IEA Urges South Korea to Overhaul Carbon Market for Enhanced Climate Action

IEA Calls for Carbon Market Overhaul

The International Energy Agency (IEA) has strongly urged South Korea to undertake comprehensive reforms of its carbon market to enhance its efficiency and effectiveness in achieving climate goals. The recommendations, detailed in a new Energy Policy Review for Korea published around November 25, 2025, emphasize the critical need for an electricity price pass-through mechanism and a clear market stabilization system.

These proposed changes aim to strengthen the price signal for carbon emissions, thereby incentivizing greater investment in low-carbon technologies and accelerating the nation's transition towards its ambitious 2050 net-zero emissions target.

Key Recommendations for Reform

The IEA's review highlights several specific areas for improvement within South Korea's Emissions Trading System (K-ETS). Central to these is the recommendation to ensure that the cost of carbon is fully reflected in electricity prices. This 'price pass-through' mechanism would provide a stronger economic incentive for industries and consumers to reduce their carbon footprint and invest in cleaner energy sources.

Furthermore, the IEA advocates for the introduction of a robust market stabilization mechanism. This system would help manage price volatility and liquidity within the K-ETS, potentially by allowing for the auctioning of additional allowances from a reserve during periods of low market activity. Other key recommendations include:

• Increasing the volume of auctioned allowances, moving away from the current high proportion of free allocations.
• Expanding participation in the K-ETS to include a broader range of financial entities, a move that South Korea has already begun to implement as of February 7, 2025.
• Establishing an independent regulator for electricity, natural gas, and hydrogen markets to bolster transparency and ensure fair pricing.

Challenges and Current State of K-ETS

Launched in 2015, the Korea Emissions Trading System (K-ETS) is one of the largest carbon markets globally, covering approximately 80% of the nation's greenhouse gas emissions. Despite its broad coverage, the IEA notes that the K-ETS has been hampered by low carbon prices and limited market activity, which have diminished its overall impact. For instance, the average price of Korean carbon allowances in 2024 was approximately KRW13,000 ($9.88) per tonne, significantly lower than prices observed in the European Union's market.

The prevalence of massive free allocations and an overly high emissions cap have been identified as factors contributing to the subdued investment signal from the scheme. While the 4th Basic Plan for the ETS (2026–2035), adopted in December 2024, aims to better align the system with the country's climate targets, the IEA's latest review underscores the need for more aggressive reforms.

Broader Energy Transition Context

South Korea has made a legally binding commitment to achieve net-zero emissions by 2050 through its 2021 Carbon Neutrality Act, which also includes a 2030 emissions reduction goal. However, the country's energy mix remains heavily reliant on imported thermal sources, with coal still accounting for over a quarter of its electricity generation. The share of renewable energy in South Korea's electricity mix is currently the lowest among IEA member countries, despite efforts to increase it.

The IEA report also highlights that South Korea faces a steadily rising electricity demand, driven by factors such as increased electrification across various sectors, greater cooling needs, and the significant energy consumption of expanding semiconductor manufacturing and data centers. The agency stresses that improving coordination across sectors and ensuring clear, actionable implementation plans are crucial for South Korea to accelerate its progress towards its climate objectives.