How better policy can support South Korea’s green steel opportunity 

Key Takeaways

A Transition to Greener Steelmaking can Build Resilience and Competitiveness

South Korea is the sixth largest steelmaker in the world, producing 62 million tons (Mt) of crude steel in 2025,¹ which provides input to almost 40% of its manufacturing output.² About 72% of South Korea’s steel production comes from coal-based blast furnace-basic oxygen furnace (BF-BOF), and the steel sector currently constitutes approximately 15% of the country’s total emissions.³

Emission-intensive steelmaking will face rising costs, as policies like the European Union’s Carbon Border Adjustment Mechanism (EU CBAM) will put an estimated US$36 to 70 billion in South Korea’s economic value at risk from 2026 to 2050.⁴ This exposure may increase as the EU is considering extending CBAM to steel embedded in some manufactured goods. Other importers of South Korean steel, such as Australia, Canada, and the United Kingdom, are considering or actively implementing CBAMs, which could put an additional 2.7 million tons of exports per year at risk.⁵ South Korea’s domestic emissions trading scheme (K-ETS) is also expected to impose costs as free allocations phase out in the future.

At the same time, demand for low-emission steel is growing globally. Estimated voluntary near-zero demand in Asia Pacific (not including China and India), Europe, and North America is about 20 Mt in 2030. Around 80% of this estimated volume will be for ore-based products, underscoring the opportunity for first-mover deployment of green hydrogen-based direct reduction and electric arc furnace (H₂ DRI-EAF) capacity that can achieve the desired emission profile.⁶

The South Korean steel sector also faces several structural challenges, including competition from low-cost Chinese steel and declining profit margins stemming from global overcapacity. Leveraging product differentiation to capture clean markets will be key to increasing competitiveness. While China is predicted to have a relative cost advantage,⁷ most of China’s hydrogen-based steelmaking is expected to serve local demand, leaving an opening for South Korean steel producers to capture this green segment in other markets.⁸ With 22 Mt of blast furnace capacity up for reinvestment in the next 5 years, South Korean steel producers can either reline and risk locking in coal-based production for decades, or transition to cleaner production pathways to capture growing green demand and stay competitive amid tightening carbon regulations. POSCO has already made a headstart with its proprietary HyREX technology. Leveraging its technology leadership and competitive edge in manufacturing, Korea can capture opportunities along the clean steel production value chain, including a US$70 billion global tech market that will grow with worldwide demand.⁹

In this analysis, we test the impact of South Korea’s current and planned policy mix on the costs of various steel production routes from 2026 to 2050 to identify the most impactful instruments for deploying clean technologies in the steel sector.

South Korea’s Green Steel Policy Mix is Emerging in Response to Sector Transition Needs

The South Korean government has established and planned policy frameworks and interventions throughout the supply chain to support a sector-wide transition (details in Exhibit A1 in Appendix A). These include tax credits, capital and research and development (R&D) subsidies, carbon pricing, and other mechanisms. Previous government subsidies have primarily focused on R&D: in 2025, state-owned steelmaker POSCO received US$227 million to develop its proprietary hydrogen-based direct reduction (HyREX) technology.¹⁰ While POSCO’s HyREX is not analyzed in this study, further development in the technology could lead to substantial cost reductions in green ironmaking in the future.

The recent K-Steel Act has created the foundation for a low-carbon steel certification framework and low-carbon steel “special zones” with simplified licensing regulations and tax benefits. A detailed implementation framework is expected to be published in late 2026 and could include additional mechanisms that could impact steel production costs.¹¹ In early 2026, the government also announced the upcoming Korea Green Transformation (K-GX) Strategy, which is expected to provide additional support for industrial decarbonization across multiple sectors.¹²

An overview of the key policies modeled in this brief is shown in Exhibit 1. Fossil fuel subsidy removals have not been passed or proposed but were modeled to explore the hypothetical impact of changing fuel costs. Similarly, the Clean Hydrogen Power Standard’s contract-for-difference (H₂ CfD) scheme currently only covers electricity made using low-carbon hydrogen. However, this analysis assumes the scheme also covers hydrogen as a stand-alone fuel to explore the potential impact of the scheme on hydrogen costs for steel production (see note in Appendix B for more details).

