On December 31, 2024, the government finalized the Basic Plan for Phase 4 of the Korea Emissions Trading Scheme (“K-ETS”), outlining key directions to enhance the scheme’s effectiveness, including the expansion of paid allocations and benchmark (“BM”) allocations.

Based on these key directions of the Basic Plan, the MOE announced the key details of the “Plans to Allocate National Emission Permits for Phase 4 (2026-2030) (the “Phase 4 Allocation Plan”)” at a public hearing on September 12, 2025, and at a second briefing session on September 30, 2025. This plan was finalized following recent deliberations by the Allocation Committee, the Carbon Neutral Committee, and at a cabinet meeting. In addition, for the implementation of the Phase 4 Allocation Plan, a partial amendment to the Act on Allocation and Trading of Greenhouse-Gas Emission Permits (the “Emission Permit Trading Act”) – which reflects necessary legal revisions and other system improvement measures – 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.
 

• The Total Emission Allowances is 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:

• 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 (“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.
 

• Performance from 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 BM are also included in the addition of reduction performance.

• Additionally, for internal or external projects to be recognized as reduction performance when calculating company-specific allocations, they must comply with the methodologies specified by the Clean Development Mechanism (“CDM”) and external projects.
   

• For the power generation sector, the paid allocation ratio will gradually increase from 15% in 2026 to 50% in 2030 (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 carbon leakage risk industries and special industries, which will continue to receive free allocations in Phase 4.
   

Expansion of Corporate Support Measures: As revenue is expected to increase due to the expansion of paid allocations during Phase 4, the support system for industry-wide reduction efforts will be strengthened. This includes funding for reduction-related R&D aimed at achieving carbon neutrality, as well as reinvestment in corporate reduction activities. Following the recent reorganization of government functions, the Ministry of Climate, Energy, and Environment will manage both the Climate Response Fund and the Power Industry Infrastructure Fund. Large corporations will be included as beneficiaries of these funds, and the Korean Carbon Contract for Difference (“CCfD”) system will be established to support large-scale reduction projects as well.
 
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 industry’s pace of reduction efforts. Meanwhile, to prevent windfall gains for those under the previous emission-based allocation method (i.e., the GF allocation method) due to the increase in BM coefficients, annual allocation coefficients will be applied to all GF targets to enhance fairness.
 

The government explains that the recently finalized Phase 4 Allocation Plan is intended to address issues such as the sharp decline in emission permit prices (caused by the excessive supply of emission permits accumulated over the first three phases) and the lack of supply-demand adjustment mechanisms in the emission permit market. It achieves this by incorporating the directions outlined in the Fourth Basic Plan—namely, enhancing fairness among participating companies and setting a stricter total permissible emission cap—with the goal of strengthening companies’ incentives to invest in greenhouse gas reduction. The Phase 4 Allocation Plan appears to strike a balance by reflecting calls for greater effectiveness, while simultaneously introducing transitional measures that consider industrial burdens (such as the gradual expansion of paid and BM allocations and the relaxation of restrictions on the carryover and borrowing of emission permits).
 
The low price of emissions allowances has been identified as a major cause of the diminished effectiveness of greenhouse gas reduction measures. The government appears to have accounted for the surplus emission permits accumulated from the previous three phases (due to oversupply) when setting the Total Emission Allowances for Phase 4. In other words, the number of emission permits is set to decrease linearly to ensure there are no obstacles to achieving the 2030 NDC goals. Furthermore, the “reserve for market stabilization purposes” has been incorporated within the total allowable emissions. A legal framework has been secured to ensure that the number of emission permits carried over from the previous phase is considered when setting the market stabilization reserve included in the Total Emission Allowances.
 
The government is expected to pursue the amendment of subordinate legislation containing detailed provisions of the recently amended Emission Permit Trading Act as a follow-up to this allocation plan. 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 concerned about declining competitiveness are also expected to continue, making it necessary for companies to closely monitor these discussions and trends in institutional improvements.
 
Companies should promptly understand and analyze these institutional changes to respond meticulously to the forthcoming applications for emission permit allocation. In particular, since amendments to the laws regarding the K-ETS may act as an additional cost factor during Phase 4, companies must thoroughly analyze the anticipated impacts and respond accordingly.

[Korean Version]