South Korea's Turning Point How Climate Action Can Drive Our

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South Korea’s turning point How climate action can drive our economic future August 2021 South Korea’s turning point Contents

Contents

Foreword 4 We have a narrow window of Executive summary 6 time. The choices made today Leading the world toward a low-emission future 8 The cost of climate inaction 10 and over the next decade will Leading the way to a low-emission economy 11 determine our future. We have Decarbonization is a new economic engine 12 South Korea’s turning point 14 the opportunity to create a The economic costs of climate inaction 16 new engine for sustainable The new normal: a climate-damaged economy 18 The high costs of inaction 20 economic prosperity while Modeling climate inaction in South Korea 22 at the same time preventing The economic cost of climate change 26 the worst consequences of The economic gains of rapid decarbonization 28 A new economic climate 30 a warming world. South Korea’s turning point 36 The path to decarbonization 38 Deloitte Economics Institute Endnotes 40

Limitations of our work 42

Related content 42

Contacts 43

Acknowledgments 44

Deloitte Economics Institute 45

2 3 South Korea’s turning point Foreword

Foreword

Our planet is our most precious, asset and yet At Deloitte, we have set a bold target to reach net without dramatic efforts to address climate change, Addressing the climate crisis zero emissions by 2030. We are also empowering the world as we know it is at risk. creates huge opportunities our professionals, connecting with others, and engaging our broader ecosystem to create solutions No one is immune to the impact of climate change, for economic growth. that facilitate the transformation to a low-emission but for South Korea and Asia Pacific, this crisis also economy in Asia Pacific and globally. presents a clear opportunity: to lead the world This report discusses how this can be achieved and find the next wave of economic growth by We look forward to working with you to help prevent and quantifies South Korea’s potential gains. accelerating action to mitigate climate change. the worst consequences of a warming world and Our research challenges one of the main concerns realize the many opportunities presented by By taking bold action now, we can create a stopping governments, businesses, and individuals decarbonization. new engine for sustainable economic prosperity, from acting on climate change—the cost. It reframes while at the same time reducing the impacts the debate to show that what seems like a cost today of climate change. In doing so, we can leverage is an investment in a climate-driven transformation our leadership in the consumer economy and for a better future. advanced, manufacturing to supply the low- The choices we make today and over the next emission innovations, processes, and know- decade will determine whether the worst effects how the world needs. of climate change are locked in or avoided. We are at a turning point, and it is time to discover how Cindy Hook In Kyoo Baek South Korea and Asia Pacific can reshape the arc Chief Executive Officer, Through bold action now of economic history. But we can only do it if we do Deloitte Korea Group Deloitte Asia Pacific and in the decades that follow, it together and act now. Board Chair we could avoid the worst Deloitte Korea Group ESG Center Leader effects of climate change.

4 5 South Korea’s turning point Executive summary

MY 2040 Executive NO O GE C HAN TUR E D C NI TE NG 2050 D A P E IN O D I IZ R N O T

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B W summary S R Y - E A A M L

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M 2,300T

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A C T 2021 IO N 1.5ºC 2070

IN 2021 AC 2070 3ºC T IO

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D Y D -₩935T

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O V O I D S U N N C E T T O I V N I C I T E Y N O B D R A E IN C C G RE A AS ES ING TUR M TEMPERA A E D AT CLIM

6 7 South Korea’s turning point Executive summary

Leading the world toward Figure 1.1: Economic growth in South Korea is the trend in a 1.5ºC world a low-emission future 2025–2040 2040–2050 ecae a armi GE eivery HAN TUR imite t D C NI cimate ays TE NG rst imacts A P IN O D I cimate R N O T cae

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If left unchecked, climate change will impose steep At the center of our research is Deloitte’s W S Y - economic costs on South Korea. These costs will uniquely calibrated Regional Computable General E A M threaten the progress and prosperity the nation Equilibrium Climate Integrated Assessment Model, L P I

S has enjoyed in recent decades. But there is an the D.CLIMATE model. This model integrates the E S

T I

To 2025 O 2050

alternative path. economic impacts of physical climate change A N

into a baseline economic trajectory to overcome ai a M 2,300T ecarie

I ₩

Rapid reductions in emissions in South Korea and F L economic gain

the myopia of many current economic models. cimate U ut rea C

across the global economy, beginning now and T

By factoring the costs of climate change into the acti U a a L

continuing through this next critical decade, offer a R ecmy

baseline, our framework reveals the tremendous E way forward to a low-emission future. This potential B economic harms of inaction or inadequate action, future not only avoids the worst impacts of climate as well as the significant opportunities that present change, it also creates prosperous long-term themselves in transforming South Korea’s economy. economic growth for Asia Pacific and the world. A C T 2070 South Korea’s future is particularly bright in a 2021 IO decarbonized world that keeps warming within South Korea’s future is particularly N 1.5ºC r maitais 1.5°C of pre-industrial levels. The country is already armi a global pioneer in renewable energy and advanced bright in a decarbonized world 2021 imits ey IN r a manufacturing technologies. Now is the time to 2070 A that keeps warming within 1.5ºC 3ºC C mer a reorient economic structures to leverage this ut rea as T IO rserus et of pre-industrial levels. signiﬁcant loss complexity and reap the economic benefits of a N er uture low-emission future. ue t cimate

iacti

However, there is a need to pivot from seeing efforts D

to limit global warming as optional costs, and instead C I R

view them as necessary and new areas of economic R E

T A

opportunity. This will require quantifying the value S

S U

of climate change mitigation and the benefits that D D -₩935T

N can come from decarbonization. This report aims P economic loss I

R to achieve these goals. E O V I D S U imate cae N Emissi amaes C E itesive T T I V N ecmies I iustry remais I T miat Y N O B R A IN C C R EA S SIN RE G TEMPERATU Emissis icrease a averae temeratures

