Carbon Neutrality Policy Costs to Cut South Korea's Growth Rate by 0.06-0.07 Percentage Points Annually Through 2060

Producer price inflation to rise by an annual average of 0.04 percentage points
Including the benefits (around +0.3 percentage points in growth) would contribute positively to growth

Need to assess the possibility of a trade-off between price an

Following the pathway to achieving the carbon neutrality target would reduce South Korea's economic growth rate by an average of 0.06 to 0.07 percentage points per year through 2060, while increasing producer price inflation by an average of 0.04 percentage points per year, in terms of costs. This is because sharply rising carbon prices would require large-scale investment, alongside the wider adoption of renewable energy and carbon capture and storage technologies. The analysis says the monetary authorities need to assess the possibility of a trade-off between price stability and economic stability, and strengthen risk management in the financial sector.

Transmission Channels of Carbon Neutrality Policies to the Real Economy. Bank of Korea

On the 28th, Kim Jaeyoon and Yeon Jeongin, deputy directors of the Climate Risk Analysis Team at the Bank of Korea's Office of Sustainable Growth, made the remarks in a BOK Issue Note titled "Economic Impact of the Carbon Neutrality Transition Pathway."

South Korea aims to transition to a carbon-neutral society by reducing net carbon emissions to zero by 2050. In August 2024, the Constitutional Court ruled that the former Framework Act on Carbon Neutrality was nonconforming to the Constitution, citing, among other grounds, its failure to set annual emissions reduction targets for 2031 to 2049 and the resulting infringement of the fundamental rights of future generations. The law was recently revised to set specific annual greenhouse gas emissions reduction targets. Carbon neutrality policies affect the real economy through measures such as emissions cap regulations centered on an emissions trading system and the expanded deployment of environmentally friendly technologies, including renewable energy.

The study analyzed the impact on the economy of a low-carbon transition following the upper and lower bounds of the carbon neutrality pathway: emissions in 2035 must be reduced by at least 53% from 2018 levels under a linear reduction pathway, and could be reduced by as much as 61% under an early reduction pathway. The results show that, at the macroeconomic level, the transition would lower the economic growth rate by an average of 0.06 to 0.07 percentage points per year through 2060 and raise producer price inflation by an average of 0.04 percentage points per year.

Deputy Director Kim said, "Under the linear reduction pathway, the economic impact would be limited by relatively lenient emissions reduction regulations in the early stages. However, the development and deployment of low-carbon technologies would also be delayed, concentrating the effects around 2050." He assessed that under the early reduction pathway, the impact would be greater due to stringent emissions caps in the initial stages and a steep rise in carbon prices, but the effects would be spread more evenly over time as low-carbon technology development and deployment proceeded in parallel.

Deputy Director Kim noted, "The difference between the linear and early reduction pathways is not large in terms of their economic impact, but the periods when the burden is concentrated are clearly different." He added, "As the government works with the industrial sector to implement the carbon neutrality roadmap without delays, the Bank of Korea needs to assess the possibility of a trade-off between price stability and economic stability during the low-carbon transition and strengthen risk management in the financial sector."

The study estimated the costs of carbon neutrality policies, or transition risks, but did not consider the benefits of mitigating climate change through carbon neutrality, or physical risks. A comprehensive analysis of the overall effects of carbon neutrality policies requires consideration of both costs and benefits. The climate change mitigation benefits presented in previous studies—an increase of around 0.3 percentage points in the economic growth rate—generally exceed the findings of this study, which estimates the cost of carbon neutrality at 0.06 to 0.07 percentage points.

This content was produced with the assistance of AI translation services.