# Chapter 3. Towards green growth1

Korea has created a strong institutional framework for green growth but faces challenges in making the transition to a more environmentally sustainable economic model. This chapter reviews efforts to mainstream environmental considerations into economic policy and to promote green growth. It analyses the use of taxation and other economic instruments to pursue environmental objectives and discusses environmentally harmful subsidies. The chapter examines efforts to scale up environment-related and low-carbon infrastructure, expand related markets and support eco-innovation as a source of economic and employment growth. It also reviews progress in mainstreaming environment in development co-operation programmes, promoting corporate social responsibility of Korean multinational enterprises and greening export credit systems.

## 1. Introduction

Korea has the eighth largest economy among OECD members, which was, until recently, one of the fastest growing. Real gross domestic product (GDP) increased 78% over 2000-15, almost three times the OECD average (28%). Since recovering from the 2008-09 global financial crisis, it has posted average annual growth of about double the OECD average. Korea’s rapid recovery was spurred by its fiscal stimulus, which was the largest among OECD countries (OECD, 2010a). Growth has slowed, however, dampened by high household debt, low productivity (particularly in services and small and medium-sized firms) and sluggish exports (OECD, 2016a). GDP per capita is increasing but remains below the OECD average. While the relative poverty rate and income inequality have fallen recently, both remain high.

Despite expressing a strong commitment to green growth, Korea faces challenges in transitioning to a more environmentally sustainable economic model. Large energy-intensive industries drive GDP growth, supported by low electricity prices, and the energy mix is dominated by fossil fuels. As a result, Korea has one of the most carbon-intensive OECD economies, and greenhouse gas (GHG) emissions increased by 39% over 2000-13. Air pollution is a serious concern, caused by emissions from energy-intensive industries, the preponderance of roads in Korea’s transport system and transboundary air pollutants and dust from China and Mongolia (Chapter 1). It is estimated that decreased labour productivity and increased health expenditure caused by air pollution will reduce GDP by 0.62% by 2060 – more than any other OECD country – compared to a baseline excluding the economic consequences of air pollution (OECD, 2016b).

A recent OECD study estimates that incorporating the total cost of pollution abatement in Korea’s GDP would reduce growth over 2000-13 by 0.7% per year, on average, more than any OECD country except Turkey (Figure 3.1). This reflects the fact that much of Korea’s spectacular growth has been at the expense of environmental quality (Cárdenas Rodríguez et al., 2016). Environmental challenges are exacerbated by the population density, which is the highest in the OECD (Chapter 1).

## 2. Green growth policy framework

Green growth was instilled in Korea’s development framework in response to Korea’s high dependence on energy imports, high vulnerability to the effects of climate change and need to transition to a less resource-intensive economic growth model (Han, 2015; Choi, 2014;). After then-President Lee proclaimed “Low carbon, green growth” as the national long-term vision in 2008, the National Strategy for Green Growth (2009-50) structured this vision around three objectives (climate change mitigation and adaptation and energy independence; creating new engines for economic growth; and improvement in quality of life and enhanced international standing) and ten policy agendas. The 2010 Framework Act on Low Carbon, Green Growth (LCGG Act) provided the legal foundation for its implementation. A first Five-year Plan for Green Growth (2009-13) was launched to provide a comprehensive roadmap and expenditure plan for implementation (Section 4.1). Korea also became a promoter of green growth and climate change action on the international stage (Box 3.1). The LCGG Act established additional core plans for energy, climate change and sustainable development2 to facilitate implementation.

Box 3.1. International engagement for green growth

Korea has made considerable effort to expand its international engagement in the area of green growth. In 2009, it was a strong promoter of green growth at the OECD when it chaired the Ministerial Council Meeting, initiating the OECD Declaration on Green Growth and contributing to the launch of the OECD Green Growth Strategy. In 2010, Korea became the host of the Green Climate Fund, established under the UN Framework Convention on Climate Change to collect and disburse finance to help developing countries mitigate GHG emissions and adapt to the effects of climate change. The same year, Korea established the Global Green Growth Institute. Originally a local think tank aiming to provide technical and policy advice on green growth to developing countries, it became an international organisation in 2012. President Lee was vocal in climate negotiations, championing the principle of Nationally Appropriate Mitigation Actions (NAMA) and the establishment of a NAMA Registry, both which were adopted by the international community (Han, 2015; MOE, 2015a). In 2014, Korea hosted the 12th conference of the parties to the Convention on Biological Diversity.

However, Korea needs to consolidate its green growth results at home to maintain credibility on the international stage and with the Korean population. A gap remains between the country’s international ambition and its domestic performance (Chapter 1). A public opinion survey on green growth policy, conducted by the Presidential Committee on Green Growth in 2013, shows a strong preference for a focus on concrete domestic actions, with only 2.8% of respondents prioritising global leadership (Han, 2015).

Source: Han, H. (2015), “Korea’s pursuit of low-carbon green growth: A middle-power state’s dream of becoming a green pioneer”, http://dx.doi.org/10.1080/09512748.2015.1013491; MOE (2015), Ecorea: Environmental Review 2015, Korea.

The LCGG Act established a comprehensive institutional framework for implementing the National Green Growth Strategy and evaluating progress. It obliges all central administrative agencies and local governments to develop annual green growth action plans. Their implementation is reviewed and evaluated by the prime minister or local governors. Results are reported to the Committee on Green Growth, which is charged with steering the implementation of the low carbon, green growth vision. In addition, individual green growth projects were evaluated over 2009-12, either directly by the Government Performance Evaluation Committee or under its supervision. Thirty green growth indicators were developed to monitor implementation of the first Five-year Plan for Green Growth and draw lessons for development of the second plan; Statistics Korea publishes results in a biennial report. From October 2013 to March 2014, some projects and measures under the first plan, chosen based on their size, policy significance and impact, were evaluated by the government and 21 experts from the public and private sectors to identify the achievements and limits of the first plan and prepare the second plan.

Korea’s green growth framework stimulated green investment, but tangible environmental progress has been hindered by pricing and fiscal policies that insufficiently integrate environmental externalities (Section 3) (Sonnenschein and Mundaca, 2015). Evaluations of the first five-year plan, while applauding the establishment of policies and projects, the increase in green expenditure and progress made in developing green industry and accelerating eco-innovation, noted that development of renewable energy sources remained marginal and below target, GHG emissions continued to rise and the general public remained largely disengaged from the green growth revolution.

The second five-year plan (2014-18) aims to address these shortcomings and integrate the current government’s flagship concept of “creative economy”. It pushes for reform of energy taxation and electricity pricing; one of its three pillars is to achieve a creative economy through the convergence of green technology and information and communications technology (ICT); and it envisages green reforms being made more tangible at local level through “eco-friendly energy towns”.

Although the second plan was adopted in 2014 and certain relevant measures were implemented, green growth is no longer the top political priority. In 2013, the Committee on Green Growth was moved from the president’s to the prime minister’s office and the Government Performance Evaluation Committee stopped evaluating green growth policies, though it still evaluates related policy areas. The environment is one of many subtopics in the government’s current blueprint for the economy, the Creative Economy Action Plan, and green growth policies were repackaged as “climate change response policies” after the Paris Agreement in December 2015. To consolidate the progress made over 2009-12, it will be essential to ensure that core and sector plans related to green growth continue to be implemented and evaluated.

## 3. Greening the system of taxes and charges

### 3.1. Introduction

While Korea currently enjoys a fiscal surplus and low public debt, it will need to increase tax revenue to finance rising social expenditure over the long run (OECD, 2016a). Although public social spending as a share of GDP was less than half the OECD average in 2014 (10.4% vs. 21.6%), it is forecast to balloon to 29% of GDP by 2060 to fund the National Pension Scheme, meaning that tax revenue will also need to rise to maintain Korea’s fiscal soundness. Environmentally related taxes provide one opportunity to do so. Furthermore, raising environmentally related taxes could give the government leeway to lower other taxes that may be putting a brake on growth, namely those on corporate income and capital gains, which, at 14% of fiscal receipts, are the fourth highest in the OECD (OECD, 2015a).

Korea’s environmentally related tax revenue rose in real terms over 2000-14. Although it dipped in 2009, due in part to the global financial crisis lowering consumption and spending and in part to the government lowering certain tax rates (e.g. the individual consumption tax on vehicles was reduced by 30% to boost the car industry), it rebounded in 2010 along with the general economy. Environmentally related tax revenue as a share of GDP and as a share of total tax revenue has declined since 2000 (Figure 3.2) but was above the OECD average in 2014 (2.5% vs. 1.6% and 10.3% vs. 5.1%, respectively), in the latter case mainly because Korea’s total tax revenue is relatively low. Environmentally related tax revenue comes almost exclusively from energy-related taxes (71%) and transport-related taxes (29%), in line with the OECD averages. Taxes are also imposed on pollution and resource use but raise very little revenue. The government is streamlining the number of environmental taxes and charges.

### 3.2. Taxes on energy consumption

As in most OECD countries, Korea taxes transport fuels more heavily than heating and process fuels and electricity. The difference between taxation of transport and non-transport fuels is, however, more marked than the OECD average in terms of both energy and carbon content (OECD, 2013a). Overall, taxes levied on transport fuels raise at least 70% of the revenue from energy taxation owing to the much higher rates at which they are taxed compared to other energy products.

The bulk of the transport fuel tax revenue comes from the Transportation-Energy-Environment tax (TEE, equivalent to an excise tax) on unleaded petrol and diesel; the rest comes from two taxes applied on top of the TEE tax, one for education (15%, applied to several taxes to fund the public education system) and the other a local motor fuel tax (36%). Energy used for heating and processes is predominantly taxed through the Individual Consumption Tax, which is also imposed on purchases of vehicles and of energy-intensive household appliances (e.g. white goods, televisions). In addition, Korea imposes import and sales duties on petroleum products, which may be used in both transport and heating and in processes. Electricity consumption is taxed through the Electricity Industry Foundation Fund Charge at a low rate: 3.7% of the retail price, before VAT (10%). The charge is intended to finance electricity market policies such as energy-saving measures and the former feed-in tariff (Ecofys, 2015). The government sets electricity prices for different users. Fuels used to produce electricity, including coal since 2014, are also subject to the individual consumption tax, again at low rates.

Transport fuel tax revenue increased in real terms between 2000 and 2007, driven by rising tax rates and growing diesel consumption. Revenue slumped during the economic crisis, when fuel consumption declined and tax rates were temporarily reduced. Since then, revenue has remained broadly constant due to increased road fuel consumption, while tax rates have steadily decreased in real terms (Figure 3.3). Failure to adjust the rates for inflation is costly in terms of forgone fiscal revenue, and reduces incentives to save energy and shift to greener modes of transport. The current context of low international fuel prices presents an opportunity to increase these taxes without overburdening consumers.

As in most OECD countries, petrol is taxed more heavily than diesel. This is regrettable from an environmental perspective, as diesel emits more CO2 and local air pollutants than an equivalent volume of petrol, and a litre of diesel normally allows more kilometres to be driven than petrol, meaning that its tax per litre should be higher to internalise driving-related externalities (Harding, 2014). As part of energy price reforms in 2001 and 2007, the government adjusted the taxes on diesel and petrol so that the tax gap narrowed markedly (Figure 3.3). While this was a positive development, it occurred more through reduced petrol taxation than higher diesel taxation, and progress has stalled since the economic crisis.

The government has long maintained a policy of low, stable energy taxes and electricity prices to keep energy affordable for households. This has supported the development and competitiveness of energy-intensive industry, which has been the backbone of the country’s growth. However, low prices have helped encourage demand, which increased faster than forecast under the first Energy Master Plan (2008-12). Large fuel price differentials have also distorted consumption, adding to the rapid rise in electricity demand (MOTIE, 2014). Recognising that continued low energy prices are unsustainable from an economic, energy supply and environmental perspective,3 the government has recently undertaken reforms. After the electricity price for industry only increased by 1% in real terms between 2000 and 2010, and fell in real terms for households, the government has progressively raised electricity prices since. Overall, the price gap between households and industry has been reduced. In 2014, the individual consumption tax was adjusted to incorporate bituminous coal and to lower the rates on “alternatives to electricity” (kerosene, LNG and propane) by 30%.

### 3.3. Carbon pricing through the Emissions Trading Scheme

Korea’s Emissions Trading Scheme (ETS), legally established by the Act on the Allocation and Trading of Greenhouse Gas Emission Permits in 2012, came into effect in January 2015. The world’s second largest carbon market (after that of the European Union), it applies to all entities with annual emissions of at least 125 000 tonnes of carbon dioxide equivalent (COeq) at company level, and of at least 25 000 tonnes of CO2 eq at facility level. The scheme covers 525 companies in 23 subsectors from the steel, cement, petrochemical, refining, power, buildings, waste and aviation sectors, accounting for about two thirds of total national emissions (ICAP, 2015). All Kyoto protocol GHGs are covered: CO2, CH4, N2O, HFC, PFC and SF6.The Korean ETS is thus broader than the European Union (EU) ETS in both the number of sectors and gases covered. However, the effective carbon rate arising from Korea’s ETS is low, far below the price resulting from taxes on road transport fuels (Figure 3.4).

