South Korea's $747 Billion Test of Transition Finance

Picture the board of a steelmaker deciding whether to replace a blast furnace. The new plant will run for thirty years or more. Whether it ever makes money depends on four things: the price of electricity, whether low-emissions hydrogen arrives in volume at a workable price, whether a process never run at full scale actually works, and whether anyone will pay more for the steel. Together they make an enormous project close to unfinanceable.

 

South Korea wants to solve that problem for its whole industrial base. On October 7, President Lee Jae Myung's government unveiled the Korean Green Transformation strategy, or K-GX, a ten-year plan to put public money and state lending behind its heaviest emitters. The question is whether the state can remove enough uncertainty that companies and commercial banks will invest at a scale they would never reach alone.

 

The headline figure is KRW 1,000 trillion, about $747 billion, spread over ten years from 2026 to 2035. It combines approximately KRW 200 trillion in planned fiscal spending with more than KRW 790 trillion in climate finance from five policy financial institutions. The financing target was first announced by the Financial Services Commission in February 2026 and subsequently incorporated into K-GX. Companies have separately announced approximately KRW 220 trillion in planned green-transition investments. These are different forms of financial commitment, and the amounts should not be treated as equivalent government expenditure or necessarily additional, non-overlapping investment. Most of the climate finance is lending and guarantees, and loans have to be repaid, so the projects behind them have to produce cash.

 

The sectors in scope explain why Korea is trying. Manufacturing produces more than a quarter of GDP, one of the highest shares of any developed economy. K-GX targets five heavy emitters: steel, petrochemicals, cement, refining, and semiconductors and displays. POSCO's domestic operations reported approximately 69.8 million tonnes of Scope 1 and 2 greenhouse gas emissions in 2025, illustrating the scale of the industrial transition challenge. Seoul has committed to reducing net greenhouse gas emissions by 53 to 61 percent below 2018 levels by 2035, following a reduction of approximately 12 percent between 2018 and 2024.

 

Why banks hesitate

 

Banks are good at financing things that have been done before, like a solar farm whose output can be modelled. The first commercial hydrogen steel plant in any country is a bet on performance data that does not yet exist. Its payback runs longer than most loans. Its operating costs depend on power and hydrogen prices nobody can forecast twenty years ahead. Demand for premium steel is thin, and carbon policy can change with each election.

 

So a bank may happily lend to POSCO as a company, because its balance sheet is strong, and still refuse to finance a specific plant whose technology and revenue risks it cannot price. Projects with credible plans stall at the final investment decision. Chey Tae-won, chairman of both SK Group and the Korea Chamber of Commerce and Industry, described this problem at the launch. He said companies had hesitated to undertake investments lasting decades because technology, markets and policy remained uncertain, leaving businesses to bear substantial risks on their own.

 

The missing ingredient is predictable technology, policy and revenue risk. That is why the design of public support matters as much as the size of the cheque.

 

The machinery

 

Most of the money flows through five policy financial institutions. Korea Development Bank, the Export-Import Bank of Korea and Industrial Bank of Korea provide banking services, while Korea Credit Guarantee Fund and Korea Technology Finance Corporation are guarantee institutions. By July 2026 they had supplied KRW 42 trillion in climate finance, 74.1 percent of the 2026 annual target.

 

State capital can lend for longer and more cheaply. Guarantee institutions could play an important role by reducing risks for commercial lenders and encouraging their participation. However, guarantees create contingent liabilities for public institutions, meaning taxpayers may ultimately bear some losses if supported projects fail.

 

A second requirement is a workable definition of what qualifies as transition finance. Green taxonomies establish criteria for environmentally sustainable activities and can include certain transitional activities. However, existing classifications have not always provided sufficient guidance for financing the gradual decarbonisation of emissions-intensive industries. South Korea's 2026 transition-finance guidelines aim to address that gap through taxonomy-based eligibility and sector decarbonisation pathways.

 

The Financial Supervisory Service plans to finalise working-level best-practice guidelines for transition finance by the end of October 2026. Separately, the Ministry of Trade, Industry and Resources is developing decarbonisation roadmaps for five emissions-intensive industries, with regulators exploring how these pathways can inform transition-finance eligibility. On August 25, Korea Credit Information Services formally launched a climate-finance web portal to help financial institutions assess projects against the K-Taxonomy and access relevant company information. That infrastructure determines whether banks can offer transition-finance products at scale or must assess each loan individually.

