Strengthening carbon regulations, solving corporate dilemmas

Kim Sung-woo

By Kim Sung-woo

• Published Dec 11, 2025 4:30 PM KST

The Korean government finalized its 2035 Nationally Determined Contribution (NDC) on Nov. 11, establishing a concrete target to reduce net greenhouse gas emissions by 53-61 percent compared to 2018 levels.

A breakdown of these figures reveals significant variation and immense challenges across sectors. The power sector faces a particularly intense reduction goal of 68.8-75.3 percent, while the building and transport sectors are tasked with reductions of 53.6-56.2 percent and 60.2-62.8 percent, respectively. By contrast, the industrial sector was assigned a relatively moderate target of 24.3-31 percent. This calibrated approach reflects the structural reality of Korea’s manufacturing-heavy economy and acknowledges the current limitations of scalable reduction technologies in hard-to-abate sectors, where emissions are deeply embedded in production processes and operations.

To achieve these ambitious NDC targets, the government is deploying a suite of policy tools. However, the primary mechanism for enforcing compliance in the power and industrial sectors remains the Emissions Trading System (ETS). Consequently, the strengthening of the NDC is equivalent to a tightening of the ETS. Coinciding with the confirmation of the NDC, the government also finalized the allocation plan for the fourth ETS planning period (2026-30). This legal framework determines the total emissions cap for the next five years as well as the methodology for allowance allocation, effectively setting the regulatory intensity companies must navigate in alignment with the new national goals.

The most profound shift involves the method of allocation. The paid allocation ratio for the power sector is set to increase aggressively from the current 10 percent to 50 percent by 2030. In the industrial sector, while “carbon leakage” industries sensitive to international price competition — such as steel, petrochemicals, cement, refining, semiconductors and displays — will maintain 100 percent free allocation to protect their global standing, the remaining industrial sectors will see their paid allocation ratio expand from 10 percent to 15 percent.

The implication of these policy shifts is stark: Over the next five years, corporations must undertake unprecedented mandatory reductions. The total allowable emission cap for the fourth ETS planning period has decreased by approximately 17 percent compared to the third ETS planning period (2021-25). When coupled with the expansion of paid allocation, the volume of free allowances available to individual firms is projected to shrink dramatically. One securities firm forecasts that by 2030, free allowances for the industrial sector will drop to two-thirds of 2018 levels, while the power sector effectively faces a cliff-edge scenario, receiving less than 30 percent of its 2018 levels.

In this rapidly tightening regulatory landscape, the teams responsible for carbon reduction within these companies are raising concerns that can be categorized into three main dilemmas.

First is the standstill caused by policy uncertainty. Corporate investment cycles often span decades, yet policy seems to fluctuate with short-term election cycles. Companies are hesitant, worrying whether the intensity of carbon regulations will shift again or if government support for specific reduction technologies will be abruptly discontinued. Furthermore, amidst the recent rapid softening of climate policies in the U.S. and Europe, there is growing skepticism in Korean boardrooms asking why Korea must continue to push so aggressively when global peers are taking a step back.

Second is the lack of internal consensus. Achieving meaningful carbon abatement is not a siloed task; it requires an integrated approach involving planning, procurement, production and finance. However, many organizations still view carbon compliance merely as “homework” for the sustainability team or simply as a cost center to be minimized. With the broader business environment deteriorating and investment capacity shrinking, internal resistance to additional costs is at an all-time high. Consequently, carbon reduction initiatives are frequently pushed down the priority list in favor of short-term survival and profitability.

Third is the sheer complexity of execution and decision-making. Companies are simultaneously facing regulatory demands to manage factory emissions and pressure from global supply chains to manage product-level carbon footprints. Navigating information disclosure has become a minefield; being transparent brings the risk of “greenwashing” accusations and reputational damage, leading some to practice “greenhushing” — staying silent to avoid scrutiny.

Additionally, regarding key levers such as adopting new technologies, switching to renewable energy or purchasing credits, companies lament the difficulty of planning. It is nearly impossible to predict when specific technologies will become commercially viable, how volatile energy and credit prices will be or whether carbon market liquidity will suffice, making long-term strategic planning fraught with risk.

With mixed domestic and international policy signals clashing with divided internal opinions, it is undeniably difficult for Korean companies to execute high-difficulty carbon reduction strategies effectively. However, the imperatives are inescapable: Export-driven firms face strict carbon requirements from global importers, consumer-centric companies face pressure from civil society and the current administration has signaled a distinct will to follow through on reduction commitments.

The only way to resolve these dilemmas is through enhanced communication. Internally, this cannot be delegated solely to working-level teams. C-suite executives must fully grasp the technical and financial details of carbon emissions to lead a consensus among leadership. Large-scale decarbonization requires fundamental shifts in companywide resource allocation, which only top management can authorize.

Externally, companies must increase engagement with the government to secure active support. The government, aiming to prevent a tilted playing field in the fierce battle against global competitors, is incentivized to ensure that these regulations lead to industrial growth rather than decline. It is from this process of honest, strategic communication that the clues to solving this predicament will emerge.

Kim Sung-woo, head of Environment & Energy Research Institute at Kim & Chang, is a member of the National Climate Fund management committee.