The ETS has a high share of allowances allocated for free (rather than auctioned), which will decline gradually from 100% in the first phase (2015-17) to 90% in the third phase (2021-25). Energy-intensive, trade-exposed industries will receive 100% of their allocation for free in all three phases, which means the most efficient allocation of permits will not be achieved. Korea may learn from the experience of the EU ETS, where free allocation resulted in windfall profits for some industries (Box 3.2). Participants in the Korean ETS can bank permits during the first phase for use in subsequent phases, and the government manages an allowance reserve enabling it to stabilise the market when price-climb, demand-climb and price-crash thresholds are crossed (Afriat et al., 2015). A third-party monitoring system verifies the emission reports companies submit to the government. While many companies make this information public, for example through annual reports, information on permit allocation is not public.

Box 3.2. Lessons from the EU ETS

The European Union was an emission trading scheme pioneer. Launched in 2005, the EU ETS is now in its third phase. It covers 31 countries, over 11 000 power generation and manufacturing installations, commercial aviation, and 45% of the EU’s GHG emissions. As the world’s largest, oldest ETS, the scheme has been extensively studied and evaluated, and provides valuable lessons for other countries considering or beginning such systems.

Evaluations have found the EU ETS to have been successful in reducing GHG emissions in the sectors covered. The system has also motivated companies to adopt low-carbon technology. Despite industry fears, carbon leakage has not been found to have occurred. However, over-allocation in the first two phases combined with the economic crisis led allowance prices to fall too low to provide incentives for long-term low-carbon investment and innovation. Free allocation of permits led to sizeable windfall profits, particularly in the power sector, which lacks exposure to competition outside the EU. Companies passed costs through to consumers and thus left them to bear most of the burden, raising equity issues. Studies have found this pass-through of carbon prices in sales prices to be very income-regressive, as low-income households spend a larger share of their income on carbon-intensive products (e.g. electricity) than high-income households. Evaluations have also shown that policy and regulatory stability, long-term clarity of emissions reduction goals, and open, transparent information and communication about emissions, auctions and allowance allocations are essential for the development of a stable, efficient market.

In response to such observations, the EU increased trading period lengths as well as the number of permits auctioned rather than freely allocated. Countries also took individual action; for example, in the second trading phase, Germany and a few other countries allocated far fewer allowances than warranted by the country’s verified emissions in the previous three years, thus correcting for over-allocation in the first phase. In the third phase, the EU has addressed the surplus of allowances by backloading permits (i.e. postponing their release into the market) and placing others in a market stability reserve.

Source: European Commission (2016), The EU Emissions Trading System (EU ETS), http://ec.europa.eu/clima/policies/ets/index_en.htm; Laing, T. et al. (2013), “Assessing the effectiveness of the EU Emissions Trading System”, www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2014/02/WP106-effectiveness-eu-emissions-trading-system.pdf; Wrake, M. et al. (2012), “What have we learnt from the European Union’s Emissions Trading System?”, http://dx.doi.org/10.1007/s13280-011-0237-2; OECD (2012), OECD Environmental Performance Review: Germany 2012, http://dx.doi.org/10.1787/9789264169302-en; Ellerman, D. and Joskow, P.L. (2008), “The European Union’s Emissions Trading System in perspective”, www.c2es.org/docUploads/EU-ETS-In-Perspective-Report.pdf.

Trade in permits in Korea has been low. The government attributes this to companies still determining what is the best option for them: abatement, permit trading or holding on to excess permits to use if their emissions increase or to sell if the permit price increases. The lack of liquidity in the market has made it difficult for certain energy-intensive industries with high emissions (e.g. cement, petrochemicals) to adapt to the ETS, as there have been no permits available for them to purchase, and they are already highly energy efficient by international standards (OECD, 2012a). In response, the government is raising the ceiling for borrowing allowances from the following year from 10% to 20%, providing additional allocations to reward early reduction and selling government reserves. The experience of the EU ETS offers a cautionary tale, however, as allocation above actual emissions lowered perceived investment incentives for clean technology adoption (Venmans, 2016) and increased emissions (Brouwers et al., 2016).

Industry has opposed the ETS, citing concern about its impact on international competitiveness, particularly vis-à-vis China, Japan and Taiwan (Kim, 2015; FKI, 2014). This has been influential in increasing the share of permits allocated for free4 and banning participation of private finance until 2021. Even so, the sector criticises the estimated business-as-usual GHG trajectory as being too low (Park and Hong, 2014), and over 40 companies have filed lawsuits against the government to demand higher allocations (Afriat et al., 2015).

The actual impact may be less substantial than industry has feared. Arlinghaus (2015) found that carbon prices worldwide have not hurt competitiveness, and that free permit allocation may not be necessary to protect firms’ competitiveness. As Korea’s strictly regulated electricity market limits the ability of firms in the sector to pass through compliance costs to consumers, they will bear the cost of the ETS more than, for example, their European counterparts (Park and Hong, 2014). Still, international competition is of less concern for the power sector, as it sells only to local markets. Initial feedback from the first year of the ETS has been that, overall, allocations are not so low as to harm industrial competitiveness; indeed, while actual emissions slightly exceeded allocations in 2015, all companies but one have complied with their obligations through the use of flexibility mechanisms such as offsets. Finally, Korea’s key competitors are also pricing carbon. An ETS was introduced in Tokyo in 2010, and Japan imposed a carbon tax in 2012. China has been operating seven pilot ETS since 2013, with a view to creating a national scheme in 2017. Korea has started to explore carbon market co-operation with China and Japan (Reklev, 2016), and these efforts should be pursued.

Industry cites increased transparency, stability and long-term visibility as key factors necessary for a smooth adoption of the ETS. In the past, mixed messages from the Ministry of Environment (MOE) and the Ministry of Trade, Industry and Energy (MOTIE) on the number of permits to be allocated in the first phase made it more difficult for companies to prepare for the introduction of the scheme. In 2016, the management of the ETS was transferred from the MOE to the Ministry of Strategy and Finance. The adoption of a 2030 target replacing the 2020 target leaves industry uncertain of emission reduction quantities and timelines. More transparency and long-term visibility concerning permit allocation are necessary. The government has identified a need to work more closely with companies and sectors to build trust and to better accompany industry in ETS adoption. To this end, it plans more information and awareness-raising activities, as well as increased support for research and development (R&D).

The ETS was preceded by the Target Management System (TMS), a regulatory instrument implemented in 2010 that caps the annual GHG emissions of individual firms. Firms negotiate their targets with the government, and pay fines based on the number of failures to meet the target, no matter how much the target is exceeded by.5 The scope of application has gradually expanded, and now applies to facilities with annual emissions of 15 000 to 25 000 tonnes of COeq; those emitting more are subject to the ETS (GIR, 2015; KEI, 2012). Abatement achieved by the TMS increased from 21.3 million tonnes (Mt) of COeq in 2012 to 39.8 Mt COeq in 2014 (MOE, 2016a). This represented 5.3% of actual GHG emissions in 2013. The petrochemical, semiconductor/display/electrical and electronic industries contributed most significantly to this result (Republic of Korea, 2014a). However, environmental NGOs argue that the TMS gives industry too much influence over target setting, and that the fines are too low to act as incentives for firms to meet their targets (Kim, 2015).

The government supports continuing the TMS in parallel with the ETS, maintaining that the TMS provides a mechanism through which smaller companies can learn and build capacity, for example concerning monitoring, reporting and verification practices, before joining the ETS. It also ensures that firms that are too small to ever join the ETS have to reduce emissions. In addition, as Korean firms are more familiar with regulation than with taxation, regulation is a relatively more accepted way of pricing carbon in the Korean context. However, to maximise efficiency and level the playing field, the TMS should be phased out and a carbon tax adopted for all sectors not covered by the ETS (OECD, 2012a; OECD, 2014a). Indeed, a 2009 study estimated that achieving Korea’s former 2020 emission reduction target through an ETS would cost only 40% as much as relying on direct regulations (Lee, 2009), indicating that the TMS is not a cost-efficient way to reduce emissions.

### 3.4. Transport taxes and charges

#### Taxes on vehicles

Korea taxes diesel vehicles more heavily than petrol ones, reflecting the higher contribution of diesel vehicles to local air pollution. At national level, vehicles purchases are subject to the individual consumption tax; the education tax is applied on top of it as a surtax. The use of diesel vehicles is taxed further as a component of the environment improvement tax. Together these three taxes made up 25% of transport tax revenue, on average, over 2006-14, with the rest coming from local vehicle taxes. The environment improvement tax is applied twice a year to the use of diesel vehicles based on their age and estimated pollution emitted, while the individual consumption tax is based on engine capacity. An initial plan to impose the environment improvement tax on diesel fuel consumption – more efficient from an environmental perspective, as it is vehicle use that generates CO2 emissions – met stiff opposition (Kang, 2012).

Exemptions to the diesel vehicle component of the environment improvement tax may limit its effectiveness in reducing local air pollution. A permanent exemption of vehicles meeting the Euro 5 emission standards was introduced in 2010, and extended to vehicles meeting the Euro 6 standards in 2015. The permanent exemption means the tax cannot keep up with technological improvements. Furthermore, studies have shown the real-world NOx emission performance of Euro 5 and 6 vehicles to be far poorer than test-cycle measurements (Carslaw et al., 2011; Franco et al., 2014), suggesting there is no environmental justification for exempting them from the tax. In the context of a rationalisation of Korea’s environmental taxes and charges, the environment improvement tax is scheduled to be phased out by 2020.

The government planned to introduce a bonus-malus programme in 2015, modelled on the French system, to provide incentives for the purchase and technological innovation of vehicles with low CO2 emissions. It would have added a tax on purchases of highly polluting vehicles and used the revenue to subsidise purchases of less polluting ones. However, implementation was postponed to 2020 due to concern that introducing this programme at the same time as the ETS would overburden industries. The government could learn from stumbling blocks encountered in the French experience, such as a prolonged deficit due to criteria which led the bonus to far outweigh the malus component, and an adverse effect on air pollution because the programme favoured diesel vehicles (OECD, 2016e). Broadening the vehicle purchase tax base to local pollutants, as in Israel, would allow average GHG emissions per car to be reduced without increasing health-damaging local air pollution (OECD, 2016f).

The government has introduced exemptions and reductions to the individual consumption tax to encourage fleet renewal and purchases of less polluting vehicles (Section 4.5). The government also encourages the retirement of old, more polluting vehicles by offering owners of cars registered before 31 December 1999 a 70% tax reduction (up to KRW 1 million) if they scrap their old diesel vehicle and register a new one within two months of scrapping. An evaluation of French, German and US vehicle scrapping programmes reveals that environmental benefits (in terms of reduced CO2 and NOx emissions) and cost-effectiveness are highest if the new car must comply with stricter fuel efficiency standards and emission limits than the scrapped car, which in addition has to have been in active use (ITF, 2011).

Road congestion in Korea is heavy and has been rising over time, and instruments to tackle the problem have not kept up. The economic cost of congestion was estimated at KRW 30.3 trillion in 2012 by the Korea Transport Institute,6 the highest value since measurement began in 1993, representing 2.2% of GDP (Cho, 2014). While Korea has economic, regulatory and voluntary instruments in place to tackle congestion (e.g. a congestion charge and a traffic generation charge), there has been little progress in their application since the last OECD Environmental Performance Review. However, the introduction of “transit mall districts” in Daegu, Busan and Seoul, to which only public transport, bicycles and pedestrians have access, is a positive development (OECD, 2012b; Lim et al., 2015).

Although a congestion charge on Namsan tunnels 1 and 3 in Seoul initially reduced vehicle volume and increased average speed through the tunnels, the rate has not been raised since its introduction in 1996. Its impact on congestion has therefore declined over time as the general price level and the costs of other transport modes have increased. Raising the rate, particularly at peak hours, could help increase the instrument’s impact (Seoul Solution, 2015). There is also a need to expand the use of congestion charges to other parts of Seoul and major roads in other cities (OECD, 2006; OECD, 2012b). While the Urban Traffic Readjustment Promotion Act provides the legal foundation to do so, the charges have not been expanded due to public opposition, a common challenge across OECD countries (ITF, 2010). Complementary measures to improve public transport and make it affordable for low-income households would be required (OECD, 2012b; Mo, 2009). Research by the Korea Transport Institute also recommends rebranding the instrument (e.g. as a “green pass”) to focus on its positive impact, closely involving citizens in the design and implementation as well as in conflict resolution related to congestion charges, increasing strategic promotion and bolstering the legal reinforcement of the charge (Mo, 2009).

The impact of the traffic generation charge has been limited by its low rate and its failure to accurately reflect regional characteristics and facility location. The charge has therefore been criticised in the past as being imposed unnecessarily in areas where congestion is not a problem, and conversely as being too low in areas where congestion is severe (Seoul Solution, 2015). Based on the principle that urban expansion generates more traffic, the charge is levied on buildings larger than 1 000 m2 in cities with more than 100 000 inhabitants. Revenue, which is used to improve transport infrastructure, has increased steadily as the number of participating facilities rises. While the unit cost component (imposed per square metre) was not raised in over 20 years, in 2014 the government introduced plans to increase it to almost three times its current level by 2020, a welcome move. Seoul has already begun to increase its rates. Furthermore, a congestion coefficient is available to calibrate the charge for regional differences and facility location. Seoul applies this coefficient, and it is essential for other cities to do the same.