Source: Deloitte Economics Institute D.CLIMATE model. Note: South Korea's stylized economic loss pathway reflects global average warming aligned with the RCP 6.0 baseline. The stylized economic growth pathway reflects limiting global average warming to no more than 1.5ºC by 2050, in line with the current ambition of the Paris Agreement. 8 9 South Korea’s turning point Executive summary

The cost of climate inaction Leading the way to a low-emission economy

In the economic future Deloitte has modeled, South The result over the next half-century would Fortunately, the temperature changes and costs But time is of the essence. Policy and investment Korea and the rest of the world do not significantly be climate change–induced economic losses to described above are not fixed. Although some decisions made in the next several years will largely reduce emissions relative to current levels. This South Korea of approximately ₩935 trillion in degree of global temperature rise and climate shape the economy and climate that South Korea future has an emissions pathway that leads to global present value terms.a This lost economic potential impact is already “locked in” due to historical and the world inherit. This narrow window makes it average warming of more than 3°C by 2070. would total 2.5 percent of GDP lost in 2070 alone. emissions, there is an opportunity to take bold even more important to understand the economics action to enable economic prosperity and avert the of a warming world and incorporate them into This pathway would lead to economic losses of For comparison, the economic cost of the 2020 worst impacts of an altered climate. Supported by decision making that addresses the multiple market more than ₩232 trillion in present value terms monsoon season, which caused widespread flooding the right economic framework, these actions can failures of climate change. by 2050—or nearly 1.0 percent of South Korea’s and landslides and the loss of thousands of homes put South Korea—and the world—on a path to gross domestic product (GDP) in 2050 alone. On and businesses, appears small. The economic cost realizing strong, equitable, and shared growth. average over the 30 years to 2050, that is an annual of unchecked climate change in South Korea loss of 0.4 percent of GDP. would be equivalent to the 2020 monsoon South Korea is at the frontier of a new economic season occurring more than 2,500 times over era and the development of a new system of the next 50 years.1,2,3 production. By making the right choices now, it could chart a more prosperous path toward a low- emission future, accelerating progress in the rest of Figure 1.2: Economic loss in South Korea due to climate inaction the world by exporting key technologies, processes, and know-how.

₩ triion

Signiﬁcant losses to South Korea from climate change inaction and a 3ºC world, by 2070.

Source: Deloitte Economics Institute D.CLIMATE model.

a. Total net present value (NPV) of deviation loss to GDP in South Korea over the period to 2070, at a 2 percent discount rate. Refer to the Technical Appendix for a discussion on the selection and application of the discount rate.

10 11 South Korea’s turning point Executive summary

Figure 1.4: Four phases of action to achieve a decarbonized South Korea in a 1.5°C world

Decarbonization is a Transforming South Korea in a 1.5ºC world new economic engine 6

loss at 2025 loss at 2040 Our modeling shows that rapid decarbonization 3 could yield economic gains of approximately -0.1% -0.2% ₩ 2,300 trillion (in present value terms) for South RCP 6.0 explained 2 Korea’s economy by 2070. Compared to a world of RCP 6.0 is one of the emission scenarios climate inaction (the Representative Concentration used by the Intergovernmental Panel on 3.9% 5.1% Pathway (RCP) 6.0 baseline described below), South 1 Climate Change (IPCC). RCP 6.0 assumes Korea’s GDP would grow by an average of 2.2 a scenario where the global community gain at 2050 gain at 2070 percent per year over the modeled decades to 2070. largely fails to introduce significant 0 In 2070, that would equate to GDP growth of climate mitigation policies, making it an 5.1 percent and a gain in economic output of over appropriate baseline for forecasting the ₩295 trillion—equivalent to adding South Korea’s potential effect of inaction. The IPCC’s 2021 2030 2040 2050 2070 most valuable multinational conglomerate to the scenarios vary widely, depending on Percentagedeviation in in reference GDP to a RCP6.0 baseline economy during 2070 alone.4 socioeconomic development and climate South Korea’s GDP percentage gain in a 1.5°C world mitigation policy settings. Early in the transition period, South Korea would experience the costs associated with adjusting its economy and shifting to a low-emission stance. Largest economic gains during transformation But over time the benefits—in avoided damage Ordered by largest GDP gain, level terms (₩) and new economic opportunities—would take hold. The country would experience net economic gains from bold climate policy decisions made Bold Climate Plays Few industries enjoy immediate early, delivering rapid investment and technology New energy sector development consistent with limiting global average GDP gains due to bold climate warming to 1.5°C by 2050. 2021–2025 plays toward a 1.5ºC world.

Figure 1.3: Potential economic gain for South Korea due to decarbonization in a 1.5°C world Coordinated Change Some industries gain consistently New energy sector in the key decade of change toward Construction

2025–2040 a 1.5ºC world.

Turning Point New energy sector Services Growing number of industries Construction benefit from decarbonization Retail and tourism

2040–2050 ₩ achieved in a 1.5ºC world. Water and utilities triion Signiﬁcant gains to South Korea New energy sector from climate change action Low Emission Future Services Construction New economic structures and a 1.5ºC world, by 2070. Retail and tourism and outputs remake South Korea Manufacturing

2050–2070 in a decarbonized 1.5ºC world. Water and utilities Source: Deloitte Economics Institute D.CLIMATE model. Agriculture and forestry

Source: Deloitte Economics Institute D.CLIMATE model.

