Korea has negligible fossil-fuel resources and imports all but 1% of its coal supplies, 1% of its oil, and less than 1% of its natural gas. Including nuclear power, just 16% of the country’s energy needs are met from indigenous sources. It is the fifth net importer of natural gas in the world as well as the fifth-largest net importer of oil. It has the sixth largest refinery capacity in the world, making it the fifth largest exporter of petroleum products since 2017.
OECD Inventory of Support Measures for Fossil Fuels: Country Notes
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Korea
Energy resources and market structure
Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).
There is significant state ownership in Korea’s energy industry. The natural-gas, electricity and district-heating sectors remain primarily under public ownership. The state-owned Korea National Oil Corporation (KNOC) is responsible for Korea’s strategic oil reserves, as well as for the exploration, development, and production of oil and natural gas within and outside of the country. The downstream oil industry and coal mining have been largely privatised.
The Korea Gas Corporation (KOGAS), a state-owned and operated company, holds a monopoly on natural-gas imports, transmission, and wholesale supply, though some companies are allowed to import gas directly for their own use. The retail market is made up of more than 30 city gas companies. Moves to privatise and deregulate the sector and open the wholesale and retail markets to competition are currently under consideration.
Korea produces very small amounts of coal; in 2021 the country produced approximately 900 000 metric tonnes of coal. Korea has steadily decreased its production of coal from the over two million metric tonnes used in 2012. As most coal is imported, the government encourages Korean companies to develop overseas energy projects; in 2015, the Korea Resources Corporation (KORES) and private Korean companies were involved in more than 50 overseas bituminous-coal projects. Korea Mine Rehabilitation and Mineral Resources Corp., officially formed on 10 September 2021, merged Korea Resources Corporation (KORES) and Mine Reclamation Corporation (MIRECO). Its name was shortened to KOMIR and the organisation focuses on managing supply chain risks for key metals.
Korea’s electricity industry is dominated by the Korea Electric Power Corporation (KEPCO). In 2001, the state-owned Korea Power Exchange (KPX) was established. Currently KEPCO’s six power-generation subsidiaries, which control about four-fifths of the country’s capacity, and independent producers sell their output into a power pool, where KEPCO is the sole buyer. After shelving plans to privatise the company in the early 2000s for the five thermal-generation companies to be privatised, the government announced in mid-June 2016 its intention to list the subsidiaries on the stock market, with a cap of 20% to 30% on private ownership in order to retain public control.
Energy prices and taxes
Natural-gas and heat prices are controlled directly by the Ministry of Trade, Industry and Energy (MOTIE). In the electricity sector, the Electricity Commission (KOREC) is responsible for regulating the KPX and final electricity tariffs. The wholesale and retail prices of oil are completely deregulated. While the price of bituminous coal is unregulated, the wholesale prices for domestically produced anthracite coal and briquettes are set by the government as part of a subsidy to support uneconomic mining.
Korea has a wide range of taxes levied on fuels. In addition to the 10% flat VAT rate applicable on all sales of fuels and energy services, excise taxes are levied on oil products and gas sales to both households and businesses. As of July 2018, there have been four main taxes: individual consumption tax, education tax, the so-called Transportation-Energy-Environment tax, and the local automobile tax which are sales charges included in the final retail price for transport fuel. Electricity is subject to an electric power industry base fund contribution, whose rate is limited by law to 6.5% of ex-tax electricity prices. The current rate is at 3.7%, with the revenue earmarked for the development of renewable energy project, demand-side management, and R&D projects in the electricity sector.
Figure 2. Total tax rebates and support for fossil fuels in Korea
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Recent developments and trends in support
The bulk of support for the consumption of fossil fuels in Korea can be attributed to the tax exemptions for fuels used in the agriculture and fisheries sectors, although their value has decreased substantially. Due to uneconomic mining, the Korean government has been supporting domestic coal production for decades. Support for anthracite mining has been provided in various ways, including through market price support, subsidies for acquiring capital equipment, subsidies for the exploration of coal resources, and support for coal miner welfare programmes and social liabilities. It has undergone cuts in the last decade, with programmes providing capital injections closing in the early 2000. Similarly, coal-briquette production is supported through the direct subsidisation of unit costs for manufacturing and supporting the freight costs of producers. This support is expected to decrease until its removal in 2020 in line with Korea’s 2009 G-20 Pittsburgh commitments.
