By Damya Kecili and Yaerin Ku
“The Republic of Korea is one of the EU's oldest and closest partners.”
These were the words of Ursula von der Leyen, president of the European Commission, as the two entities celebrated 60 years of bilateral relations in May 2023. The Republic of Korea (RoK) and the European Union (EU) are strategic partners, and have been collaborating closely for decades. South Korea was the first Asian country to sign a Free Trade Agreement with the EU in 2011, highlighting the will of the Union and South Korea to work together on resilience and economic security, all the while remaining open and promoting healthy competition. As a result, the EU and the RoK have launched a number of joint initiatives throughout the years. The most recent sign of constant tightening of their collaboration was the announcement that took place last March: Korea was officially joining a group of countries associated with Horizon Europe, the EU research and innovation programme that contributes to achieving the United Nations Sustainable and Development Goals. It is the first Asian country to join this programme.
Among numerous joint initiatives that make up the EU-RoK partnership, the Green Partnership, signed in May 2023, stands out amid the climate challenges. Collaboration on concrete initiatives is needed now, more than ever, in order to mitigate climate change. Dedicated to keeping the 2015 Paris Agreement goals within reach, the two entities are highly aware of the benefits of strengthening bilateral cooperation and exchanging best practices on climate action, clean and fair energy transition, protection of the environment, and other fields of the green transition.
In her speech following the enactment of this Green Partnership, Ursula von der Leyen pointed out that the EU and South Korea are dedicated to working on convergence in key areas such as carbon pricing, deforestation, and plastic products. She also stated that they will explore joint projects in the fields of renewable energies, energy efficiency, and hydrogen economy.
Over the next 4 years, from January 2024 to January 2028, the EU will allocate €3.9 million to support the implementation of the EU-Korea Green Partnership, with GOPA Worldwide Consultants GmbH as the contractor. The project aims to enhance green diplomacy and outreach, facilitate a clean and just energy transition, promote industry cooperation on the circular economy, protect biodiversity, combat environmental pollution, and foster city-to-city cooperation on green and smart city innovations.[1]
As momentum builds for concrete initiatives facilitating a global green transition through cooperation, this article will analyze the environmental policies enacted by South Korea and the EU toward achieving their respective net-zero emission goals by 2050. It will then highlight current challenges stemming from new green legislation and examine how various stakeholders are adapting to foster environmental sustainability.
Part I.
Green Transition: an Overview of Environmental Policies in the EU and South Korea
South Korea
South Korea started implementing laws related to the environment as early as the 1990s. Key legislation during this period included the Basic Environment Law in 1990, which established the legal framework for environmental protection, and the Framework Act on Environmental Policy in 1993, which outlined the government's basic environmental policy goals and principles. The RoK then started to focus on sustainable development in the 2000s. Korea was one of the first OECD countries to announce a Green Growth strategy in 2008. The administration of then-president Lee Myung-bak (2008 - 2013) introduced the "Low Carbon, Green Growth'' initiative, which aimed to decouple economic growth from environmental degradation by promoting green technologies and industries. By doing so, the administration believed that Korea could recover a higher GDP growth rate if the current carbon-intensive economy were to be transformed into a low-carbon economy. As a result, green growth was positioned as a key priority, and the Presidential Committee on Green Growth (PCGG) was formulated as the advisory committee for the President to promote the national agenda on green growth. In order to make those initiatives irreversible, the government enacted the Framework Act on Low Carbon and Green Growth in 2010. This framework has been revised throughout the years, the latest version being the Carbon Neutral Green Growth Framework Act of 2021. This Framework Act provided a long-term vision of green growth that is effective from 2009 to 2050 and requires the establishment of a ‘Five-Year Green Growth Plan’ every five years to implement the national strategy for green growth.
Although the transition to low-carbon industries is slow in South Korea, its progress throughout the years is noticeable. From 2005 to 2019, South Korea's carbon intensity in manufacturing decreased by approximately 38.2 percent.