 

For 2027, the Ministry of Climate, Energy and Environment is preparing financial support for eligible green and transition investments, including interest subsidies for loans and bonds and guarantee assistance. The government has also indicated that expected emissions reductions should inform financing support, although the precise terms of the proposed programme have yet to be finalised. In June 2026, Woori Bank, NH NongHyup Bank and Korea Technology Finance Corporation agreed to support green policy financing for smaller and mid-sized companies. Eligible businesses can receive differentiated interest subsidies and preferential rates according to company size and assessed greenhouse gas reductions. Tying financing terms to expected emissions reductions makes sense in principle, because it links support to the outcome it is intended to deliver.

 

The effectiveness of emissions-linked financing will depend on whether projected reductions are verified after investments become operational. South Korea is developing systems for post-financing monitoring, but the consistency of project-level verification and the consequences of missing reduction targets will show whether the new arrangements work. Oh Il-young, a senior official at the Ministry of Climate, Energy and Environment, cautioned that it would be difficult to attribute a precise proportion of the national emissions target to climate finance alone. He also indicated that the emissions-reduction performance of supported projects would be assessed.

 

Why steel matters most

 

Steel will be one of the clearest tests of whether K-GX works. POSCO's HyREX process is the national flagship. It reduces fine iron ore with hydrogen in a reactor developed from the company's FINEX technology, then melts the iron electrically. POSCO is developing a HyREX demonstration facility at Pohang with an annual production capacity of 300,000 tonnes, targeting completion in 2028. The company aims to establish the technology needed for commercialisation by 2030. Separately, the government's wider K-GX strategy envisages commercial-scale deployment around or after 2037. The distinction matters: proving the technology at demonstration scale is different from operating hydrogen-based steelmaking commercially across the industry.

 

Getting there needs several things to go right at once. The process has to perform at scale. The reliable supply of affordable clean hydrogen and electricity may prove as challenging as the technology's commercial deployment. The pipelines and grid links have to exist. Someone has to sign long-term contracts to buy the steel.

 

Each participant can carry a different part of the risk. Public grants may support technology demonstration, while policy loans and guarantees can help reduce financing risks during construction. Commercial lenders may participate where project economics and expected revenues are sufficiently credible. Long-term purchasing agreements with customers such as carmakers and shipbuilders could provide an important source of revenue certainty.

 

A green-steel plant can qualify as transition finance under every Korean definition and still not be bankable. Cheaper debt trims the cost of capital. It cannot close the gap between hydrogen-based and conventional steel if the gap is wide and nobody pays to cover it.

 

Who buys the steel

 

Demand creation remains a critical challenge for K-GX. South Korea has recognised the need for low-carbon product standards and green purchasing policies, but the extent to which these measures will translate into bankable customer commitments remains uncertain. A bank weighing a loan for a low-carbon steel or cement plant wants to know who will buy the product, and at what price, for the life of the loan.

 

POSCO Holdings President Lee Ju-tae emphasised the need for affordable clean energy and a market that recognises the economic value of low-carbon steel. POSCO also called for standards defining low-carbon steel and green purchasing policies to support the development of a broader decarbonised industrial ecosystem.

 

Carbon pricing is another part of the investment equation. South Korea's emissions trading system has operated since 2015, and allowance prices have risen substantially from the levels seen in 2025. KAU26 allowances closed at KRW 29,550 per tonne on October 7, 2026. Under the fourth allocation period, power-sector auctioning will increase from 15 percent in 2026 to 50 percent by 2030, compared with 10 percent in the previous phase. Major trade-exposed industries, including steel, continue to receive free allocations, meaning the direct financial pressure on industrial investment depends on allocation rules as well as the market price of allowances.

 

Targeted tools work on demand directly. Japan provides eligible producers with a tax credit of ¥20,000 per tonne of qualifying green steel produced and sold, subject to conditions under its strategic domestic production incentive and a cap of 40 percent of annual corporate tax liability. Germany signed its first carbon contracts for difference in October 2024, committing up to €2.8 billion over 15 years to cover 15 companies' extra cost of cleaner production. South Korea has already indicated that it will consider carbon contracts for difference: the climate ministry is designing a Korean scheme, and a support programme has been proposed in the 2027 climate budget. Their effectiveness, like that of procurement rules and product standards, will depend on whether they provide enough revenue certainty for commercial-scale investment.

