South Korea has demonstrated its extensive commitment to combatting climate change. The country participates in the multilateral climate change regime including joining the Montreal Protocol in 1992 and the UNFCCC (UN Framework Convention on Climate Change) in 1993, and ratifying the Kyoto Protocol in 2002 and the Paris Agreement on 3 November 2016.

South Korea has also contributed to the establishment of the Global Green Growth Institute (GGGI), an international organisation launched in October 2012 to contribute to the global co-operation on green economy. In 2022, South Korea announced its plan to form the GGGI Green New Deal Trust Fund and contribute KRW6 billion annually for five years to expand support for responding to climate change, including adaptation in water management, sanitation, agriculture, etc. In 2013, the GGGI was granted Official Development Assistance (ODA) eligibility status by the OECD’s Development Assistance Committee (DAC), which assists developing and emerging economies in responding to the challenge of climate change. South Korea has vowed to raise its climate and green ODA ratio above the OECD Development Assistance Committee (DAC) average by 2025. In addition, South Korea, as the Deputy Director-General and Auditor of the GGGI, actively supports developing countries in reducing greenhouse gas emissions and responding to climate change.

To help finance the global effort to mitigate climate change, South Korea, as a board member of the Adaptation Fund, established in 2021 the Climate Action and Support Transparency Training (CASTT) Adaptation Academy together with the UNFCCC Secretariat and relevant international organisations and has held an international training programme to strengthen the reporting capacity of developing countries on climate change adaptation. Furthermore, South Korea recently announced its plan to give a total of KRW3.6 billion to the Adaptation Fund from 2023 to 2025 (KRW1.2 billion annually) at the high-level dialogue on the Adaptation Fund at the 27th Conference of the Parties (COP27) of the UNFCCC.

The Asia-Pacific region collaborates in responding to climate change issues. South Korea actively participates in the regional effort to battle climate change as a board member and also the hosting country of the Green Climate Fund (GCF) and a member of the Asia-Pacific Economic and Social Commission (UNESCAP). On 29 May 2023, South Korea held the 2023 South Korea-Pacific Islands Summit and adopted the “2023 Declaration of the Leaders of the Pacific Islands: Partnership for Freedom, Peace, and Prosperity in a Resilient Pacific.” At the Summit, South Korea vowed to increase the ODA for Pacific Island countries and the South Korea-Pacific Islands Forum (PIF) co-operation fund, and to pursue customised development co-operation projects for individual countries, and President Suk Yeol Yoon commented that “South Korea will participate in minimising the damage of climate change through customised technical assistance for Pacific Island countries.”

South Korea realises the severity of climate change on the global ecosystems, infrastructure, etc, and has long demonstrated its commitment to mitigating the impact of climate change. As an example, for carbon neutrality by 2050, it legislated the Framework Act on Carbon Neutrality to Respond to Climate Crisis (the “Carbon Neutrality Act”) in 2021 and also pledged to cut emissions by 40% from the 2018 level.

In April 2023, South Korea proposed more specific measures for the development of innovative green technologies, adaptation to the climate crisis, just transition, and international co-operation to achieve the 2030 NDC (Nationally Determined Contribution) and established the First National Basic Plan for Carbon Neutral Green Growth.

In addition, South Korea implements, every five years, national climate crisis adaptation measures based on the Carbon Neutrality Act with regard to adaptation to climate change in consideration of the uncertainties of climate change.

The Constitution of South Korea (Article 35) stipulates the environmental rights of its citizens and provides that the scope of such rights and obligations are to be determined by law. The Constitution is the principal source of the government’s authority for enacting regulations for climate change, and the substance thereof is determined by the relevant acts.

The Carbon Neutrality Act was enacted to specifically propose South Korea’s greenhouse gas reduction goals and obligate the national and local governments to perform various roles to achieve the goals and ultimately transition into a carbon-neutral society. The Carbon Neutrality Act, recognising that climate change disrupts human life on a global scale, specifies the basic principle that South Korea shall aggressively participate in the efforts of the international community to limit the global average temperature rise to 1.5 degrees Celsius above pre-industrial levels (Article 3).