Exhibit 1

Expected Policies Still Leave Near-Zero Steel at a 24%–38% Premium in 2035

With current and expected policies, our analysis shows that H₂ DRI-EAF steel does not break even with BF-BOF production by 2050 (Exhibit 2). In 2035, when EU CBAM will be fully phased in, domestic H₂ DRI-EAF production still costs 38% more than BF-BOF production; when using green iron sourced from Australia, the H₂ DRI-EAF cost premium comes down to 24%. Steel made using natural gas HBI from the United States with domestic EAF (NG DRI-EAF) is consistently lower than the hydrogen routes, but could be subject to price exposure. Moreover, NG DRI-EAF steel only reduces emissions by 37% (or 25% if based on 20-year global warming potential factors for upstream methane leakage), raising additional concerns around natural gas products’ ability to meet global emission standards with tightening carbon regulations.

Scrap EAF production can undercut BF-BOF steel production costs by 2035 with established and planned policies. However, scrap production cannot serve the volumes subject to CBAM as Korea’s EU exports mostly include flat products (i.e., hot rolled coil, cold rolled coil, and coated sheets). Around 80% of the projected 20 Mt green demand will also be for ore-based products. Moreover, regional scrap supply is limited. South Korea is a net importer of scrap steel, relying primarily on Japan, which is trending toward restricting future exports.¹³

Additional policy support will be needed beyond what is currently in place to bring ore-based, low-emission steel premiums closer to zero by 2035 and incentivize the deployment of more clean production capacity in coming years.

Exhibit 2

The impact of these individual policies on the green steel premium in 2035 is disaggregated in Exhibit 3 to show the effect of each policy.

Exhibit 3

The capital expenditure subsidies, coal subsidy removals, and K-ETS have some impact on reducing the green premium, particularly for the scrap EAF route, which has a much smaller green premium at the start. However, for H₂ DRI-EAF routes, individual policies only reduce premiums by 7% or less, except for carbon pricing, which can bring premiums down by 11 to 16%. When combined, these policies can narrow the cost gap by 17%–25%, but still leave an overall cost premium of US$163 to 254 per tonne of hot rolled coil (HRC).

While capital subsidies such as the Green Steel Fund and H₂ Steelmaking Demonstration subsidy can reduce some upfront investments, the operational costs for green steel plants make up a larger portion of total project costs, resulting in an overall insignificant impact on green premiums (2%–3% reduction). Production- and end-use-stage policies — akin to the Japanese low-carbon steel tax credit or clean energy vehicle (CEV) tax credit, which credits car buyers who purchase cars made with steel certified under Japan’s “green transformation” (GX) framework — may prove more effective at directly covering the remaining premiums.

Similarly, while removing coal subsidies proves more effective than removing natural gas or electricity subsidies, overall, upstream fuel subsidies or their removal have a minimal impact on lowering green premiums because of low subsidy values assumed in our model.¹⁴ The H₂ CfD scheme, even when assumed to cover hydrogen as an input (instead of only electricity made using hydrogen), has no impact, as it is likely that sectors with a lower cost gap between conventional fuels and green hydrogen (e.g., trucking, fertilizer, and shipping) will outbid steelmakers in the reverse auction system (see note in Appendix B for more details).

As indicated in Exhibit 3, assuming free allowances for the steel sector are phased out, the K-ETS could reduce green premiums by 11–16% in 2035, under a mid-carbon pricing projection (see Exhibit B2). Higher carbon prices will enable more significant impacts. In 2025, K-ETS prices fluctuated around US$7 per ton of carbon dioxide (CO₂), roughly 92% lower than EU ETS prices (US$83/tCO₂).¹⁵ Phasing out free allocations and decreasing benchmarks to gradually cover all product emissions (including Scope 2 and 3 emissions) would also be effective in incentivizing a faster deployment of clean technologies. As of June 2026, it is still unclear when allocations for the steel sector will be adjusted.

The K-Steel Act has recently announced a low-carbon steel certification system that could qualify steel production zones for additional tax breaks or subsidies (details still forthcoming). The definition of low-carbon steel will determine the effectiveness of these subsidies: if too relaxed, the certification system could create counterproductive incentives, risking the lock-in of fossil fuel-based assets (e.g., coal-based BF-BOF or NG DRI-EAF). Additional incentives for green steel may also be included in the upcoming K-Steel Act guidance.

