The Republic of Korea (henceforth “Korea”) is located in East Asia, on the southern half of the Korean Peninsula. It has a temperate climate, with rainfall heavier in summer and cold winters. The total population of Korea is 51.2 million, of which the urban population accounts for 82.7%. The capital city, Seoul, is the largest and the most populous city, accommodating nearly one fifth (9.8 million) of the total population. The past four decades have witnessed dramatic economic growth and international integration of Korea. It has transformed from an underdeveloped economy with a Gross Domestic Product (GDP) level comparable to poor countries of Sub-Saharan Africa into a high-tech industrialized economy that is a member of the “trillion-dollar club.” However, Korea suffers from various environmental issues, including severe air pollution in large cities, acid rain, and water pollution.
Overall Fiscal Profile
Korea has achieved great success in combining rapid economic growth with remarkable poverty reduction. As an exceptional example of an aid recipient turning in to a high-income economy, Korea’s GNI per capita soared form US$67 in the 1950s to US$22,670 in 2010s. After the financial crisis in 2008, the Korean government has taken decisive and proactive fiscal measures to stimulate the economy, including government investment and consumption, income transfers, and taxes, with sizes of fiscal stimulus well above the average level of other G20 countries. With these fiscal approaches in place, its economic growth rate was revived and has stabilized at approximately 2.8% since 2013, relative to the severe downturn (0.7%) over 2008-2009. However, to achieve sustainable economic growth, stimulate employment, promote social inclusiveness, and environmental sustainability, Korea could take further steps in using fiscal policy reforms as well as reforms in public financial governance.
Policy and Strategic Framework for Green Economy
The country is strongly committed to promote The National Strategy For Green Growth for the period of 2009-2050, beginning with its Five-Year Plan (2009-2013). The Strategy emphasized three major objectives: to promote a synergistic relationship between economic growth and environmental protection, to improve the quality of life and promote environmentally friendly behaviour of people, and to contribute to the international efforts to combat climate change and other environmental threats. Korea for instance, announced that it intended to reduce GHG emissions by 30% by 2020 relative to a “business as usual” scenario. The Five-Year Plan outlines government actions for implementation of the Strategy, and details tasks for ministries and local governing entities (incl. specific budgets), thereby establishing a comprehensive policy framework for green growth in the short and long term.
The Korean government aims to play a leading role in the area of green research and technology. In line with this plan, Korea has passed a US$ 30.7 billion stimulus package aimed to support its green ambitions. This includes renewable energy resources, energy efficient buildings, expanding of railway systems and improving waste management. Despite the intended environmental benefits, these actions are expected to promote employment in green sectors, improved income and energy security, as well as significantly reduced greenhouse gas emissions.
In addition to the policy framework, Korea has also applied the proposed OECD green growth indicators to evaluate the implementation of this green growth policy framework since 2000. A report using 23 indicators was issued, which shows that Korea’s environmental and resource productivity (including CO2 productivity), energy productivity and domestic material consumption have improved since 2000, though in more recent years, there have been no significant improvements.
Fiscal Measures for Green Economy
In line with the National Strategy for Green Growth, the Five-Year Plan calls for annual spending of 2% of GDP on green growth programs and projects including green technology development and green public construction. The spending was financed mainly by the central government budget (1.2% of GDP) as well as two public enterprises (0.8%).
Korea already has a range of green fiscal policies in place. In 1998, the National Committee on Saving Energy launched a voluntary agreement system to encourage improvements of energy efficiency in the business sector. Firms participating in the voluntary programme sign agreements with the government specifying their voluntary energy conservation and GHG emission reduction targets, together with timelines and strategies to achieve them. In return, firms will be eligible for concessional loans for energy-efficient facilities and tax benefits. Apart from these fiscal incentives, technical support is also provided to help firms reach their commitments. By 2008, this programme had contributed cumulatively 58 million tonnes of CO2 equivalent to energy saving, and cost savings of 0.6% of GDP for participating firms over that decade. A voluntary approach plays a significant role in revealing firms’ abatement costs, even though voluntary approach is not cost-effective in addressing environmental externalities. Nevertheless, the Korean government has piloted a mandatory project in 2010, based on the voluntary experience, and has further expended the pilot programme into the GHG and Energy target Management System since 2014.