In an effort to reach carbon neutrality by 2050, South Korea was also the first East Asian country to implement its own Emission Trading System (K-ETS) in 2015. An emission trading system (ETS) is a market-based approach where a government sets a cap on pollutant emissions, allocates permits to emitters, and allows trading of these permits, incentivizing emission reductions at the lowest cost. The K-ETS covers 804 of the country’s largest emitters in the power, industrial, buildings, waste, transport, domestic aviation, and domestic maritime transportation sectors, which accounts for 89 percent of South Korea’s national greenhouse gas emissions.[2]
However, despite the efforts that have been put into place since the 1990s, Korea’s greenhouse gas (GHG) emissions are still very high, and the green energy transition is moving very slowly. Apart from a dip in 1998, Korea's GHG emissions have consistently risen, reaching a peak in 2018 at 727.6 MtCO2e, surpassing twice its 1990 emission level.[3]
In an attempt to counter these tendencies, the administration of former President Moon Jae-In (2017-2022) released the “Korean New Deal” in 2020 (K-ND), which was inspired by the European Green Deal. The K-ND contains both a Digital and a Green New Deal, and was presented by the then-president Moon as a deal that “will set the foundation for Korea’s next 100 years.” The K-ND includes ambitious targets for carbon neutrality by 2050, investment in renewable energy, green infrastructure projects, and the phase-out of coal power plants. It also emphasizes job creation in green industries and the transition to a more sustainable economy. This is considered to be an important milestone in Korea’s attempt at mitigating climate change.
One of the key climate policies of the K-ND is related to the energy sector, which accounts for 87 percent of the nation’s CO2 emissions.[4] The K-GND plans scaling up offshore wind farms, providing subsidized loans for renewable installations, establishing hydrogen pilot cities, and fostering hydrogen-focused enterprises.
Although it is clear that the transition is underway, Korea faces higher transition costs compared to other economies, making the goal of achieving net-zero emissions ambitious.
The European Union
Although the EU’s interest in environmental policies dates back to the time of the European Coal and Steel Community, during which the first Environmental Action Programme was decided in 1973, it is only very recently that environmental issues have been put at the center stage in the EU policy making, with the launch of the European Green Deal in December 2019. It is a set of policy initiatives introduced by the European Commission that aims to guide the EU towards achieving climate neutrality by 2050. The Green Deal adopts a holistic and cross-sectoral approach, involving various policy areas such as climate, environment, energy, transport, industry, agriculture, and sustainable finance. In order to integrate the Green Deal ambitions into law, the EU enacted the European Climate Law in July 2021.
International cooperation:
a key component of the EU climate and environment policy
The Global Gateway
The EU Global Gateway is an initiative launched by the EU in 2021 to strengthen the Union's strategic autonomy and resilience by building stronger, more sustainable, and fairer global connections. It aims to promote the EU's interests and values while enhancing its economic, technological, and political links with key partners worldwide. In 2023, ninety key projects were launched worldwide across the digital, energy and transport sectors through Global Gateway.
Horizon Europe
Horizon Europe, the EU's research and innovation program, plays a crucial role in supporting the EU Global Gateway's objectives. Horizon Europe’s central mission is to fund innovative projects that contribute to tackling climate change and help achieve the United Nations Sustainable Development Goals.
A number of like-minded countries have already joined the programme, and South Korea has officially announced that it has completed an agreement and will thus join by 2025. South Korea will be the first Asian country to join Horizon Europe.
“I am happy to welcome Korea into the Horizon family. This is a milestone for our cooperation and great news for global science and innovation. Together, we will be able to tackle global challenges more effectively. ”
Iliana Ivanova
(Commissioner for Innovation, Research, Culture, Education and Youth[5])
Green Partnerships
Under the European Green Deal, a number of documents have been adopted that give a clear mandate for the EU external action and contain specific commitments in terms of engagement with partners and mainstreaming of the Green Deal priorities into EU international partnerships. This includes the promotion of ambitious green partnerships with like-minded partners around the world.
It is within this context that the EU and South Korea formalized their commitment to sustainability by signing a Green Partnership in May 2023. This partnership aims to strengthen bilateral cooperation and exchange best practices on climate action, clean and fair energy transition, protection of the environment, and other fields of the green transition. In recent years, the RoK and the EU relationship has evolved to become more multifaceted beyond purely economic matters. This partnership is seen as a great opportunity to foster best practices and trigger positive change. While the initiatives under this partnership are yet to be defined, several challenges must be addressed to strengthen EU-Korea cooperation on the green transition.
Part II. Addressing Challenges in EU-Korea Cooperation on Green Transition
Compliance with CBAM and a Comparative Overview of ETS
The EU officially adopted a comprehensive set of legislation under the “Fit for 55” package in April 2023 to help achieve the EU’s ambitious target of a 55% reduction in GHG emissions from 1990 levels by 2030. This included the introduction of the EU Carbon Border Adjustment Mechanism (CBAM).
CBAM was adopted in 2022 as part of the European Green Deal and began its transitional period in October 2023. It is expected to be fully enforced by 2026. CBAM was established to prevent carbon leakage. Under the EU CBAM, importers will need to pay a carbon adjustment corresponding to the price they would have paid if the goods had been produced under the EU ETS.