12 13 South Korea’s turning point Executive summary

South Korea’s turning point Bold Climate Plays Turning Point from 2021 to 2025 from 2040 to 2050 The next few years set the stage for rapid The decarbonization of high-emitting industries decarbonization. The decisions by government, should be nearly complete by this period. The regulators, business, industry, and consumers cost of new low-emission technologies would be would reinforce initial progress and create the decreasing and net economic gains would be shared market conditions to deliver decarbonization more widely. Efforts to curb emissions would begin at pace and scale. This would send price signals, to manifest in lower global average temperatures In our modeling, the economic benefits of climate action for South transform supply chains, and lay the foundation relative to a higher-emitting posture (a greater Korea would escalate impressively toward the middle of the century. for a structural shift that limits global average than 0.2°C average decrease across the decades warming to 1.5°C. Clean energy initiatives would to 2055, compared to the RCP 6.0 baseline). This Our analysis shows that by around 2040, the structural adjustment gain momentum in South Korea, as would the pathway would result in a 1°C difference in the global costs of rapid decarbonization would be more than offset by positive pace of investment in renewable energy projects. mean temperature by 2070, relative to the RCP 6.0 Emissions-intensive parts of the economy would baseline. This decade would be the climatic and returns in the capital and technology that shift economies onto a be the first to experience the adjustment costs economic turning point that avoids a “locked in” decarbonized pathway. We also show how rapid decarbonization of this transformation. higher-emission pathway and realizes the economic dividends of technological progress. By this point the b toward a 1.5°C world would be likely to occur through the following decarbonization transformation would be spreading four economic phases. more widely throughout South Korea’s economy, and key areas—such as retail and tourism, construction, and upstream services—would begin to benefit. Coordinated Change

from 2025 to 2040 old limate The hardest shifts in industrial policy, energy lays systems, and consumer behavior would occur in this period. Businesses and economies would A Low-Emission Future begin to see the consequences of bold climate plays, after 2050 oordinated with different industries and countries transforming hange at different paces. Although this period would By the end of the century, South Korea’s economy involve the most pronounced structural costs would be near net zero emissions and the world’s of transformation for South Korea, the energy sector economic systems of production would be keeping would experience significant benefits as momentum global average warming to around 1.5°C. Economic grew, emerging technologies began to mature, structures would be radically transformed, and alternative renewable fuel sources proliferated. underpinned by a series of interconnected, low-emission systems spanning energy, mobility, manufacturing, and food and land use. The energy Turning mix would be dominated by low- or zero-emission oint sources across every market, with green hydrogen and negative-emission solutions, both natural and technological, playing prominent roles. South Korea would experience remarkable economic growth during this period—its new supply chains established, its energy sources and industries transformed, and its economy aligned to a new growth trajectory. ow-Emission Future b. References to 1.5°C in this report describe a situation in which nations successfully achieve rapid decarbonization, limiting global average warming to 1.5°C by the middle of the century and maintaining that average until the end of the century. Under this scenario, South Korea would achieve nearly net zero emissions by 2050. This scenario has been dimensioned and modeled by Deloitte Economics Institute.

14 15 South Korea’s turning point The

economic 2021

2070 3ºC

costs of D

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O V O I D S U N N inaction C E T T O I V N I C I T E Y N O B D R A E IN C C G RE A AS ES ING TUR M TEMPERA A E D AT CLIM

16 17 South Korea’s turning point The economic costs of climate inaction

The new normal: Figure 2.1: Trends in South Korea’s per capita GDP growth and carbon emissions10 groth S eissions S a climate-damaged economy

eissions etritons Most economic thinking has it wrong. Growth with consequences Dominant economic projections do not account South Korea is integral to this growth story. From for the consequences of climate change, or the its roots as an agriculture-intensive region to its world’s efforts to adapt to or mitigate the impacts. current position as a global leader in technological When they do consider climate change damage innovation, South Korea has seen rapid growth and mitigation policy, it is often in scenario analyses and economic transformation. that compare alternative future states to the d erage annua groth inapitaper same incorrect starting point—and against an One of the Four Asian Tigers, South Korea has erroneous “business as usual” trend that assumes experienced incredible economic growth since

