would also ease structural change in a green transition. However, there are also trade-offs that need to be bridged (OECD, 2021b). Decarbonisation of electricity production and pricing electricity at its true cost will likely increase energy prices on average, and will almost certainly increase them for those who enjoy favourable rates today, including low-income households and SMEs. Targeted ad hoc policies may have a role to play if structural change is concentrated in certain geographies and sectors, but there is a risk that targeted policies would disproportionately benefit regular workers, who are in a strong negotiating position and protected by labour unions. A general strengthening of the social safety net, notably employment insurance and re-skilling policies, would help people in a range of situations to cope with structural change from the green transition and from other causes, and should therefore be the preferred solution to soften the impact.

Public opinion does not fully match economic orthodoxy when it comes to the choice of policy instruments. Support for various concrete policy measures is moderate, except for subsidising low-carbon technologies, which is supported by 71% of the Korean population. Only 46% support a tax on fossil fuels, which is nonetheless a much higher level of support than in Germany, France and the United States, and on par with the United Kingdom and Denmark. However, support increases to around 80% if carbon revenues are used to subsidise low-carbon technologies and fund environmental infrastructure (Dechezleprêtre et al., 2022). As argued above, low-carbon technologies and environmental infrastructure need to be prioritised as part of the green transition, and there should be ample scope to present policies as a package, where carbon pricing revenue is linked at least politically to green expenditure (OECD, 2022a).

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