New findings reveal fossil fuels are key drivers of recent inflation in South Korea

New Cambridge Econometrics analysis for the European Climate Foundation explores the role of energy prices in recent consumer price inflation in South Korea, with a view to understanding the potential for faster energy transition measures to ease inflationary pressures and risks. 

Cambridge Econometrics analysed energy system and inflation data from a variety of sources to understand the role of energy prices in South Korean consumer price inflation. The report also takes stock of South Korea’s wider energy transition strategy, the South Korean government’s response to the recent energy price increases and discusses how the future energy system can better protect consumers from sudden price hikes. 

3 key findings:

1. Recent increases in household energy prices make low-income households in South Korea nearly 300,000 won worse off in 2022 compared to 2021, mostly due to higher petrol, diesel and gas prices

  • We estimate that the poorest households in South Korea will spend roughly 19% more on energy in 2022 than in 2021. 
  • The South Korean government is using tax cuts in addition to tightly regulated tariffs to mitigate the impacts of higher energy prices on household budgets. The latest announced measures are expected to cost taxpayers over 3 trillion won (over $21bn). 

2. Korea is highly dependent on imported fossil fuels and a complex market structure and government regulations are hindering the deployment of renewables 

  • Fossil fuel price increases were responsible for over a quarter of South Korea’s inflation rate this summer, but this only partially reflects the true impact of rising fossil fuel prices on South Korea’s economy. Korean households are shielded from the full impact due to the government’s control of gas and electricity tariffs. Instead, the state-owned energy monopolists KEPCO and KOGAS have been amassing huge deficits which will ultimately be borne by taxpayer money. 

3. Renewables are now highly price competitive; boosting capacity would reduce South Korea’s energy import dependency, but reforms are required

  • Increasing the share of renewables in South Korea’s energy mix is key to reduce the country’s energy import dependency. This requires: 
    • regulatory reforms to streamline permitting for new wind and solar power plants. 
    • market reforms that create greater incentives for the deployment of renewables and provide clearer prices signals to energy users. 
Carl Heinemann Managing Economist [email protected]