South Korea's net zero ambitions will potentially become a secondary issue in 2024 as it grapples with energy security, economic growth and geopolitical tensions, with a renewed focus on boosting export revenue from semiconductors, batteries and automobiles.
South Korea is seeking to "minimise the increase in national debt" by tightening the 2024 budget, although Seoul is allocating 75pc of the total budget to January-June 2024 to "revitalise" the economy, said the economy and finance ministry (Moef).
The final budget was confirmed at 656.6 trillion won ($500bn) in late December, lower by W300bn from the initial proposed budget in August. This was still a slight 2.8pc increase from the 2023 budget but remains the lowest year-on-year growth, said Moef.
"Energy security and economic security are increasingly on the mind of the Yoon administration," said Korea Economic Institute's senior director and fellow Troy Stangarone, pointing to the Israel-Hamas conflict in the Middle East and China's various export controls for urea, gallium/germanium and graphite as driving factors.
This has pushed South Korea to cut its reliance on Chinese supplies by boosting domestic capacity and securing supplies from other countries, such as graphite from Tanzania and Mozambique.
"In the medium to long term, South Korea needs to focus on supply chain diversity and lessen its dependence on China for key inputs and the Middle East for energy," Stangarone suggests. "This would entail an increased commitment to an energy transition to lessen South Korea's overall need for petroleum imports."
Differing strategy
But South Korea seems to be pursuing a different strategy for energy and decarbonisation. It has been expanding its connections with the Middle East, despite the Israel-Hamas conflict heightening regional security concerns.
Seoul in December 2023 signed free trade agreements (FTAs) with the six Gulf Co-operation Council countries, which will remove or reduce tariffs on items such as naphtha and natural gas. This comes after South Korea in October signed a bilateral FTA with the UAE, which will abolish a 3pc import tariff on crude for up to 10 years and halve a 0.5pc tariff on naphtha for five years. This is in addition to an agreement with Saudi Arabia's state-controlled Saudi Aramco to store 5.2mn bl of crude at South Korean state-owned KNOC's Ulsan storage facility.
South Korea also seems set to reprioritise net zero initiatives in the coming year, with less funding allocated to energy transition in its budget. The environment ministry (ME) previously proposed W14.4 trillion in August but the final budget has edged down by W107.4bn to W14.3 trillion. ME's energy transition funding also dropped by about 4pc in the final budget, with reduced funding for environmental industry and green infrastructure exports, as well as for zero emissions vehicle supplies.
Export push
South Korea's focus has instead switched to bolstering its exports to fuel economic growth. This also means an increased emphasis on key export sectors, such as semiconductors, batteries and automobiles, including electric vehicles (EVs).
This is reflected in the trade, industry and energy ministry's (Motie) 2024 budget, which was raised by W300bn above the proposed budget to W11.5 trillion, in contrast to the lower ME budget. Motie's 2024 budget is focused on "restoring economic vitality" as it boosts funding to stabilise the supply of energy and key minerals, as well as for export growth and attracting investment. The country also in mid-December unveiled a W38 trillion financial package to boost its battery sector's competitiveness, one of the latest in its series of support measures for the sector.
The country has also been strengthening trade relations with various countries in 2023, such as FTAs signed with the Philippines and an upgraded FTA with the UK, among others.
South Korea's export earnings hit $632.69bn in 2023, according to Motie, down by 7.4pc from a year earlier because of global higher interest rates and China's delayed economic recovery. This is largely in line with projections of $630bn, according to a report by Korea International Trade Association (Kita) on 30 November, which it attributed to a delayed global economic recovery, as well as lower information and communication technology demand. But export items such as EVs, batteries and cathode materials have emerged as new export growth engines, Kita added.
Kita forecasts export earnings to rise by 7.9pc from 2023 to $680bn in 2024, with products such as semiconductors driving overall growth. But it sees the global economy's growth remaining low in 2024 because of the Chinese real estate crisis, an economic downturn in the EU and continued monetary tightening in major countries.
Hydrogen uncertainty
South Korea's reprioritisation of net zero initiatives also calls into question its commitment to its hydrogen economy, especially with some potential infrastructure issues.
The country's hydrogen supply chain faces potential problems, with shortages at some hydrogen refuelling stations in November. This is in line with a Kita report released in August, which urged the country to allocate more funds towards solutions for hydrogen storage and transportation to avoid lagging behind other countries. South Korea's policies and research investments have been skewed towards promoting production and use of hydrogen, a move that has resulted in a gap in infrastructure developments, Kita added.
But hydrogen will remain a priority for South Korea, said Stangarone, especially given the country's agreement with Japan to jointly develop a hydrogen supply chain. The two countries in November strengthened ties to raise bargaining power and enhance energy security to achieve net zero greenhouse gas emissions by 2050.
But it remains unlikely that hydrogen will feature highly in the country's list of priorities, given the country's budget focus on economic growth. This is especially so in the lead-up to national assembly elections on 10 April 2024, which will further bolster political pressure to secure public support by ensuring energy security.