In addition to the Carbon Neutrality Act, South Korea also enacted in 2012, (i) the Act on the Allocation and Trading of Greenhouse Gas Emission Permits pursuant to which a greenhouse gas emission trading system on a cap-and-trade basis was introduced, and (ii) the Act on the Promotion of the Development, Use, and Diffusion of New and Renewable Energy pursuant to which the Renewable Portfolio Standard (RPS) Scheme was introduced.

Moreover, the “Guidelines on Pre-Approval for International Reduction Projects and Acquisition of International Reduction Results” were enacted in January 2023 and have since been implemented as required for commencement of international reduction projects through the sustainable development mechanism (SDM) under Article 6 of the Paris Agreement. The Guidelines set forth the trading of international emission reduction results, standards, and methods for pre-approval of international emission reduction projects, acquisition, and the international emission reduction consultative group under Article 6.4 of the Paris Agreement.

South Korea plans to set up an international emission reduction register system in 2023, and use the emission reduction results transferred to the government-held account in order to achieve the NDC.

In April 2023, South Korea established the “First National Basic Plan for Carbon Neutral Green Growth to Respond to the Climate Crisis” to co-operate with other countries to achieve emission reduction targets as set forth in Article 6 of the Paris Agreement. It indicates the South Korean government’s commitment to actively pursue greenhouse gas reduction projects by sector (including industry, agriculture, and forestry) in 19 major countries, such as Vietnam, Mongolia, Gabon, the UAE, and Indonesia, by executing bilateral climate agreements with such countries at an early stage.

In fact, on 18 May 2023, South Korea initiated bilateral discussions for the cross-border transfer of greenhouse gas reduction results with six Southeast Asian countries (Vietnam, Thailand, Malaysia, Bangladesh, Laos, and Cambodia), with the aim of entering into bilateral agreements with such countries to conduct greenhouse gas reduction projects therein and transfer the reduction results to South Korea for the purpose of achieving the overseas reduction target of 37.5 million tonnes as part of the 2030 NDC targets.

Furthermore, the South Korea–EU Summit held on 22 May 2023 led to the South Korea–EU Green Partnership between South Korea and the EU, which is intended to strengthen co-operation in responding to global issues, such as climate action and environmental protection, and to jointly contribute to the green transition of developing countries.

At the national level, the Ministry of Environment (MOE) is the primary regulatory body governing the administration and enforcement of South Korea’s climate change policy. The MOE is entrusted with establishing and implementing the 20-Year National Carbon-Neutral Green Growth Plan every five years.

The 2050 Carbon Neutrality & Green Growth Commission under the direct control of the President – which was officially established in March 2022 in accordance with the Carbon Neutrality Act (Article 15) – is an advisory body that deliberates and resolves on major policies and plans necessary for the transition to a carbon-neutral society and promotion of green growth. Further, the Commission reviews and implements the national mid- and long-term reduction targets and national basic plans, and establishes, modifies, and inspects the national climate crisis adaptation measures.

The Greenhouse Gas Allocation Commission, which is under the Ministry of Economy and Finance, is in charge of overseeing greenhouse allocation pursuant to the Act on the Allocation and Trading of Greenhouse-Gas Emission Permits and various authorities – (in addition to the MOE) the Ministry of Trade, Industry, and Energy; the Ministry of Agriculture, Food, and Rural Affairs; and the Ministry of Land, Infrastructure, and Transport – and oversees and controls the allocation of greenhouse gas emission permits.

Additionally, local governments are responsible for establishing Ten-Year Local Action Plans pursuant to the 20-Year National Carbon-Neutral Green Growth Plan.

At the international level, the Ministry of Foreign Affairs is actively leading international negotiations on climate change and multilateral environmental diplomacy.

South Korea has implemented various policy schemes aimed to reduce carbon emissions and promote renewable energy pursuant to relevant statutes including the Carbon Neutrality Act.