### 3.5. Taxes and charges on environmental pollution and resource use

Korea has many other environmentally related taxes and charges, whose features and revenue use are determined by individual laws. Their levels are generally too low to bring about behavioural change, yet the government is reluctant to raise rates due to concern about burdening industry and hindering investment in an economic downturn. The collection rate of many taxes and charges is also fairly low (Kang, 2012), representing substantial forgone revenue.

The MOE collects the bulk of taxes and charges on pollution and resource use, namely those pertaining to air and water pollution, waste (including recycling) and ecosystem preservation. These are explained below, with the exception of waste charges covered in Chapter 4. Other agencies collecting environmentally related taxes and charges include the Korea Forest Service, with a reforestation tax on land developers to finance reforestation in mountainous districts; the Ministry of Oceans and Fisheries, which collects four taxes and charges to discourage pollution and other damage to the marine environment and to fund marine ecosystem conservation; the Ministry of Land, Infrastructure and Transport (MOLIT), which imposes taxes on congestion, noise and land development; and the Ministry of Trade, Industry and Energy (MOTIE), with taxes to help improve nuclear safety.

#### Air pollution

Air emission standards (Chapter 2) are complemented by an air pollution tax, introduced in 1983. It has two components. The “basic” rate, imposed on SO2 and total suspended particles, is applied to emissions within permitted levels, while the “excess” rate, imposed on nine pollutants including SO2 and NH3, applies to emissions exceeding permitted levels (MOE, 2015a). The government uses data from the well-established smokestack tele-monitoring system (Chapter 1) to apply the taxes. However, their level would need to be raised to have an environmental impact. Furthermore, while increasing, NOx emissions from industry are not yet subject to either component of the tax. Finally, small companies are exempt from the basic charge, and facilities using low-sulphur fuels are exempt from the SOx charge.

#### Water resource management

Korea’s charges related to water resource management do not encourage efficient water management and use. MOLIT manages the river water use fee to finance water management expenditure, the dam water tariff to recover the cost of building and operating dams, and the multiregional water tariff to cover the cost of supplying water through multiregional systems. The tariffs do not signal water-related risk (e.g. flooding, scarcity) as they reflect neither local water conditions nor shifts in water availability (OECD, forthcoming). Instead, MOLIT sets a nationwide unitary rate for each tariff and fee, and their revisions are infrequent and minor. As the rates of these tariffs do not cover all infrastructure costs, long-term construction and maintenance of physical assets depend on the ability of local water authorities to secure funding from the central budget, which is difficult in the current economic context.

#### Water and wastewater infrastructure and services

A water supply charge and sewerage charge are intended to cover costs associated with providing water supply and sanitation services. While these charges are under the remit of the MOE, their rates are set at local level and thus vary across 162 local governments. Both comprise a fixed minimum charge plus block charges that increase with the volume of water used and wastewater produced. Rates also vary by user type, with households generally paying the least. “Polluter charges” apply to those requiring the extension or creation of a new water supply and sanitation network in order to cover the costs involved.

The rates of these charges are insufficient to guarantee the continued operation, maintenance and extension of water and sewerage infrastructure. Although the revenue from both charges has been gradually increasing, it has not kept pace with the rising cost of providing these services and, consequently, the cost recovery rate has been declining. The growing gap between the charge paid by consumers and the cost of service provision is particularly marked for wastewater treatment, as costs have risen due to strengthened effluent quality standards and increased tertiary treatment (MOE, 2016a; MOE, forthcoming).

The water supply and sewerage charge rates are the lowest in the OECD, and do not encourage efficient water use. They are kept low to address social concerns, but their share of household disposable income is far below the OECD and global averages, suggesting there is room to increase them (OECD, 2011a; Ahn et al., 2015). There are also considerable cross-subsidies between user groups and regions; for example, in 2014, the average rate of the water supply charge paid by large bath and sauna businesses was 61% higher than that paid by households, and 41% higher than that paid by industry (MOE, 2016b).

In addition, socially motivated reductions and exemptions to the water supply charge dilute the incentive to rationalise water use and reduce the budget available for water infrastructure. Reductions apply to those over 65, those with a disability, and low-income households. The amount of reduction is decided by ordinance by each local government. Schools, social welfare facilities, facilities with rainwater storage and wastewater reclamation and reuse systems, public restrooms, and disaster shelters also pay reduced rates (MOE, 2016a). From a financing perspective, the reduction for those over 65 is particularly critical, given the rate at which the population is ageing. Alternative solutions could restore the incentive to rationalise water use while supporting vulnerable households, such as removing reductions and exemptions but providing separate aid decoupled from water use.

#### Water quality

The MOE manages four economic instruments related to water quality. Two are intended to raise revenue for water quality projects and the other two to encourage pollution reduction. The one that raises the most revenue is the water use charge, which is applied to end (downstream) users of water from the four major rivers as a function of the volume used. Revenue from the charge, which has risen gradually over time, is used to finance water quality improvement projects and compensate landowners for constraints on their property rights (certain activities are restricted upstream in order to maintain good water quality). The rate is adjusted every two years by each River Basin Management Committee, taking into account the water quality target and the budget required to meet this target.

To encourage pollution reduction, the tax for total pollution load management applies to discharges in excess of an actor’s allocated load of biochemical oxygen demand (BOD) and total phosphorus (T-P), and the water effluent tax penalises actors that exceed effluent standards for 19 types of pollutants (Chapter 2). The latter has two components: the basic effluent tax for discharges of organic substances and suspended solids above effluent water quality standards but below permissible discharge limits set in the Water Quality and Aquatic Ecosystem Conservation Act, and the excess water effluent tax for discharges of all 19 types of pollutants above the act’s permissible limits. Once again, the rates are too low to encourage pollution reduction. The collection rate of the water effluent tax is very low – 5.4% in 2011, 11% in 2015 (MOE, 2016a). This lack of enforcement further weakens the power of the tax to encourage pollution reduction. One reason for the low collection rate is that the tax applies predominantly to smaller businesses, of which an increasing number and share are non-viable (with negative operating profit over three years) (OECD, 2016a) and are hence unable to pay.

Finally, there is the water quality improvement charge, imposed on manufacturers and importers of spring water. Of the total revenue, 60-70% goes to local governments to subsidise public drinking water quality management; the rest goes to the Special Account for Environmental Improvement. As with other water quality taxes and charges, the collection rate is fairly poor – below 60% (MOE, 2016a).

#### Biodiversity protection

Korea applies an ecosystem conservation tax to developers of projects whose environmental impact assessment indicates that they could negatively affect biodiversity. The amount corresponds to the size of the land area lost or damaged; there is no component linked to the type of damage done. The revenue is used to fund conservation efforts, including ecosystem restoration. A developer that carries out a conservation project or pays a third-party professional to do so can be refunded up to 50% of the tax (MOE, 2015a). However, developers rarely take this option; between 2006 and 2014, there were 7 350 cases of the tax being paid and only 93 reimbursement projects (MOE, 2016a), suggesting it is cheaper to pay the tax and cause environmental damage than to engage in conservation efforts and obtain partial reimbursement.

#### Environmental improvement

Despite being a large and rising revenue raiser for the MOE, the environmental improvement tax is being phased out following criticisms of being out of date, imperfect in its application and collection, and overlapping with other taxes and charges (GSC, 2012a). Introduced specifically to reduce pollution and create a stable revenue stream to finance investment in environmental improvement, it was imposed on facilities over 60 m2 causing air and water contamination, and still applies to the use of diesel vehicles (GSC, 2012a) (Section 3.4). The tax on facilities was discontinued in 2015, with the water pollution component incorporated into the sewerage charge. The tax was not efficient in encouraging pollution abatement, as it was imposed on facility owners rather than occupants, the standard quantities used to calculate it differed substantially from actual quantities, and the air pollution element was restricted to SOx (GSC, 2012a). The tax was unpopular with the public and subject to many petitions demanding modifications (Kang, 2012). The diesel car component is to be phased out by 2020.

### 3.6. Environmentally harmful subsidies

#### Support to fossil fuel production and consumption

The government has been phasing out long-standing support for domestic coal production. The abolition of the coal production stabilisation subsidy, involving price support subsidies for capital equipment acquisition and exploration, was completed in 2010. However, support for the coal briquette production subsidy fund has been increasing since 2012 and represented KRW 166 billion (USD 158 million) in 2014 (OECD, 2015b), the equivalent of about 3% of the MOE’s budget that year (MOE, 2016a). The subsidy aims to combat fuel poverty by setting the price of briquettes below production costs and paying the difference to producers (OECD, 2015b). It was scheduled for abolition by 2020, but the process was put on hold after an increase in price levels raised concern that low-income households would not be able to cope without the subsidy. However, since 2014, the minimum wage has increased much faster than the economy in real terms, and very low inflation in 2015 meant that real overall wage growth was higher than economic growth for the first time in years. This context, plus the recent introduction of the energy voucher system (see below), presents an opportunity for the government to resume phasing out the coal briquette subsidy.

As part of the transition away from coal briquette subsidy, the government introduced an energy voucher system in December 2015. Available in the winter months only, it targets low-income households with elderly people, young children and people with disabilities. The system may require some changes to improve its impact. The amount was based on the cost of heating in 2009, leading to criticism that it was insufficient, so the government plans to raise the voucher value to reflect current heating prices (Seo, 2016). Furthermore, a survey by the Korea NGOs Energy Network indicates that many energy-poor households suffer heat-related illnesses in summer, suggesting that energy support may also be needed for cooling, and that more communication is necessary to raise awareness among energy-poor households about the government’s energy welfare policies (Ahn, 2016). Finally, as the voucher can only be used for energy, it effectively reduces the price of energy and therefore works against more frugal, efficient energy consumption. To avoid diluting the incentive to save energy, the voucher could be untied from energy use and used by low-income families to meet needs of their choice.

Korea also provides substantial consumer support through tax exemptions on a number of fossil fuels, particularly for agriculture and fishing. Although support to these two sectors fell almost by half between 2007 and 2014, it still stood at KRW 1.8 trillion (USD 1.7 billion) in 2014, over ten times the level of support for coal briquettes (OECD, 2015b). Energy-intensive industries (e.g. cement and steel) are exempt from the tax on bituminous coal, which is only applied to power generation. Agriculture and fishing are also major beneficiaries of electricity cross-sector subsidies. Electricity prices are below production cost for all sectors, representing an environmentally harmful indirect subsidy (Section 4.4), and the cost recovery rate is lowest for agriculture (33% in 2012) (MOTIE, 2014).

The government has provided a fuel subsidy to buses, trucks and LPG taxis since 2000. It is funded by the motor fuel tax, introduced for this purpose, meaning that private vehicle users are cross-subsidising buses, trucks and taxis. The subsidy was to initially run for three years to help these vehicles’ operators cope with rising LPG and diesel prices resulting from the government’s first energy tax reform to recalibrate fuel prices. However, extended multiple times, it still operates today and was expanded in 2015 to diesel taxis meeting the Euro 6 standard so as to promote fuel diversification in the taxi industry. This is despite the fact that diesel vehicles emit more local air pollutants than LPG vehicles (which the majority of taxis are) and studies show that Euro 6 vehicles emit more air pollution than test-cycle measurements indicate (Franco et al., 2014). Other OECD countries are moving in the opposite direction, with Paris committing to ban diesel vehicles by 2020 and London and Madrid considering similar measures.

The above exemptions and subsidies are regrettable, as they encourage increased fossil fuel use, generate more pollution and represent substantial forgone and spent budget resources that could be used to support other policies. They also contravene the polluter-pays principle and can lead to additional future expenditure to remediate the potential environmental and health damage caused.

#### Support for agricultural production

Although Korea has gradually reduced its farm support over the past decade, it is still one of the largest providers of producer support for agriculture in the OECD: the producer support estimate (PSE) as a share of gross farm receipts is almost three times the OECD average (OECD, 2016g). However, the role of agriculture in the economy is moderate and declining; between 2006 and 2014, the share of agriculture, forestry and fishing in GDP declined from 2.4% to 2.0%, and from 7.7% to 5.7% of employment (OECD, 2015c). The predominant method of producer support is market price support. High import tariffs are also applied; indeed, in 2009-11, Korea had the OECD’s highest share of production and trade-distorting support in its PSE (OECD, 2013b). Recent free trade agreements with Canada, Australia and New Zealand have helped reduce barriers to agricultural imports (OECD, 2015d), but some high tariffs remain; for example, the tariff rate on rice imports is 513% (OECD, 2016g).

Direct producer support distorts the market in an environmentally harmful way by encouraging farmers to increase production and use more inputs than they otherwise would, thereby increasing pressures on the natural resource base (OECD, 2013b). Some OECD countries are moving to green direct payment programmes by restricting the amount of output allowed, decoupling support from production (e.g. through “area payments”) and integrating environmental conditionality into the granting of support. There is great potential for Korea to make progress on this front, given that the share of its PSE based on commodity output and non-constrained variable input use is the highest in the OECD, providing an incentive for agricultural intensification (OECD, 2013b).