Stronger Policy Design Could Reduce Premiums to Below 10% in 2050

Assuming higher carbon prices and earmarked H₂ CfD funds for the steel sector, H₂ DRI-EAF using Australian green HBI reaches a 9% cost premium relative to NG DRI-EAF using US natural gas HBI, and a 21% cost premium over BF-BOF in 2035, which may be within some buyers’ willingness to pay.¹⁶ Integrated domestic H₂ DRI-EAF still has a 21% cost premium over NG DRI-EAF and a 34% cost premium over BF-BOF in 2035, primarily driven by high hydrogen costs. The need to use higher-cost DR-grade iron ore pellets also adds to the remaining cost premium over BF-BOF. However, our analysis does not cover HyREX technology and its maturity over time, which could bring down costs in the future, as HyREX can utilize lower-grade fines. Again, scrap EAF production outcompetes BF-BOF production by 2035.

In 2050, an 8%–14% premium still exists for H₂ DRI-EAF compared to BF-BOF; when compared to NG DRI-EAF, the premium is around 4%–9%. This underscores the need for stronger or supplementary measures that can help H₂ DRI-EAF production compete (see Exhibit 4) and allow faster deployment of initial volumes to access carbon-conditioned markets and capture growing green demand segments. For lead markets like the automotive sector, the government can also consider implementing end-use incentives like Japan’s CEV credit to cover the remaining cost premium. Public procurement can also be leveraged to derisk some initial clean volumes. These measures can complement existing policy incentives to support the deployment of one or two pioneering commercial-scale plants by 2035, including POSCO’s HyREX, and help meet the Korea Iron and Steel Association’s target of producing 2.5 Mt of commercial-scale hydrogen-based steelmaking by 2035.

Exhibit 4

Recommendations

With competitive pressure from tightening carbon regimes, global overcapacity, and low-cost Chinese steel on the one hand, and opportunities to capture growing green demand on the other, product differentiation may be key to enhancing competitiveness for South Korean steel producers. Transitioning the steel sector toward cleaner production also creates opportunities for value creation along the clean steel supply chain. Current and planned policies tested in this analysis (i.e., capital subsidies, fuel subsidies, and the K-ETS) show that these policies as currently designed still leave a significant cost gap between H₂ DRI-EAF and BF-BOF production in 2050.

Although further analysis will be needed to carefully design a policy mix that is fiscally efficient and impactful, we propose several measures (Exhibit 5) that can support the deployment of some initial clean volumes to help South Korea capture growing green demand and maintain access to markets with carbon regimes.

Exhibit 5

Preliminary recommendations for enabling policies

Other policy considerations to enhance the competitiveness of near-zero production over time include the gradual phase-out of K-ETS allocations for the steel sector and raising prices under K-ETS. Revenues from K-ETS could be used for reinvestments in domestic clean production capacity. Additionally, developing a comprehensive policy framework for embodied carbon regulations beyond the current Green Standard for Energy and Environmental Design could open up a significant demand segment for low-emissions steel.

Appendices

Appendix A. Policy Details

Exhibit A1

Extended list of policies along the steel supply chain

Appendix B. Modeling Methodology and Assumptions

Exhibit B1

Exhibit B2

Note: Under its current design, the Clean Hydrogen Power Standard only covers electricity made from clean hydrogen. An estimated ₩5 trillion (US$3.54 billion) will be allocated over 15 years (US$236 million per year), based on previous bids, with a cap of US$0.35/kW (~US$11.67/kg H₂). The scheme includes four draft tiers for green hydrogen, with Tier 1 requiring 100% renewable energy for hydrogen production. This analysis assumes the scheme will cover hydrogen as a stand-alone fuel to explore the impact of a policy on green steel costs. To estimate the impact of the H₂ CfD, the authors assumed that sectors with smaller cost gaps between conventional fuels and green hydrogen would be the first recipients of H₂ CfD funding, covering the highest-willingness-to-pay sector’s total demand before allocating to other sectors, similar to other schemes in the EU and Japan.¹⁸ Sector green demand estimates are based on sector-specific targets and/or nationally determined contribution (NDC) targets. Hydrogen costs are expected to decrease as electrolyzer technology is deployed for various sectors, which could lower the estimated cost gaps between conventional fuel costs and green hydrogen.

Endnotes