 

Europe provides another incentive for industrial decarbonisation. The EU's Carbon Border Adjustment Mechanism entered its definitive phase on January 1, 2026, introducing carbon-related obligations for relevant imports, including steel. Certificate purchases begin in 2027 for 2026 imports. For Korean exporters, the mechanism creates both additional compliance costs and a potential competitive advantage for products with lower embedded emissions.

 

Japan and Europe

 

Japan's GX programme is the obvious comparison. Tokyo is issuing about ¥20 trillion of transition bonds over ten years to help draw out more than ¥150 trillion of public and private investment. It began in February 2024 with what it called the world's first sovereign transition bonds. Public money is the down payment; companies are expected to supply most of the rest.

 

Europe's Innovation Fund uses revenues from the EU Emissions Trading System to support innovative low-carbon technologies, with potential funding estimated at around €40 billion over 2020 to 2030, based on an assumed carbon price of €75 per tonne. Its European Hydrogen Bank runs auctions in which producers bid for a fixed premium per kilogram, paid for up to ten years, so competition rather than officials sets the price of support.

 

Comparing headline totals reveals little, since a yen raised by bond and a won lent by a policy bank carry different costs and risks. What the programmes share is a premise: governments now treat heavy-industry decarbonisation as an investment problem that markets will not solve fast enough alone.

 

Keeping score

 

The case against extensive public risk-sharing is serious. Seoul has committed to directing at least 70 percent of policy climate finance towards small and medium-sized and mid-sized enterprises, while also prioritising investment outside the capital region. These measures could support decarbonisation across industrial supply chains. However, the largest industrial emissions are concentrated in energy-intensive production facilities operated by major companies. The challenge is ensuring that financing reaches investments capable of delivering additional emissions reductions, regardless of company size, without disproportionately subsidising projects that could have proceeded commercially.

 

Transition labels can also be too loose. When South Korea issued its K-Taxonomy guidelines in December 2021, it conditionally included LNG-fired power generation within its transitional category, subject to specified requirements. Environmental organisations criticised the decision, warning that the inclusion of fossil gas could undermine the credibility of the framework.

 

Long-term guarantees create contingent liabilities for public institutions. Even when they do not require an immediate cash outlay, they expose the state to future financial losses if supported projects fail. And additionality is hard to police. If a large steelmaker could have secured commercial financing without public support, providing cheaper policy finance may simply replace private investment rather than enable additional emissions reductions. Assessing additionality will therefore be as important as measuring the volume of financing supplied.

 

K-GX should be judged against a scorecard published before more money moves:

• verified emissions reductions against credible baselines, independently assessed after supported projects become operational

• additional private capital mobilised because of public support, reported project by project and distinguished from financing that would have occurred anyway

• the share of supported projects that reach commercial operation

• how long each project needs subsidy before it stands alone

• consistency with the sector pathways the industry ministry is now drafting

• who absorbs the losses if a project fails, stated in advance

 

If the answer is always the policy bank, and so the taxpayer, market discipline has quietly gone. A large volume of climate lending proves that money moved. It does not prove that industry decarbonised.

 

Go back to that steel board. Two things would change its decision: a public lender willing to carry the construction risk, and a customer willing to sign a ten-year contract at a price that covers the cost. K-GX establishes a substantial public-finance framework intended to reduce investment risk, but that does not mean construction financing has been secured for every project. The government and industry have also recognised the need for stronger demand for low-carbon products. Those efforts still have to produce long-term purchasing commitments and commercially sustainable revenues. Without that, cheaper finance may reduce the cost of building a plant without resolving the economics of operating it.

 

If K-GX works, hydrogen-based steel will leave Pohang in commercial volumes and show up as a fall in the national emissions inventory. Banks and customers will take more of the risk with each new project until the policy lenders can step back. If the state is still underwriting every deal in 2036, K-GX will have demonstrated persistent dependence on public support rather than a successful transition to commercially financed investment. Success should be measured by how much private capital arrives once the early risks are absorbed, and how much public capital is needed to mobilise each won of private investment.

 

Sources

K-GX figures come from the government's 7 October briefing as reported by the Korea Herald, Financial News and Nocut News. Climate-finance and transition-finance details draw on Financial Services Commission updates reported by Smart Today and Dealsite, while steel and HyREX details come from POSCO, Hankooki and MTN. Carbon-market figures are from Korea Exchange data, Money Today and The Fact, and the international comparisons from METI, the European Commission, Germany's economy ministry and PwC.