In addition, agriculture has been largely exempt from water charges since 2000, which contravenes the user-pays and polluter-pays principles (OECD, 2010b; OECD, 2006). In 2013, 12% of water use expenditure went to agricultural water management (MOLIT and K-Water, 2016). The sector is the economy’s largest water user, and groundwater abstraction for agriculture has increased rapidly (Chapter 1). Land and livestock account for over 90% of diffuse pollution and over 65% of BOD and T-P water pollution, owing to intensive pesticide use and rising livestock numbers. Subjecting the sector to water charges would be highly desirable, from an ecological perspective, to encourage efforts to reduce consumption and pollution.

The government provides support for environment-friendly agricultural practices, though it has not been sufficient to offset harmful subsidies. To cover the start-up costs and initial loss of income associated with transitioning to eco-friendly farming, the government has provided subsidies to registered farmers with eco-friendly product certification since 1999. Support is available for five years for organic farmers and three years for farmers using either no or low amounts of pesticides, on farms of up to 5 hectares. However, participation has been declining since 2011, the intensity of commercial fertiliser use remains among the highest in the OECD, and the share of agricultural land dedicated to organic farming is about half the OECD average (Chapter 1). Farmers can be paid to carry out ecosystem conservation activities on their land through biodiversity management contracts with local governments. Use of this instrument rose from 3 local governments in 2002 to 25 in 2015 (MOE, 2016a).

## 4. Investing in the environment to promote green growth

### 4.1. The Green New Deal and the first Five-year Green Growth Plan

Following the 2008 economic crisis, Korea’s green stimulus package was one of the world’s most significant, representing 4.5% of its 2008 GDP (OECD, 2011b). The KRW 50 trillion (USD 39 billion) package was allocated to 9 key projects and 27 supporting projects in water and waste management, green transportation, energy efficient buildings, and clean energy (OECD, 2011b). The Four Rivers Restoration project (Box 3.3) and rail investment accounted for over half of spending, underscoring the government’s emphasis on large-scale public infrastructure to stimulate growth and job creation.

Box 3.3. The Four Rivers Restoration Project

The Four Rivers Restoration Project was a flagship green growth expenditure project under the former Lee government. Its stated objectives were to secure water resources, control floods, improve water quality, restore river ecosystems, develop waterfront leisure spaces and promote regional development (KEI, 2009). A 2012 evaluation by MOLIT found the project achieved some of these objectives: the number of large floods decreased, more water resources have been secured and water quality, as measured by average BOD and T-P, improved (Kang et al., 2014). Completed in about two years (2009-11), the project was of an unprecedented scale and budget, costing around KRW 22.2 trillion (USD 19.3 billion), restoring over 1 000 km of major streams and involving the building of 16 weirs (dams that allow water to flow over the top).

However, independent reviews by the Board of Audit and Inspection of Korea in 2013 and the Four Rivers Restoration Project Investigation Evaluation Committee in 2014 identified environmental, procedural and structural problems. They found, for example, that some weirs were insufficiently durable and that high maintenance costs are expected. The reviews also found that the dredging plan was implemented inefficiently and without accurate prior review, and that there is a mismatch between where water resources have been secured by weirs and locations of previous serious droughts. From an environmental perspective, the reviews found that while BOD and T-P levels improved, other measures of water quality deteriorated, with algae blooms in some areas caused by the weirs slowing flows almost to a standstill. The slowed flow has caused the population of some aquatic species to decrease and the dams block ecological corridors. The river dredging and construction of the riverside eco-parks affected some habitats and species, and much of the planted flora is inappropriate for marshes. As the eco-parks were designed without overarching land use planning, the necessary mix of conservation areas, buffer zones and leisure spaces is lacking. Continued monitoring is needed to evaluate long-term changes in aquatic ecosystems and riverbeds.

The project met heated opposition from civil society organisations, academics and some local politicians. They contended that it was rolled out too fast, raising concern about the quality of the planning and construction, and flagged negative environmental effects. As with other large infrastructure projects, the groups also maintained that the government failed to take into account the views of a range of stakeholders (e.g. local residents, NGOs) when designing and implementing the project (Chapters 2 and 5).

Source: Four River Restoration Project Investigation Evaluation Committee (2014), Four River Restoration Project Evaluation Report, www.molit.go.kr/USR/policyData/m_34681/dtl.jsp?id=3860; KEI (2009), “Four Major River Restoration Project of the Republic of Korea”; BAI (2013a), Environmental Audit on Four Major Rivers Restoration Program, http://english.bai.go.kr/bai_eng/cop/bbs/detailBoardArticle.do?bbsId=BBSMSTR_200000000004&nttId= 14087&searchCnd=7&searchWrd=&searchBgnDe=&searchEndDe=&searchYear=&searchCate=&mdex=; BAI (2013b), “Quality of main facilities and water quality management status of the Four Rivers Restoration Project”; Kang et al. (2014), “Experiences and Lessons of Korea’s Green Growth”; Kang et al. (2012), Water and Green Growth.

Korea’s Green New Deal was integrated into the budget for the first Five-year Green Growth Plan (2009-13), which aimed to spend 2% of GDP per year (KRW 107 trillion in total) on green growth projects. Actual expenditure over this period exceeded what was planned (KRW 111 trillion) (Choi, 2014), allowing the 2% target to be met. The government expected the plan to induce production worth 20% of 2009 GDP and boost employment by as much as 10% by 2013. Expenditure was divided under the plan’s ten policy agendas, with the bulk going to water, waste and transport infrastructure. While the high spending on green growth is laudable, the green credentials of some areas of expenditure, such as “development of foreign oil fields” and “nuclear energy development”, are questionable.

### 4.2. Expenditure for environmental protection

Environmental protection7 expenditure as a share of GDP increased steadily from 2001 to 2009 before falling annually from 2010 to 2014. As in most OECD countries, the bulk goes to wastewater and waste management (about 60%). The public sector accounts for over half of wastewater expenditure, and private specialised producers account for over half of waste expenditure (Figure 3.5).

Combating air pollution is the next highest area of expenditure (around 20% per year), reflecting Korea’s challenges in this area. Air pollution is particularly severe in the Seoul Metropolitan Area due to its high population density (and accompanying road traffic) and high concentration of industry, engendering substantial health impacts (MOE, 2015d; OECD, 2010a) (Chapter 1). Business sector expenditure on combatting air pollution reflects obligations arising from measures the government has taken over the past decade (Chapters 1and 2).

### 4.3. Investment in water supply and sanitation

The financing of water infrastructure and services is fragmented and heavily reliant on the central budget. MOLIT, the MOE and the Ministry of Agriculture, Food and Rural Affairs are the key ministries involved, in addition to spending by local governments and K-Water.8 Expenditure data are not readily available to those outside each ministry. Nor do the ministries appear to co-ordinate data collection time frames, making it difficult to get an overview of how much the public sector spends on water as a whole. Nonetheless, water management expenditure was estimated at KRW 17.9 trillion (USD 16.3 billion) in 2013, of which only about 50% was covered by revenue in the sector (MOLIT and K-water, 2016).

Public expenditure on water supply and sanitation increased steadily over 2006-14, resulting in excellent connection rates; in 2014, 96%9 of the population was connected to public water supply and 93% to wastewater treatment plants (Figure 3.6). Since 2000, expenditure on operation and maintenance (current expenditure) has increased faster than investment. Current expenditure for water supply has surpassed investment; with the majority of the population now connected, the focus is shifting from building new infrastructure to maintaining the existing network.

Declining cost recovery rates for water supply and sanitation services, increasing costs from ageing infrastructure and a persistent gap between urban and rural services threaten the sustainability of Korea’s water sector financing model. Cost recovery rates declined between 2006 and 2014, from 82% to 76% for water supply and from 58% to 39% for sewerage services (Figure 3.6). This puts increasing strain on central and local budgets; indeed, sewerage infrastructure and wastewater management systematically received the highest share of the MOE’s budget over 2006-15 (MOE, 2016a). The share of multiregional and local infrastructure which is over 20 years old is projected to reach 80% and 46%, respectively, by 2025 (MOLIT and K-Water, 2016). To replace ageing sewerage, annual expenditure will need to increase by about a third from the 2009-14 level. Finally, the water supply charge in rural areas is higher than that in cities, as the former do not benefit from economies of scale and the infrastructure quality is worse (the leakage rate is six times higher in rural than in urban areas) (MOE, 2016c). There is also a substantial gap in service coverage between urban and rural areas (Chapter 5).

Korea is taking a multipronged approach to address its financing challenge for water supply and sanitation. One element is a commitment to gradually raise the water supply and sewerage charges over time (MOE, 2016a). The National Sewerage Service Master Plan (2016-25) sets the objective of achieving a cost recovery rate of over 80% by 2025 by making central government subsidies conditional on local governments’ plans and performance in increasing the cost recovery rate (MOE, 2016a), and the National Waterworks Master Plan (2016-25) sets a 95% waterworks cost recovery rate objective. The government is also pursuing improved management efficiency, for example by introducing an asset management system for water supply and sanitation, rationalising operations by amalgamating multiple water supply services to benefit from economies of scale, and devolving water services from local governments to specialised agencies. The amalgamation of water supply services and their devolution to K-Water achieved positive results in Gyeongnam Province; consignment charges (operating cost, investment repayment and commissions to K-Water) have fallen in every participating municipality, and the project is expected to cut costs by KRW 24 billion (USD 21 million in 2015) over the 20- to 30- year contract period (OECD, 2015e), compared with business as usual. The government is also encouraging private sector participation by introducing a Rehabilitate-Transfer-Operate system (MOE, 2016f), and has committed to directly using the public budget to replace ageing rural water supply and sanitation infrastructure (MOE and MOSF, 2016).

Rising investment in water quality over 2006-15 led to a marked reduction in point source pollution, but with water systems under increasing pressure from diffuse pollution and climate change, more investment will be needed in those areas. Point source pollution has fallen, largely thanks to heavy investment in sewerage treatment, which accounted for 76% of water quality expenditure over 2006-15. Although investment in reducing diffuse pollution has risen far faster than any other area of water quality expenditure, only 43% of the original investment planned in this area in 2006 was actually made, and it remained the area of lowest investment overall over 2006-15, at 1% (MOE, forthcoming). The remainder of water quality investment went to restoring freshwater ecosystems (12%), managing hazardous substances (9%) and building livestock waste treatment facilities (2%). As livestock wastes alone account for 37% of the total water pollution (MOE, 2013), efforts could be bolstered in treatment facilities.

### 4.4. Investment in energy efficiency and renewable energy

Developing renewable energy sources and curbing increasing energy demand are essential to improve energy security and reduce GHG emissions. One study estimates that if Korea invested 1% of GDP in renewables and 0.5% of GDP in energy efficiency measures every year over the next 20 years, it could halve its total energy consumption and CO2 emissions per capita compared to a business-as-usual scenario (UNIDO and GGGI, 2015). The Korean share of renewables in the energy mix is the lowest in the OECD, and energy intensity has been declining more slowly than the OECD average. The second Energy Master Plan (2014-35) sets ambitious targets for energy demand and renewables (Chapter 1). A transition to demand management policies and improvement of energy policy sustainability are two of plan’s six major tasks. Korea has made progress on both, but needs to scale up efforts to meet its targets. Price reform, subsidies and technology development will all have roles to play.

#### Managing energy demand

Demand has increased faster for electricity than for any other energy source (Chapter 1), leading the government to make electricity rate revision one of the pillars of the transition to demand management policies (MOTIE, 2014). Korea’s electricity prices have long been maintained below production cost to support industrial competitiveness, keep electricity affordable for households and provide price stability. The government regulates electricity prices on the grounds that the network structure is monopolistic, and prices are differentiated by sector and user. There are considerable cross-subsidies between and within sectors, of which industry and agriculture have been the primary beneficiaries (Section 3.6) (MOTIE, 2014; Pittman, 2014).

Korea’s electricity prices are low by OECD standards, with negative economic, environmental and social outcomes. Demand has outstripped supply, resulting in rolling blackouts in Seoul in 2011 and 2014. The cost recovery rate hit a trough in 2008 (77.7%) and another in 2011, the year of the first blackouts (87.4%), but has been improving since (KEPCO, 2016). The prices for industry and households are below the OECD average (Figure 3.7), much lower than the OECD Europe average at purchasing power parity (PPP) exchange rates and among the lowest in the OECD at market exchange rates (IEA, 2016a). Korea’s electricity prices are also lower than those of oil and fall far short of reflecting the social and environmental costs of power generation (MOTIE, 2014, 2015).

The government has announced reforms to make electricity costs better reflect system costs (i.e. of production, transmission, distribution, peak load management, etc.). However, it has struggled to translate these into action. The first and second Energy Master Plans called for abolishing cross-sector subsidies, but they remain. In June 2009, the government announced plans to introduce a pricing system that would move in line with global energy commodity prices and allow the Korean Electric Power Corporation (KEPCO) to pass fuel costs on to consumers, but they have not been implemented (IEA, 2012; Ecofys, 2015).