As the fifth-largest iron and steel exporter to the European Union in 2020—the most affected of the six sectors initially covered by the EU CBAM—Korea is among the top ten countries estimated to be hit hardest by the EU CBAM.
Out of Korea's $68.1 billion in exports to the EU last year, $5.1 billion (7.5%) were items subject to CBAM in 2022.[6] If CBAM coverage is expanded beyond the six categories in the original proposal to include organic chemicals, hydrogen, ammonia, polymers, and indirect emissions released during the production of electricity used in the production of CBAM-covered goods or upstream products (as approved by the European Parliament in June 2022), these additional sectors could affect as much as $6.4 billion of Korean exports to the European Union in 2021, or 9.9% of total exports to the EU.[7]
Transitional phase (October 2023 to December 2025): The phase-in will be gradual to allow businesses to adjust. Only monitoring and reporting obligations will apply for direct and indirect emissions for all CBAM goods.
Post-transitional phase (January 2026 onward): Start of full implementation of the CBAM, with a gradual phaseout of free allocation for covered sectors, reducing free allocation to zero by 2034. Emissions reporting will exclude indirect emissions for CBAM goods that may receive indirect cost compensation under the EU ETS.
Starting January 2026, companies will face a cost burden as they will have to pay additional costs based on their carbon emissions. Although reporting and payment are the importer's responsibility, non-EU export companies must prepare the necessary documentation for submission and verification.
Therefore, measures to reduce free allocation and tighten the cap of the K-ETS are called for, as this will help reduce the CBAM charge for Korean exporters of relevant goods. Under EU ETS, free allocation will be phased out for CBAM sectors gradually from 2026 to 2034. As such, the EU’s push to reduce the level of free allocation should be followed in Korea, especially since the current low K-ETS carbon price indicates an excess supply of allowances. The RoK can consider the experience of the EU in setting more ambitious benchmark levels and developing its own approach for Phase 4 of the K-ETS. It could also consider making 100% free allocation conditional on adequate energy efficiency measures and, for worst performers, carbon neutrality plans, as is the case in the EU.
Adapting to CSRD, ESRS, and CS3D
The Corporate Sustainability Reporting Directive (CSRD) is part of the EU Green Deal that entered into force in January 2024. It is a new ESG reporting regulation aiming at improving the consistency and comparability of ESG disclosures for organizations in the European Economic Area. From 2024 onwards, the new directive will progressively affect 40,000 EU & 10,000 non-EU companies, extend the scope of the EU taxonomy, and require disclosure against numerous environmental, social, and governance (ESG) indicators.
Following the European Green Deal, the EU has introduced sustainable finance measures to drive the transition to a sustainable economy across all sectors. By regulating finance, the EU encourages businesses to prioritize sustainability. As part of the effort, the Union developed a Sustainable Finance Action Plan, which includes the creation of the EU Taxonomy, the Sustainable Finance Disclosures Regulation (SFDR), and the CSRD.
The CSRD will require companies to produce annual reports on environmental, social, and governance issues. Each year, relevant companies will therefore have to collect thousands of data items representing their activities, along with their impact on a range of indicators or data points in Excel format, as well as taking stock of the measures they have taken to mitigate the negative impact of their activities on these indicators.
The European Sustainability Reporting Standards (ESRS) are the reporting standards and requirements that organizations must adhere to in order to comply with the CSRD. Whilst the CSRD sets out reporting requirements and obligations, the ESRS provides the framework and methodology for reporting. From fiscal year 2028 in the 2029 annual report, third-country companies with subsidiaries or branches in the EU will be affected by the new reporting requirements. This applies if the threshold of €150 million in net sales in the EU area is exceeded over two years. Samil PwC reports that over 30 percent of the top 100 companies by market capitalization in the Korean stock market have subsidiaries in the EU that meet the disclosure requirements.[8]
The aim of the ESRS is to instill within businesses greater transparency, improved accountability, and more responsibility concerning their environmental and societal impact. One important concept of ESRS is the double materiality. This dual approach has two dimensions:
Impact Materiality (inside-out): when a company significantly affects people or the environment, either positively or negatively, over short, medium, or long-term horizons. It includes impacts from the company's operations, value chain, products, services, and business relationships.
Financial Materiality (outside-in): when a sustainability matter poses risks or opportunities that could affect the company’s financial performance, position, cash flows, access to finance, or cost of capital over various time horizons.
The Corporate Sustainability Due Diligence Directive (CS3D or CSDDD), another key initiative under the EU Green Deal, complements the CSRD by requiring companies to identify, prevent, mitigate, and account for human rights and environmental impacts throughout their operations and supply chains. This directive extends accountability beyond mere reporting to include proactive measures aimed at sustainable and responsible corporate behavior.
