A recent analysis by the Bank of Korea indicates that achieving carbon neutrality by 2050 could result in a reduction of up to 10.2% in the country's gross domestic product (GDP) compared to existing growth trajectories. While delaying greenhouse gas reductions may lessen initial economic burdens, it could lead to concentrated growth shocks around 2050. The transition to carbon neutrality is estimated to require an investment of approximately 840 trillion won.
According to the Bank of Korea's issue note titled 'Economic Impact of Carbon Neutrality Pathways,' released on October 28, the GDP in 2050 is projected to decrease by 10.2% under a linear reduction scenario and by 8.2% under an early reduction scenario, compared to a baseline scenario without additional carbon reduction efforts.
The analysis compares two pathways: a linear reduction path that aims for a 53% reduction in greenhouse gas emissions by 2035 compared to 2018 levels, and an early reduction path targeting a 61% reduction. Both pathways achieve carbon neutrality by 2050, but they differ in the timing of economic burdens associated with emissions cuts.
The early reduction path, characterized by stringent emission regulations, shows a relatively larger initial economic shock. However, as low-carbon technologies are developed and disseminated more rapidly, the burden is spread out over time. In contrast, the linear reduction path limits initial shocks but delays technology adoption, resulting in a larger GDP decline by 2050.
Under carbon neutrality policies, the average annual economic growth rate is expected to decrease by 0.06 to 0.07 percentage points until 2060, while the producer price inflation rate is projected to rise by an average of 0.04 percentage points. The analysis suggests that increased production costs due to stricter carbon regulations will likely lead to a decline in value-added in high-carbon manufacturing sectors such as refining, chemicals, cement, and steel.
The costs associated with the energy transition necessary for achieving carbon neutrality are substantial. From 2026 to 2050, cumulative investment needs in the energy supply sector are estimated at 839.4 trillion won for the early reduction path and 843.3 trillion won for the linear reduction path. Additionally, carbon prices are expected to surge from about $7 per ton in 2025 to between $1,352 and $1,488 by 2050.
However, it is noted that early reductions cannot be deemed unequivocally advantageous. The early reduction path requires annual investment demands in the energy supply sector to peak at 45.7 trillion won around 2035. This implies that substantial investments must be made, supported by technological advancements, to mitigate economic shocks effectively.
This study estimates only the economic costs associated with carbon neutrality policies and does not account for the benefits of reduced climate change damages. The Bank of Korea explains that previous research has estimated the growth rate improvement effects from climate change mitigation to be around 0.3 percentage points annually, surpassing the carbon neutrality costs analyzed in this report.
Kim Jae-yoon, head of the Bank of Korea's Climate Risk Analysis Team, stated, "While early reductions may result in slightly lower economic volatility, the scale of investment required for early reductions is quite challenging."
The analysis does not reflect the anticipated increase in electricity demand due to the government's three mega projects. Kim added that while transition costs in the power and energy sectors may rise between 2030 and 2035, long-term improvements in productivity and energy efficiency driven by AI could potentially reduce transition costs.
* This article has been translated by AI.
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