In the wake of the COVID-19 pandemic, the Korean Presidency announced its pledge to become carbon neutral by 2050, which includes, among others, earmarking multi-billion funding support for the commercial development of large-scale carbon capture utilisation and storage technologies. Also under this pledge is a plan to phase out domestic and overseas coal financing by public institutions. By contrast, there were announcements of a USD 2 billion worth of bailouts to the country’s biggest coal plant manufacturer, the Doosan Heavy Industries and Construction, which is mainly involved with exporting coal plants overseas.
In answer to the global energy price crisis, the government implemented several measures to limit the rise in domestic retail energy price. Taxes on gasoline, diesel and LPG were reduced by 20% from 12 November 2021 to end April 2022; these tax reductions were then increased to 30% until July 2022, and to 37% until the end of 2022. Import tariffs on LNG were removed from November 2021 to March 2023 and income tax reductions for public transport expenses were doubled (to reach 80% of expenses) in the second half of 2022.
The government also froze gas tariffs from November 2021 to March 2022 through the state-owned Korea Gas Corporation Company. In the framework of its 2022 Budget, the government dedicated additional resources to cushion vulnerable households from the repercussions of the global energy crisis. The vouchers were direct support for energy expenses ― for electricity, gas, LPG, and heating fuels/sources ― and targeted approximately 1.2 million households. This support was increased twice in 2022 to boost energy vouchers amounts; the first increase was from KRW 127 000 KRW to KRW 172 000, and the second was from KRW 172 000 to KRW 185 000.
The fiscal cost of support measures for fossil fuels in Korea was estimated to be KRW 9635.93 billion in 2022 (Table 1). Ninety-eight per cent (98%) was directed at end user beneficiaries, as opposed to 2% directed to firms. Support was mainly given out in the form of tax expenditures (KRW 9396.11 billion) accounting for 98% of the total fiscal cost of support measures. Direct transfers amounted to KRW 239.82 billion.
The fiscal cost of support measures for fossil fuels has increased by 484% since 2017. Since 2022, tax expenditures have increased by 466%, from KRW 2756.74 billion to KRW 9396.11 billion, and direct transfers increased by 8%, from KRW 222.90 billion to KRW 239.82 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 1. Fiscal cost of support measures for fossil fuels (in billions of national currency)
|
|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|---|---|---|---|---|---|---|
|
Tax expenditures |
1366.317 |
1379.614 |
1398.717 |
1425.658 |
2756.742 |
9396.106 |
|
Direct transfers |
283.049 |
234.381 |
234.999 |
199.532 |
222.900 |
239.820 |
|
Total |
1649.366 |
1613.995 |
1633.715 |
1625.190 |
2979.642 |
9635.926 |
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Table 2. Selected support measures for fossil fuels with a large fiscal cost (in billions of national currency)
|
Measures associated with large fiscal cost in 2022 |
2022 |
2017 |
Variation since 2017 |
|
|---|---|---|---|---|
|
Tax expenditures |
|
|||
|
Temporary fuel tax cut in some petroleum products |
7739.615 |
(Started 2021) |
7739.615 |
|
|
Fuel Tax Exemptions for Fisheries |
745.865 |
707.000 |
38.865 |
|
|
Fuel Tax Exemptions for Agriculture |
707.010 |
642.772 |
64.238 |
|
|
Direct transfers |
||||
|
Energy vouchers |
80.775 |
(Started 2022) |
80.775 |
|
|
Coal Mining Inherited Social Liabilities (Welfares) |
73.190 |
90.958 |
-17.768 |
|
|
Support for Coal Briquette Production (Manufacturing Cost) |
22.021 |
97.016 |
-74.995 |
|
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 3. Description of selected support measures for fossil fuels
|
Temporary fuel tax cut in some petroleum products |