The Korea Emission Trading Scheme (K-ETS)

The K-ETS is a market-based greenhouse gas reduction system established in 2012 under which the South Korean government allocates emission permits on an annual basis to the businesses emitting greenhouse gases beyond a certain limit (the businesses subject to allocation (BSA)) and allows emission activities only within the allocated allowances. As of 2023, about 700 companies are qualified as BSAs responding to the K-ETS, and their annual greenhouse gas emissions account for about 73.3% of the country’s total emissions. It serves as one of the most important initiatives to achieve South Korea’s 2030 NDC targets and 2050 carbon neutrality.

The Phase 3 allocation plan (2021-25) assigned emissions rights in 2020 to 685 BSAs (companies and public entities whose total annual emissions were 125,000 tonnes or more of carbon dioxide equivalent (tCO2eq), or to places of businesses with annual emissions of 25,000 tCO2eq or more). Compared with the Phase 2 allocation plan (2018-20) which allocated allowances to 589 BSAs, this is a rather steep increase. If any company or public entity’s emission level exceeds the allocated allowances, it may be subject to administrative fines, or be required to purchase emissions credits from the emissions trading market or offset excessive emissions with offset credits.

The Target Management System (TMS)

The TMS has been in place since 2010 pursuant to the Framework Act on Low Carbon, Green Growth, which was replaced by the Carbon Neutrality Act, and under the TMS, the government directly designates the businesses emitting greenhouse gases above a certain level as “entities subject to management” and individually assigns and manages greenhouse gas reduction targets for them. The Carbon Neutrality Act also mandates the implementation of the TMS, and, as of 2023, about 400 companies and local governments have been designated as entities subject to management under the TMS (Article 27).

The Renewable Portfolio Standard (RPS) Scheme

The RPS scheme requires power generation business operators to supply a certain percentage of their total power generation with renewable energy. Pursuant to the Act on the Promotion of the Development, Use, and Diffusion of New and Renewable Energy, South Korea has been implementing the RPS scheme since January 2012 in lieu of the existing Feed in Tariff (FIT) scheme. The entities subject to mandatory participation in the RPS scheme are power generation business operators with a power generation capacity of 500MW or more and are designated annually by the government (Ministry of Trade, Industry, and Energy). In 2023, 25 power generation business operators subject to the above supply obligation have been designated to supply about 630 million MWh of renewable energy.

The Clean Hydrogen Portfolio Standard (CHPS) Scheme

On the hydrogen economy, the Hydrogen Act was enacted in February 2020 and took effect in February 2021. The Hydrogen Act governs implementation of the “Hydrogen Economy Roadmap” which was initially introduced in 2019 and subsequently supplemented with version 2.0 and promotes the safety of hydrogen supplies and facilities using and operating on hydrogen fuel.

The Hydrogen Act was subsequently revised to establish the Clean Hydrogen Portfolio Standard (CHPS), a mandatory quota for hydrogen power generation. On 9 May 2023, the South Korean government announced the Hydrogen Safety Management Roadmap 2.0 to develop safety standards relating to acquisition, storage, distribution, and infrastructure, such as hydrogen pipeline safety standards for liquefied natural gas (LNG) hydrogen hybrid power generation, and established safety standards for various clean hydrogen production facilities.

Environmental/Climate Change Impact Assessments

In South Korea, environmental impact assessments are conducted to determine whether major national plans or development projects may be approved. It is also expected that climate change impact assessments will be implemented as part of environmental impact assessments.

On 25 September 2022, South Korea introduced the Regulations on Climate Change Impact Assessment Methods and the Regulations on the Handling of Consultation Tasks relating to Climate Change Impact Assessments. These regulations require that climate change impact assessments be conducted as part of environmental impact assessments, and include the prediction, analysis, and assessment of climate change impacts, greenhouse gas reduction targets, and establishment of greenhouse gas reduction and climate crisis adaptation plans.

K-RE100

The South Korean government introduced the South Korean RE100 (K-RE100) scheme in 2021 as more South Korean companies voluntarily join the global RE100 or are required to respond to the carbon-neutral supply chain at the request of foreign customers. South Korean companies, public institutions, and local governments that have or have not participated in the global RE100 campaign may participate in the K-RE100, and as of May 2023, 288 companies and public institutions have participated therein.