The government has, however, raised electricity prices since 2010, which has led to improvements in the cost recovery rate. Research by the Korea Energy Economics Institute found that the long-term benefits of raising electricity prices, in terms of energy efficiency and energy import cost savings, would far outweigh the short-term economic shock (Choi and Lee, 2015). In line with IEA recommendations (IEA, 2012), the government has introduced pricing by voltage to more accurately reflect system costs, in addition to load management measures such as seasonally/hourly tiered pricing. Time-of-use pricing, whereby prices reflect generation costs hour by hour, has been compulsory for all high-voltage general and industrial users since 2013, and may be expanded to households following the roll-out of smart meters (MOTIE, 2014). However, further reforms are needed to reduce peak demand and to ensure prices reflect costs of power generation, transmission and distribution (Pittman, 2014).

Korea has made progress in sector-specific demand management policies. In industry, Korea introduced a pilot energy management system in 2008, and established a legal basis for it in 2011. The system works via ISO 50001 certification and is applied to industrial facilities and large buildings. In addition, soft loans and tax incentives are available for investment in energy-saving facilities; the total value of the tax expenditure (in terms of forgone revenue for the government) peaked in 2011 before falling year on year (MOE, 2016a). Energy audits are compulsory for companies using more than 2 000 tonnes of oil equivalent (TOE) annually but audit fees for small and medium-sized enterprises with energy consumption below 10 000 TOE are subsidised. In the transport sector, fuel efficiency standards led to efficiency gains of 32% over 2006-12, but vehicles remain less efficient than those in the EU and Japan, suggesting there is room to tighten the standards. They could also be extended from passenger cars to small commercial vehicles (MOTIE, 2014). In the area of buildings, while the scope of standards applicable to new buildings has been expanded to cover all buildings over 500 m2, there is an urgent need to improve policies for existing buildings, which often have low energy performance. The inclusion of existing buildings in energy efficiency certification is a step in the right direction. As for household appliances, Korea operates four programmes: the Energy Efficiency Labelling and Standard programme, the High-efficiency Appliance Certification programme, the e-Standby programme and a subsidy for high-efficiency electrical products. These programmes could be further strengthened, for example by expanding the range of products subject to energy efficiency standards or to production and sales bans (MOTIE, 2014).

Korea is a leader in energy storage technologies (Section 6), recently becoming home to the world’s largest battery energy storage system for frequency regulation. The system will reduce the need for KEPCO, the country’s largest power utility, to turn to power plants to provide regulation services and will therefore save fuel (Runyon, 2016). The government plans to build on this system and its industrial energy management system to create demand management markets rewarding providers of electricity capacity and the energy efficiency measures (also known as a white certificate market). In designing these markets, Korea could draw upon lessons learned from such programmes in parts of Europe, Australia and the United States. While white certificate systems have proven efficient and effective, experience in Italy and France has shown that: care should be taken in minimising their administrative burden and maximising their transparency; ex post evaluations are useful to determine the real energy savings achieved by the certificates; and careful analysis of the interaction of the system with other instruments, such as the ETS and subsidies for energy efficiency measures, is desirable (OECD, 2013c; OECD, 2016e).

#### Support for renewables

While its mountainous topography, contested and militarised waters and high population density pose challenges to renewables development, Korea has further opportunities to exploit, both in domestic production and in development of technology for export. The government is pushing for wind and solar photovoltaic power to become core pillars of Korea’s new and renewable energy mix, and is also promoting strong growth in solar thermal and geothermal energy (Invest Korea, 2015). Korea also has a robust manufacturing industry and advanced technology to draw on in pursuing, for example, development of solar cells and tidal power turbine technology (Chen et al., 2014; Kim, 2015).

Renewables investment and generation capacity increased steadily over 2008-11 (MOE, 2016a), made more competitive by high oil prices and further spurred by a raft of government support measures detailed below. Investment then crashed along with the global renewables market in 2012, caused by sluggish demand, oversupply and a reduction in government support (MOTIE, 2014; Invest Korea, 2015). Solar PV and wind were hit hardest. The government budget for renewables has also declined since 2011, and it consistently amounted to less than 0.1% of GDP over 2011-14 (MOE, 2016a).

The government introduced a feed-in tariff (FIT) system in 2002 as its key renewables support measure. It was replaced by a renewable portfolio standard (RPS) in 2012 to accelerate renewables diffusion and ease the budget burden, though FITs continue to be paid to existing participants and amounted to 60% of the budget for renewables deployment and infrastructure in 2015. The burden will continue to decrease over time as the FIT contracts end. Under the RPS, power producers with generation capacity exceeding 500 MW must produce or buy a share of their electricity from renewables, set at 2% in 2012 and rising to 10% by 2022. In parallel, producers have to include a rising share of solar PV in their supply. Under the RPS, producers get certificates based on kilowatt hours of renewables-based electricity produced, with weightings applied to different renewable sources based on generation costs, the expected impact on renewable technologies, and the environmental effect. Certificates can be traded between producers to allow them to meet quota obligations (OECD, 2012a).

The RPS appears to have accelerated the installed capacity of renewables: while the FIT system led to the installation of 1.03 GW over nine years, the RPS led to the installation of 1.75 GW in just two years. However, the renewables industry is also much more developed now than it was when FITs were introduced, making it difficult to attribute the rapid growth in capacity solely to the transition to the RPS.

While empirical analysis shows that an RPS has a larger impact on renewables innovation than FITs (Johnstone et al., 2010), it also comes with a risk of excessive use of low‐quality renewables. Weighting certificates by technology can address this problem, but the government will need to continue to monitor technological developments in the renewables market and adjust weightings accordingly (OECD, 2012a).

In addition to the RPS, the government operates a Renewable Fuel Standard (RFS) programme, and studies are underway to introduce a Renewable Heat Obligation (RHO) for new buildings over a certain size. The aim is to combine the RPS, RFS and RHO in an integrated market that allows the transaction of certificates between them. The current RFS was introduced into law in 2013 and applied from 31 July 2015. However, the blending of a small share of biodiesel into transport fuel has been obligatory since 2012, following a history of pilot programmes and voluntary blending. The raw materials to produce biodiesel must be imported, therefore not improving energy security, and some (e.g. palm oil) come with their own environmental and social controversies. This challenge needs to be addressed before increasing the mandatory share of biodiesel to be incorporated into transport fuel.

Korea also provides subsidies, loans and tax incentives to develop renewables. These include the home subsidy programme, formerly known as 1 Million Green Homes, which aimed to install renewables-based systems (solar thermal, solar PV, geothermal, biomass and/or small scale wind) on one million houses by 2020. In 2013, the programme was renamed and the target was changed to the installation of renewables-based systems for 10% of all households by 2020. Most installations so far have been solar PV, in part because 1 Million Green Homes absorbed an existing programme to install 100 000 solar roofs. Subsidies are also available for renewables installations on existing local government and other buildings, and long-term, low-interest loans and tax incentives are available to both customers and manufacturers of completely commercialised renewables systems (KEMCO, 2014).

The second Energy Master Plan proposes reforming subsidies to focus on communities instead of individual homes and buildings, and calculating incentives as a function of renewable energy rather than up-front installation investment. Loans could also be redirected, decreasing the focus on renewables that are already economically feasible and instead supporting commercialisation of emerging technology.

Despite this raft of support measures, renewables deployment remains hindered by low electricity prices, the failure of government to prioritise renewables, low public acceptance (e.g. for dams and wind farms) and local regulations (e.g. for wind installations in mountainous areas) (MOTIE, 2014). Public and private funding for fossil fuels continues to outweigh that for renewables; promoting renewables represented only 3.4% of the budget for the first Five-year Green Growth Plan, less than that dedicated to the development of foreign oil fields, and planned annual investment in coal over 2015-19 is 70% higher than the public budget and private investment in renewables in 2014 (MOE, 2016a; MOTIE, 2015). The seventh Basic Plan for Electricity (2015-29) maintains coal as the dominant power source and only increases the share of renewables in the mix by 0.1% compared to the sixth plan (MOTIE, 2015).

### 4.5. Investment in transport

Road transport consistently accounts for over half of transport investment expenditure (MOLIT, 2016a, 2008-14). Over 2000-14, the total length of roads grew by 19%, the third highest increase in the OECD and double the averages for the OECD as a whole (9%) and for OECD Asia-Oceania (10%) (MOE, 2016d; OECD, 2015f). The share of investment in rail infrastructure increased from 16% in 2006 to 33% in 2015 (Figure 3.8), thanks to a boost to high-speed rail by the first Five-year Plan for Green Growth. However this has not translated into a modal shift to rail. Between 2006 and 2013, the share of total inland freight transported by rail fell from 28% to 7%. As for passenger transport, although the volume of passengers using subway and rail transport10 increased markedly over 2006-13, the share of total passengers transported by these means fell from 35% to 15%. The large majority of freight and passengers are transported by road (74% and 83%, respectively, in 2013) (MOLIT, 2016b).

Rail transport is used less frequently for inter-city transport due to the inaccessibility of the stations, such as for pedestrians and cyclists, and the lack of linkage with other transport modes, such as buses. This makes rail transport both slower and more expensive than private vehicle use (IFT, 2012). Korea is aiming to build a single nation-wide public transport system which would allow all forms of transport to be planned and operated together, instead of independently as at present. It will also be essential to integrate public transport planning with land use planning, to ensure that the network meets the population’s needs efficiently and effectively (ITF, 2012; Kwon and Ahn, 2013; OECD, 2014b).

The government has introduced some measures to make urban public transport more convenient, such as bus rapid transit lanes and a public transport card that can be used on all forms of public transport nationwide. These appear to have borne fruit. For example, comprehensive reform of the bus infrastructure, routes, and fare and information systems in the Seoul Metropolitan Area in 2004 led to a substantial increase in ridership and satisfaction within a year of operation (Allen 2011; Lee, 2013). The government has also increased its focus on supporting bike transport: the Master Plan for National Bike Roads, implemented in 2010 with a budget of KRW 2.35 billion (USD 2.03 million), developed 4 835 km of bike paths. Public bike share systems have been growing and existed in 14 cities in 2012, and newly planned cities integrate bike infrastructure (Shin et al., 2013).

As with environmental protection, Korea has a special budget account for transport infrastructure, managed by MOLIT. Roughly 65% of its funds come from the TEE tax (the share fluctuated between 53% and 85% over 2006-15). Indeed, 80% of TEE tax revenue is earmarked for this account, down from 86% in 2006 (Park, 2012). Plans call for the TEE tax to be merged with the individual consumption tax in 2019, which may have implications for the funding of transport infrastructure; however, the TEE tax has been extended multiple times since its initial planned expiry in 2003.

As road transport is a significant source of air pollution and GHG emissions, the government has introduced subsidies and tax incentives for less polluting vehicles. This effort began in 2000 with a programme to replace diesel buses and garbage trucks with natural gas in urban areas. Between 2000 and 2014, 36 162 buses and 1 212 garbage trucks were replaced, and 189 natural gas stations were constructed at a cumulative cost of KRW 795 billion (USD 755 million11). Support was provided through grants (65%) and loans (34%) for vehicle and fuel purchases, and through tax and charge reductions and exemptions (e.g. exemption from value-added tax) (GSC, 2012b; KEI, 2008). As of 2014, 82% of intra-city buses ran on natural gas. The investment in natural gas vehicles is seen as an important factor in reducing PM10 concentrations in urban areas (MOE, 2016a; KEI, 2008). The next step could be to progressively convert inter-city buses from diesel to natural gas.

More recently, Korea introduced tax incentives and subsidies to promote the use of hybrid, plug-in hybrid, electric and hydrogen vehicles. The exemption of hybrid vehicles from the individual consumption tax, up to KRW 1 million (KRW 1.3 million including the education tax exemption), was introduced in 2008 and extended until the end of 2015. Electric vehicles are exempt from the individual consumption tax, up to KRW 2 million, from 2012 to 2017. Parallel subsidies for electric vehicle purchase, introduced in 2010, have totalled more than KRW 104 billion (USD 92 million12) to date. Subsidies for hybrid vehicles were introduced in 2014. The government plans to accelerate electric vehicle uptake through further subsidies and tax incentives, expanding support to electric taxis, buses and trucks, mandating 25% of vehicle purchases by public institutions to be electric, and encouraging private sector engagement (MOE and MOTIE, 2014).

These incentives appear to be encouraging people to buy clean vehicles, but such vehicles still account for an extremely marginal share of the fleet. The share of hybrid cars in total vehicle registrations increased from 0.02% in 2008 to 0.87% in the first quarter of 2016. Over the same period, the share of diesel cars rose from 37% (up from 33% in 2002) to 41%, at the expense of cleaner petrol and LPG vehicles (Figure 3.9). As for electric vehicles, annual purchases more than tripled between 2011 and 2014, with uptake particularly strong on the island of Jeju (MOE, 2016g). Nonetheless, with just 5 838 electric vehicles on the road in early 2016, uptake must increase dramatically for the target of 200 000 by 2020 to be met, a goal revised down from 1 million (MOE and MOTIE, 2014). One approach may be to increase incentives associated with green vehicle use, such as creating dedicated lanes, and lowering parking tariffs that they pay (OECD, 2012b). Another would be to invest in more charging stations, to increase the convenience of using the vehicles.

