South Korea is an active participant in the collective international effort against climate change, having joined the UNFCCC in 1993, ratified the Kyoto Protocol in 2002 and ratified the Paris Agreement on 3 November 2016.

Korea is also a contracting state to the following international agreements and regulations on climate matters:

• the Vienna Convention for the Protection of the Ozone Layer;
• the Montreal Protocol on Substances that Deplete the Ozone Layer;
• the London Amendment to the Montreal Protocol;
• the Copenhagen Amendment to the Montreal Protocol;
• the Montreal Amendment to the Montreal Protocol;
• the Beijing Amendment to the Montreal Protocol; and
• the Marrakesh Accords.

With respect to climate finance, South Korea is a board member of the Adaptation Fund. Moreover, South Korea led the establishment of the Global Green Growth Institute (GGGI) and has been actively supporting technology transfer in developing countries along with the other 43 member countries. South Korea is also a member of the OECD’s Development Assistance Committee (DAC), which supports developing countries in tackling climate change through Official Development Assistance (ODA). The GGGI received ODA eligibility status in 2013.

The Asia-Pacific region pursues a co-operative approach to addressing climate change. South Korea is the hosting country of the Green Climate Fund (GCF) and a board member representing the Asia-Pacific region. As a member of the Asia-Pacific Economic and Social Commission (UNESCAP), South Korea is also involved in co-operative activities to cope with regional climate change.

South Korea has long taken the importance of responding to climate change seriously and has strengthened its domestic reduction ambition to implement the Paris Agreement: in the pursuit of 2050 carbon neutrality, the Framework Act on Carbon Neutrality to Respond to Climate Crisis (the Carbon Neutrality Act) was legislated in 2021, stipulating that the Korean nationally determined contribution (NDC) should be at least 35% compared to 2018 and then at COP26, South Korea submitted its goal of a 40% reduction from the 2018 level as the first renewed NDC.

Korea has established a monitoring and evaluation system through the Second Basic Plan for Climate Change Response; and has been delivering it since 2020. In addition, preparations are being made for technology transfer and other capacity-building support for the implementation of the Transparency Framework. Please refer to 5.1 Carbon Markets for discussion of internationally transferred mitigation outcomes.

Article 35 of the Constitution of Korea provides the environmental rights of citizens and the obligations of the state, which captures the notion of coping with climate change (see 2.1 National Climate Change Policy for a discussion of the Carbon Neutrality Act).

Other than the Carbon Neutrality Act, there are various laws related to climate change, which are supported by the above constitutional provision.

The Ministry of Environment (MOE) is the leading authority supporting the administration and enforcement of Korea’s climate change policy. The MOE has the obligation to support the set-up and implementation of the 20-Year National Carbon-Neutral Green Growth Plan every five years. One of the Prime Minister’s Secretariat, the Office for Government Policy Coordination also plays an important role in climate change policy for reviewing and determining the government’s main policy and plans, as well as their implementation in the transition to a carbon-neutral society and green growth along with the 2050 Carbon Neutral Green Growth Committee, a recently established private consultative body. Local governments are responsible for establishing Ten-Year Local Action Plans based on the said National Plan and the regional characteristics of their respective jurisdictions.

In order to achieve the NDC (40% reduction compared to 2018 by 2030) and 2050 carbon neutrality, the Korean government has implemented various policy measures to reduce carbon and promote renewable energy through the Carbon Neutrality Act (see 2.1 National Climate Change Policy) and other relevant acts.

The major policy measures are as follows.

The Korea Emission Trading Scheme (KETS) and Carbon Taxes

In 2015, Korea established a greenhouse gas emissions allocation system and national cap-and-trade system, commonly known as the KETS, under the Act on the Allocation of and Trading of Greenhouse-Gas Emission Permits.

In 2020, the emissions rights for the Phase 3 allocation plan (2021–25) were allocated to 685 companies and public entities whose total annual emissions were not less than 125,000 tons of carbon dioxide (tCO₂), or to places of businesses with annual emissions not less than 25,000 tCO₂, which represents a drastic increase from 589 companies in the Phase 2 allocation plan (2018–20). If greenhouse gas emissions of a company or public entity exceeded the allocated emissions, then the company or public entity either has to pay administrative fines, purchase emissions rights from the emissions trading market or offset excessive emissions with offset credits.