erage annua apitaper unconstrained economic growth via emissions- the 1950–53 Korean War, with nominal GDP intensive economic production. This is the economic expanding as much as 35-40 percent in a single year 7 s s s s s baseline that informs how most decisions and at one point during the 1970s. In the decades since s investments are made, for governments and 1990, South Korea has quadrupled its economy due to its export-driven policies and investment in businesses alike. Source: Deloitte Economics Institute analysis of World Bank data. manufacturing and services. Today, *Per capita GDP growth to 2019; per capita emissions to 2016. And no wonder. Since the Industrial Revolution, it is the world’s 10th largest economy.8 economic growth has moved nearly in lockstep with rising greenhouse gas (GHG) emissions. Although this transformation has propelled South Korea forward in terms of economic development, Changing the economic narrative As humanity burned fossil fuels, removed forests, it has not been without consequences. The country’s Economic growth and rising and converted land to intensive agriculture, it energy demand has grown by more than 55 percent Mainstream economic theory and models assume enjoyed the “fruits” of those actions: economic since 2000—manufacturing and services have seen unconstrained emissions do not have negative standards of living have come growth, rising standards of living, and better quality even more pronounced increases—and most of that consequences for economic growth potential. at a huge cost. of life.c The world economy has expanded almost demand is being met with fossil fuels.9 The result has This view of the world has now come up against every year since 1750. While growth has not been been rapidly rising GHG emissions (primarily CO2), the overwhelming scientific consensus—and constant or even—across regions and individual which have continued to increase even in recent increasingly our own lived experiences—telling us countries—GDP growth has, on average since decades as economic growth has slowed. As a result, that the current system of economic production is the Industrial Revolution, been around 1.5 percent South Korea is now the 11th largest GHG emitter in generating untenable changes in the climate.11 These per year. 5 the world. changes put at risk South Korea’s economic growth That emissions-intensive growth has been perhaps and prosperity.12 most evident in the Asia Pacific region, where the Deloitte’s D.CLIMATE model integrates the economic last several decades have seen dramatic economic impacts of physical climate change into a baseline expansion and hundreds of millions rising out economic trajectory, to overcome the myopia of poverty—alongside rapidly increasing carbon 6 of many current economic models. By factoring dioxide (CO2) emissions. the costs of climate change into the baseline, our framework reveals the tremendous economic harms of inaction or inadequate action, as well as the significant opportunities that present themselves in remaking South Korea’s economy.

c. Economic growth as measured by GDP, and improved standards of living as measured by increasing GDP per person. d. The Four Asian Tigers are the high-growth economies of Taiwan, Hong Kong, Singapore, and South Korea.

18 19 South Korea’s turning point The economic costs of climate inaction

The high costs of inaction Figure 2.2: How climate change impacts the economy

Impacted workers Lost productive land Heat stress, the “slowing down” A loss of productive land through Unmitigated climate change threatens to wipe out of workers, and their reduced rising sea levels and a reduced level decades of hard-won economic growth in South Climate change could reverse ability to perform results in of productive activity on the land Korea. The foundations of the nation’s prosperity— South Korea’s hard-won lower labor productivity. impacts low-lying and coastal areas. its natural and human capital—are at risk, and along with them its standard of living, its prospects for economic gains. future growth, its place on the global stage, and the wellbeing of its people.13 If South Korea’s recent economic story is one of growth, unchecked climate change would turn it into one of decline.

Stalling productivity Diminished health and investment and wellbeing Economies suffer as investment repairs Increased incidence of existing assets instead of contributing mortality and morbidity to new, more productive capital. Climate disrupts living standards and change stalls economic progress. the lives of the working population.

Disrupted flow of Agricultural losses global currency Despite adaptation, climate The scale of loss of tourism change inaction limits what and international money farmers can do. Significant circulating in economies impacts variations in crop yields damage business, jobs, and livelihoods. the agricultural sector’s output.

Source: Deloitte Economics Institute.

20 21 South Korea’s turning point The economic costs of climate inaction

Modeling climate inaction in South Korea

1 4

Global emissions will continue to rise if no further This modeling framework involves significant The model projects economic output (as measured The damage to the factors of production is significant action is taken to mitigate climate change. research on region-specific climate and economic by GDP) with emissions reflecting RCP 6.0 to the distributed across the economy, impacting GDP. The outcome would be increasing global average impacts across Asia Pacific, which are used as inputs year 2100.e RCP 6.0 represents a single scenario Any change in emissions (and, correspondingly, warming toward the end of the century. In this for Deloitte’s D.CLIMATE model (refer to the Technical without significant additional efforts to constrain temperatures) over time results in a change to these world, inaction on climate change would be the Appendix for more detail). emissions (a baseline scenario).14 This results in a impacts and their interactions. The economy impacts baseline path for the economies of South Korea projected emissions-intensive global economy. the climate, and the climate impacts the economy. and the world. This baseline scenario would To quantify this conclusion, Deloitte modeled negatively impact economic growth when the economic impacts of a changing climate on compared to a world without climate change long-term economic growth in South Korea, using (refer to the Technical Appendix for more detail). the following stepped process: 2 5

Increased atmospheric GHGs cause average The key variables of time, global average temperature, global surface temperatures to continue rising and the nature of economic output across industry above pre-industrial levels.f In the RCP 6.0 baseline structures combine to offer alternative baseline scenario, global average temperatures increase views of economic growth. Specific scenario analysis 1. more than 3°C above pre-industrial levels by is then conducted, referencing a baseline that g roected the end of the century. (Note that present-day includes climate change damage. Scenarios can also emissions-intensive temperatures have already risen more than include policy actions that either reduce or increase global economy 2. 1.0°C above pre-industrial levels.) emissions and global average temperatures relative lobal surface to the RCP 6.0 baseline view. temperatures continue rising 3

Warming causes the climate to change and results 3. in physical damage to the factors of production. hysical damage to The Deloitte model includes six types of economic the factors of damage, regionalized to the climate, industry, and production workforce structure of each defined geography in Asia Pacific.

4. 5. Impacts to lternative the economy baseline views of economic growth

e IPCC-adopted emission scenarios vary widely, depending on socioeconomic development and climate mitigation policy settings. RCP 6.0 is chosen as an intermediate baseline scenario as it includes no specific or significant climate mitigation policy effort, making it an appropriate baseline for reference. f Pre-industrial is defined in IPCC assessments as the multi-century period before the onset of large-scale industrial activity around 1750. g The associated climate data (like annual temperature increases and atmospheric concentrations) are sourced from a synthesis of the models available through the Coupled Modeling Intercomparison Project (CMIP6). See the Technical Appendix for further detail.

