Positive signals of Framework Act on Carbon Neutrality

By Kim Sung-woo

In March, the Framework Act on Carbon Neutrality and Green Growth came into force to address the climate crisis by codifying carbon neutrality targets and their implementation plan. Multiple bills had been proposed since 2020, but they were merged into a single bill which finally passed the National Assembly in August 2021.

The act provides: "The government shall make the transition into a carbon-neutral society to achieve carbon neutrality by 2050, and the nation's vision shall encompass growth that harmonizes both environment and economy." Notably, the act made it clear that Korea's medium and long-term goal is to reduce carbon emissions by more than 35 percent by 2030 from the 2018 level, with the particular reduction percentage target to be prescribed by a presidential decree.

This is to have at least a certain level of reduction targets prescribed under the law so that we can ensure a certain level of carbon reduction, even if the government's climate-related policy ebbs and flows. To achieve this target, the government must establish "a framework plan for carbon neutrality" with a 20-year horizon, which has to be announced every five years.

In particular, the government must set reduction targets for each year and monitor and disclose implementation status of the targets. While the reduction targets had been set previously for a relatively longer period of time such as by 2030 or 2050, we now have annual reduction targets to check if the nation is on track regarding carbon neutrality.

The nation's budget planning is not an exception from this direction. Going forward, greenhouse gas (GHG) reduction will be linked with how the National Assembly plans for the nation's budget. Large-scale development projects will be subject to a higher level of scrutiny for their climate impact: Development projects with substantial GHG emissions will need to receive a prior assessment of their climate impact before the project commences.

In parallel, various policies have been delineated under the act in support of "green growth" of the private sector. Development and promotion of green technologies, support for green industries and promotion of a "circular economy" are some of the examples. The common goal of these policies is to help companies save and efficiently use energy and resources in their operation while minimizing GHG emissions and pollution so that companies can fulfill their social responsibility (so-called "green management").

To raise monetary resources, the act also provides for the establishment of a fund responding to climate change, including how the fund is to be operated and for what purposes it can be used. The act prescribes matters related to internationally recognized GHG reduction projects such as technology transfer, investment and procurement that are designed to achieve the GHG reduction targets under Article 6 of the Paris Agreement.

The act governs who has authority to approve such projects, monitoring and verification procedures, registration and management of reduction performances, approval procedures for bringing such projects in and outside of Korea, and authorities in charge.

Importantly, the act requires the government to do its best to meet the carbon neutrality target. As a result, the government is expected to present various policies that affect how companies do business: policies for transition in energy use, a stricter carbon-emission trading system and promotion of disclosure for consumer and investor protection, to name a few. Furthermore, various stakeholders may exert even more pressure on the government and the companies taking steps toward carbon neutrality.

Perhaps this is because how rigorously the act is enforced may decide our initial steps to achieve carbon neutrality. The fact that the COVID-19 pandemic ― which totally changed our day-to-day lives ― reduced only 5 percent of the global GHG emissions tells us how critical it is for all of us to take enforcement of this act seriously and responsibly.

Setting the challenges aside, there are some positive effects expected to arise from the enforcement of the act, particularly in the private sector. By sending long-term policy signals to corporate players, the act is expected to be a stepping stone for companies to invest in a long-term strategy to achieve carbon neutrality.

According to a survey by the Korea Chamber of Commerce and Industry conducted in March concerning 346 companies participating in the carbon-emissions trading system, 91.6 percent of the respondents said they have established carbon neutrality targets. Three out of four respondents, however, said they have yet to implement any projects promoting carbon neutrality.

Perhaps the reason for this discrepancy is as follows: According to another survey conducted in May with respect to the top 1,000 manufacturing companies (based on their revenues), many were facing difficulties in implementing carbon neutrality because of complexities in relevant administrative procedures and lack of legal support for efforts toward carbon neutrality.

The survey also illustrated that companies are more focused on short-term implementation rather than investing in new businesses and technologies with medium to long-term goals in mind. While a number of respondents picked "reduction in electricity use" (55.5 percent), "transition of fuels and raw materials used" (19.5 percent) and "use of renewable energy" (10.2 percent) as their major activities to implement carbon neutrality, only a small number of respondents answered, "promotion of new businesses" (4.7 percent) and "development of innovative technologies" (1.9 percent).

The latter seems to be more long-term oriented. However, in fact, these activities must be considered sooner rather than later. Hopefully, the Framework Act on Carbon Neutrality can send a positive signal to companies by removing barriers to their pursuit of long-term strategies.

Kim Sung-woo is head of the Environment & Energy Research Institute at Kim & Chang.