With the revision of the sub-regulation on the KETS in 2021, by purchasing renewable energy certificates (RECs) – which are certificates authenticating the fact of supply by using renewable energy facilities, based on each megawatt-hour of electricity generated from a renewable energy resource – an organisation receives credit for carbon emissions in the amount equivalent to the purchase amount (indirect emissions from electricity use). This is to encourage companies to participate in the RE 100 (production of products using only renewable energy), representing the partial integration of the RPS market and the KETS market.

In addition, carbon reduction is induced through taxation and levies on fossil fuels.

The Renewable Portfolio Standard (RPS) Scheme and the Clean Hydrogen Portfolio Standard (CHPS) Scheme

In 2012, the government replaced the previous feed-in-tariffs regime and implemented the RPS in accordance with the Act on the Promotion of the Development, Use and Diffusion of New and Renewable Energy. The RPS relies on RECs, which can be traded once issued.

The government has obliged companies with a generation capacity of 500MW or more to generate a certain minimum percentage of gross power from renewable energy sources. Currently, 22 large power companies in Korea are subject to this obligation. Failure to meet the required generation quota may result in administrative fines of 150% of the average trading price of an REC. As of October 2021, the average trading price of an REC is approximately KRW35,000.

In February 2020, Korea enacted the world’s first Hydrogen Act, which entered into force in February 2021. The Hydrogen Act is a law to (i) implement the “Hydrogen Economy Roadmap”, which was initially announced in 2019 and subsequently supplemented with a 2.0 version; and (ii) to promote the safety of hydrogen supplies and facilities using hydrogen fuel.

As of May 2022, to promote a hydrogen economy, the Act adopted a Clean Hydrogen Portfolio Standard (CHPS), a mandatory renewable energy supply system using hydrogen by excluding hydrogen energy and fuel cells from the scope of the existing RPS scheme.

Environmental Impact and Climate Change Impact Assessments

In South Korea, major national plans or development projects are approved only after sufficient mitigating measures to reduce environmental are introduced through environmental impact assessments. In addition, a separate regulatory framework for climate change impact assessments, expanding the greenhouse gas assessment currently done as a part of environmental impact assessments, will be implemented as in near future.

South Korea has been making various efforts to adapt to climate change. The government established the Third National Climate Adaptation Plan (NAP) for 2021–25 to draw up three key policy pillars:

• improving climate change resilience by implementing measures to manage 84 climate risk in six sectors including water management, etc;
• building infrastructure for science-based forecasting and assessment and improving climate vulnerability and risk assessment tools; and
• “mainstreaming” adaptation by putting in place a right governance, co-operation mechanism and a foundation for rasing awareness.

Major climate change adaptation sectors include water, ecosystems, land and coast, agricultural and fisheries, health, industry, and energy. The sectoral adaptation measures are established in anticipation of climate change scenarios, reflecting the NDC and carbon neutrality goals.

South Korea plans to use both co-operative approaches (Article 6.2) and the Sustainable Development Mechanism (Article 6.4) under Article 6 of the Paris Agreement as complementary measures to achieve overseas reduction share of its NDC.

South Korea has been actively carrying out emissions-reduction projects under the Clean Development Mechanism (CDM), but this has often led to the issuance of offsetting emissions in connection with regulatory markets such as the EU Emissions Trading Scheme and KETS, and voluntary carbon market participation has been low. As of June 2022, the government is currently in the process of designing a system or instrument with accompanying market support, and will contemplate various ways of doing this in order that operators that are currently preparing to open the carbon market can launch the voluntary market without a hitch.

South Korea’s exports of steel and steel products to the EU amounted to around USD1.5 billion in 2020, and there are concerns over the steel industry’s export competitiveness as the nation’s dependence on exports to major steel markets is high. South Korea’s industry may adapt to the new mechanism relatively easily, given that South Korea has been successfully implementing KETS, which covers both direct and indirect emissions since 2015, along with other carbon price policies.

The government has taken the Recommendations of the Task Force on Climate-Related Financial Disclosures (TFCD) seriously, and the MOE and Financial Services Commission are included in the Korea’s 110 TCFD supporters.

On 27 June 2022, the Korean TCFD Alliance, in which 55 companies and financial institutions are participating, was launched at the National Assembly Hall. The Alliance is a private-led voluntary association and was founded to increase TCFD execution and response capabilities.

In South Korea, climate-related financial disclosure is not yet mandatory. However, as an increasing number of financial institutions realise that climate change-related information about a corporate entity has a significant impact on financing and investment decisions, the obligations and liabilities of directors related to climate change are gradually expanding. With growing pressure from civil society on companies that cause climate change and damage the environment at home and abroad, many companies have been increasing their investment in climate change responses.