Seoul first introduced the automotive fuel tax cut on 12 November 2021, reducing taxes on diesel and gasoline by 20% until 30 April 2022. The ministry then extended the duration of the policy and raised the scale of the tax cut to as high as 37%, effective 31 December 2022. Seoul decided last December to extend the duration of the tax cuts once again until end-April, though the scale of the tax cut for gasoline was lowered to 25% over January-April from the previous 37% cut. The tax reduction rate of 37% remained applicable for diesel. The government has been introducing measures to boost consumer confidence and private spending as the economy struggles to cope with high inflation and lackluster goods and services exports. The government also plans to hand out around USD 100 worth of cash-equivalent coupons to employees of small businesses for their domestic holiday travel and accommodation. The government decided to extend 20% tax cuts on gasoline, diesel, and liquefied petroleum gas (LPG) and 0% quota tariff for liquefied natural gas (LPG) from November 2021 until Apr 2022. In March 2022, the government announced to extend the program until July 2022. The tax cut is equivalent to a reduction of KRW 164/litre of gas and KRW 116/litre of diesel. In May, the government increased the temporary fuel tax cut on gasoline, diesel, and liquefied petroleum gas from 20% to 30%. In July, the government increased the temporary fuel tax cut on gasoline, diesel, and liquefied petroleum gas from 30% to 37% and extended it until the end of 2022. |
|
Fuel Tax Exemptions for Fisheries |
This measure dates to 1972 and is similar in principle to the fuel-tax exemptions benefitting agriculture in Korea (see “KOR_te_01”), except that it was introduced earlier and applies to the fisheries sector. Certain coastal passenger ships are also eligible for the exemptions provided that the fuel they use is supplied directly to the Korea Shipping Association. |
|
Fuel Tax Exemptions for Agriculture |
This provision was introduced in 1986 to exempt farmers from the various indirect taxes that are usually levied on sales of petroleum products in Korea. The country’s end-user prices for motor fuels comprise several layers of taxes, such as the regular VAT (10%), the education tax, and an array of transport taxes (the so-called traffic, energy, and environmental taxes). In the case of heavy oil, kerosene, and LPG, an “individual consumption” tax is levied in lieu of the transport taxes. |
|
Energy vouchers |
In the framework of its 2022 Budget, the Korean government will dedicate additional resources to cushion vulnerable households from the repercussions of the global energy crisis. The vouchers are direct support for energy expenses, for electricity, gas, LPG, and heating fuels/sources, and target around 1.2 million households. This support increased twice during the year, to boost energy vouchers amounts, first from KRW 127 000 KRW to KRW 172 000, then from KRW 172 000 to KRW 185 000. |
|
Coal Mining Inherited Social Liabilities (Welfares) |
The policies included under this general heading comprise government funding for helping former coal miners by way of welfare programmes, the treatment of pneumoconiosis (i.e. the so-called “black-lung disease” that affects coal miners), accident-compensation insurance, and elementary education and scholarship funds for miners’ children. Some support is also provided to alleviate the economic and social impacts of mine closures. |
|
Support for Coal Briquette Production (Manufacturing Cost) |
Government support for the production of coal briquettes in Korea is provided in several different ways and reporting a complete breakdown would not be practical. For that reason, this inventory groups together several measures under the same general heading of “Support for Coal-Briquette Production”. These various measures generally involve the direct subsidisation of unit costs for manufacturing and freight incurred by producers of coal briquettes. Support is expected to be phased out progressively and terminated by the end of 2020 as indicated in Korea’s submissions to the G-20 under the 2009 Pittsburgh commitment to phase out “inefficient fossil-fuel subsidies that encourage wasteful consumption.” |
Data sources
Note on the Methodology
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.