Air pollutant emissions from large-scale industrial facilities in South Korea rose to 220,441 tons in 2023. (Image courtesy of Yonhap)
SEOUL, Jan. 1 (Korea Bizwire) — Power companies in South Korea will face tougher carbon emissions rules starting in 2026, with a significant increase in the portion of greenhouse gas allowances they must purchase at auction.
The move is part of the government’s plan to strengthen its emissions trading system and accelerate efforts to combat climate change.
The revised framework, known as the 4th Basic Plan for Emissions Trading, was approved on December 31 during a cabinet meeting. It outlines targets and operational changes for the fourth plan period (2026–2030) and the fifth (2031–2035).
New Rules for Carbon Trading
Under the updated system, power generation companies and other high-emitting sectors will need to acquire a larger share of their carbon allowances through auctions. Currently, only 10% of allowances are auctioned.
The government also plans to simplify classifications, grouping companies into just two sectors—power generation and non-power—down from six.
In a significant change, South Korea will revise how it determines free allowances, shifting from a cost-based metric to one based on carbon intensity, which measures emissions per unit of economic value added.
Officials say the change is aimed at promoting fairness and encouraging cleaner production methods.
The alarm bells are ringing louder about the climate crisis caused by human activity. The World Meteorological Organization (WMO) warns that “if we do not urgently take action to reduce greenhouse gas emissions, we will pay a heavy price.” (Image courtesy of Pixabay/CCL)
Market Reforms to Spur Reductions
South Korea’s emissions trading market, established in 2015, has struggled to incentivize significant emissions reductions due to an oversupply of free allowances that have kept carbon prices low. Allowance prices peaked in 2019 at 40,950 KRW per ton but fell sharply to 7,020 KRW by mid-2023.
To address these challenges, the government plans to introduce financial instruments, such as futures contracts, and strengthen market mechanisms, including integrating the market stabilization reserve into the overall emissions cap.
It is also considering eliminating certain mechanisms, such as “indicator-based allowances” and “rollover limits,” by 2031.
Balancing Climate Goals and Industry Concerns
Environmental groups have pushed for 100% auctioning of allowances in the power sector, arguing that this would accelerate emissions reductions.
However, industries have raised concerns about the potential impact on electricity prices and competitiveness. The government says it will strike a balance by reinvesting auction revenues into corporate emissions reduction efforts.
The plan also includes the introduction of Carbon Contracts for Difference (CCfD), a mechanism that guarantees stable returns for companies investing in emissions-cutting technologies. These contracts are expected to encourage long-term investments in decarbonization projects.
Toward a Greener Economy
South Korea is aligning its emissions trading system with global standards to bolster its position as a leader in green innovation. The government will raise efficiency benchmarks applied to companies, increasing their coverage from 60% to at least 75%.
This aims to push businesses toward adopting more energy-efficient practices while fostering competitiveness in a low-carbon economy.
The 4th Basic Plan represents a pivotal step in South Korea’s climate policy, signaling its commitment to achieving net-zero emissions while navigating the complex balance between environmental responsibility and economic stability.
M. H. Lee (mhlee@koreabizwire.com)