The private sector has an important role to play in facilitating the transition towards a greener vehicle fleet. The government estimates that over 2008-10, private investment in green cars by 30 Korean corporations totalled KRW 2.4 trillion (USD 2.1 billion13), with a focus on increasing battery and engine efficiency (MOE, 2016a). As for the car industry, the government aims to increase production of environment-friendly vehicles from 78 000 in 2015 to 920 000 in 2020, and expects their domestic market share to rise from 2% to 20% of new vehicles sold over the period (Lee, 2015).

## 5. Expanding environment-related markets and employment

### 5.1. Trends in the environmental goods and services sector

The environmental goods and services sector (EGSS) accounted for 6.6% of GDP and 1.8% of total employment in 2014, an impressive increase from 2.6% and 0.5%, respectively, in 2005 (Figure 3.10). The growth rate has been far higher than that of the general economy; both sales and the number of employees in the EGSS almost tripled over 2006-14. Wastewater management and the recycling sector have consistently been the strongest performers in EGSS sales over time and also employ the most people (Figure 3.10), which may reflect the high government focus on these areas (Section 4.3; Chapter 4). Growth has been faster in resource management activities than in pollution control activities, spurred by the strong recycling sector and the development of heat and energy saving and waste-to-energy sectors. Nonetheless, the share of renewables and energy savings in total sales and employment is well below many other OECD countries. Employment in biodiversity is surprisingly high, likely due to Korea’s broad definition of “bio-related services” (e.g. spraying pesticides and fertiliser on crops).

Growth in EGSS employment has been strong; however, there has been some criticism about the quality of the jobs (i.e. their duration, skill level and wages), particularly those associated with large construction projects launched under the green stimulus package and first Five-year Green Growth Plan (Kim, Han and Park, 2012; Yun, 2014). While the government established a plan for green job creation and training in 2009 and 70 000 green job traineeships were created between 2009 and 2011 (Republic of Korea, 2014b), a government performance evaluation of green growth policies in 2012 found that more specific and targeted measures were needed to create green jobs (Prime Minister’s Office, 2012).

More recent efforts have been made to boost green jobs and skills. Under the creative economy strategy, a plan to foster human capacity in the green technology industry has been given a legal grounding, and is to be reviewed every five years. It focuses on seven environment-related areas14 identified by analysing skills demanded by industry. In addition, a job matching system, established in 2013, serves as an interface between universities training individuals and environmental industries demanding people with particular skills (MOE, 2016a). However, to manage the transition to a green economy, Korea will need to conduct a whole-of-economy, quantitative assessment to identify where and how many jobs in “brown” industries may be lost, where there is concrete potential to create green jobs, the skills needed to do them and the training and investment needed to develop them, and how to assist workers in the transition between contracting and expanding sectors (OECD, 2015g; OECD, 2012a).

In the renewables industry, government measures (section 4.4) have stimulated firm and job creation, investment and exports. Solar PV dominates the industry, accounting for 70‐90% of employment, investment and exports in any given year (KEMCO, 2014; KNREC, 2015). Between 2008 and 2011, sales tripled, employment doubled, the number of renewables companies almost doubled and export revenue increased by a factor of 2.6 (MOTIE, 2014). However, domestic and global demand did not keep pace with the rapid growth of the renewables industry, leading to an overabundance of solar PV and wind manufacturers (KEMCO, 2014; MOTIE, 2014). The industry contracted sharply in 2012, with investment amounting to less than a third of its value in 2011, exports almost halving, employment dropping and firms closing (KNREC, 2015). In the mid- to long term, however, the government expects increased competition fostered by the RPS and related policies to lead to considerable further growth (MOTIE, 2014).

It remains a challenge for Korea to position itself in the renewables export market, given that its technical capacity remains below that of the United States, Japan and the EU yet its products are more expensive and produced in lower volume than in China, its key rival (GGGI, 2015; Invest Korea, 2015).

### 5.2. Green public procurement

Korea’s well-established green public procurement (GPP) system is recognised as an example of best practice among OECD countries (OECD, 2015h). It is part of a broader world-class public procurement system praised for its efficiency, comprehensiveness and flexibility (OECD, 2016h). GPP in Korea, which relies on a strong eco-label foundation (see below), received a boost in 2005 when the Act on Promotion of Purchase of Green Products (Chapter 2) made it obligatory. Each year, institutions must submit a voluntary GPP target and implementation plan to the MOE, though there is no overarching, binding government target. Institutions must also submit a record of green purchasing receipts from the previous year, and over 96% comply (OECD, 2015h). Reporting data are centralised online at the Green Products Information Platform (www.greenproduct.go.kr), which streamlines the monitoring and reporting process and renders institutions’ performance transparent to the public (OECD, 2015h).

The GPP system has stimulated Korea’s EGSS. The Korea Environmental Industry and Technology Institute (KEITI) estimates that the number of certified products grew from 2 721 to 14 026 and total green purchase value by public institutions increased from KRW 787 billion (USD 768 million) to KRW 2.4 trillion (USD 2.1 billion) over 2005-15, and that 18 264 jobs were created over 2005-14 (MOE, 2016a). Despite this progress, green products only account for 8% of total public procurement and 42% for categories with green options available, indicating room for growth (OECD, 2015h; KEITI, 2014).

To further strengthen the impact of Korea’s GPP, the scope, number and quality of green products could be expanded to better meet public institutions’ product needs. To this end, the government should improve engagement with the private sector concerning these needs and the green standards that products should meet to be eligible for purchase. Maintaining open channels for dialogue between government, procurers and businesses has been crucial to the success of GPP in Canada, Belgium and Austria, for example (OECD, 2015h). GPP officials should be designated in each public institution, to help combat the problem of frequent turnover, and they should receive more specialised training (KEITI, 2014). Increased support for professionalisation has been identified as a need in the broader public procurement system (OECD, 2016h). Finally, GPP regulations should be harmonised with Korea’s numerous other procurement regulations to minimise procurers’ confusion and regulatory burden (OECD, 2015h).

### 5.3. Supporting sustainable consumption

The government manages many environmental labels to inform consumers about the environmental and energy performance of products, shops and buildings so as to stimulate green consumption and production. The Korea Eco-Label (1992) and Good Recycled Mark (1997) are the best-established labels, and provided the basis for smooth implementation of GPP and rapid growth in the green goods market. A carbon footprint label was introduced in 2009. These represent just a fraction of Korea’s numerous labelling and certification programmes, which create complexity and burden for producers, consumers and public procurement officials (OECD, 2016h). It may be beneficial to review environmental labelling and certification programmes to look for opportunities to streamline and simplify them.

The number of Eco-Label certified products has grown steadily since 2001, yet recognition of the label remains around 50% and a gap persists between its recognition and actual purchase of certified products (KEITI, 2014). Reasons include higher prices and a lack of variety of green products, insufficient product information, problems with quality and what are perceived as misleading labelling and advertising (GSC, 2014). Indeed, in 2012, 46.4% of eco-labels were found to be false, leading the government to revise the Environmental Technology and Industry Support Act in 2014 to provide a legal basis to punish false eco-labels (MOE, 2015b). Greater collaboration with the private sector and tighter monitoring of eco-labels is essential to tackle low quality and false labelling. Experience from other countries, such as India, shows that full life-cycle analysis of green products and communication of their costs and benefits to consumers are essential to convince people of the economic (as well as environmental and social) advantages of purchasing them (OECD, 2015h). High-level support from a trusted public figure could help overcome misgivings about the system; for example, support by Vienna’s city councillor for environment for the “ÖkoKauf GPP project” helped overcome a belief that ecologically sound goods and services were more expensive than conventional ones (OECD, 2015h).

The government has introduced incentives that reward consumers who buy environmental goods and services and save resources. Since 2009 the “carbon point” system has rewarded electricity, water and gas savings and the “carbon cashbag” system has rewarded purchases of energy-efficient products. Both were integrated with the flagship Green Credit Card system in 2011 (Box 3.4). However, KEITI has found that one barrier to greater uptake of the card is a lack of consumer awareness of eco-friendly lifestyles (KEITI, 2014). This is despite the Greenstart Movement, launched in 2008 to promote green behaviour in non-industry sectors (households, transport, businesses) by developing green leaders, running seasonal events and campaigns, and supporting climate change education (KEI, 2013a).

Box 3.4. The Green Credit Card system

The Green Credit Card system was introduced in 2011 to reward eco-friendly consumption. It provides a normal credit card service, but also allows users to accumulate “eco-money points” (equivalent to 3-24% of the product price) when they use the card to purchase low-carbon and eco-friendly products. They can also earn points by saving electricity, water and gas (through linkage with the “carbon point” system) and using public transport (points equivalent to up to 20% of the fare). The points can be converted into cash rebates, used to buy other products (not only green) or to pay public transport fares and phone bills, or donated to environmental associations. Cardholders can also get into certain public facilities such as national parks and museums free of charge.

There are more than 10 million users of the system. The Green Credit Card is used more often than other credit cards to pay for public transport. The number of participating public facilities increased from 381 in 2012 to 746 in 2014. KEITI estimates that reduced household use of electricity, water and gas through the system saved USD 6 million between July 2011 and December 2014. The system is estimated to have mitigated 531 000 tonnes of CO2 over 2011-14; however, on an annual basis this represents less than 0.02% of total GHG emissions. The system is attracting international attention as a low-cost, convenient way to encourage green consumer behaviour (KEITI, 2016). The government plans to expand its partnerships with retailers and manufacturers (e.g. adding large supermarkets and department stores) as well as the number and type of eligible products and services (e.g. car sharing). The government is also looking to extend use of the card to online shopping and, eventually, to international purchases by establishing a global green credit card partnership (KEITI, 2014).

Source: KEITI (2014), Policy Handbook for Sustainable Consumption and Production of Korea; KEI (2012), “Green card system”, Korea Environmental Policy Bulletin, Issue 1, Vol. X, Korea Environment Institute, Sejong.

## 6. Promoting eco-innovation

### 6.1. General innovation performance

Korea is the world’s most research and development (R&D)-intensive country. Gross domestic expenditure on R&D grew from 2.2% of GDP in 2000 to 4.3% in 2014, well above the OECD average (2.4%), but below the ambitious target of 5% set for 2012 in the first Five-year Plan for Green Growth (OECD, 2016i). Korea also ranks first in business R&D, which accounted for 3.4% of GDP in 2014. Large manufacturing conglomerates are the main performers of business R&D, with the service sector and SMEs playing much smaller roles (OECD, 2014c). The government has implemented a vast array of initiatives to raise public support to SMEs. However, streamlining could be beneficial, and some incentives – such as the R&D tax credit, which lacks carry-over provisions or cash refunds – could better stimulate innovation in small service sector firms (OECD, 2014d).

While public R&D expenditure is high, Korea has few world-class universities and produces few high-impact publications by OECD standards (OECD, 2014c). This partly results from Government Research Institutes (GRIs) focusing on applied and development-oriented research. While the Basic Plan for Science and Technology (S&T) aims to expand public R&D to KRW 92.4  trillion (6.2% of 2014 GDP) over 2013-17, public R&D investment could be made more efficient by strengthening fundamental research and evaluating the performance of national R&D programmes (OECD, 2015i). Industry-university links have traditionally been underdeveloped. Current initiatives, such as the plan to establish new joint industry-university-GRI R&D centres, should be strengthened to improve technology transfer and commercialisation.

Better integration with global science and innovation networks is a priority, as Korea’s levels of international co-authorship and co-patenting are among the lowest in the OECD. The low level of patent applications with foreign co-inventors is partly due to Korea’s conglomerate industrial structure, which tends to keep technology development within the group. The government has developed a Comprehensive Plan for Global Co-operation, emphasising the formation of a global network of overseas Science, Technology and Industry (STI) outposts, expansion of S&T-related official development assistance, reinforcement of science diplomacy, promotion of international joint R&D and sharing of large R&D facilities. These measures could be usefully complemented by further improvement of the regulatory environment for trade and investment (OECD, 2016a).

### 6.2. Performance on eco-innovation

In 2014, the government of Korea was the fourth largest provider of funds for R&D on energy and the environment in the OECD. Since 2000, spending on energy and environment-related programmes has increased from 0.05% to 0.14% of GDP (compared to the OECD average of 0.04%), reflecting both the government’s overall effort to promote R&D and the increased priority given to energy. In 2014, 9% of the total government R&D budget was allocated to energy, more than twice the OECD average (Figure 3.11). Over the past decade, projects have increasingly focused on renewables (solar and wind), energy efficiency and fossil fuels (carbon capture and storage), while nuclear power has received less support (IEA, 2016b).

The first Five-year Green Growth Plan clearly identified green technologies as new engines for economic growth and prompted increased public R&D investment on these, which cover a broader scope than energy and environment (Figure 3.11). The Green Technology R&D Master Plan provided for a doubling of related funding over 2008-12 with a focus on 27 key technologies selected for their growth potential. In 2013, about half of public investment in green technologies was allocated to experimental development and one-fifth to applied research. Although the share of fundamental research increased from 15% in 2008 to 26% in 2013, the 35% target set for 2012 was not met (MSIP-GTC-K, 2014). Raising this proportion to 40% of total R&D expenditure, as planned in the Basic Plan for Science and Technology (2013-17), could maximise social returns and spillover effects (OECD, 2014d).