22 23 South Korea’s turning point The economic costs of climate inaction

Figure 2.3: Sector loss at 2070, in a climate damaged South Korea in a 3°C+ world Figure 2.4: Loss to the economy over 50 years

-₩ Services Manufacturing 935 -₩67.1T -₩26.7T

l o s 0 t trillion 7 f r 0 o 2 m y b S y ou m th no Services Korea’s eco Retail and tourism -₩17.6T -₩13.6T Construction -₩445 trillion

Manufacturing -₩190 trillion

Retail and tourism Conventional energy Transport -₩6.5T -₩6.4T -₩112 trillion

Other -₩187 trillion

Agriculture and forestry -₩1.3T -₩1.0T Water and utilities

Mining and gas -₩0.4T ₩0.0T New energy

Source: Deloitte Economics Institute D.CLIMATE model. Source: Deloitte Economics Institute D.CLIMATE model. Note: Total NPV of deviation loss to GDP in South Korea over the period to 2070, at a 2 percent discount rate. Refer to the Technical Appendix for a discussion on the selection and application of the discount rate. 24 25 South Korea’s turning point The economic costs of climate inaction

The economic cost of climate change

In the economic future modeled, South Korea and Substantial losses to industries, South Korea’s robust manufacturing sector is Other important aspects of South Korea’s the rest of the world do not significantly reduce firms, and workers already exposed to the impacts of climate change; economy—from retail and tourism, to construction emissions relative to current levels. This future has its south and south-east coastal areas are home and fossil fuel–based energy—would also suffer as an emissions pathway that leads to global average South Korea’s economy is highly exposed to the to numerous industrial facilities that are frequently labor productivity declined and extreme weather warming of more than 3°C by 2070.h economic damage caused by climate change. Over disrupted and damaged by typhoons.18 This sector events became more frequent. the next 50 years, the top five most impacted would suffer acutely in the event of unchecked The result over the next half-century, by The estimated climate impacts to 2070 would reduce industries in terms of economic activity comprise climate change, with workers feeling the impacts Deloitte’s estimates, would be climate change– the value added by these three sectors by more than 92 percent of the country’s current output. directly, and physical capital degrading over time. induced economic losses to South Korea of ₩10 trillion per year in average annual terms. approximately ₩935 trillion in present value These industries—services (government and private), As storms grew more frequent and more intense, terms.i This loss to economic potential would manufacturing, retail and tourism, construction, and manufacturers and related infrastructure, including be equivalent to nearly 2.5 percent of GDP in conventional energy—are economic powerhouses ports, would suffer mounting damage. In the next 2070 alone. and major sources of employment in South Korea. five decades, these estimated impacts would reduce Together, they form the basis of the country’s the value added by South Korea’s manufacturing For comparison, the economic cost of the 2020 contemporary economic engine. sector by nearly ₩8 trillion per year in average monsoon season, which caused widespread annual terms. flooding and landslides and the loss of thousands Deloitte estimates that by 2070, these five industries of homes and businesses, appears small. The would experience an average annual loss in the Figure 2.5: Largest industry losses in South Korea due to climate change economic cost of unchecked climate change in value added to GDP of more than ₩36 trillion South Korea would be equivalent to the 2020 per year. monsoon season occurring more than 2,500 In our model, the impacts would threaten South times over the next 50 years.15,16,17 Korea’s position as an advanced manufacturing If substantial actions are not taken, climate change and services-based economy, as both sectors would, in average annual terms, reduce South would bear the greatest share of climate-related Korea’s economic potential by 0.9 percent a year economic damage. over the next 50 years. As temperatures continued to rise and the region hae of oth oeas total This pathway would lead to economic losses of experienced worsening impacts, South Korea’s more than ₩232 trillion in present value terms services industries would suffer significantly. Direct economic by 2050—or 1.0 percent of South Korea’s GDP in impacts—such as to insurance, human health, and 2050. On average over the 30 years to 2050, that is social work—would combine with indirect effects output an annual loss of 0.4 percent of GDP. across many upstream services industries such as Services business and financial services, which are exposed to climate impacts in other parts of the economy. Manufacturing Over the period to 2070, unchecked climate change would, in average annual terms, reduce the value Retail and tourism added by South Korea’s services sector by 92% ₩19 trillion per year. Construction

Conventional energy Most impacted industries h. IPCC-adopted emission scenarios vary widely, depending on socioeconomic development and climate mitigation policy settings. RCP 6.0 is chosen as an intermediate baseline scenario as it includes no specific or significant climate mitigation Source: Deloitte Economics Institute D.CLIMATE model. policy effort, making it an appropriate baseline for reference. i. Total NPV of deviation loss to GDP in South Korea over the period to 2070, at a 2 percent discount rate. Refer to the Technical Appendix for a discussion on the selection and application of the discount rate.

