Finalization of Phase 4 National Emission Permit Allocation Plan and Trends in Amendments to Emission Permits Trading Act

The “Plan to Allocate National Emission Permits for Phase 4 (2026–2030)” (the “Phase 4 Allocation Plan”) is now finalized and a partial amendment to the Act on the Allocation and Trading of Greenhouse-Gas Emission Permits (the “Emission Permit Trading Act”) will become effective.

In September 2025, the Ministry of Climate, Energy and Environment announced the key details of the Phase 4 Allocation Plan, which was ultimately finalized following deliberations by the Allocation Committee and the Carbon Neutral Committee, and at a cabinet meeting. In addition, for the implementation of the Phase 4 Allocation Plan, an amendment to the Emission Permit Trading Act was promulgated on October 28, 2025 and is scheduled to be enforced from April 29, 2026 (six months after promulgation, except for certain provisions).

The key details of the Phase 4 Allocation Plan and the amended Emission Permits Trading Act are explained below.

1.	Key Details of Phase 4 Allocation Plan

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Overview of Allocation, Total Emission Allowances and Reserve

Overview of Allocation: For Phase 4, 764 companies participating mandatorily and eight companies participating voluntarily are scheduled to be designated. Unlike Phase 3, sectors will be divided into just two categories: (i) the power generation sector, and (ii) the non-power generation sector. Industry classification will be based on business sites operated by the designated companies, with the classification criteria further detailed – primarily using the three-digit Korean Standard Industrial Classification (“KSIC”) code, but also utilizing the four-digit code if the three-digit code corresponds to a non-carbon leakage industry.

Total Emission Allowances: The total amount of emission allowances (the “Total Emission Allowances”), which represents a reduction of approximately 16.8% compared to Phase 3, has been set to ensure a linear reduction from 2026 to 2030. This is designed to facilitate the achievement of the 2030 Nationally Determined Contribution (“NDC”), while considering the scope of coverage of the emissions trading system.

The Total Emission Allowances amount to 2,537,295,393 tons (calculated separately for the power generation sector and the non-power generation sector).
The components of the Total Emission Allowances include:

(i)	Advance Allocations: Approximately 795.75 million tons for the power generation sector and about 1,567.22 million tons for the non-power generation sector, totaling about 2,362.98 million tons of emission permits allocated in advance;

(ii)	Reserve for Other Uses: A reserve of approximately 89.04 million tons for other uses; and

(iii)

Reserve for Market Stabilization: A reserve of approximately 85.28 million tons for market stabilization purposes.

The annual advance allocations for both the power generation and non-power generation sectors are set on a linear path, taking into account the reserves for other uses and market stabilization.
Additionally, separate from the Total Emission Allowances, there is an additional reserve of 20 million tons designated for market creation and liquidity management.

Preliminary Reserve: A key distinction between Phase 3 and Phase 4 is that the Total Emission Allowances now include a reserve for market stabilization. The operation method of the Korean Market Stability Reserve (the “K-MSR”) is planned to be designed through future amendments to the Emission Permit Trading Act, considering both quantity-based and price-based approaches.

Volume Allocated to Each Company: Each company’s allocation is determined on a site-by-site basis, calculated by multiplying the recognized application amount for each compliance year, by an adjustment factor. Please note that performance of reduction projects can also be added. Specifically, internal reduction performance and renewable energy usage are limited to those subject to the grandfathering (“GF”) application, but fuel consumption reduction projects within the scope of the fuel benchmarking (“BM”) are also included in the addition of reduction performance.

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Expansion of Paid Allocations and BM Allocations

Expansion of Paid Allocation Ratio: Compared to Phase 3, the increased paid allocation ratio will be applied differentially by sector and industry in Phase 4.

For the power generation sector, the paid allocation ratio will gradually increase from 15% in 2026 to 50% in 2030 (i.e., 15% in 2026, 20% in 2027, 30% in 2028, 40% in 2029 and 50% in 2030).
For the non-power generation sector, the paid allocation ratio will increase to 15%, except for industries deemed at risk of carbon leakage and special industries, which will continue to receive free allocations in Phase 4.