The government has been supporting green businesses through grants, loans, credit guarantees and venture capital investment. The LCGG Act (Articles 28 and 31) provided for specific provisions to channel finance to green technologies and the enVinance system was established to give the financial sector information on companies involved (Chapter 2). However, public financing mostly relies on state-owned banks and public funds (OECD, 2012a). While support to green technologies is justified by higher risk, such intervention can cause distortions by limiting the development of market-based financing. Companies involved in green technologies have also been granted generous tax incentives, including an income and corporate tax deduction of up to 30% for SMEs and 20% for non-SMEs for research and human development costs (OECD, 2014d). Although such tax incentives ensure a more market-based selection of research projects, they often involve windfall profits and tend to benefit incumbent firms more than young SMEs which lack taxable income. For example, tax deductions for energy savings were found to have mostly benefitted large enterprises (GGGI, 2015).

A high level of investment has made Korea one of the world’s most innovative countries in climate change mitigation technology. Over the past decade, high-value inventions in such technology increased more than sixfold (Figure 3.12). In 2010-12, climate change mitigation technology accounted for 10% of overall patent applications15 associated with inventors located in Korea, up from 4% in the early 2000s. In particular, Korea has developed a comparative advantage16 in technology related to renewable energy sources (solar photovoltaic), energy sector enabling technology (batteries and fuel cells), buildings (energy-efficient lighting, ICT for the reduction of energy use) and transport (electric vehicles).

Technological advancement has been most prominent in secondary batteries and light-emitting diodes (LEDs), which also benefitted from a strong public procurement policy. In 2013, Korea held the greatest share (36%) of the global lithium-ion battery market and Korean manufacturers are now key players in the market. The LED industry’s exports increased from KRW 1.4 trillion (USD 1.1 billion) in 2009 to KRW 5.6 trillion (USD 5.0 billion) in 2012, raising related SME revenue. The total number of employees manufacturing LED lights increased from 4 750 to 19 900 over 2007-12 (GGGI, 2015).

High R&D inputs have not yielded the expected outcomes for renewable development and GHG emission reductions, highlighting the need to strengthen Korea’s climate policy. A survey of petrochemical companies showed that, besides high up-front costs and investment uncertainty, low energy prices are a major impediment to low-carbon technology uptake (Suk, Lee, and Jeong, 2016).

Although an increasing number of patents have been applied for technology related to air and water pollution abatement, there has been a shift in focus from general environmental management to climate-and energy-related technology, as in other OECD countries. This shift may partly reflect the greater maturity of environmental management technologies, but could also suggest some missed opportunities. For example, while Korea is recognised as a growing market17 for technology related to water pollution abatement and waste management, it has lost its competitive advantage in such technology over the past decade. While climate-related innovation is crucial for Korea, it should not crowd out innovation in other important environmental domains. When selecting technologies to target, Korea should carefully assess the extent to which they reflect current strengths and future needs. The Basic plan for Science and Technology (2013-17) updated the roadmap for green technology development. It renewed the focus on many of the 27 key technologies (solar energy, eco-friendly automobile, smart grid, carbon capture and storage [CCS], high-efficiency buildings), although waste recycling is excluded (Han, 2013). The second Five-year Green Growth Plan aims at promoting fundamental research on CCS and nuclear energy; commercialising energy demand management technology and developing new IT-based business models; and promoting resource-cycling industrial development and supporting clean SME production.

Compared with other OECD countries, Korea has one of the lowest co-invention rates with foreign partners in environment-related technology, mirroring the general weak links with international knowledge networks. However, the country is increasingly collaborating in international technology programmes and recorded one of the highest levels of participation in IEA programmes on energy and climate in 2015 (IEA, 2016c). The 2013 Basic Plan for Science and Technology aims at expanding international joint research on global challenges such as climate change and energy; establishing Korea as a hub of global science and technology; increasing overseas development assistance in science and technology; and building infrastructure for international co-operation (OECD, 2014d).

### 6.3. The eco-innovation policy framework

Korea has a rich organisational landscape of ministries, public agencies and co‐ordination bodies engaged in formulating, implementing and evaluating technology and innovation policy (OECD, 2014d). In 2013, the Ministry of Science, ICT and Future Planning (MSIP) was established to implement the creative economy initiative introduced to foster cutting-edge innovation and consolidate a knowledge-based economy increasingly driven by high-value services. A new National Science and Technology Council (NSTC) was established under the Prime Minister’s Office (previously under the president) as the highest decision-making body on cross-agency STI policy issues (OECD, 2014c). It established the Basic Plan for Science and Technology (2013-17) with the aims of strengthening R&D’s ties to economic growth, technology commercialisation and job creation.

Eco-innovation policy is organised around a range of actors. The Green Technology Council, established under the previous NSTC, was the overarching body in charge of the green technology agenda. It provided R&D support for the Green Growth Committee (Chapter 2) and played a key role in the formulation of the 2009 Green Technology R&D Master Plan and prioritisation of key green technology areas together with 11 government ministries and agencies (GGGI, 2015). Line ministries have also contributed with their own plans to the promotion of green technology, in particular the second and third plans for Fostering Environmental Technology and Industry (2008-12, 2013-17, MOE) and the third and fourth plans for New and Renewable Energy (2009-30, 2014-35, MOTIE). Since 2009, the Korea Environmental Industry and Technology Institute, affiliated with the MOE, has promoted the sector’s expansion by granting green certifications and managing the support system for certified businesses. In 2013, the Green Technology Center was established as an affiliate of the Korea Institute of Science and Technology18 for managing government budget and co‐ordinating policies on green technology.

MOTIE and MSIP play a key role in supporting green technology. In 2013, they accounted for 35% and 33%, respectively, of related public R&D expenditure. Other ministries with significant responsibilities include MOLIT (7%), the Small and Medium Business Agency (6%), the MOE and the Ministry of Oceans and Fisheries (5% each) (MSIP-GTC-K, 2014). Enterprises and GRIs are the main recipients, receiving 37% and 35%, respectively, of public R&D on green technology, while universities received 17%.19 Since 2012, SMEs have benefited slightly more than large conglomerates from this support, reflecting renewed efforts to encourage SME innovation.

## 7. Environment, trade and development

### 7.1. Development co-operation

Korea was the first former aid recipient to join the OECD Development Assistance Committee (DAC), gaining membership in 2010. This transformation from recipient to provider allows it to play a bridging role between the two communities, and experience as a developing country heightens its credibility as a provider of finance and know-how (OECD, 2013d). Korea’s net official development assistance (ODA) disbursements have almost quadrupled since 2006, with multilateral disbursements increasing almost twice as fast as bilateral ones. However, Korea did not meet its target of giving 0.25% of gross national income (GNI) as ODA by 2015 due to the global economic downturn, tighter fiscal policy and a change in the GNI calculation (OECD, 2016j). Korea has set itself the new target of giving 0.30% of GNI by 2030.

Korea aims to increase its green ODA to 30% of total ODA by 2020, which appears difficult to achieve (OECD, 2016j). Its green ODA, as measured in the DAC Creditor Reporting System using the environment and Rio markers, declined from 18%, on average, in 2007-08 to 14% in 2013-14 (Figure 3.13), while the OECD DAC average increased from 15% to 25%. Korea’s environment-related bilateral ODA is heavily concentrated in water supply and sanitation (particularly large systems and waste management and disposal) (Figure 3.13), in which it has extensive domestic experience (Section 4.3), and in the Asia Pacific region, in which it has a geographic and cultural advantage. Korea’s environment-related ODA is more focused on adaptation and desertification than the OECD DAC average, reflecting the importance of these issues in Asia Pacific. For example, 68% of Korea’s bilateral environment-related ODA in Oceania and 46% of that in Far East Asia over 2010-14 targeted adaptation.20 Korea also provides multilateral environment-related ODA, including USD 27.5 million to the Global Environment Facility over 2010-14, USD 20 million to the Asian Development Bank’s Future Carbon Fund over 2010-13 and USD 100 million to the Green Climate Fund for the initial period of resource mobilisation through to 2018. Korea engages in regional co-operation on green growth and environmental challenges, as a donor providing finance and know-how and a partner finding shared solutions (Box 3.5).

Box 3.5. Regional co-operation on green growth and environmental challenges

As a donor, Korea actively promotes green growth in the Asia Pacific region. Its flagship programme was the East Asia Climate Partnership (EACP), which provided USD 200 million to 20 bilateral and nine multilateral projects over 2008-12 supporting water management, low-carbon energy, low-carbon cities, waste treatment, forestation and biomass. Projects implemented through the EACP were independently evaluated in 2013, and the Korea International Cooperation Agency (KOICA) has since provided follow-up assistance. Korea also collaborates with the United Nations Economic and Social Commission for Asia and the Pacific to run the Seoul Initiative on Green Growth, which has helped countries transition to a green economy through green technology transfer and environmental co‐operation projects since its founding in 2005.

Korea also co-operates closely with countries in the region on shared environmental challenges. Korea, China and Japan hold an annual Tripartite Environment Ministers Meeting to develop and implement joint five-year action plans on environmental co‐operation, and have more specific co-ordination and co-operation structures to tackle dust and sand storms, air pollution (Chapter 1) and marine waste. The three have also held an annual environmental industry round table meeting since 2001. Korea co-operates with China, Russia and Mongolia on transboundary environmental impact assessment, though this initiative has not yet led to the creation and adoption of a mechanism (Lee and Moon, 2014). Korea has bilateral environmental co-operation agreements with China, Japan and Russia, and has signed memoranda of understanding on environmental co-operation with Viet Nam (2000), Indonesia (2007), Mongolia and Cambodia (2009).

Source: MOE (2016), “Response to the questionnaire for the OECD Environmental Performance Review of Korea”; MOE (2015), Ecorea: Environmental Review 2015, Korea; Lee, Y-J. and N. Moon (2014), “Strategy for Introducing Transboundary Environmental Impact Assessment in Northeast Asia”, http://dx.doi.org/10.14249/eia.2014.23.6.505.

Korea has taken steps to mainstream environment- and climate-related considerations into its ODA activities. Although its mid-term ODA Policy for 2011-15 identifies environment as one of five cross-cutting issues to be considered in all development co-operation activities, a review in 2012 found that mainstreaming guidance for environment and climate change needed to be strengthened (OECD, 2013d). In response, KOICA developed a Guideline and Implementation Strategy on Environment Mainstreaming 2013-15, including an Environment Manager System that appoints a staff member in each department to be in charge of monitoring and evaluating environmental mainstreaming, and introduced a screening and evaluation mechanism to review the environmental impact of all projects. KOICA later published a Guide to Environmental Mainstreaming for Practitioners, and has added environmental mainstreaming as a key performance indicator. The Economic Development Co-operation Fund (EDCF) applies environmental safeguards based on those of the Asian Development Bank, and is conducting two pilot projects upon which an updated safeguards strategy in 2016 was based.

Korea makes extensive use of concessional loans in its environment-related ODA, as in its total ODA. Over 2007-14, 64% of Korea’s environment-related ODA was delivered as loans, a share greater than that of all but three other DAC donors (OECD, 2016j). The remainder was delivered as grants. Reflecting the importance of loans in Korea’s aid system, they are managed separately by the EDCF within the Ministry of Strategy and Finance, while grants are managed by KOICA within the Ministry of Foreign Affairs and Trade. Korea’s emphasis on loans stems from its positive experience as a recipient of loans in the past, and a belief that they impose fiscal discipline on recipient countries (OECD, 2013d). However, Korea’s use of loans is fairly uniform across all income groups, while loans are generally considered more appropriate for middle-income countries than for least developed and other low-income countries, given that the former have more capacity to repay them.

Korea’s policies for international co-operation and for environmental technology export promotion are closely intertwined. It has programmes to identify opportunities for environmental technology transfer and technical knowledge-sharing, and to adapt its environmental technology to best suit the context of partner developing countries. These programmes are run by KEITI, established in 2009 to provide systematic support to the environmental technology industry. Technology transfer and other environmental co‐operation opportunities are identified through environment management master plans that Korea establishes with partner countries, and through feasibility studies on overseas environmental projects funded by Korea. The master plans count as part of Korea’s ODA activities, while the rest of KEITI’s global partnership activities do not. While KEITI’s technology expertise is strong, it could be better complemented with financial expertise to accompany project implementation. Knowledge-sharing takes place through seminars and exhibitions, exchanges of specialists, and joint research. Korea has established Environmental Cooperation Centres in China, Viet Nam, Indonesia, Colombia and Algeria, thereby institutionalising its environmental co-operation with these five partner countries in particular. The centres serve as channels to promote the exchange of environmental information, technology and experts between Korea and partner countries, and facilitate the development and implementation of joint co-operation projects (KEI, 2013b; MOE, 2015a).

While Korea is committed to greening its ODA, its other official flows (OOF21) to developing countries have provided considerable support to polluting activities, raising questions about Korea’s policy coherence. For example, over 2007-14, almost two-thirds of Korea’s OOF supported the industry, mining and construction sector, including activities such as drilling and mining for oil, coal and gas, and chemicals production. In other sectors, support for more polluting activities outweighed that for greener alternatives; for example, in the energy sector, OOF for coal- and gas-fired power plants was more than triple that for geothermal and hydroelectric plants.