26 27 South Korea’s turning point The economic gains of rapid decarbonization

The 2040 MY NO O GE C HAN TUR E D C NI TE NG 2050 economic D A P E IN O D I IZ R N O T

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2021 1.5ºC 2070

28 29 South Korea’s turning point The economic gains of rapid decarbonization

A new economic climate Figure 3.1: Economic growth in South Korea is the trend in a 1.5ºC world

2025–2040 2040–2050 ecae a armi GE eivery HAN TUR imite t D C NI cimate ays TE NG rst imacts A P IN O D I cimate R N O T cae

O avie C

L O

The economic costs of climate change are not fixed. But time is of the essence. Policy and investment W S Y - Although some degree of global temperature rise decisions made in the next several years will largely E A M and climate impacts are already “locked in” due to shape the economy and climate that South Korea L P I

S historical emissions, there is an opportunity to take and the world will inherit. This narrow window E S

T I

To 2025 O 2050

bold action to enable economic prosperity and avert makes it even more vital to understand the A N

the worst impacts of an altered climate. Supported economics of a warming world and incorporate ai a M 2,300T ecarie

I ₩

F L economic gain

by the right economic framework, these actions them into decision making that addresses the cimate U ut rea

can put South Korea—and the world—on a path to multiple market failures of climate change. acti U a a L

R ecmy

O realizing strong, equitable, and shared growth. E B South Korea is at the frontier of a new economic era and the development of a new system of production. By making the right choices now, it A C could chart a more prosperous path toward a T 2070 low-emission future while accelerating progress in 2021 IO N 1.5ºC r maitais the rest of the world by exporting key technologies, armi processes, and know-how. imits ey IN 2021 2070 A r a 3ºC C mer a ut rea as T IO rserus et signiﬁcant loss N er uture ue t cimate

iacti

S U

E D D -₩935T

P economic loss I

R E

O V I D S U imate cae N Emissi amaes C E itesive T T I V N ecmies I iustry remais I T miat Y N O B R A IN C C R EA S SIN RE G TEMPERATU Emissis icrease a averae temeratures

Source: Deloitte Economics Institute D.CLIMATE model. Note: South Korea's stylized economic loss pathway reflects global average warming aligned with the RCP 6.0 baseline. The stylized economic growth pathway reflects limiting global average warming to no more than 1.5ºC by 2050, in line with the current ambition of the Paris Agreement. 30 31 South Korea’s turning point The economic gains of rapid decarbonization

Recent policy actions suggest that South Korea The country is aiming for renewables to comprise Decarbonization is a new is laying the groundwork for this transformation. approximately 20 percent of its total electricity economic engine In 2020, it released its Green New Deal, a plan to generation by 2030, climbing to 35 percent by reach carbon neutrality by 2050 by investing in 2040. Investment to expand the use of clean Rapid decarbonization could yield gains renewable energy and green infrastructure, and power has already begun, focusing on solar, for South Korea’s economy of over restructuring its industrial sector. This adds specific wind, and hydrogen, with a particular emphasis ₩2,300 trillion in present value terms by 2070. policy commitments and accountability to South on hydrogen.19 And the government has unveiled Compared to a world of climate inaction (the Korea’s previously stated climate change goals. plans to construct the world’s largest offshore wind RCP 6.0 baseline scenario), South Korea’s GDP farm, with ambitions to become the world’s largest would grow by an average of 2.2 percent each year South Korea has already made headway in producer of hydrogen-powered vehicles and fuel over the modeled decades from today to 2070. reducing its reliance on coal. The government cells by 2030.20 has suspended construction of coal-fired power Early in the transition period, South Korea would stations and has committed to shutting down experience the costs associated with adjusting its 14 coal-fed power plants. economy and shifting to a low-emission stance. But over time the benefits—in avoided damage and new economic opportunities—would take hold. The country would experience net economic gains from bold climate policy decisions made Figure 3.2: Potential economic gain for South Korea due to decarbonization in a 1.5°C world early, delivering rapid investment and technology development consistent with limiting global average warming to 1.5°C by 2050. In 2070, that would equate to GDP growth of 5.1 percent and a gain in economic output of over ₩295 trillion—equivalent to adding South Korea’s most valuable multinational conglomerate to the ₩ economy during 2070 alone.21 triion

Signiﬁcant gains to South Korea from climate change action and a 1.5ºC world, by 2070.

Source: Deloitte Economics Institute D.CLIMATE model.

32 33 South Korea’s turning point The economic gains of rapid decarbonization

Figure 3.3: The process of economic adjustment to decarbonization in a 1.5°C world scenario

How South Korea rapidly decarbonizes

In the modeled scenario where global warming is limited to 1.5ºC by 2050, South Korea's economy would prosper as it rapidly reduced the emissions intensity of economic activity ₩2,300 compared to today’s levels. The country would become a leader in global decarbonization a efforts as fast adopter of change and an exporter of decarbonization. d trillion d 0 e 7 d 0 1 2 3 2 to y b S y Change is valued Energy transforms Fuels switch ou m th no Korea's eco

Decarbonization policies, Pricing change and Pricing change and energy investments and, new decarbonization efforts system transformation technologies structurally encourage renewable accelerate electrification change economies. electricity to transform and the use of new sources South Korea’s energy system. of low-emission fuel for industry and households.

The value of this structural change is ‘priced into’ As renewables become economic activity. cheaper compared to fossil This transformation fuel sources in end-use, links energy-producing there is a substitution and energy-consuming for renewable power. sectors more closely.

The type and pace of change sets the price for industries in South Korea to reduce emissions. The energy sector has Economies have cheaper many ways to decarbonize and cleaner energy, and and the incentives for more productive economic investment are strong. output from it.

Source: Deloitte Economics Institute D.CLIMATE model.

Note: Total NPV of deviation loss to GDP in South Korea over the period to 2070, at a 2 percent discount rate. Refer to the Technical Appendix for a discussion on the selection and application of the discount rate.