Out of the 205 Korean export companies surveyed, regarding their response to ESG regulations, 48.3 percent of the companies identified CBAM as the most burdensome ESG-related export regulation. This was followed by CS3D (23.9%), Packaging Law (12.2%), and CSRD.[9]
Most companies are not conducting supply chain due diligence, indicating a need for policy support in this area. Specifically, 81.4 percent of the responding companies stated that they are "not conducting supply chain due diligence," while only 9.3 percent responded that they are "conducting it" or "planning to conduct it."
In particular, when asked about their level of response to supply chain due diligence for overseas partners, 67.9 percent responded that they are "unable to respond," revealing significant difficulties in managing overseas partners.
Introduction to EU Taxonomy & a Comparative Analysis between the Korean and EU Taxonomies
The EU taxonomy is a cornerstone of the EU’s sustainable finance framework and an important market transparency tool, in line with the European Green Deal objectives. It allows financial and non-financial companies to share a common definition of economic activities that can be considered environmentally sustainable. It is linked to the obligation of the CSRD as both regulations follow the objective of the Green Deal.
To report in accordance with the EU Taxonomy, a 4-step process must be followed. This includes identifying the economic activities of a company, classifying each economic activity by overarching conditions that economic activity has to meet, calculating financial Key Performance Indicators, and reporting all taxonomy-eligible and taxonomy-aligned economic activities.
Overall, Korean taxonomy is legally weaker compared to the EU taxonomy, but there are nuances that should be taken note of:
In terms of usage, the EU mandates disclosure through related regulations, directives, and delegated acts utilizing the EU taxonomy, whereas South Korea's system is not currently linked to disclosure requirements.
The EU verifies both eligibility and alignment with the taxonomy, while South Korea checks only for alignment.
Regarding protective measures, South Korea focuses on legal compliance, while the EU emphasizes adherence to globally accepted guidelines, such as the OECD Guidelines for Multinational Enterprises, UN Guiding Principles on Business and Human Rights, and the International Bill of Human Rights.[10]
To reduce the compliance burden on companies and boost cross-border investments, it is crucial to establish mutual compatibility between Korea's green taxonomy and international standards, allowing economic activities recognized as green in one jurisdiction to be accepted in others.
Part III. Initiatives for Fostering Sustainability through Adaptation
CBAM Case in Point: SK C&C Develops ‘Digital Carbon Passport Platform’
SK C&C is an advanced ICT company that provides comprehensive digital solutions, specializing in Digital Transformation, IT, cloud services, and blockchain. SK C&C announced in February that it has signed a contract with Lotte Aluminium and Joil Aluminium to build a ‘Digital Carbon Passport Platform’ for comprehensive carbon management throughout their product production processes.[11] Lotte Aluminium produces aluminum foil for secondary batteries, while Joil Aluminium supplies the raw materials. Both companies are part of the global secondary battery supply chain and are subject to the EU's CBAM and battery regulations.
The platform will allow the companies to manage carbon emissions across Scope 1, 2, and 3, making it the first industry-wide product-level carbon footprint management system. It will simplify compliance with CBAM, track Product Carbon Footprints (PCF), and meet the EU's Digital Battery Passport (DBP) requirements, which mandate digital tracking of greenhouse gas emissions throughout a product’s lifecycle. This carbon management platform supporting both CBAM and Lifecycle Assessment (LCA) regulations is a first in Korea. Lotte Aluminium expects this to provide accurate, reliable carbon emission data, aiding proactive compliance with EU regulations and ongoing efforts to minimize carbon emissions. |
CS3D Case in Point: Hyundai accelerates sustainability management in domestic and global supply chains with ESG standards-based contracts Hyundai Motor Group is actively managing ESG within its supply chain to comply with global regulations like the European Corporate Sustainability Due Diligence Directive (CSDDD). The company is developing a standard contract incorporating ESG evaluation results, which will be used across its subsidiaries. Starting next year, first-tier suppliers that fail to meet these standards may be excluded from re-contracting. This move is driven by increasing regulatory pressure, especially as Hyundai's overseas sales, which grew by 4.7 percent in May, make up a significant portion of its revenue.