There are five procurement options for the K-RE100:

• green premiums;
• REC purchases;
• renewable energy power purchase agreements (PPA);
• renewable energy power generation equity participation; and
• self-construction of renewable energy power generation.

As of 2023, green premiums and REC purchases are mainly used to implement the scheme.

Greenhouse Gas Reduction Recognition Budget System

The Carbon Neutrality Act mandates the implementation of the “greenhouse gas reduction recognition budget system” that analyses the impact of national and local government budgets and funds on climate change and reflects them in the management of national and local government finances (Article 24). The greenhouse gas reduction recognition budget system is for national and local governments to assess the impact of greenhouse gas emission reductions, and to implement fiscal policies so as to foster businesses reducing greenhouse gases, while reducing budgets for those that have not achieved emission reduction, during the budgeting or fundraising process.

The National Finance Act mandates the preparation of a “greenhouse gas reduction recognition budget”, which is a report analysing in advance the impact of government budgets on greenhouse gas reduction. The budget report must include an analysis of the anticipated impact of the government’s budget on greenhouse gas reduction, performance targets, and analysis of effect (Article 2).

South Korea has made significant climate commitments over the years. The government developed the Third National Climate Adaptation Plan (NAP) for 2021–25 with three policy objectives (excerpted from The Republic of Korea’s Adaptation Communication: A Report to the United Nations Framework Convention on Climate Change):

• to improve climate resilience across all sectors of society;
• to promote science-based adaptation by establishing climate monitoring and prediction infrastructure; and
• to achieve the mainstreaming of adaptation among the public and all stakeholders.

Key sectors affected by the NAP – based on climate change scenarios and reflecting the NDC and carbon neutrality goals – include water management, ecosystem, terrestrial and coastal areas, agriculture and fisheries, health, industry, and energy.

With implementation of the Carbon Neutrality Act, starting from 2022, the MOE is required to inspect the progress of the climate change adaptation measures taken by the national and local governments in the previous year and disclose the results after deliberation and resolution by the 2050 Carbon Neutrality & Green Growth Commission.

On 10 November 2022, the MOE and the 2050 Carbon Neutrality & Green Growth Commission presented the results of inspection of the 2021 progress of the 3rd national and local climate change adaptation measures (2021–2025) to the Carbon Neutrality & Green Growth Commission, and, as a result, the Commission assessed and resolved that the measures were being carried out adequately as planned.

South Korea intends to use both co-operative approaches to greenhouse gas emissions (Article 6.2) and the Sustainable Development Mechanism (Article 6.4) to participate in the market mechanism evolving under Article 6 of the Paris Agreement.

South Korea has demonstrated its strong commitment to emissions reduction by operating various projects under the Clean Development Mechanism (CDM), but voluntary carbon market participation has been low.

At the initial stage of the carbon market, South Korea permitted only the companies obligated to participate in the emissions trading scheme to participate in the Korean Allowance Unit (KAU) trading. However, since the third planning period, private financial companies have also been permitted to trade emission permits, and the scope of companies permitted to participate in the trading will be further expanded in the future. The volume of emission trading is showing a continuous increase each year.

South Korea has been actively conducting CDM projects under the existing Kyoto Mechanism, and the MOE has approved the conversion of CERs issued by the United Nations to i-KOCs that can be used in the K-ETS. As of May 2023, the volume of the CERs converted to i-KOCs was about ten million tonnes. Through the enactment of the Guidelines on Pre-Approval for International Reduction Projects and Acquisition of International Emission Reduction Results, the South Korean government has established administrative procedures to support South Korean companies in pursuing Sustainable Development Mechanism (SDM) projects under the Paris Agreement (Article 6.4).