34 35 South Korea’s turning point The economic gains of rapid decarbonization

South Korea’s turning point The path to decarbonization

Deloitte expects rapid decarbonization to a 1.5°C world to follow four key economic phases.

In the modeled scenario, South Korea’s future As technologies continued to advance, emerging Figure 3.5: Four phases of action to achieve a decarbonized South Korea in a 1.5°C world energy mix would see a significant transition alternate fuel sources such as hydrogen and biofuels away from fossil fuel sources, from more than would become core to South Korea’s energy mix. South Korea’s GDP percentage gain in a 1.5°C world 95 percent in the early 2020s to around 30 percent These fuels would be used in a range of applications 6 by 2050. Clean electricity generation—via solar, including passenger cars, power generation turbines, wind, hydro, geothermal, and nuclear—would ramp steelmaking facilities, heavy-duty vehicles, and ships. 5 up significantly. Deloitte estimates that hydrogen would comprise In this future, South Korea would continue to reduce up to 16 percent of South Korea’s energy mix by its use of petroleum, coal, and gas, replacing these 2050, compared with approximately 2 percent in 4 historical sources with renewables—such as green 2030. Biofuels would account for another 2 percent loss at 2025 loss at 2040 hydrogen using electrolysis, or biofuels generated by 2050. 3 from plants, algae, or animal waste. Its need for -0.1% -0.2% constant load-generating capacity would mean some fossil fuels remaining a component of the total 2 energy mix. This is where innovation in technologies 3.9% 5.1% for carbon capture and storage would be crucial. 1

gain at 2050 gain at 2070 0 Figure 3.4: South Korea's fossil fuel usage by 2050

oa i an petroeu prouts 2021 2030 2040 2050 2070 Percentagedeviation in in reference GDP to a RCP6.0 baseline

Largest economic gains during transformation Ordered by largest GDP gain, level terms (₩)

Bold Climate Plays New energy sector 2021–2025

Coordinated Change New energy sector 2025–2040 Construction Turning Point New energy sector Retail and tourism Services Water and utilities 2040–2050 Construction

Source: Deloitte Economics Institute D.CLIMATE model. New energy sector Manufacturing Low Emission Future Services Water and utilities 2050–2070 Construction Agriculture and forestry Retail and tourism

Source: Deloitte Economics Institute D.CLIMATE model.

36 37 South Korea’s turning point The economic gains of rapid decarbonization

Bold Climate Plays Coordinated Change Turning Point A Low-Emission Future from 2021 to 2025 from 2025 to 2040 from 2040 to 2050 after 2050 The next few years set the stage for rapid The hardest shifts in industrial policy, energy Our model suggests the decarbonization Beyond 2050, our model predicts South Korea’s decarbonization. The decisions by government, systems, and consumer behavior would get adjustments in industry should be almost complete economy would be near net zero emissions and regulators, business, industry, and consumers would underway by this point. This would be the decade in by this period. The cost of new low-emission the economic systems of production would keep reinforce initial progress and create the market which economies, businesses, and industries began technologies would continue to decrease and net global average warming to around 1.5°C by the conditions to deliver decarbonization at pace and to see the consequences of bold climate plays, with economic gains would be more widely shared. end of the century. Economic structures would scale. This would send price signals, transform different industries and regions transforming at This is when the material benefits of limiting global be radically transformed, underpinned by a supply chains, and lay the foundation for a structural different paces. average warming through decarbonization would series of interconnected, low-emission systems shift that limits global average warming to 1.5ºC. be likely to materialize, in the form of a greater spanning energy, mobility, manufacturing, and South Korea’s energy sector would continue to than 0.2°C average difference in the global mean food and land use. Clean energy initiatives would gain momentum in experience significant benefits as momentum temperature in the decade leading up to 2050, South Korea, as would the pace of investment in grew and emerging technologies began to mature. The energy mix would be dominated by low- or compared to the RCP 6.0 baseline. new renewable electricity projects. Easier-to-abate Efforts to target harder-to-abate emissions from zero-emission sources across every market, with emissions would be the first target, and the clean the transport sector would get underway, as This would be the climatic and economic green hydrogen, biofuels, and negative-emission energy industry would thrive, but emissions-intensive alternative fuel sources such as hydrogen and turning point, preventing the shift to a “locked solutions, both natural and technological, playing parts of the economy would be the first to experience biofuels proliferated. New global supply chains in” higher-emission pathway while realizing prominent roles. the adjustment costs of this transformation. would emerge to meet the energy needs of the economic dividends of systems-level South Korea would experience remarkable economic South Korea and other nations. transformations. By this point, the benefits of growth during this period—its new supply chains the decarbonization transformation would be This period would involve the most pronounced established, its energy sources and industries spreading more widely throughout South Korea’s structural costs for the South Korean economy as it transformed, and its economy aligned to a new economy, as clean energy continued to expand, navigated this transition. Conventional energy and growth trajectory. Historically significant aspects of hydrogen and biofuels grew in prominence, and emissions-intensive sectors such as manufacturing South Korea’s economy, such as manufacturing and the role of renewable energy sources stabilized. and transport would be most heavily impacted. services, would gain significantly from productivity Key areas of the economy—such as retail and The construction sector would experience small improvements and lower costs—and by avoiding tourism, construction, and upstream services— net gains as a result of falling electricity costs and climate damage that would have existed in a world would begin to benefit from lower-cost energy investment in new infrastructure for the clean of unconstrained emissions. and avoided climate damage. energy sector.