Under the current Korean law, shareholders are not usually held directly responsible for the illegal activities of the companies in which they own shares, nor are parent companies for the actions of their subsidiaries. However, there is an exceptional law that allows shareholders/parent companies to be held responsible for violations of laws related to climate change in cases where de facto control is exercised; thus, it is also possible for shareholders or parent companies, according to their influence, to be responsible for violation of climate change-related laws and regulations.

South Korea has been gradually expanding its ESG reporting system, which is currently based on voluntary ESG disclosure but will become mandatory in phases for firms listed on the Korea Composite Stock Price Index (KOSPI). During the years 2021–25, companies can voluntarily report in line with the ESG Reporting Guidance, but starting from 2025, public disclosure will be mandatory for KOSPI-listed firms with assets of more than KRW2 trillion, and the requirements will be further extended to all KOSPI-listed firms in 2030. However, governance information disclsure has been a requirement for KOSPI-listed firms with more than KRW2 trillion in assets since 2019, and the governance disclosure rule will be extended to all KOSPI-listed companies in 2026.

In relation to climate change, whether a company is subject to a greenhouse gas emissions allocation may have a substantial impact on the valuation of a business during an M&A transaction. Companies subject to the emissions permit trading system have been allocated with a total emissions permit for the period from 2021–25, as well as annual greenhouse gas emissions permits for the period. If a company’s discharge of greenhouse gases exceeds its allocated permit, it must either purchase additional permits from the exchange or borrow permits from other years within the same programme period, in order to submit a total amount of permits that matches its actual greenhouse gas emissions. Failure to submit matching permits despite trading up to a certain portion can lead to the relevant company having a surcharge imposed of up to three times the market price of the excess emissions, capped at KRW100,000 per ton of CO₂. As such, in a legal due diligence, the actual emission amount and the allowance cap must be compared and considered in evaluation.

Please refer to 3. National Policy and Legal Regime (Mitigation) for discussion of the RPS and CHPS.

Beginning with the Renewable Energy Act, the government has implemented a low-interest financing support system for businesses that invest in energy-saving facilities. Individuals and small and medium-sized enterprises that manufacture, produce, or install facilities related to new and renewable energy are supported with low-interest loans.

When renewables equipment is installed in houses, buildings, local government buildings and social welfare facilities, funding may be provided to businesses that rent out the solar power facilities to the buildings and houses. Furthermore, financial support is provided for the manufacturers of renewable energy equipment and the facilities or the companies that install and operate new and renewable energy facilities.

The Energy Savings Company

The government also supports the Energy Saving Company (ESCO), which is a company equipped with the required facilities, capital and technology, and registered with the Ministry of Trade, Industry and Energy pursuant to Article 25 of the Energy Use Rationalisation Act and Article 30 of the Enforcement Decree of the same Act, and provides loans at lower interest rates than the market rates.

South Korea has implemented the Environmental Technology and Industry Support Act to support climate investing.

Disclosure of Environmental Information

In the context of climate change, certain entities are mandated to disclose environment-related information (27 items, including water use, energy consumption, chemicals and waste generation) under the Environmental Technology and Industry Support Act. Subject to these requirements are:

• “green enterprises” (ie, certain companies designated by the government as operating environmentally friendly businesses);
• KOSPI-listed firms with assets over KRW2 trillion (see 6.4 ESG Reporting and Climate Change for further discussion); and
• public institutions and certain companies/organisations that have a large environmental impact.

The K-Taxonomy Policy

K-Taxonomy is a national green classification system of green economic activities, prepared and distributed by the MOE in December 2021. The K-Taxonomy Guideline sets forth the principles and standards of green economic activities. Although the Guideline is not legally binding, it will allow financial market participants and authorities to assess whether certain economic activities are “sustainable,” and thus is designed to put an end to so-called greenwashing or the overstatement of green credentials.

The industries selected for K-Taxonomy are recognised as those involved in economic activities that contribute to six major environmental goals:

• greenhouse gas reduction;
• climate change adaptation;
• sustainable water conservation;
• resource circulation;
• pollution prevention and management; and
• biodiversity conservation.

The K-Taxonomy is also largely divided into “green” sectors and “transition” sectors, and consists of 64 economic activities.

Given that the new administration headed by President Yoon hampered the nuclear power phase-out and that the equivalent finalised EU taxonomy included nuclear power and natural gas, it is expected that the K-taxonomy will be amended to include nuclear power.