Allocation Methods: The application scope of the emission efficiency-based allocation method (i.e., the BM allocation method) has been expanded compared to Phase 3, adding some emission activities from the semiconductor and display industries, as well as nitric acid and quicklime manufacturing to the BM application targets. BM coefficients will be gradually strengthened from the average emission efficiency level in 2026 to the top 20% level in 2030, considering the pace of the industry’s reduction efforts. Meanwhile, to prevent windfall gains for those under the GF allocation method due to the increase in BM coefficients, annual allocation coefficients will be applied to all GF targets to enhance fairness.

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Relaxation of Restrictions on Carryover and Borrowing and Strengthening of Criteria for External Project Approval

Approval criteria for external projects have been strengthened. Only projects that started after the domestic enforcement date of the Paris Agreement on December 3, 2016 (existing projects will continue to be recognized) and are not otherwise subject to legal requirements are accepted. For foreign projects, approval criteria have been strengthened by limiting eligibility to those projects that can be used toward the 2030 NDC international reduction achievements (37.5 million tons) recognized by the government.

2.	Key Details of Amended Emission Permit Trading Act

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Matters Related to Phase 4 Allocation Plan

Establishment of Allocation Plan: The number of emission permits carried over from the previous phase or expected to be carried over will be considered when determining the amount of the reserve. Additionally, legal grounds have now been established to cancel the designation of a business entity eligible for allocation if its emissions decrease significantly and fall below the standards set by the Presidential Decree.

Free Allocation Criteria for Sectors with Carbon Leakage Concerns: The standard for determining entities eligible for allocation will change from the “business unit” (Phase 3) to the “business site” (Phase 4). Additionally, the “cost occurrence” item in the calculation formula for free allocation determination for sectors with carbon leakage concerns has been replaced with “carbon intensity,” which does not consider emission permit prices.

Change in External Project Approval Criteria: To enhance the reliability of external projects, status surveys conducted by the competent authority will now include external project operators.

(2)

Measures to Enhance Effectiveness of Korea Emissions Trading System (“K-ETS”)

Establishment of Total Free Allocation Ratio: When establishing allocation plans, the Total Free Allocation Ratio (i.e., the ratio of emission permits allocated free of charge within the Total Emission Allowances) must be determined for each period. However, the Total Free Allocation Ratio will be explicitly specified starting with the Phase 5 allocation plan.

Other Matters: The legal cap on administrative surcharges imposed for failure to submit emission permits (100,000 KRW/ton) has been removed. In addition, new provisions have been introduced to strengthen management and supervision for the healthy operation of the emission permit market, such as prohibitions on unfair profit-making (e.g., through price fluctuations or price-fixing), thereby promoting effective greenhouse gas reductions.

Through the recently finalized Phase 4 Allocation Plan and the amended Emission Permit Trading Act, the government aimed to address the sharp decline in emission permit prices caused by (i) the excessive supply of emission permits accumulated over the first three phases, and (ii) the lack of supply-demand adjustment mechanisms in the emission permit market. The government sought to restore balance by (i) addressing criticisms regarding the K-ETS’s limitations in reducing carbon emissions and its overall effectiveness, and (ii) simultaneously introducing transitional measures that take into consideration industrial burdens (e.g., the gradual expansion of paid/BM allocations and the relaxation of restrictions on the carryover/borrowing of emission permits).

Meanwhile, the industrial sector appears concerned that these policy changes could lead to increased industrial electricity rates due to higher emission permit prices, thereby exacerbating the already difficult economic situation. Accordingly, follow-up measures to strengthen the greenhouse gas reduction inducement function of the K-ETS and establish a timely government response system will continue even after the finalization of the Phase 4 Allocation Plan. Discussions on easing the burden on industries facing declining competitiveness concerns are also expected to continue, making it necessary for companies to closely follow these discussions and trends in institutional improvements.

[Korean Version]

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