In addition, the South Korean government is encouraging South Korean companies to enter the carbon reduction markets of developing countries by supporting international reduction projects led by private sectors, and to contribute to the NDC targets. Furthermore, the government is working on establishing a system to utilise voluntary reduction performance at the corporate ESG level through the privately led voluntary reduction market. Accordingly, the [South] Korean Chamber of Commerce and Industry operates the Carbon Reduction Certification Centre, which is a specialised organisation that evaluates companies’ voluntary carbon reduction activities and certifies their reduction performance. With President Suk Yeol Yoon’s visit to the UAE on 16 January 2023, a Memorandum of Understanding for “Voluntary Carbon Market (VCM) Partnership” was executed between SK Inc and the UAE’s Mubadala Investment Company, which mainly provides for investment in a carbon trading platform, establishment and operation of a carbon reduction certification centre, and development of carbon reduction technologies.

The EU published regulations on the Carbon Border Adjustment Mechanism (CBAM) in the official gazette on 16 May 2023, and the regulations came into force the following day, ie, 17 May 2023. The CBAM will be initially applied to six industries, including steel, aluminum, cement, fertiliser, and hydrogen.

There is an expectation that South Korea’s industries may adapt to the CBAM relatively easily, given that South Korea has been successfully implementing different carbon price policies including K-ETS.

Even before the EU’s announcement of the CBAM bill, the South Korean government conveyed its position to the EU through various co-operation channels, and internally prepared for the implementation of the bill through communication between the government and companies. On 25 May 2023, the government signed with the EU a Green Partnership to the effect that they will continue to engage in close communication and discussions on implementing the WTO-compliant CBAM to avoid any restriction on the bilateral economic co-operation.

As of now, 106 institutions in South Korea have declared their support for Climate-Related Financial Disclosures (TFCD) and the South Korean government has referred to the Recommendations of the TFCD in devising its own policies.

On 27 June 2022, the South Korean TCFD Alliance was launched as a private platform voluntarily created by 55 South Korean companies and financial institutions that have declared their support for TCFD. The Alliance was founded to improve TCFD execution and response, and plans to carry out various activities, such as establishing a TCFD-based climate disclosure system, reflecting climate risks in the overall financial supervision system, sharing know-how through analysis of overseas TCFD reporting cases, and enhancing the ability to analyse climate change scenarios necessary for establishing TCFD strategies.

Currently, companies are not required to disclose climate-related financial information to the public and thus directors have no obligation/liability relating thereto. However, an increasing number of companies recognise that investors and financial institutions are interested in learning about their impact on the environment/climate, and are paying closer attention to improving their climate change responses.

In practice, the firm has not seen such cases where shareholders have, or a parent company has, been held liable.

In theory, a shareholder or an officer or employee of a parent company may be subject to criminal punishment as accomplices and held liable if they are deemed to have de facto influence on the officers/employees of the company in violating the Act on the Allocation and Trading of Greenhouse-Gas Emission Permits by, eg, making false or fraudulent filings. However, the firm is not aware of any precedent where this has actually happened.

ESG reporting is currently not a regulatory requirement in South Korea, but is expected to become mandatory in phases for firms listed on the Korean Composite Stock Price Index (KOSPI). Specifically, ESG reporting will remain voluntary until 2024 such that companies can voluntarily report in line with the ESG Reporting Guidance – however, from 2025, public disclosure will be mandatory for KOSPI-listed firms with assets of more than KRW2 trillion, and the reporting requirements will further apply to all KOSPI-listed firms beginning in 2030.

In December 2021, the South Korean government (Ministry of Trade, Industry, and Energy) provided the “Korean ESG Guidelines” (K-ESG Guidelines) containing the key elements necessary for ESG management to support the spread of autonomous ESG management by South Korean companies. In December 2022, the government also separately produced and disclosed the “K-ESG Guidelines for Responding to Supply Chain Due Diligence” to support South Korean exporters in responding to global supply chain due diligence.

Pursuant to these guidelines, some South Korean companies are currently voluntarily making ESG disclosures. As of 2022, 131 companies published and voluntarily disclosed their sustainability reports and financial companies are establishing a credit rating system that reflects their evaluation of ESG management.