Hyundai is also assessing potential fines of up to €5,367 million for non-compliance with the EU's CSDDD, which could impose penalties of up to 5 percent of the company’s total revenue. With around 15 percent of its global vehicle exports sold in Europe, Hyundai and other major automakers like Kia and KG Mobility, which generate 25-30 percent of their sales in the European market, are directly impacted by this regulation.[12] |
ESRS and CSRD Case Study Let’s first zoom in on ESRS E1 Climate Change: The largest Korean Tier 1 supplier to the automotive industry in Korea as well as one of the largest chassis component suppliers worldwide, HL Mando supplies parts to all of the main European automotive manufacturers. The company has been managing greenhouse gas emissions based on its sources since the introduction of the K-ETS in 2015. Aiming for carbon neutrality by 2045, HL Mando has set annual greenhouse gas reduction targets for each facility and monitors progress. Emissions from on-site boilers, company vehicles, and emergency generators are classified as direct emissions (Scope 1), while emissions from electricity use and externally supplied steam or hot water are categorized as indirect emissions (Scope 2). Direct emissions account for 9.6 percent of the total, and indirect emissions make up 90.4 percent. Additionally, HL Mando manages six Scope 3 categories, which are indirect emissions caused by the company’s value chain. The company continues to meet its short-term carbon reduction goals annually.[13]  |
Conclusion
Half of total greenhouse gas emissions and more than 90 percent of biodiversity loss and water stress are linked to the extraction and processing of material. Energy production and use are key drivers of greenhouse gas emissions, hence both EU and South Korea recognize the pivotal role clean energy technologies will play in meeting their climate objectives.
Linear production, consumption patterns and continued global investment in unabated coal power generation is incompatible with keeping 1.5°C within reach. Thus, the EU-RoK Green Partnership is the response to the urgent need to shift energy investments away from fossil fuels and towards renewable and low-carbon energy electricity production, in line with the Paris Agreement objective of making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.
By instigating effective exchanges of information and technical consultations regarding individual policies to promote sustainable finance to help investors identify and seize sustainable investment opportunities, such as taxonomies, sustainability-related disclosures, standards and labels, the Green Partnership is indeed a milestone in the bilateral relations between the EU and South Korea. But significant challenges await the two partners and call for a catalytic collaboration across wide-ranging stakeholders – including but not limited to governments, industries, sectors and researchers.
Footnotes
[1] (2024). EU-Korea Green Partnership. https://adelphi.de/en/projects/eu-korea-green-partnership
[2] (2022). Korea Emissions Trading Scheme
International Carbon Action Partnership (ICAP). https://icapcarbonaction.com/en/ets/korea-emissions-trading-scheme
[3] Ritchie, H. & al. (Revised 2024, January). CO₂ emissions
Our World in Data. https://ourworldindata.org/co2-emissions
[4] Raihan, A. (2023, September). Nexus between greenhouse gas emissions and its determinants: The role of renewable energy and technological innovations towards green development in South Korea
[5] (2024, March). Republic of Korea to join Horizon Europe programme. https://ec.europa.eu/commission/presscorner/detail/en/ip_24_1701
[6] Lee, J. & al. (2023, September). 미리 보는 EU 탄소국경조정제도 시범 시행 기간 주요 내용 및 시사점. https://www.kita.net/researchTrade/report/commerceReport/commerceReportDetail.do;JSESSIONID_KITA=1DB26EA5F15C7B04F5EBDC1D7FBE24D4.Hyper?no=2490&logGb=A9400_20231005
[7] Schott, J. & al. (2022, July). Is South Korea Vulnerable to EU and US Carbon Border Restrictions?
Peterson Institute For International Economics. https://www.piie.com/sites/default/files/documents/pb22-10.pdf
[8] Kang, S. & al. (2024, February). EU CSRD·ESRS 이해 및 대응방안. https://www.pwc.com/kr/ko/services/sustainability-platform/eu-csrd-esrs.html
[9] Choi, T. (2024, March). 국내수출기업 ESG 규제 대응현황 정책조사. https://gecci.korcham.net/front/boardlink/boardlinkContentsView.do?boardId=13&contId=20120937634&menuId=1819
[10] Kyo, D. (2023, June). 국내외 녹색분류체계 비교분석-EU 분류체계를 중심으로. https://www.cgs.or.kr/publish/paper_view.jsp?tn=18&pp=3&spyear=&skey=&svalue=
[11] Jeong, H. (2024, August). Development of FPTIS and ESG Platform SK C&C Provides Carbon Emissions
Management Solution. https://www.mk.co.kr/en/it/11084971
[12] Choi, H. & al. (2024, June). EU 공급망 실사지침의 주요 내용과 파급효과. https://eiec.kdi.re.kr/policy/domesticView.do?ac=0000185021
[13] (2023). 2023 HL Mando Sustainability Report.
About the Authors
Damya Kecili
Yaerin Ku
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