38 39 South Korea’s turning point Endnotes

Endnotes

1 Aon. (2020). Weather, Climate & Catastrophe Insight. 6 Friedlingstein, P. et al. (2020). “The Global Carbon Budget 2020.” (2020)12, Earth System Science Data. 2 Jeong, J. Climate crisis is now–South Korea’s 2020 monsoon and its aftermath. Greenpeace. 7 World Bank. (2019). GDP (current $US)–Korea, Rep. Selected data from World Bank national accounts data and OECD National Accounts data files 1960–2020. 3 Shin, J. “Air Conditioner Sales Drop Sharply as Record Long Rainy Season Drags on.” The Korea Bizwire, 5 August 2020. 8 World Bank. (2021). GDP Ranking. 4 Yahoo! Finance. (2021). Samsung Electronics Co. Ltd. 9 World Bank. (2021). World Development Indicators. 5 Bank of England. (2019). How has GDP growth changed over time? 10 The World Bank. (2021). World Development Indicators. 11 IPCC. (2014). Climate Change 2014 Synthesis Report: Fifth Assessment Report (AR5); IPCC. (2018). Global Warming of 1.5°C. 12 Bank of England. (2019). How has GDP growth changed over time? 13 Asian Development Bank. (2017). Promoting Ecosystem Services and Forest Carbon Financing in Asia and the Pacific;WWF. (2012). Ecological Footprint and Investment in Natural Capital in Asia and the Pacific;IPCC. (2007). Asia. Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change; Rasul, G. (2021). “Twin Challenges of COVID-19 Pandemic and Climate Change for Agriculture and Food Security in South Asia.” (2021)2, Environmental Challenges. 14 IPCC. (2014). Climate Change 2014 Synthesis Report: Fifth Assessment Report (AR5). 15 Aon. (2020). Weather, Climate & Catastrophe Insight. 16 Jeong, J. Climate crisis is now–South Korea’s 2020 monsoon and its aftermath. Greenpeace. 17 Shin, J. “Air Conditioner Sales Drop Sharply as Record Long Rainy Season Drags on.” The Korea Bizwire, 5 August 2020. 18 Air Worldwide. (2010). Managing Typhoon Risk in South Korea. 19 The Government of the Republic of Korea. (2020). 2050 Carbon Neutral Strategy of the Republic of Korea. 20 Shin, H. (2021). “South Korea unveils $43 billion plan for world’s largest offshore wind farm.” Reuters, 5 February 2021. 21 Yahoo! Finance. (2021). Samsung Electronics Co. Ltd.

40 41 South Korea’s turning point Contacts

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In Kyoo Baek Ok Su Lee ESG Center Leader, Sustainability Leader, Related content Deloitte Korea Deloitte Korea [email protected] [email protected]

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Asia Pacific’s turning point China’s turning point India’s turning point Japans’s turning point How climate action can How climate action can How climate action can How climate action can drive our economic future drive our economic future drive our economic future drive our economic future August 2021 August 2021 August 2021 August 2021

Southeast Asia’s turning point Taiwan’s turning point Pacific Nations’ turning point How climate action can How climate action can How climate action can Turning point drive our economic future drive our economic future drive our economic future Technical appendix August 2021 August 2021 August 2021 August 2021

42 43 South Korea’s turning point Deloitte Economics Institue

Acknowledgements Deloitte Economics Institute

The following economists and specialists crafted and created The pace and scale of global economic, social, environmental, the insights in this report: and digital disruption is rapid, and we all now operate in a world we no longer readily recognize. This creates a need to understand how structural economic change will continue to impact economies and the businesses in them, and the livelihoods of our citizens.

In pursuit of economic prosperity, progressive organizations need future-focused, trusted advisors Dr Pradeep Philip Will Symons Claire Ibrahim to help them navigate complexity and deliver positive impact. The Deloitte Economics Institute combines foresight with sophisticated analysis to shape and unlock economic, environmental, Partner, Partner, Lead Director, financial, and social value. Connecting leading global insight and local knowledge with an independent Deloitte Economics Institute Climate and Sustainability Leader, Deloitte Economics Institute perspective, we illuminate future opportunities and drive progress. [email protected] Asia Pacific [email protected] [email protected] The Deloitte Economics Institute offers a full suite of economic services to governments, businesses, and community groups around macroeconomic and microeconomic analysis, including economic forecasting and modeling, policy and program evaluation, impact and contribution studies, and regulatory economics. Our economic rigor comes from our cutting-edge analytic tools; our experience working with businesses and governments; and the expertise of our people who help shape public policy, deliver business insights, and inform investment strategy. We share practical policy, industry know-how, and evidence- based insights to help businesses and governments tackle the most complex economic, financial, and social challenges. Cedric Hodges Matt McGrath With over 400 economists across Asia Pacific, the Americas, and Europe, our depth and breadth Lead Director, Global Chief Marketing Officer, of experience is matched by a strong understanding of trends in global economies and their effect on Deloitte Economics Institute Deloitte business. Our dedicated team of economists works closely with our industry leaders across the globe [email protected] [email protected] to apply economic thinking and commercial acumen to everyday business problems. The Deloitte Economics Institute prides itself on rigorous qualitative and quantitative analysis, and is supported by proprietary and specialist models refined over many years. Our highly qualified economists and practitioners have a strong reputation for objectivity and integrity. A special thanks to the following individuals who provided the support For more information on the Deloitte Economics Institute, please visit our website: to make this report possible: www.deloitte.com/deloitte-economics-institute

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