### 7.2. Corporate social responsibility

Korea’s National Contact Point (NCP), established in 2000, promotes the OECD Guidelines for Multinational Enterprises, but could improve the transparency of its activities. Korea is one of the four OECD countries to include independent experts, who work with delegated officials from MOTIE, the Ministry of Employment and Labour, and the MOE. The NCP is well resourced, benefiting from a dedicated budget and staff (OECD, 2014e). It has an arbitration committee to handle specific cases, of which there have been seven since 2000. None was related to the environment; rather, they primarily pertained to employment, industrial relations and human rights (OECD, 2016l). Only two cases are published on the NCP website (www.ncp.or.kr), and the NCP does not adhere to the best practice of publishing its annual reports online (OECD, 2014e).

### 7.3. Export credits

The Export-Import Bank of Korea (Kexim) has developed internal policies to implement the Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence. All projects above SDR 10 million, with a repayment term of two years or longer, related to the nuclear sector or in environmentally sensitive areas, are screened for potential environmental and social risks. Projects classed as category A (potential for serious adverse impact) or category B (potential for adverse impact) undergo full environmental and social impact assessments (ESIA) for the preparation of environmental and social management plans, and details of the projects are published on the KEXIM website. KEXIM publishes ESIA and review checklists on its website to help clients prepare for environmental and social due diligence procedures. The bank recognises the Guidelines for Multinational Enterprises vis-à-vis The Common Approaches in its procedures for social and environmental due diligence (OECD, 2014e).

The value of export credits that Korea provided to coal-, oil- and diesel-fired power generation projects substantially exceeded that of all other OECD members over 2003-13. The value of its export credits supporting coal-fired power plants is USD 1 billion higher than that of the second highest supporter, Japan (USD 4.3 billion vs. USD 3.3 billion), and the value of its export credits supporting oil- and diesel-fired power plants is more than twice that of the second highest supporter, France (USD 2.6 billion vs. USD 1.2 billion) (OECD, 2015j). Korea’s exports credits for coal-fired power plants will be greatly restricted by an OECD agreement, reached in November 2015, to significantly limit the circumstances under which these can be financed; the OECD estimates that two-thirds of all coal-fired power plants financed by export credits over 2003-13 would not have been eligible under the new rules (OECD, 2015k). Korea and Australia weakened the ambition of the agreement by securing an exception allowing construction of less efficient small coal-fired power plants in developing countries.

### 7.4. Green bonds

In 2013, KEXIM became the first non-international bank to issue green bonds and the first institution in Asia to issue green bonds in US dollars, showing itself to be a pioneer in this field. The bank issued USD 500 million in five-year bonds at 1.75%, which attracted USD 1.8 billion of demand from more than 100 investors, 47% of them from the US, 32% from Europe and 21% from Asia. After this successful issuance, the bank followed up with a second five-year green bond in 2016 (USD 400 million, 2.125%). Interest in green bonds in Asia is growing, with investors in the region taking 48% of Kexim’s 2016 issuance. Proceeds are used to extend loans to projects that promote “low carbon, climate resilient growth”, including renewables and water treatment projects (Horne, 2016; Wee, 2013). The green expertise of Kexim and the green credentials of the financed projects are independently verified by the Norwegian research centre Cicero, a leading provider of second opinions on green bond frameworks for over 30 institutions. However, Kexim is one of only four institutions that does not permit Cicero to publish their second opinion of its green bond projects online.

### 7.5. Plurilateral agreements on environmental goods

Korea has aggressively pursued trade liberalisation by signing many free trade agreements with key trading partners such as the European Union (2011), the United States (2012) and China (2015). These agreements have facilitated a decline in Korea’s import tariffs on environmental goods; for example, 95% of tariffs on US exports to Korea, including environmental goods, will be eliminated by 2017 (US Department of Commerce, 2016). Nonetheless, in 2013 Korea’s barriers to trade and investment were ranked second highest in the OECD (OECD, 2016a). In the environment sector, a number of non-tariff barriers exist, such as testing requirements for products already meeting international standards, and a culture of demanding high quality at low cost (US Department of Commerce, 2016; Canadian Trade Commissioner Service, 2012).

Korea is one of 17 economies participating in negotiations to forge a plurilateral Environmental Goods Agreement. The negotiations, if successful, will phase out import tariffs on a range of goods used to control pollution, monitor the environment or improve environmental performance. Many of the goods under consideration for tariff elimination are used to generate electricity from renewables or to improve energy efficiency. Korea has completed legislative preparations to allow for domestic implementation of the agreement once it is concluded. As a member of Asia-Pacific Economic Cooperation, Korea has committed to reduce its applied import tariffs to 5% or less (on an ad valorem basis) on a list of goods covered by 54 tariff subheadings, many of which pertain to renewables or energy efficiency.

Recommendations on green growth
• Strengthen political commitment to green growth. Provide political and institutional stability in terms of roles and responsibilities in designing, monitoring and implementing the framework.

• Green the energy sector to help meet Korea’s GHG gas and air pollution reduction and energy security goals:

• Progressively raise electricity prices to reflect system costs (i.e. of production and distribution), providing targeted support decoupled from energy use to vulnerable households where needed; remove cross-sector subsidies.

• Raise taxes on fuels used for electricity generation, particularly coal, to reflect environmental and health costs.

• Redouble efforts in energy demand management.

• Increase public investment in renewables development and deployment; review the outcomes and cost-effectiveness of existing instruments and adjust the measures based on the results; provide a stable and transparent policy framework; monitor changing technology costs and adjust support measures and weightings applied to different renewable energy sources under the RPS accordingly.

• Strengthen the effectiveness and efficiency of the ETS to help Korea meet its GHG emission reduction target:

• Steadily increase the share of permits auctioned and the stringency of the total emission cap.

• Increase the transparency, stability and long-term visibility of the ETS to allow businesses to better adapt and make the long-term investments necessary to reduce their emissions. This would include providing public information on current and future permit allocation at the sector level.

• Phase in a carbon tax for firms and sectors not covered by the ETS; phase out the TMS.

• Adjust taxes, charges and subsidies to better reflect environmental externalities:

• Adjust the rates of pollution- and natural resource-related taxes and charges to reflect environmental and social costs and to encourage reduced pollution and natural resource use. For example, raise water supply and sewerage charges and the water effluent tax. Strengthen the enforcement of these taxes and charges, in particular of those related to water quality, for which the collection rates are very low. Extend the air pollution charge to cover NOx emissions in areas not covered by an air pollutant emission cap management system.

• Progressively phase out domestic fossil fuel subsidies, such as those for the agriculture and fishing sectors, fuel subsidies for buses, trucks and taxis, and subsidies for producers of coal briquettes used by low-income households. Progressively phase out export credits and other official flows supporting fossil fuel extraction and use.

• Reorient agriculture production subsidies away from direct producer and price support and towards support encouraging, or conditional on, provision of environmental services (e.g. water management, flood buffering, biodiversity protection) and efficient resource and input use. Remove water charge exemptions for agriculture, with the long-term objective of full cost pricing.

• Establish an institutional mechanism, such as a green tax commission, to review the environmental effects of fiscal instruments, identify environmentally harmful subsidies and prioritise which to phase out first, and improve the effectiveness and efficiency of economic instruments.

• Strengthen measures to reduce transport-related GHG emissions, air pollution and congestion:

• Raise the excise tax on diesel to at least match that on petrol, and index the tax on both fuels to inflation to avoid erosion of its value in real terms.

• Implement measures that encourage not only the purchase but also the use of clean vehicles, such as dedicated lanes, lower parking tariffs and tolls, and more charging stations for electric vehicles.

• Further increase investment in rail and other public transport; better link transport modes and integrate public transport planning with land use planning.

• Expand the use of congestion charges; update the rate of the Namsan tunnels congestion charge; continue to raise the traffic generation charge and encourage cities to differentiate its rate according to facility location.

• Secure the long-term sustainability of financing for water supply and sanitation infrastructure:

• Gradually raise water supply and sewerage charges to improve the cost recovery ratio of providing these services.

• Pursue the amalgamation of water supply services to enhance their efficiency.

• Pursue efforts to foster and disseminate green innovation:

• Rebalance public spending in energy- and environment-related R&D from technology development and demonstration to fundamental and applied research; promote greater involvement from universities and strengthen links with industry and government research institutes; continue to strengthen international co-operation in energy- and environment-related R&D.

• Regularly assess the consistency between instruments used in environmental and innovation policies and the outcomes of eco-innovation policies against Korea’s strengths and future needs; scale up development and deployment of carbon capture and storage; promote innovation in a circular economy.

• Increase green public procurement and green purchasing by consumers:

• Improve government engagement with the private sector concerning public sector product needs and the green standards these products would need to meet to be eligible for purchase, in order to expand the range of green products available.

• Harmonise GPP regulations with the many other procurement requirements and streamline environmental labelling and certification schemes, to reduce complexity for public procurers and consumers.

• Tighten the application and monitoring of eco-labels to ensure that products are of high quality and that labels are not applied falsely.

• Significantly scale up green bilateral ODA to meet the 2020 target of 30% of total bilateral ODA. Ensure that the use of grants or concessional loans is adapted to recipient countries’ economic context, financial position, governance, preferences and needs.

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Annex 3.A. Data on green growth performance

## Notes

← 1. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

← 2. The notion of sustainable development in Korea pre-dates that of green growth, with the first sustainable development plan spanning 2006-10. The LCGG Act incorporated the second and future sustainable development plans, providing the legal basis for their renewal every five years. Implementation is tracked by way of indicators and the Commission on Sustainable Development, which sits under the MOE. The third sustainable development plan (2016-20) aims to increase emphasis on the social pillar of sustainable development. This is particularly important given that Korea’s green growth policy focuses solely on integrating economic and environmental considerations, leaving the social dimension to be addressed by the sustainable development plan.

← 3. For example, the LCGG Act of 2010 states that “the Government shall [reorganise] taxation and financial systems so that economic expenses incurred by environmental pollution or greenhouse gases can be reflected reasonably in market prices of goods and services”, and the second Energy Master Plan of 2014 states that the future direction must be one in which energy taxes and electricity prices are adjusted to encourage more rational energy and electricity consumption, and to better reflect social costs such as GHG emission reduction.

← 4. In the first draft of the bill (2010), 90% of the permits in the first phase would be allocated, the share in the second phase would be determined according to presidential decree and 0% would be allocated in the third phase. After three iterations, the enforcement decree (2014) provides for 100% of permits to be allocated in the first phase, 97% in the second, and 90% in the third (Kim, 2015).

← 5. According to Kim (2015), the fine is KRW 3 million for the first violation, KRW 6 million for the second, and KRW 10 million (USD 8 840) for the third.

← 6. Congestion costs have been estimated by the Korea Transport Institute (KOTI) since 1993. While the institute recognises that the traffic congestion cost should reflect environmental and social costs, their method only reflects economic costs of congestion. KOTI estimates traffic congestion costs by taking the sum of fixed and variable vehicle operating costs and of the time value of money.

← 7. Investment and internal current expenditure (excluding payments for environmental protection services) less receipts from by-products (e.g. materials recovered as a result of waste treatment) by public and business sectors, including specialised producers of environmental protection services. Includes expenditure for i) pollution abatement and control covering air protection, waste and wastewater management, protection and remediation of soil and groundwater, and other activities (R&D, administration, education); and ii) biodiversity and landscape protection. Excludes expenditure on water supply.

← 8. Public corporation acting under the authority of MOLIT and responsible for the operation and management of water resources facilities. K-Water supplies bulk water to municipalities and industries through dams and multi-regional water supply systems. In some cases, it acts as service provider through a consignment contract with local authorities to manage water services.

← 9. Excluding village waterworks and small facilities.

← 10. As measured in million passenger-kilometres.

← 11. Calculated using 2014 average exchange rate.

← 12. Calculated using 2015 average exchange rate.

← 13. Calculated using 2010 average exchange rate.

← 14. The seven environment-related industries on which the Korean government is focusing its human capacity development efforts are: climate and air; water; environmental restoration and recovery; environmental health and safety; resource recirculation; sustainable environment and resources; and environmental knowledge and services.

← 15. Inventions of high potential commercial value for which protection has been sought in at least two jurisdictions.

← 16. As measured by the revealed technology advantage, i.e. Korea’s share of world patents in these technologies is higher than its share in all fields.

← 17. As measured by the share of patent applications filed in Korea by domestic or foreign applicants in total patents filed in these technologies.

← 18. A GRI created to carry out R&D in key technological fields.

← 19. The remaining part goes to ministries and public research bodies other than the GRIs.

← 20. The adaptation “Rio” marker in the OECD Creditor Reporting System was introduced in 2010. The environment marker was introduced in 1992, and the mitigation, biodiversity and desertification markers were introduced in 1998. Application of the markers has been mandatory since 2007.

← 21. Other officialflows are defined as official sector transactions that do not meet ODA criteria. OOF include grants to developing countries for representational or essentially commercial purposes; official bilateral transactions intended to promote development, but having a grant element of less than 25%; and official bilateral transactions, whatever their grant element, that are primarily export-facilitating in purpose.