Climate change due diligence has become a key component of M&A transactions involving a target company subject to a greenhouse gas emissions allocation. Although the scope of diligence exercise differs by each transaction, climate change due diligence may include assessing the following:

• the greenhouse gas emissions of the company or its assets;
• the potential for reducing greenhouse gases;
• the allocation of greenhouse gas emissions allowances;
• the status of the emissions allowances that can be held and carried forward;
• the prospect for excess or shortage of emissions allowances;
• the measures to secure insufficient emissions allowances (application for additional allocation, borrowing, and sale and purchase); and
• potential penalty surcharge for failure to secure insufficient emissions allowances.

In addition, the K-ETS obligates the relevant parties to carry out the “succession of rights and obligations thereunder” relating to the obligation to implement the scheme and the ownership of emissions allowances, especially upon any acquisition, merger, or sale of assets involving the companies subject thereto. Accordingly, the actual emission amount and the allowance cap must be compared and examined in a legal due diligence investigation.

South Korea has set a greenhouse gas reduction target of 45.9% for the power generation sector to achieve by 2030 compared to 2018 in the “First National Basic Plan for Carbon Neutral Green Growth”. In order to achieve the reduction target for the power generation sector, South Korea plans to increase the share of renewable energy generation from 9.2% as of 2022 to at least 21.6% by 2030 by expanding the supply of clean energy such as solar power, offshore wind power, and hydrogen.

In addition to the Renewable Portfolio Standard (RPS) scheme and Clean Hydrogen Portfolio Standard (CHPS) scheme detailed in 3.1 Policy/Regulatory Instruments and Spheres of Government/Sectors, the South Korean government has implemented a low-interest financing support system for businesses that invest in energy-saving facilities. This financing support system grants low-interest loans to individuals and small-and-medium enterprises that manufacture, produce, or install facilities related to new and renewable energy.

In addition, the Korea Technology Finance Corporation, funded by the South Korean government, has introduced a “carbon valuation guarantee” to provide a guarantee so that companies promoting renewable energy generation and greenhouse gas reduction projects can raise funds more easily.

South Korea plans to invest about KRW5 trillion by 2030 in order to increase exports in the renewable energy industry, and contribute to achieving the overseas reduction target of 37.5 million tonnes as part of the 2030 NDC targets through the promotion of overseas renewable energy greenhouse gas reduction projects. In particular, the government plans to operate an overseas renewable energy market development group to support overseas expansion projects focused on these target countries.

South Korea has been supporting climate investing by enacting the Environmental Technology and Industry Support Act.

Disclosure of Environmental Information

Under the Environmental Technology and Industry Support Act, certain entities (as listed below) are required to disclose environment-related information; eg, 27 items of environmental information to be disclosed in the manufacturing and other industrial sectors, and 19 in the public administration, health, and other service sectors, and the status of greenhouse gas management and renewable energy management, which are essential components of climate investing, to be disclosed in all sectors.

• “Green” companies (ie, those companies deemed to be operating environmentally friendly business and designated by the government as such).
• KOSPI-listed firms with assets over KRW2 trillion (see 6.4 Environmental, Social and Governance (ESG) Reporting and Climate Change for more detail).
• Public institutions and certain companies/organisations that have a large environmental impact in the course of their operation.

The K-Taxonomy Guideline

Pursuant to the Environmental Technology and Industry Support Act (Article 10-4), the South Korean government announced the K-Taxonomy Guideline for classification of green economic activities in December 2021 to promote various green financial activities (eg, issuance of green project financing, green bonds, green credit, and green funds).

The K-Taxonomy Guideline classifies green economic activities that promote six environmental objectives:

• reduction of greenhouse gas emissions;
• adaption to climate change;
• conservation of water for sustainable living;
• circulation of resources;
• prevention and management of pollution; and
• conservation of biodiversity.

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

On 23 December 2022, the South Korean government amended the green classification system to include “research, development, and substantiation of nuclear power-related technologies to reduce greenhouse gases and improve safety and environmental effect” in the “green” category, and “construction and continued operation of new nuclear power plants” in the “transition” category. This amendment came into force as of 1 January 2023.