Besides conventional fiscal incentives, Korea is also at the forefront of carbon pricing initiatives. In line with the Kyoto Protocol, Korea has been an active participant in the Clean Development Mechanism (CDM). In 2005, Korea initiated a voluntary carbon market for the Korea Certified Emission Reductions (KCERs). This market is open to firms that have invested in renewable energy, and have reduced 500 tonnes of CO2 emissions annually through improved energy efficiency as well as efficient production process. Eligible firms receive KCERs for voluntary GHG emission reductions and are allowed to trade with each other in the carbon market. However, due to the lack of domestic emission reduction obligations, there are limited buyers in the market. Therefore, the government typically purchases the majority of KCERs in order to support the market’s operation. By the end of 2009, there were 5.6 million KCERs issued in total, of which 4.7 million were purchased by the government.
In 2015, Korea officially launched an Emission Trading Scheme (ETS). However, similar to the KCER market, the total transaction volume of traded permits－Korean Allowance Unites (KAUs)－remains low or even zero for some periods. To improve the effectiveness of ETS, there have been institutional and regulation changes since 2016. The second phase, which will run from 2018-2020, introduces auctioning and expands benchmark-based free allocation from three sectors to between seven and nine sectors. In addition, a market maker will enhance trade activity and market liquidity; offsets from international credits developed by domestic companies will be allowed at a maximum of five percent . Furthermore, Korea is also seeking international cooperation with its counterparts on carbon pricing, having cooperated with Beijing on research and exchanged views on climate policy and carbon markets.
Environmental taxes also play a role in Korea’s transition to a green economy. They account for 9.5% of Korea’s total tax revenue, which is well above the average level of the OECD countries (5.4%). Moreover, during 2001-2007, the government raised the tax on diesel by 2.4 times and the tax on LPG butane by 6.8 times. Heavy oil that was previously tax-exempt for supporting industry development became subject to taxation due to its negative impact on the environment in 2001.
Sustainable Public Procurement
Korea is a regional leader of implementing sustainable public procurement (SPP), also known as green public procurement (GPP), in Asia. International experience has shown that SPP is a powerful strategic instrument to generate environmental benefits (e.g. GHG emission reduction), social benefits (e.g. improved labour conditions and reduced inequality), and economic benefits (e.g. job creation and cost savings). In Korea, as a part of the Sustainable Consumption and Production Programme, SPP has been implemented at the national level since the 1990s, having evolved out of procurement policies dating back to the early 1980s with mandates to prioritize purchases of products produced by army veterans. To achieve the intended goals and effective implementation of SPP, the Ministry of Environment collaborated with the Korea Environmental Industry and Technology Institute (KEITI) and Korean Public Procurement Services (PPS) to introduce several SPP activities. They include, among others, the development of green public procurement guidelines based on eco-labelling criteria, the establishment of an information sharing platform－the Green Products Information Platform－ for procurers, and the instatement of a nation-wide online monitoring system.
Having implemented this programme for a decade, the total sustainable public expenditure in SPP has increased significantly from US$ 254 million in 2004 to US$ 2.2 billion in 2014 GHG emission reductions and US$ 382 million in cost savings in 2014.
Against this background, Korea is committed to further advance its practice of SPP, with the hope of realizing more economic benefits, especially job creation, and environmental benefits, as well as facilitating the progress of achieving SDGs.
Fossil Fuel Subsidy Reform
Korea has some explicit subsidies on fossil fuels. On average, the total fossil fuel subsidies amount to US$217 million per year. The majority of subsidies is for the production of coal briquettes, mostly in the form of a direct subsidy per unit of production, accounting for US$140 million annually. This subsidy is expected to be completely phased out by the end of 2020 as Korea has made a pledge to end fossil fuel subsidies at the G20 summit in Pittsburgh in 2009.
Korea is also establishing new taxes on certain types of fossil fuels. In June 2015, Korea started to levy a tax on coal imports, which would have impacts on the downstream production of coal-fired electricity. Meanwhile, consumption taxes were simultaneously reduced on a number of other fossil fuels, such as fuel oil and propane. The cost and effectiveness of these reform approaches are yet to be seen, as data collection and analysis are ongoing.
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